The External Assessment
External environment analysis
Chapter 3
The External Assessment ◼ PEST+++ analysis
(External Strategic Management Audit) ◼ Industry analysis-5 forces model analysis
◼ Product Life-cycle analysis
◼ Others models...
Ch 3 -1
1 2
Exetnal environment analysis
The External Assessment Components of the External Environmental Analysis
Scanning • Identifying early signals of environmental
changes and trends
External environment analysis
◼ Main benefits and values-OBJECTIVES ? Monitoring • Detecting meaning through ongoing
observations of environmental changes and
❑ Identify Opportunities and threats trends
❑ So, firms identify what they might choose to Forecasting • Developing projections of anticipated
outcomes based on monitored changes and
do. trends
Assessing • Determining the timing and importance of
environmental changes and trends for firms’
2–4
strategies and their management
3 4
Analyzing the External Environment
External Strategic Management Audit
Identify & evaluate factors
❑ Increased foreign competition
❑ Population shifts
Opportunities
❑ Aging society
and threats
❑ Fear of traveling
❑ Stock market volatility
These factor beyond the control of a
single firm generally
3–5
By studying the external environment, firms Ch 3 -6
identify what they might choose to do.
5 6
External Strategic Management Audit External Audit
Gather competitive
intelligence –
Purpose of External Audit
◼ Social
❑ Identify ◼ Cultural
◼ Demographic
◼ Opportunities ◼ Environmental
◼ Governmental
◼ Threats ◼ Legal
◼ Technological
Ch 3 -7 Ch 3 -8
7 8
The General Environment: Segments and Elements: the PEST ++ model
Macro environment analysis-example
Demographic
Economic
Governmental
Cultural
Technological
Global
Environmental
2–9
9 10
The Five-Forces Model of Competition The Five-Forces Model
Bargaining Power of Consumers
◼ Customers concentrated or buying in
volume affects intensity of competition
◼ Consumer power is higher where products
are standard or undifferentiated
Ch 3 -11 Ch 3 -12
11 12
Conditions Where Consumers Gain The Five-Forces Model
Bargaining Power
◼ If they can inexpensively switch
Bargaining Power of Suppliers
◼ If they are particularly important
◼ If sellers are struggling in the face of falling
consumer demand ◼ Large number of suppliers & few
substitutes affects intensity of competition
◼ If they are informed about sellers’ products,
prices, and costs ◼ Backward integration can gain control or
ownership of suppliers
◼ If they have discretion in whether and when
they purchase the product
◼ ....
Ch 3 -13 Ch 3 -14
13 14
The Five-Forces Model The Five-Forces Model
Potential Entry of New Competitors Potential Development of Substitute
Products
◼ Barriers to entry are important
◼ Quality, pricing, and marketing can ◼ Pressures increase when consumers’
overcome barriers switching costs decrease
◼ Firm’s plans for increased capacity &
market penetration
Ch 3 -15 Ch 3 -16
15 16
Competitive Forces The Five-Forces Model
Identifying Rival Firms
•Strengths Rivalry Among Competing Firms
•Weaknesses
•Capabilities ◼ Most powerful of the five forces
•Opportunities ◼ Focus on competitive advantage of
strategies
•Threats
•Objectives
•Strategies
Ch 3 -17 Ch 3 -18
17 18
The Five-Forces Model The product life cycle
To analysis we have to identify:
◼ Who are key customers and their characteristics Introduction Growth Maturity Decline
Quantity/Revenue
◼ Who are key supplier and their characteristics
◼ Who are key competitors and their strength and
weaknesses
◼ What are potential substitutes and their
characteristics/attributes
◼ Easy or not to have new competitors in the future
Time
Ch 3 -19
19 20
The product life cycle External Audit – Sources of Information
•Internet
•Libraries
•Suppliers
Stage Introduction Growth Maturity Decline
Management Entrepreneurial Professional Administrator Asset stripper •Distributors
management
Market Growth High High Low Low
•Salespersons
Market Share Low Low High Low
•Customers
Cash demand Hungry Hungry Rich Fair
Planning Long-term Long-term Medium-term Short-term •Competition
Ch 3 -22
21 22
Performing External Audit – Variables
Performing External Audit
•Market share
•Breadth of competing products
•World economies Long-term Orientation
•Foreign affiliates
Measurable
•Proprietary account advantages External
Factors Applicable to
•Price competitiveness Competing Firms
•Technological advancements
Hierarchical
•Interest rates
•Pollution abatement
Ch 3 -23 Ch 3 -24
23 24
External environment analysis outcomes
Opportunities ?
Threats ? Competitive Forces and
The Competitive Profile Matrix
(CPM)
Ch 3 -25 Ch 3 -26
25 26
Competitive Forces Competitive Forces
Collection & evaluation of data on Competition on virtually all industries can be
competitors is essential for successful described as intense
strategy formulation
Ch 3 -27 Ch 3 -28
27 28
Competitive Forces Industry Analysis: Competitive Profile
Matrix (CPM)
Identifying Rival Firms
•Strengths
•Weaknesses Identifies firm’s major competitors and
•Capabilities their strengths & weaknesses in
•Opportunities relation to a sample firm’s strategic
•Threats positions
•Objectives
•Strategies
Ch 3 -29 Ch 3 -30
29 30
An exam[le
Industry Analysis CPM- Matrix
Competitive Forces
Companies/competitors Company 1 Company 2 Company 3
Critical success factor Weight Rating Score Rating Score Rating Score
Sources of Corporate Information
Advertising •Moody’s Manuals
Product quality •Standard Corporation Descriptions
Price competitiveness •Value Line Investment Surveys
Management •Dun’s Business Rankings
Financial position •Standard & Poor’s Industry Surveys
Customer loyalty
•Industry Week
Global Expansion
•Forbes, Fortune, BusinessWeek
Market share
Ch 3 -31 Ch 3 -32
Total 1.00 .... ...... .......
31 32
Competitive Forces Forecasting Tools and Techniques
7 Characteristics of Most Competitive Firms:
◼ Forecasts are educated assumptions about
1. Market share matters future trends and events
2. Understand what business you are in ❑ Quantitative techniques – most appropriate when
historical data is available and there is a constant
3. Broke or not, fix it relationship
4. Innovate or evaporate ❑ Qualitative techniques
5. Acquisition is essential to growth
6. People make a difference
7. No substitute for quality Ch 3 -33 Ch 3 -34
33 34
Industry Analysis:
The External Factor Evaluation
(EFE) Matrix
Ch 3 -35 Ch 3 -36
35 36
Industry Analysis EFE
Total weighted score of 4.0
◼ Organizationresponse is outstanding to
threats and weaknesses
Total weighted score of 1.0
◼ Firm’sstrategies not capitalizing on
opportunities or avoiding threats
Ch 3 -37 Ch 3 -38
37 38
The Global Challenge
The today issues of business
environment Multinational Corporations (MNCs)
Simultaneously globally competitive &
◼ The Global Challenge
nationally responsive
◼ The increasingly complexity of business
today
Ch 3 -40
39 40
The Global Challenge The Global Challenge
Globalization of Industries
Globalization
▪Similar consumption patterns
Worldwide integration of:
▪Global buyers and sellers
▪Strategy formulation
▪E-commerce
▪Strategy implementation
▪Instant transmission of money,
▪Strategy evaluation information and technology
Ch 3 -41 Ch 3 -42
41 42
The External Assessment
Question?
43