Strategic Management

Chapter 3- EXTERNAL ENVIRONMENT ANALYSIS

BBA VIII

Hari Om Sharma
 Remote Environment Analysis
Environment Industry Operating
PEST Environment Environment

• Political/Legal • Entry barriers

• Supplier power •
• Economical • Buyer power Competitors
• Creditors
• Socio-cultural • Substitute
• Customers
FIRM
products
• Technological • Competitive
• Labor
• Suppliers
rivalry
 Porter’s Five Force
 ItAnalysis
is devised by Michael Porter and contends that “the
collective of these forces determines the ultimate profit
potential in the industry, where profit potential is measures in
terms of long-run return on invested capital”
 The nature and degree of competition in an industry depends
upon five forces
1. Threats of New Entrants (competitor bringing in new
capacity with a desire to increase market share)
2. Threats of Substitute Products (customers finding
similar solutions from other product types)
3. Bargaining Power of Suppliers (a situation where
suppliers can force buyers to pay higher prices affecting
profitability and this can occur if supplier has a monopoly
or the buyer’s industry is not important to the supplier)
4. Bargaining Power of Buyers (a situation where buyers
forces down the prices and this occurs if there is many
competing and substitute products and switching costs are
low)
5. Competitive Rivalry (intensity of competition)
 Porter’s Five Force Model
Threat of New Substitute
Entrants Products
Brand identity
Product differentiation Performance
Capital Switching costs
Economies of scale Buyer’s propensity to
Rivalry
Government policy substitute
Determinant
s

Industry growth
Product
differences
Competitors
Supplier Power diversity
Exit barriers Buyer Power
Number of suppliers
Buyer switching costs
Importance of volume
Buyer information
to suppliers
Options available
Example of Under Armour

Competitive rivalry:

Under Armour faces intense competition from Nike, Adidas,

and newer players.

Nike and Adidas, which have considerably larger resources at

their disposal, are making a play within the performance
apparel market to gain market share in this up-and-coming
product category.

Under Armour does not hold any fabric or process patents,

hence its product portfolio could be copied in the future.
Example of Under Armour

Bargaining power of suppliers: A diverse supplier base

limits supplier bargaining power. Under Armour’s products
are produced by dozens of manufacturers based in multiple
countries. This provides an advantage to Under Armour by
diminishing suppliers’ leverage.

Bargaining power of customers: Under Armour’s

customers include wholesale customers and end-user
customers.

Wholesale customers, like Sporting Goods, hold a certain

degree of bargaining leverage, as they could substitute
Under Armour’s products with those of Under Armour’s
competitors to gain higher margins.

The bargaining power of end-user customers is lower as

Under Armour enjoys strong brand recognition.
Example of Airline

Threat of new entrants: The threat of new entrants in the

airline industry can be considered as low to medium.

It takes quite some upfront investments to start an airline

company (e.g. purchasing aircrafts). Moreover, new entrants
need licenses, insurances, distribution channels and other
qualifications that are not easy to obtain when you are new
to the industry (e.g. access to flight routes).

Furthermore, it can be expected that existing players have

built up a large base of experience over the years to cut
costs and increase service levels.
Example of Airline

Bargaining powers of suppliers:

The bargaining power of suppliers in the airline industry can

be considered very high.

When looking at the major inputs that airline companies

need, we see that they are especially dependent on fuel and
aircrafts.

These inputs however are very much affected by the

external environment over which the airline companies
themselves have little control.
Example of Airline

Bargaining powers of buyers:

Bargaining power of buyers in the airline industry is high.

Customers are able to check prices of different airline

companies fast through the many online price comparisons
websites such as Skyscanner and Expedia.

In addition, there aren’t any switching costs involved in the

process. Customers nowadays are likely to fly with different
carriers to and from their destination if that would lower the
costs.
Example of Airline

Threat of substitute products:

In terms of the airline industry, it can be said that the

general need of its customers is traveling.

It may be clear that there are many alternatives for traveling

besides going by airplane.

Depending on the urgency and distance, customers could

take the train or go by car.

Especially in Asia, more and more people make use of

highspeed trains such as Bullet Trains and Maglev Trains..
Example of Airline

Competitive Rivalry:

When looking at the airline industry, we see that the industry

is extremely competitive because of a number of reasons
which include the entry of low cost carriers, the tight
regulation of the industry wherein safety become paramount
leading to high fixed costs and high barriers to exit, and the
fact that the industry is very stagnant in terms of growth at
the moment.
Class Activity- Porter’s 5
Force Model
 Strategic Group Mapping
 Strategic group – a group of firms in an
industry which follow the same or similar
strategy for competitive advantage
 The competition between firms within a
strategic group is greater than the competition
between a member of a strategic group and
competitors outside that of strategic group
 Intra-strategic group competition is more
intense than is inter-strategic group competition
 Strategic groups of firms within an industry
constitute a cluster and imply that the firms in
the same industry may not be direct
competitors for other firms
 The firms in the strategic group my be treated
similarly inn terms of technological leadership,
product quality, pricing policies, distribution
channels, customer service
Strategic Group Map of Selected Automobile
Industry
Strategic Group
Implications
 Firms within the same group offer similar products
to same customer groups – competition can be
intense affecting profitability
 The strengths of five industry forces differ across
strategic groups
 The closer the strategic groups are in terms of
their strategies, the greater the likelihood of
rivalry between the groups
What is PEST?
 Changes in your business environment can create
great opportunities for your organization – and
cause significant threats.
 Opportunities might come from new technologies
that help you reach new customers, from new
funding streams that allow you to invest in better
equipment, and from changes to government
policy that opens up new markets.
 Threats might include deregulation that exposes
you to intensified competition, a shrinking market,
or increases to interest rates, which can cause
problems if your company is burdened by debt.
What is PEST/ PESTEL?

 PEST Analysis is a simple and widely used tool

that helps you to analyze the Political, Economic,
Socio-Cultural, and Technological changes in your
business environment. So you can gain a better
understanding of the "big picture" forces of
change that you're exposed to, and, from this,
take advantage of the opportunities that they
present.
 PEST – Political and Legal
 It defines the legal and regulatory parameters within
which firm must operate
 Protectionist policies and entry barriers for MNCs,
regulations, economic reforms and liberalization-
Campa Cola
 Protecting and benefiting firms – patent laws,
government subsidies, product research grants
 Examples:
 Campa Cola in during Indian Liberalization in 1980s
PEST – Political and Legal
 When is the country's next local, state, or national
election? How could this change government or regional
policy?
 Who are the most likely contenders for power? What are
their views on business policy, and on other policies that
affect your organization?
 Depending on the country, how well developed are
property rights and the rule of law, and how widespread
are corruption and organized crime? How are these
situations likely to change, and how is this likely to affect
you?
 Could any pending legislation or taxation changes affect
your business, either positively or negatively?
 How will business regulation, along with any planned
changes to it, affect your business? And is there a trend
towards regulation or deregulation?
 PEST – Economic Factors
 Nature and direction of the economy in
which the firm operates
 Economic growth rate, money supply,
employment rates
 GDP, GNP, interest rates, tax rates,
inflation rates, income
 The economic groups like EU has brought
up opportunities and challenges to the
products -Example –Brexit in 31st Jan, 2020.
 Loss of jobs/ Unemployment
 Inflation due to tariffs
 2.5 % GDP decrease
 6% investment decrement
 6.5% unemployment
 1 % capital income
PEST – Economic Factors

 How stable is the current economy? Is it growing,

stagnating, or declining?
 Are key exchange rates stable, or do they tend to
vary significantly?
 Are customers' levels of disposable income rising
or falling? How is this likely to change in the next
few years?
 What is the unemployment rate? Will it be easy to
build a skilled workforce? Or will it be expensive
to hire skilled labor?
 PEST – Social Factors
 Socio-cultural environment - demographical changes
(population quantity and quality)
 Cultural aspects (values, customs, beliefs, opinions,
lifestyles changes, new practices)
 Religious, ethical, and moral factors
 Social change has been the accelerating interest of
consumers and employees in quality-of-life issues –
flexible working hours, entertainment
 As social attitudes change, so does the demand for
 cloths, book, food, beverages, including ready-to-eat
packaged foods, frozen foods, home appliances
 leisure activities – health clubs, eating out coffee culture,
travel and tours
 Example-Shift of People’s buying behavior to Online
market
 Several offers during wedding season or festive season
PEST – Social Factors
 What is the population's growth rate and age profile?
How is this likely to change?
 Are generational shifts in attitude likely to affect what
you're doing?
 What are your society's levels of health, education,
and social mobility? How are these changing, and
what impact does this have?
 What employment patterns, job market trends, and
attitudes toward work can you observe? Are these
different for different age groups?
 What social attitudes and social taboos could affect
your business? Have there been recent socio-cultural
changes that might affect this?
 How do religious beliefs and lifestyle choices affect
the population?
PEST – Technological Factors
 Pace of technological change and new products
developments
 To avoid obsolescence and promote innovation, a firm
must be aware of technological changes that might
influence its industry
 Technological adaptations can suggest possibilities for
new products or for improvements in existing products,
or in manufacturing or marketing techniques
 Technological forecasting – the science of anticipating
environmental and competitive changes and estimating
their importance to an organization’s operations – it
alerts managers of challenges and opportunities
 Example- Taking food orders in a Restaurant through
App
 ChatGPT getting popular and useful for many industries
PEST – Technological
Factors
 Are there any new technologies that you could be
using?
 Are there any new technologies on the horizon
that could radically affect your work or your
industry?
 Do any of your competitors have access to new
technologies that could redefine their products?
 In which areas do governments and educational
institutions focus their research? Is there anything
you can do to take advantage of this?
 How have infrastructure changes affected work
patterns (for example, levels of remote working)?
Ecological/Environment
Factors
 The reciprocal relationship between
business and the ecology – human being’s
interaction with natural elements
 Companies are developing eco-friendly
green products like biodegradable
packages, hybrid cars etc.
 Companies are concerned with air, water,
land pollutions as the consumers are
concerned too
Ecological Factors

 Water pollution
 Air pollution
 Recycling standards
 Renewable energy
 Natural Disasters
PEST Analysis of an Airline
Industry
 Political- 9/11 terrorist attack
 Economic- New Environment tax is introduced
 Social- People take lot more holidays abroad these
days
 Technological- Booking tickets direct over the
internet
 Legal- Extra Checks at customs
PEST Analysis of Pathao
 Political- Need of registering the business model in
country like Nepal
 Have to follow minimum wage rules.
 Need to face law suit with taxi association
 Economic- Easily accessible
 Affordable fare charges
 Offer job opportunities
 Social- User Friendly
 Quick pick up- mobility
 Gives better ride experience than taxi
 Affordable
 Technological- Excellent App for users
 Using social media for promotion
 Ecological- Fuel Usage may increase
 Traffic congestion is a concern
Class Assignment-Group
Work
 Select the company of your final project
 Start with the brainstorming session to ideate on
potential mega-trends, which can impact the industry
over the next 1-5 years.
 Organize your ideas by category, brainstorm
implications to the industry, and then prioritize the
top 2-3 for each category.
 The next step is to think through potential actions or
strategies to either capitalize on opportunities or
neutralize / minimize threats.
PEST Or PESTLE-Summary