Module 3: External Analysis
Key Question:
What are the key factors external to the firm that impact its
profitability, and how do leaders manage/mitigate these
factors?
External Analysis Steps
First step: Macroenvironmental Analysis
How broad (macro) political, societal and
economic factors affect the profitability of most
firms within that market
Second step: Industry Analysis
How factors specific to the industry affect profit
potential within that sector
Third step: Strategic Group Mapping
How factors specific to firm’s niche within the
industry affects profitability
External Environments
Commercial Aircraft
Manufacturers
Main Players
Airbus
Based in Europe with its headquarters in Toulouse, France
Product line-up of 14 jet aircraft ranging from 100 to 500+
seats
Boeing
Based out of Chicago, IL
Product line-up includes the 737, 777 and 787 families
offering 140 to 450 seats
Bombardier
Was the third largest civil aircraft manufacturer (mostly
regional jets)
Based out of Montreal, Quebec, Canada
COMAC
Based in Shanghai, China; rejional jets with 70 to 200 seats
Embraer
Based in São José dos Campos, Brazil
Step 1: General
Environment Analysis
Since general environments are outside the direct
control of organizations, leaders should attempt to
scan, monitor, forecast, assess in planning
Scanning involves identifying early signals of changes in
key segments of the general environment
Monitoring involves detecting meaning through careful
observation over time
Forecasting involves developing projections of outcomes
and determining their probabilities
Assessing involves determining the significance of
identified changes and most probable future outcomes
PEST(EL) analysis is a tool used to assess the firm’s
external environment
1. Political/Legal Segment
Captures the pressures exerted on organizations
by governments, and outcomes of legislative
processes (laws, regulations, court decisions, and
executive mandates)
Traditionally, political and legal issues are
considered to be outside of a firm’s direct control
In Bombardier’s Case…
A number of governmental agencies monitor and
enforce civil aviation standards
FAA in the U.S.
Transport Canada
European Union Aviation Safety Agency
Civil Aviation Administration of China
A different set of agencies monitor and enforce rules
on imports and exports of aircraft and components
In fact, every stage of product design, development,
production, QA, certification and sales is influenced
by regulators from around the world
To Complicate Matters…
The incoming Trump presidency and associated
political/legal changes can make things harder
for Bombardier:
Political / Legal Influence
While influence was thought to be unidirectional in
the past, companies can and do try to influence
their political-legal environments
Companies can:
Finance political parties
Publicly express support for a candidate or party
Publicly express views on political issues
Lobby governmental agencies for input into public policy
Even have current or former executives who run for office!
This relatively recent phenomenon is termed
‘corporate political activity’ or ‘CPA’
Lobbying
Lobbying is a preferred mode of CPA among large
organizations
Lobbying is the process of working to persuade government
officials (directly or indirectly) to favor a particular position in
decision-making
Involves providing information to policy makers to aid in decision-
making
Involves communicating with legislators, staff members,
administrators, regulatory agencies, broader public, etc.
Lobbying
Types of lobbyists:
Business associations or interest groups (like the Business
Council of Canada)
In-house lobbyists (where large companies maintain a
public affairs dept to influence public policy)
Specialist / consultant from a lobbying firm
Usually, someone who held a public policy position in the
past (aka the revolving door)
At the federal level in Canada and the US, lobbying
is a regulated activity!
Check out this fact sheet and annual report
But the Canadian Lobbying Act does not reveal the
resources that companies spend in lobbying…
2. Economic Segment
Relates to macroeconomic factors and
associated trends that affect business
Examples include:
Economic growth/decline rates
Interest rates
Levels of employment
Currency exchange rates
3. Sociocultural Segment
Relates to societal attitudes, cultural values, and
demographic trends that affect business
E.g., Bombardier’s Industry:
Air travel as a commodity
Attitudes towards environmental concerns
Trends for and against commercial flights
4. Technological Segment
Relates to the rate of knowledge creation and its
application to new products, processes and
design
Innovations in processes (Lean and JIT
Manufacturing, Six Sigma) and products have
changed the aviation sector
Innovations in aviation technology (engines, AI,
unmanned systems, green technologies)
External Analysis Steps
First step: General Environmental and
Macroeconomic Analysis
How broad societal and economic factors affect
the profitability of most firms within that market
Second step: Industry Analysis
How factors specific to the industry affect profit
potential
Third step: Strategic Group Map
How factors specific to firm’s niche within the
industry affects profitability
Step 2: Industry Analysis
Definition of industry
Group of companies that produce similar products
and services, and cater to similar customers
Usually grouped together under the same NAICS or
SIC code
Industry environment has more direct effect on
firm’s strategic competitiveness
Specifically, the industry’s profit potential is a
function of five forces…
Porter’s Five Forces
Buyer Power
Refers to the extent to which buyers (of the industry)
can exert pressure on firms to lower prices and
increase quality
Buyer power is high when:
They are few in number
They are organized
They purchase a large portion of industry’s total
output
They have low switching costs
Industry products are undifferentiated or
standardized
Buyers of Airplanes
ICA / ISOA
Conduct a Five Forces Analysis on the North
American Auto Industry
Pick one neighbor or online class participant to
work with
I’ll provide you with 2-3 minutes of time for each of
the five forces!
To start off, take the next few minutes to discuss the
power of buyers of the auto industry…
Here’s a checklist to help you!
Checklist – Buyer Power
Consider the buyers of the auto industry:
Are they few in number and/or larger in size (aka
consolidated)?
Do they purchase a large portion of industry’s total
output?
Do they have low switching costs?
Are the industry’s products somewhat
undifferentiated or standardized?
Are they organized?
Supplier Power
Refers to the extent to which suppliers (to the
industry) can exert pressure on firms by demanding
higher prices for supplies and providing lower
quality
Supplier power is high when:
They are few in number and large in size (i.e.,
supplier industry is concentrated or consolidated)
They produce differentiated products and supply
critical inputs to firms
There are no substitutes for suppliers’ products
Firms face high costs to switch suppliers
Airplane Manufacturing
Engines
Engines
Engines
Supplier Power
Refers to the extent to which suppliers (to the
industry) can exert pressure on firms by demanding
higher prices for supplies and providing lower
quality
Supplier power is high when:
They are few in number and large in size (i.e.,
supplier industry is concentrated or consolidated)
They produce differentiated products and supply
critical inputs to firms
There are no substitutes for suppliers’ products
Firms face high costs to switch suppliers
Checklist – Supplier Power
Consider the suppliers to the auto industry:
Are they few in number and/or larger in size (aka
consolidated)?
Do they produce differentiated products and
supply critical inputs to firms?
Are there substitutes for suppliers’ products?
Do firms face high costs to switch suppliers?
Threat of New Entrants
Refers to the risk that potential competitors will
enter an industry, create excess supply, and
depress prices
Determined by two factors: industry entry barriers,
and expected retaliation from incumbents
Entry barriers:
Economies of scale
Customer switching costs
Government regulations
Capital requirements
Access to raw materials and distribution channels
Threat of Substitutes
Refers to the risk that products or services from
outside the industry might adequately meet the
needs of current customers
Especially salient if these products or services
perform same or similar functions at a competitive
price
Intensity of Rivalry
The intensity with which companies in the same
industry fight for market share and profitability
Intensity of rivalry is high when:
There are numerous and equally balanced
competitors
There is lack of differentiation or low switching costs
Industry growth is slow, demand has stagnated or is
declining
Exit barriers are high – specialized assets, fixed costs
of exit
External Analysis Steps
First step: General Environmental and
Macroeconomic Analysis
How broad societal and economic factors affect
the profitability of most firms within that market
Second step: Industry Analysis
How factors specific to the industry affect profit
potential
Third step: Strategic Group Map
How factors specific to firm’s niche within the
industry affects profitability
Strategic Groups
Strategic groups
A set of companies that pursue a (very) similar
strategy in a specific industry
Strategic Group Mapping
The strategic group mapping technique clusters
different firms into groups based on key strategic
dimensions
Product attributes
Spending on R&D
Technology
Product variety
Pricing
Customer service
Mapping of Commercial
Airline Manufacturers
Airbus
Boeing
Seat Capacity
COMAC
Embraer
Bombard
ier
Range
Insights from Mapping
Rivalry is usually strongest within a strategic group
Firms within a strategic group monitor each other’s
actions and respond to competitive moves
Changes in the external environment affect strategic
groups differently
Five forces affect strategic groups differently
Some strategic groups are more profitable than
others
Difficult for a firm to switch strategic groups
Easiest way to jump groups is through an alliance or
M&A
As a manager…