Evaluating the

External
Environment

Presented by:

Jerry N. Gayon
E-MBA
 Understanding the External
Environment

The external environment refers to the factors outside of

the company that can impact its operations and
success. These factors can include political, economic,
social, technological, legal, and environmental
influences.

By understanding the external environment, businesses

can identify potential threats and opportunities.

Failing to understand the external environment can lead

to missed opportunities and unexpected challenges. By
staying informed and aware of external factors,
businesses can make better decisions and adapt more
effectively to changes in the market and industry.
Analyzing the Industry

Key Trends Key Challenges

• Increased competition from new entrants • Economic uncertainty and market volatility
• Growing demand for sustainable products • Rapidly changing consumer preferences
and practices and behavior
• Shift towards digital platforms and e-commerce • Regulatory and legal challenges
Assessing Market Opportunities
• Identify emerging trends and shifts in consumer behavior
• Analyze market size, growth potential, and profitability
• Evaluate competitive landscape and potential barriers to entry
• Assess potential partnerships and collaborations
Evaluating Threats
Potential Threats
•Economic downturns or recessions
•New competitors entering the market
•Changes in consumer preferences or behavior
Mitigating Threats
• Diversifying the product or service offerings to reduce reliance
on a single area of the business
• Developing strong relationships with suppliers and distributors
to ensure a stable supply chain
• Conducting market research to stay up-to-date on consumer
preferences and behavior
 Michael Porter’s
Five Forces Model
Introduction to Michael Porter
Michael E. Porter is a renowned professor at Harvard
Business School and a leading authority on competitive
strategy. He is best known for his Five Forces Model,
which is a framework for analyzing the competitive
forces that shape every industry and market. The model
helps businesses to understand their industry's
structure and identify opportunities for competitive
advantage.

The Five Forces Model is widely used by businesses

and organizations around the world, and it has become
an essential tool for strategic planning and decision-
making.
 New Entrants
- New competitors entering the market can increase competition
Overview of Five Forces Model and decrease profitability.

Suppliers
- Suppliers with significant bargaining power can increase costs and
reduce profitability for companies in the industry.

Buyers
- Buyers with significant bargaining power can lower prices and
reduce profitability for companies in the industry.

Substitutes
- Substitute products or services can reduce demand and
profitability for companies in the industry.

Rivalry
- Intense competition between existing competitors can lower prices
and reduce profitability for companies in the industry.
Threat of New Entrants
The threat of new entrants is a key component of Michael Porter's Five Forces Model. It refers to the possibility
of new competitors entering the market and disrupting the current competitive landscape. This threat can come
from various sources, such as startups or existing companies in related industries.

Barriers to Entry Potential Impact

One way to assess the threat of new entrants is to
look at the barriers to entry in the market. These
barriers can include economies of scale, brand
recognition, access to distribution channels, and
government regulations.
The threat of new entrants can have a significant
impact on the competitive dynamics of a market. If
the threat is high, existing companies may need to
invest in innovation and marketing to maintain their
market share.
Bargaining Power of Suppliers

The bargaining power of suppliers is one of the five forces in Michael Porter's Five Forces Model. This force
refers to the degree of control that suppliers have over the price and quality of inputs that are required by
companies in a particular industry.

Factors Affecting Supplier Bargaining Power

• Number of suppliers in the market
• Availability of substitute inputs
• Switching costs for companies to change suppliers
• Importance of the input to the company's operations
• Ability of suppliers to integrate forward into the industry
Bargaining Power of Buyers
Definition
The bargaining power of buyers refers to the ability of
buyers to negotiate prices, quality, and other terms
with sellers. It is one of the five forces that determine
the intensity of competition in a market, as outlined by
Michael Porter's Five Forces Model.
Factors Affecting Bargaining Power
• Number of buyers in the market
• Size of each buyer's purchases
• Availability of substitute products
• Buyer's switching costs
Threat of Substitutes
The threat of substitutes refers to the availability of alternative products or services that can satisfy the same customer needs.
If there are many substitutes available, customers can easily switch to another product or service, which can decrease
demand for the original product and reduce profitability.

Factors Affecting the Threat of Substitutes Examples of Substitutes

• Price-performance trade-off: Customers may switch to a
substitute if it offers better value for money.
• Switching costs: High switching costs can make it difficult
for customers to switch to a substitute.
• Brand loyalty: Strong brand loyalty can reduce the threat
of substitutes.
• Availability of substitutes: The more substitutes available,
the higher the threat of substitutes.
• Smartphones and laptops can be substitutes for each other
in terms of accessing the internet and using applications.
• Streaming services like Netflix and Hulu can be substitutes
for cable television.
• Online retailers like Amazon can be substitutes for brick-and-
mortar stores
Rivalry Among Existing Competitors
According to Michael Porter's Five Forces Model, the intensity of rivalry among existing competitors is one of the key factors
that determines the profitability and attractiveness of a market. This force is influenced by factors such as the number and
size of competitors, industry growth rate, and level of product differentiation.

Factors Affecting Rivalry Implications for Business Strategy

The intensity of rivalry among existing competitors is affected Understanding the intensity of rivalry among existing
by several factors. competitors is crucial for developing effective business
Examples: strategies.
• To the extent that the growth rate of demand for the For example, businesses operating in highly competitive
industry’s offerings is low markets may need to focus on cost-cutting or product
• Fixed costs in the industry are high differentiation to remain profitable. Alternatively, businesses
• Competitors are not differentiated from one another operating in less competitive markets may be able to focus on
• Exit barriers in the industry are high expanding their market share or increasing prices.
Applications of Five Forces Model
The Five Forces Model is a useful tool for analyzing the competitive landscape of an industry. It can be applied
in various ways, including:

Strategy Mergers and Market

Development Acquisitions Analysis
Limitations of Five Forces Model
Ignores Internal Factors
The Five Forces Model focuses solely on external
factors and does not consider internal factors such as
organizational culture or resources, which can have a
significant impact on a company's competitiveness.
Static Analysis
The Five Forces Model provides a snapshot of the
industry at a particular point in time and does not
account for changes in the industry or market
dynamics over time.
Limited Scope
The model is primarily focused on analyzing the
competitive landscape of an industry and may not
provide a comprehensive understanding of all the
factors that affect a company's performance.
Assumes Homogeneity
The model assumes that all competitors in an
industry are similar, which may not be the case in
reality. Competitors may have different strategies,
capabilities, and resources that make them more or
less competitive.
Conclusion

In conclusion, Michael Porter's Five Forces Model provides a comprehensive framework for
analyzing the competitive forces within an industry. By considering the bargaining power of suppliers
and buyers, the threat of new entrants and substitutes, and the intensity of rivalry among existing
competitors, businesses can gain a better understanding of their industry and make informed
strategic decisions. It is important to note that while this model is a valuable tool, it should not be
used in isolation. Other factors such as macroeconomic trends, technological advancements, and
regulatory changes must also be taken into account. Overall, the Five Forces Model is a powerful
analytical tool that can help businesses stay competitive and thrive in today's dynamic market
environment.
THANK YOU!
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