Chapter 2

Introduction to External Environment

In strategic management, the external environment refers to all the factors
outside a company that can affect its performance.

A company cannot control these factors, but it must understand and respond
to them to survive and grow.

The external environment is divided into two levels:

 Macro-environment (big picture factors)

 Micro-environment (closer, industry-level factors)

1. Macro-environment

The macro-environment includes broad forces that affect all companies in a

country or region. These are large, uncontrollable factors like:

 Economy (growth, inflation)

 Politics and laws (tax rules, trade policies)
 Technology (new inventions, automation)
 Social and cultural trends (lifestyle changes, values)

Example:

When Bangladesh’s economy grows, people have more income. This helps
companies like Aarong because more people can afford lifestyle products.

2. Micro-environment

The micro-environment includes factors close to the company and specific

to its industry. These factors directly affect how the company competes and
operates, such as:

 Customers
 Competitors
 Suppliers
 Distributors and partners
Example:

For Aarong, competitors like Cats Eye or Yellow, suppliers of fabrics, and
customers in the fashion market are all part of its micro-environment.

Summary

The macro-environment is the big picture (economy, politics, culture,

technology). The micro-environment is the closer circle (customers,
competitors, suppliers). Companies cannot control these factors, but they
must understand and adjust to them to stay successful.

External Environmental Analysis

External Environmental Analysis is the process of studying the world outside
the company to understand opportunities and threats.

It helps managers make better strategies by knowing what is happening

around the business.

This process has four main steps:

1 Scanning
🔍 What it means: Looking for early signs of changes or trends in the
environment.

Example: A fashion company like Aarong watches for new global clothing
trends or changes in customer lifestyles.

2 Monitoring
🔍 What it means: Keeping a close eye on the trends or issues found
during scanning to see how they are developing.

Example: Aarong monitors how popular online shopping is becoming in

Bangladesh.

3 Forecasting
What it means: Predicting what might happen in the future based on
the trends being monitored.

Example: Seeing the growth of e-commerce, Aarong forecasts that more

customers will prefer buying clothes online in the future.
 4 Assessing
What it means: Deciding what the changes mean for the company –
are they opportunities or threats?

Example: Aarong assesses online shopping as an opportunity to reach more

customers and decides to strengthen its online store.

Summary
External Environmental Analysis helps companies:

 Scan for early signals

 Monitor important changes
 Forecast what might happen next
 Assess how those changes affect the business

By doing this, companies like Aarong can prepare better strategies and stay
ahead of competitors.

Classification of External Environment

In strategic management, the external environment means all the factors
outside the company that can influence its success.

It is divided into three levels:

1 General Environment
Definition:Broad forces that affect all companies in an economy, not
just one.
Description:Includes political, economic, technological, legal, social,
and cultural factors. These are uncontrollable, but companies must
understand and respond to them.

Example:

If Bangladesh’s economy improves, people earn more money and spend

more. Companies like Aarong benefit because customers buy more clothes
and lifestyle products.

2 Industry Environment
Definition: Forces that affect all businesses within a specific industry or
sector.
 Description: Covers customers, suppliers, new competitors entering,
substitute products, and business partners. These factors decide how
competitive an industry is.

Example:

In the fashion industry, Aarong competes with brands like Cats Eye and
Yellow, and it depends on fabric suppliers to keep producing clothing.

3 Competitor Environment
Definition: The closest and most direct level – focuses on current
competitors and future rivals.
Description: Companies study competitor strategies, pricing, products,
and promotions to respond effectively and stay ahead.

Example:

Aarong observes what brands like Yellow are doing (e.g., new collections,
discounts) and adjusts its own marketing and designs to stay competitive.

Summary
 General Environment: Big-picture forces (economy, politics, laws,
culture).
 Industry Environment: Factors affecting all companies in the same
industry (suppliers, customers, new entrants).
 Competitor Environment: Focus on direct competitors and their
strategies.

By understanding all three, companies like Aarong can prepare better

strategies and maintain success.
PESTEL Analysis
Definition

PESTEL analysis is a tool used in strategic management to study the macro-

environment – the large external forces that influence how a company
operates.

These factors cannot be controlled by the company, but understanding them

helps managers plan strategies, reduce risks, and find opportunities.

PESTEL stands for:

P – Political | E – Economic | S – Social | T – Technological | E –

Environmental | L – Legal

🔹 1. Political Factors

Meaning: Political stability, government policies, trade rules, and taxes affect
how companies do business.

Example: If the Bangladesh government promotes local handicrafts and

gives tax benefits, Aarong gains support for its artisan-based products.

🔹 2. Economic Factors

Meaning: Economic conditions like growth rate, inflation, unemployment, and

customer income shape buying power.

Example: When the Bangladeshi economy grows, people have more

disposable income to spend at Aarong. But in times of inflation, customers
might cut back on spending.

🔹 3. Social Factors

Meaning: Changes in culture, lifestyle, education, and population trends

influence what customers want.

Example: As Bangladeshi youth adopt modern fashion tastes, Aarong designs

fusion clothing to match changing preferences.
🔹 4. Technological Factors

Meaning: New technologies change how products are made, marketed, and
sold.

Example: Aarong uses online stores, mobile apps, and digital marketing to
reach a larger audience and improve customer experience.

🔹 5. Environmental Factors

Meaning: Issues like climate change, sustainability, and eco-friendly

practices are increasingly important for businesses.

Example: Aarong promotes eco-friendly fabrics and supports sustainable

production to meet environmental expectations.

🔹 6. Legal Factors

Meaning: Companies must follow laws and regulations related to labor,

safety, and consumer protection.

Example: Aarong follows labor laws to ensure artisans receive fair treatment
and wages.

Summary for Exam

PESTEL analysis studies six external factors: Political, Economic, Social,
Technological, Environmental, and Legal.

Companies like Aarong use PESTEL to spot opportunities, prepare for risks,
and make better strategies to stay competitive.
Industry Environment
Definition

The industry environment is the set of factors within the industry that
directly affect how a company competes and makes strategic decisions.

Main Factors of the Industry Environment

1 Threat of New Entrants
New companies entering the market create more competition.

Example: New fashion brands in Bangladesh can challenge Aarong’s position.

2 Suppliers
Suppliers influence prices and quality of raw materials.

Example: If fabric suppliers raise prices, Aarong’s costs increase.

3 Buyers (Customers)
Strong buyers demand better service or lower prices.

Example: Aarong’s customers expect premium quality; otherwise, they may

switch to other brands.

4 Product Substitutes
Other products can replace what the company offers.

Example: Cheaper imported clothes may substitute for Aarong’s handmade

items.

5 Rivalry Among Competitors

Competition from other brands in the same industry.

Example: Aarong competes with Cats Eye and Yellow for customers.

Environmental Threat and Opportunity Profile

(ETOP)
Definition
ETOP divides the external environment into different sectors (economic,
social, technological, etc.) and examines the level of threat or opportunity
from each.

🔹 Purpose

 Identifies where risks are coming from

 Shows where opportunities exist

Example:

 Opportunity: Growing love for Bangladeshi crafts supports Aarong’s

handmade items.
 Threat: Cheaper foreign fashion items are a risk to Aarong’s sales.

Quick Environmental Scanning Technique (QUEST)

Definition

QUEST is a fast and low-cost method to scan the environment and focus only
on urgent and critical issues.

🔹 Purpose

 Helps managers spot quick changes

 Allows fast decisions to stay competitive

Example:

If a new global fashion trend goes viral, Aarong can quickly respond using
QUEST by creating new designs before competitors do.

Summary for Exam

 Industry Environment: Consists of new entrants, suppliers, buyers,

substitutes, and rivalry — all directly shaping competition.
 ETOP: Breaks the environment into sectors to find threats and
opportunities.
 QUEST: A quick and inexpensive scanning tool for urgent issues.

By using ETOP and QUEST, companies like Aarong can understand changes,
reduce risks, and make smart strategies to stay ahead.
Industry
An industry is a group of companies that make similar products or services. It
directly affects how companies compete and earn profits.

Example: The fashion industry in Bangladesh includes Aarong, Cats Eye, and
Yellow.

Industry Analysis
Industry analysis is the study of the industry environment where a company
works. It helps to understand competition, find chances to grow, and spot
risks.

Example: Aarong studies its competitors and customer trends to improve its
strategies.

Porter’s Five Forces Model

This model helps analyze the competition by looking at five forces:

1. Threat of New Entrants

New companies entering the market increase competition. Usually bad
because it reduces market share and profits.

Example: New fashion brands in Bangladesh challenge Aarong’s position.

2. Bargaining Power of Suppliers

Suppliers can raise prices or reduce quality. Usually bad because it
increases costs.

Example: If fabric suppliers increase prices, Aarong’s costs go up.

3. Bargaining Power of Buyers

Customers demand better prices or quality. Usually bad because
strong buyers can lower profits.

Example: Customers expect good quality from Aarong and may switch
brands if disappointed.
 4. Threat of Substitute Products
Other products that can replace a company’s products reduce
demand. Usually bad because substitutes reduce sales.

Example: Cheaper imported clothes can replace Aarong’s handmade items.

5. Rivalry Among Existing Competitors

Competition among existing companies. Usually bad when competition
is strong, leading to price cuts and marketing battles.

Example: Aarong competes with Cats Eye and Yellow for customers.

Summary
An industry is a group of firms producing similar products. Industry analysis
helps understand the competitive environment and plan strategies. Porter’s
Five Forces explain the competition by looking at threats from new entrants,
suppliers, buyers, substitutes, and rivalry. These forces are mostly challenges
(bad) for companies, but knowing them helps firms like Aarong stay strong.

Strategic Group
Definition

A strategic group is a set of companies within the same industry that follow
similar strategies or compete in similar ways. These companies often have:

 Similar types of products or services

 Comparable price levels
 Similar target customers
 Similar distribution channels or marketing methods

Because of these similarities, companies within a strategic group compete

more directly with each other than with firms outside their group.

🔹 Why Strategic Groups Matter

They help analyze competition more clearly within an industry. Companies in

the same group face similar opportunities and threats. Understanding
strategic groups helps firms identify their closest competitors and find gaps
in the market.
Example of Strategic Group

In the Bangladesh fashion industry:

 High-end Lifestyle Brands Group: Includes companies like Aarong and

Cats Eye. These brands focus on premium quality, handmade or unique
designs, and higher price ranges. They target customers looking for
exclusive, quality products.
 Mass-market Brands Group: Includes brands like Yellow. These focus on
trendy, affordable clothing for young and price-conscious customers.
Their products are widely available in many retail outlets.

Summary for Exam

A strategic group is a group of firms in the same industry with similar
strategies and competitive approaches. Companies in the same strategic
group compete more closely with each other than with companies outside
the group. Understanding strategic groups helps businesses analyze
competition and develop better strategies.

Example: Aarong and Cats Eye form a high-end strategic group in

Bangladesh’s fashion industry, while Yellow belongs to a different, mass-
market group.

Competitor Analysis
Definition

Competitor analysis is the process of carefully studying the companies that a

firm competes with directly in the same industry. It helps understand
competitors’ strengths, weaknesses, strategies, and behavior to make better
strategic decisions. This analysis is especially important in industries where
only a few companies have similar size and abilities, making competition
intense.

🔹 Key Areas to Analyze in Competitor Analysis

1. Products and Services

Understand what products or services competitors offer. Identify which
 customer segments they target, such as budget or premium
customers.

Example: A competitor may offer only economy class services but plans to
expand to business class.

2. Strategy
Study the competitor’s main approach to the market. Determine
whether they focus on low cost, quality, innovation, or other factors.

Example: The competitor’s strategy might be unclear if it’s controlled by a

diversified company.

3. Capabilities
Assess how strong the competitor is in key areas like cost control,
quality, and customer service. Compare their abilities with other
competitors.

Example: The competitor keeps costs low but not as low as other low-cost
airlines.

4. Gaps or Weaknesses
Identify what competitors are missing in their products, services, or
strategy.

Example: The competitor does not offer business class, which is a gap in
their service.

5. Market Behavior and Comments

Observe how the competitor acts in the market. Are they aggressive,
stable, or predictable?

Example: The competitor was once aggressive but is now a stable and
predictable player.

Example

Consider a low-cost airline competing in a market with a few similar airlines:

The competitor focuses on economy class only, targeting budget travelers
with low fares. Their strategy is unclear because the controlling company is
involved in various transport businesses. Their costs are low but not as low
as other competitors like Jetstar or Tiger Airways. They currently do not have
business class service, which limits their market reach. Initially aggressive,
they now behave as an established and predictable competitor.
Summary for Exam
Competitor analysis helps a company understand its direct rivals by studying
their products, strategies, strengths, weaknesses, and market behavior. This
knowledge allows the company to create better strategies to compete
successfully. Key areas include products and services, strategy, capabilities,
gaps, and market behavior.

Example: A low-cost airline competitor offering only economy class, with

moderate cost advantage, planning to expand, and now acting predictably.