Abhishek Srivastav

Learning Outcomes
 After studying this topic you should be able to:
 Understand the role of external analysis in
strategy formulation.

 Use a range of tools to analyse an

organisation’s external environment.

 Explain the limitations of these analytical tools

and the role of more subjective analytical
approaches.
Link to overall strategic management
 “Strategic management includes understanding
the strategic position of an organisation, strategic
choices for the future and managing strategy in
action (Johnson et al., 2008:12).”

 Strategic position identifies the impact of

 External environment
 Strategic capability
 Expectation and influence of stakeholders on
strategy
The Business Environment
(Johnson et al. 2008: 54)

The
Organisation

2-4
External analysis stages
Analysing the external environment involves breaking a complex inter-
related reality into sets of issues to make the analysis manageable. The
main sets of issues are usually:

 Macro-environment – these are broad trends shaping the

national and international environment in terms of political,
economic, social and technological trends (i.e. PESTEL factors,
key drivers ).
 Micro-environment – this is the operating environment or
industry sector in which the firm competes. It addresses a range of
issues such as suppliers, customers, competitive intensity, threat
of new entry and of substitute products arising (i.e. the ‘five-
forces’ analysis).
 Competitor analysis – seeks to understand the rival offers from
other firms seeking to serve the same customers and to out
manoeuvre their managers with our innovation and competitive
moves.
 Market analysis seeks to evaluate the current needs of today’s
customers and the emerging needs of tomorrow’s customers so
new products can be anticipated. These will be different in
different market segments.
 The Macro-Environment
 Difficult for the firm to influence
 Changes can be far-reaching
 The media: rich source of both information and
speculation
 Tools for analysing the macro-environment
 The PESTEL (Variants PEST/DEEPLIST) framework
 Key drivers
 Scenarios
 The PESTEL Framework
 The PESTEL framework categorises environmental
influences into six main types:
 Political -
 Economic
 Socio-cultural
 Technological
 Environmental
 Legal

 PESTEL analysis evaluates the broad societal

trends that affect many industries. It identifies current
and future developments that will shape the micro-
environments of each industry sector.
 Good PESTEL Analysis
 Focuses on society wide.
 Based on sound research of actual issues.
 Provides evidence from the research to validate
points made.
 Future oriented.
 Interpretive and not descriptive
 Major Risk
 Like the old-fashioned SWOT technique, PESTEL
helps us make lists
 Lists can help us think, but…
 A list should be the beginning, not the end of
thinking
 Harrison (2003: Ch 2) integrates this with industry
and company analysis
 Johnson et al. (2008:55-59) look at the way
PESTEL factors combine…
 then at key drivers and trends of business change
Key Drivers and Scenarios Planning
 Key drivers for change are environmental
factors that are likely to have a high impact on
the success or failure of strategy.

 Scenarios are detailed and plausible views of

how the business environment of an organisation
might develop in the future based on key drivers
for change about which there is a high level of
uncertainty.
 Industries and Sectors Analysis
 An industry is a group of firms producing the same
principal product or service.
 The industry analysis involves identifying
 Competitive forces
 Industry life cycles
 Competitive cycles

Porters five forces framework has two main aims:

 To understand the drivers of competitive behaviour in
the sector and;
 To evaluate the long-run profit potential of the sector
The Five Forces Framework (Johnson et al. 2008: 60)

Potential
entrants

Competitive
Suppliers Buyers
rivalry

Substitutes
 Five forces model – Details
• Capital requirements
• Differentiation
• Switching costs
• Access to Threats of Potential • Size of purchases
supply/distribution entrants • Differentiation in product
channels • Few substitutes
• Intellectual property • A few big suppliers
• Expected retaliation • Threat of backward integration
• Legislation/Government
action Competitive rivalry
• Economies of scale
• Competitor balance
Power of • Industry growth rate Power of
Suppliers • High fixed costs Customers
• High exit barriers
• Low differentiation
• Size of purchases
• Undifferentiated product
• Per cent of cost
• Low margins (buyer)
• Threat of forward • Degree of differentiation
integration • Technological innovation
• Impact on quality Substitute • Price performance relationships
• Price performance is
high
5
 Evaluation of the Five Force Model

ADVANTAGES DISADVANTAGES
 Firms industry environment is a
small determinant of that firm’s
 Identifies drivers of profitability
competitive behaviour.  Suppliers of complementary
products are ignored
 Indicates trends in  Highlights the need to
profitability. disaggregate broad industry
groupings and examine
 Highlights strategies to competition at segment or
strategic group level Assumes all
alter industry structure. business relationships are
competitive.
(Lynch 2000)  Assumes industry boundaries are
stable over time, ignoring
innovation and entrepreneurship.
(Grant 2005)
The Industry Life Cycle
(Johnson et al. 2008: 68)

2-15
Cycles of Competition
(Johnson et al. 2008: 69)

2-16
 Competitors analysis
 This involves the analysis of strategic groups,
market segments and strategic customers.

 Strategic groups
 Strategic groups are organisations within an industry with
similar strategic characteristics, following similar strategies or
competing on similar bases.

 Benefits identifying strategic group analysis

 Understanding competition
 Analysis of strategic opportunities
 Analysis of mobility barriers
 Strategic Group Analysis (SGA)
“A strategic group is the group of firms in an industry following
the same or a similar strategy along the strategic dimensions1.”
Porter (1980), p.129.

Broad Motor Industry

Global full-line
producers
Regional The key to the strategic
Broad-line group concept is that
Product Luxury differences in profitability
Range producers between groups persists
because of the existence
of mobility barriers that
National Niche- High performance stop firms entering or
specialists sports
moving between groups
Narrow and thus competing away
National Geographic Global profit differentials.
Scope

1. “strategic dimensions” refers to any significant criteria for grouping firms, e.g. segments served,
branding, cost position, etc.
 Characteristics for Identifying
Strategic Groups
Scope of activities Resource commitment
 Extent of product  Extent of branding
diversity  Marketing effort
 Extent of geographic  Extent of vertical
coverage integration
 Number of segments  Product quality
served  Technological
 Distribution channels leadership
 Organisational size

2-19
 Market Analysis
• Determines attractiveness and competitive
advantage
• Key variables to determine:
• Overall size
• Market shares of key competitors
• Growth rates/trends
• Segments (relative growth rates)
• Profitability
• Existing/likely competitors
• Accessibility issues
 Strategic customer and critical
success factors
 A strategic customer is the person(s) at whom the strategy is primarily
addressed because they have the most influence over which goods or
services are purchased.
 What do our customers want? (basic source of profit in the industry,
who are they, what are their needs and how do they make
decisions?)

 Critical success factors (CSFs) are those product features with

which a organisation must outperform the competition because they
are particularly valued by a group of customers.
 “those factors within the firm’s market environment that determine
its ability to survive and prosper” (Grant 2005, p92)

 What does the firm need to do to survive competition? (how intense

is competition and what are the key dimensions upon which
competitors compete?)

 How then can firms use their resources and capabilities to profit
from KSF?
 Market segment analysis
 A market segment is a group of customers who
have similar needs that are different from customer
needs in other parts of the market.

 Market segment analysis

 Identify key segmentation variables
 Construct a segmentation matrix
 Analyse segment attractiveness
 Identify KSFs in each segment
 Choose between broad or narrow segment focus.
Some Bases of Market Segmentation
(Johnson et al. 2008:77)

2-23
 Summary
 External analysis involves four main areas: PESTEL
factors, Industry analysis, competitor profiling and
market analysis.
 The macro-environment can be analysed in terms of
PESTEL factors.
 Industries and sectors can be analysed using Porter’s
Five Forces model.
 Industry changes can be analysed through industry life
cycle & hypercompetitive models of competition.
 The inner layer of the environment can be analysed
with strategic group analysis, market and segment
analysis.
 Reading materials
Required reading:
 Johnson et al (2008), chapter 2.

Recommended reading:
 Porter, M.E. (1980). Competitive Strategy:
Techniques for analysing industries and
competitors. Free Press: New York. Chapters 1 &
3
 Harvard Business Review (1991). Michael E
Porter on Competition and Strategy. Harvard
Business Press, pp3-11
 Assignment Case Study 1
 Using the data from the case study assignment,
carry out for the tourism industry:

 A PESTEL analysis
 A five force analysis and what do you
conclude?
 How does the changes in the PESTEL and
five forces impact on TUI
 What are the relative strengths and
weaknesses of the TUI