Chapter four

External environment Analysis

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• What is environment?

• Environment refers to the surroundings , external

objects , influence or circumstances in which
someone or something occurs.
• As the environment affects an organization in
many different ways, it is very essential for the
managers to understand it.
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• The environment in which business operates
has a greater influence on their successes or
failures
• The external environment which is dynamic
and changing holds both opportunities and
threats for the organizations.

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 The Process of Performing an
External Audit
The process of performing an external audit
must involve as many managers and
employees as possible. As emphasized the
involvement in the strategic-management
process can lead to understanding and
commitment from organizational members.
Individuals appreciate having the opportunity
to contribute ideas and to gain a better
understanding of their firms’ industry,
competitors, and markets.

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 Cont…

To perform an external audit, a company

first must gather competitive intelligence
and information about economic, social,
cultural, demographic, environmental,
political, governmental, legal, and
technological trends.
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 Cont….
Individuals can be asked to monitor various
sources of information, such as key magazines,
trade journals, and newspapers. These persons
can submit periodic scanning reports to a
committee of managers charged with
performing the external audit.
This approach provides a continuous stream of
timely strategic information and involves many
individuals in the external-audit process.

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 Cont….

The Internet provides another source for

gathering strategic information, as do
corporate, university, and public libraries.
Suppliers, distributors, salespersons,
customers, and competitors represent
other sources of vital information.
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 Cont…
Once information is gathered, it should be
assimilated and evaluated. A meeting or series
of meetings of managers is needed to
collectively identify the most important
opportunities and threats facing the firm.
These key external factors should be listed on
flip charts or a chalk board.

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 Cont….
A prioritized list of these factors could be
obtained by requesting that all managers
rank the factors identified, from 1 for the
most important opportunity/threat to 20
for the least important opportunity/threat.
These key external factors can vary over
time and by industry. Relationships with
suppliers or distributors are often a critical
success factor.

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 Characteristics of Environment
 Environment is complex. The environment
includes many factors, events conditions, &
influences emerging from various sources.
• Environment is dynamic ,the environment is
continuously changing in nature
 Environment is multifaceted
The shape and character of an environment relies on
the perception of the observer. Different observers
perceive changes in the environment or new
development differently.

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Environment has a far – reaching
impact
• Environment has a significant
impact on organizations.
• The growth & profitability of the
organization relies mainly on
environment in which it carries out
its operation

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 Major component of an organization’s
external environment
A. Social ,cultural & demographic
environmental forces
• These factors have a major impact on products,
services, markets, and customers
What are opportunities & threats of organizations?
 Lifestyle
 Number of marriage
 Cultures
 Demographics
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 B. Technological forces
 Technological changes & discoveries are
having a dramatic impact on organizations
 Technological forces represent major
opportunities & threats that must be
considered in formulating strategies
 What are technological opportunities
& threats for firms?

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 C. Economic forces
Economic factors have a direct impact on the
potential attractiveness of varies strategies.
What are opportunities & threats for
organizations?
• Interest rates price fluctuation
• Inflation rates
• Unemployment trend Tax rates
• Import/export factors GDP trend
• productivity levels
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 D. Political, governmental, & legal
forces
Political, governmental, & legal forces can
represent key opportunities or threats for both
small and large organizations.
What are opportunities & threats on firms?
• Import/ export restrictions,
• International investment restriction
• Exchange control restriction
• Local & state elections

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 A model of the macro-environment(based on Fahey

&Narayanan,1986 )
• .
Political factors
Sociological factors

Economical factors Technological factors

Analysis for identifying ,tracking, projecting & assessing

trends,4 stages
1. Scanning the environment to detect ongoing and emerging change
2.Monitoring specific environmental trends and pattern to determine
their evolution
3. Forecasting future direction of environmental changes
4. Assessing current and future environmental changes for their
strategic
03/01/24 & organizational implications
Agama Abdisa(MBA) 16
 E. Competitive Environment
• The nature of competition in an industry of a firm
is directly affected by the developments in the
competitive environment.
• The competitive environment includes;
competitors, customers, & suppliers.
• The key concept and analytical technique, which
are used by managers to evaluate their
competitive environment, are, Michael porters
five forces model which shows the way in which
these forces are used for describing profitability in
an industry.
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 Competitive Advantage
• Competitive advantage refers to factors
that allow a company to produce goods or
services better or more cheaply than its
rivals. These factors allow the productive entity
to generate more sales or superior margins
compared to its market rivals.
• The ability of a company to outperform its
competitors.

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Competitive advantage Strategy

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 Competitive Analysis: Porter’s
Five-Forces Model
Porter’s Five-Forces Model of competitive
analysis is a widely used approach for
developing strategies in many industries.
It is an assessment of the strengths and
weaknesses of current and potential
competitors
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According to Porter, the nature of
competitiveness in a given industry can be
viewed as a composite of five forces:
1.Rivalry among competing firms
2. Potential entry of new competitors
3.Potential development of substitute products
4. Bargaining power of suppliers
5. Bargaining power of consumers
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Potential entry of competitors
Whenever new firms easily
enter into particular
industry, the intensity of
competitiveness among
firms increases

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• Substitute products are those products that
are produced by the competitor industry
and which perform similar function as that
of products produced by the other industry
• The existence of substitute goods prevents
the competitors’ from charging high prices
and if there is a raise in the price of any
substitute good then the customer’s
preference, any loyalty shifts toward the
relatively substituted products

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 Sources of External Information
A wealth of strategic information is available
to organizations from both published and
unpublished sources.
Unpublished sources include:
 customer surveys,
 market research,
 speeches at professional and shareholders’ meetings,
 television programs,
 interviews, and
 conversations with stakeholders.
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 Cont…
 Published sources of strategic information includes :
 periodicals,
 journals,
 reports,
 government documents,
 abstracts,
 books,
 newspapers, and
 manuals.
 The Internet and others has made it easier for firms to
gather, assimilate, and evaluate information.

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 Forecasting Tools and Techniques
 Forecasts are educated assumptions about future trends
and events.
 Forecasting is a complex activity because of factors
such as technological innovation, cultural changes, new
products, improved services, stronger competitors,
shifts in government priorities, changing social values,
unstable economic conditions, and unforeseen events.

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 Cont….
 Forecasting tools can be broadly categorized into two groups: quantitative

techniques and qualitative techniques.

 Quantitative forecasting is an objective, data-based process that businesses and

salespeople can use to make accurate predictions to guide future business

decisions.

 Qualitative forecasting is an estimation methodology that uses expert judgment,

rather than numerical analysis. This type of forecasting relies upon the knowledge

of highly experienced employees and consultants to provide insights into future

outcomes.
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 Cont…
 No forecast is perfect, and some forecasts are even wildly
inaccurate. This fact accents the need for strategists to devote
sufficient time and effort to study the underlying bases for
published forecasts and to develop internal forecasts of their
own.

 Key external opportunities and threats can be effectively

identified only through good forecasts. Accurate forecasts can
provide major competitive advantages for organizations.
Compiled by: Lemma N.
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Strategic Management (MGMT 3142)
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