LECTURE 4

Analysing the external environment

 Process of Strategic Management

Analysing Corporate
External Strategies
Environment

Goal- Business Choice Implement

setting Strategies

Analysing
Functional
Internal
Strategies
Environment

Lynch (2015), Strategic Management, 7th ed.

Learning outcomes
- Explain why it is important to study the environment of the organisation;
- Outline the main environment influences on the organisation;
- Undertake a PESTLE analysis of the general influences on the
organisation;
- Identify a Five Forces Analysis of the specific influences on the
organisation.
Figure 1: Analysing the external environment - the nine basic analytical tools
See: Lynch, Chapter 3
Analysing the external environment

Tools for analysing external (outer) environment:

1. General evaluation: Environment basics (market size, growth and share)
2. Country-level (all industries) analysis: PESTEL analysis
3. Industry-level analysis: Five Forces analysis
4. Industry-level analysis: Key factors for success
5. Industry/business-level analysis: Industry Life cycle
6. Industry/business-level analysis: Degree of turbulence
7. Factors specific to co-operation: Four Links analysis
8. Factors specific to immediate competitors
9. Customer analysis: demand, segmentation and positioning
Tool 1: General evaluation
• Market definition and size
• Market definition – what products/services do we include?
• Is the market large or small?
• Implications for business opportunity?

• Market growth
• How fast that is changing?
• Attractive opportunity or saturated?

• Market share
• Dominant company? Or fragmented market?
Tool 2: Country-level (all industries) analysis: PESTEL
Analysis
• PESTLE framework provides objective view on six macro criteria :
• Political
• Economic
• Sociological
• Technological
• Environmental
• Legal

• Key point: Businesses are affected differently in each country and each
market. While generalizations are useful, the macroenvironment is in a way
“unique” to each company
 Political factors
■ Type of government and political stability
– Political parties, rule of law, bureaucracy, corruption
■ Existing legislations
– Employment, environment, social, consumer protection
■ Evolution of regulations and de-regulations
– Taxation, legal requirements, etc.
■ Trade policies
– Tariffs, quotas, red-tape, etc.
 Economic factors
■ Economic situation (growth, potential)
■ Period of the business cycle (boom, recession, recovery)
■ Interest rates and inflation (purchasing power)
■ Unemployment
■ Consumer expenditure and disposable income
■ Currency fluctuations and exchange rates
■ Investment
 Sociological

■Population size and rate of growth

■Demographic changes
■Distribution of income
■Social mobility
■Job market mobility and attitude to work
■Education and health levels
■Cultural factors:
–Language
–Religion
–Values and attitudes
 Technological factors

■ Maturity of technology
– manufacturing maturity and capacity
■ New patents and products
■ Technology development
– Level of R&D on organisation’s rivals
– replacement technology/solutions
– Speed of change and adoption of new technology
■ Technology legislation
– technology access, licencing, patents
– intellectual property issues
 Environmental and Legal factors
■ Environmental factors
– Sustainability and ”green” issues
– Level and types of fuels and energy consumption
– Depletion of natural resources
– Pollution
■ Legal factors
– Employment regulations
– Competition law
– Health and safety regulations
– Product safety regulations
– Antitrust laws
– Patent infringements
 Tool 3: Five Forces Analysis (Porter, 1979)
Porter’s five forces framework is a powerful tool to analyse micro environment, which include bargaining power
of suppliers, bargaining power of buyers, threat of new entrants, threat of substitutes and the extent of
competitive rivalry (Porter, 2008).
• Main function: analysing the competitiveness of the industry
• Underpinning logic: economic power in the market place
• Key question: how much bargaining power does a company have against the five
forces acting against it?
• The Five Forces: each with an example of their power
1. Suppliers – e.g. there are only a few suppliers
2. Buyers – e.g. may be large enough to dictate buying terms
3. Potential new entrants – e.g. could enter the market with new technology and
threaten the company’s existence
4. Substitutes for the company’s products – e.g. may be cheaper
5. Industry competitors – e.g. some may have differentiate products
 Tool 3: Five Forces Analysis (Porter, 1979)
How to analyse the Five Forces:
Suppliers: have high, Customers: have high,
medium or low bargaining medium or low
power depending on what bargaining power
they supply – patented, based on size of order,
quality, etc. Industry competitors: etc.
high, medium or low
threat based on
competitors’
resources, plans, etc.

Substitutes: high, Potential entrants:

medium or low threat high, medium or low
based on ease and cost threat of new entrants
of alternative, etc. based on barriers to
entry
Tool 4: Five Forces Analysis (Porter, 1979)