STRATEGIC MANAGEMENT
Course Information: 3rd Week/ External Analysis
Instructor's Name: DR. A. MERVE URFA YILMAZ
E-mail: aysemerveurfa@[Link]
murfa@[Link]
isletme_ytu yildizisletme [Link]
Outline
External Analysis
The PESTEL(Political, Economic, Sociocultural, Technological,
1
Ecological, Legal Factors) Framework
Industry Structure and Firm Strategy: The Five Forces Model (The
2 Threat of Entry, The Power of Suppliers, The Power of Buyers, The
Threat of Substitutes, Rivalry among Existing Competitors)
3 External Factor Evaluation (EFE) Matrix
Macro Environmental Forces and
The PESTEL Framework
Macro Environmental Forces
Political Factors:
Ideological Forces: Tesla-USA vs. China
State Control
Political Stability/Instability
Political Challenges-Risks: Eni and Shell- Nigaria
Historical Political Conflicts and Hostilities: Tata Motors-India and Pakistan
Terrorism: TotalEnergies-Mozambique
Government Support for Industry and Companies: Germany's strong
support for the renewable energy sector
Macro Environmental Forces
Economic Factors:
Economic Cycles (Crisis, Recovery, Prosperity, Decline)
Monetary and Fiscal Policies
Inflation rates
National Income
Costs of Production Factors
Interest rates
Consumption patterns
Unemployment trends
Macro Environmental Forces
Sociocultural and Demographic Factors:
Verbal and Nonverbal Communication
Personal Spaces Regional changes in tastes and
Religion preferences
Aesthetics Number of marriages
Education and Literacy Levels Number of divorces
National Cultural Characteristics Number of births
Population changes by race, age, and Number of deaths
geographic area
Macro Environmental Forces
Technological Factors:
Automation
Internet
Cybersecurity
Technical Infrastructure
Technical Competence
Share of R&D Expenditures
Macro Environmental Forces
Environmental Factors:
Carbon Footprint: is the measurement of
greenhouse gases released into the atmosphere
due to human activities, calculated in carbon
dioxide (CO2) equivalent.
Environmental Pollution, Eco-Friendly Initiatives
Single-Use Waste Mechanisms, Emissions
Climate Conditions
Country Locations
Macro Environmental Forces
Legal Factors:The concrete form of political
environment factors as formal regulations.
Commercial Law
Obligations Law
Bankruptcy and Enforcement Law
Tax Law
Labor Law
Industry Structure and Firm Strategy:
The Five Forces Model
Industry: A group of incumbent firms with more or less the same set of
suppliers and buyers.
Industry analysis: A method to
(1) identify an industry’s profit potential and
(2) derive implications for a firm’s strategic position within an industry.
Strategic position: A firm’s strategic profile based on the difference
between value creation and cost.
Competion in the Five Forces Model
Five forces model: A framework that identifies five forces that determine
the profit potential of an industry and shape a firm’s competitive strategy.
Porter derived two key insights that form the basis of the five forces model:
1. Competition is viewed more broadly in the five forces model
2. Industry profit potential is a function of the five competitive forces:
The stronger the five forces, the lower the industry’s profit potential
The weaker the five forces, the greater the industry’s profit potential
Competion in the Five Forces Model
Rivalry Among Existing
Competitors
The rivalry among existing competitors is high when:
There are many competitors in the industry.
Industry growth is slow, zero or negative.
Exit barriers are high.
Incumbent firms cannot read or understand other firms’ strategies well.
Fixed costs are high and marginal costs are low.
Excess capacity exists in the industry.
The product or service is perishable.
The Threat of Entry
The threat of entry describes the risk of potential competitors
entering the industry.
Potential new entry makes an industry less attractive in two significant
ways:
1. It reduces the industry’s overall profit potential: When new
companies try to enter an industry, existing companies may lower
their prices to discourage competition.
2. It increases spending by incumbent firms: The threat of entry by
additional competitors may force incumbent firms to spend more to
satisfy their existing customers.
The Threat of Entry
Entry barriers, which are advantageous for incumbent firms, are
obstacles that discourage or prevent entry into an industry.
Incumbent firms can benefit from several types of entry barriers:
Economies of scale
Network effects
Customer switching costs
Capital requirements
Advantages independent of size
Government policy
The Threat of Entry
Economies of scale: refer to the cost advantages that a
company gains as it produces more goods or services.
Network effects: The positive impacts that one user of a product
or service has on other users of that product or service.
Customer switching costs: Switching costs are the costs that a
customer incurs when changing to the products, services, and/or
brands offered by a different vendor.
Capital requirements: refer to the amount of money needed to
enter and compete in an industry.
Advantages independent of size: Brand loyalty
Government policy
The Power of Suppliers
Powerful suppliers reduce a firm’s ability to obtain superior performance for two
reasons:
1. Powerful suppliers can raise the cost of production by demanding higher
prices for their inputs or by reducing the quality of input factors or service level
delivered.
2. Powerful suppliers threaten firms because they reduce the industry’s profit
potential by capturing part of the economic value created.
The Power of Suppliers
The relative bargaining power of suppliers is high when:
The supplier’s industry is more concentrated than the industry it sells to.
Suppliers do not depend heavily on the industry for much of their revenues.
Incumbent firms face high switching costs when changing suppliers.
Suppliers offer products that are differentiated.
There are no readily available substitutes for the suppliers’ products or
services.
Suppliers can credibly threaten to forward-integrate into the industry (that is,
move into the buyer’s industry).
The Power of Buyers
The power of buyers is high when:
There are only a few buyers, and each buyer purchases large quantities
relative to the size of a single seller.
The focal industry’s products (that the buyer purchases) are standardized
or undifferentiated commodities.
Buyers face low or no switching costs.
Buyers can credibly threaten to integrate into the industry backwardly.
The Threat of Substitutes
Substitutes are products or services from outside an industry that
can meet customer needs in a similar way.
A high threat of substitutes reduces industry profit potential by limiting
the price that the industry’s competitors can charge for their products
and services. The threat of substitutes is high when:
The substitute offers an attractive price/performance trade-off.
The buyers’ cost of switching to the substitute is low.
A Sixth Force: The Strategic Role
of Complements
Complement: A product, service, or competency that adds value to the original
product offering when the two are used in tandem.
Complementor: A company that provides a good or service that leads
customers to value your firm’s offering more when the two are combined.
Co-opetition: Cooperation by competitors to achieve a strategic objective.
Digital Strategy and Five Forces
Rivalry among competitors is likely to be more intense.
Threat of potential entry is also heightened because digital technologies lower
entry barriers.
Bargaining power of suppliers is often enhanced.
Bargaining power of buyers is often enhanced.
The threat of substitutes will become stronger.
The External Factor Evaluation Matrix
Step 1: Develop a Full and Narrow List of Key External Factors:Create a list of
50 to 100 factors related to PESTEL and competitive areas. Then, narrow the list to
20 key external factors.
Step 2: Assign Weights to Key External Factors: assign a weight that ranges
from 0.01 (not important) to 1.0 (all�important) for each factor.
Step 3: Assign Ratings to Key External Factors: assign a rating between 1 and 4
to each key external factor to indicate how effectively (or ineffectively) the firm’s
strategies are responding to the opportunity or threat.
Step 4: Obtain Weighted Scores: multiply the factor’s weight by its rating to
determine a weighted score for each factor.
Step 5: Obtain Total Weighted Score: Sum the weighted scores to determine the
total weighted score for the organization.
The External Factor Evaluation Matrix
References
Rothaermel, F. T. (2024). Strategic management. McGraw-Hill.
David, F. R. (2023). Strategic management concepts and cases.
Prentice hall.
Peng, M. W. (2022). Global strategy. Cengage learning.
Ülgen, H., Mirze, K. (2016). İşletmelerde Stratejik Yönetim. İstanbul:
Beta.
Thank you:)
Any questions?