MARIANO MARCOS STATE UNIVERSITY

College of Business, Economics and Accountancy

Learning Activity Packets (LAP)

UNIT III – ANALYZING THE ORGANIZATION’S EXTERNAL
ENVIRONMENT

STRATEGIC MANAGEMENT PROCESS

PHASE I STRATEGY ANALYSIS

UNIT II - DEFINING/ANALYZING ORGANIZATIONAL GOALS
UNIT III – ANALYZING THE ORGANIZATION’S EXTERNAL ENVIRONMENT
UNIT IV ANALYZING THE ORGANIZATIONS INTERNAL ENVIRONMENT

Subject / Course BA 27- STRATEGIC MANAGEMENT

UNIT II ANALYZING Topics covered:

ORGANIZATIONAL GOALS
Unit II Assessing the Organization’s External Environment

A. The General External Environment

1. The Political environment

2. The Economic environment
3. The Sociocultural environment
4. The Technological
5. Legal
6. The Demographic
7. Global
B. The Frameworks in Analyzing the Organization’s External Environment

1. Techniques in Creating An Environmentally Aware Organization

2. The General Environment
3. Frameworks in Assessing External Environment
a. PESTLE Analysis
b. Scenario Analysis

C. Industry Analysis (Porter’s Five Force Model of Industry Competitiveness

Time Allotment 3 hours

Introduction Introduction
Strategies are not and should not be developed in a vacuum. In order
to avoid mistakes firms must be knowledgeable and must be responsive to the

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College of Business, Economics and Accountancy

external business environment. One of the tools for analyzing trends is

forecasting. In the development of forecasts, environmental scanning and
environmental monitoring are important in detecting key trends and events.
Managers also must aggressively collect and disseminate competitor
intelligence.

This module is focused on External Analysis, a component of Strategic

Analysis which involves identifying and analyzing the forces and trends from
the external environment that are beyond control such political, economic,
social, technological, legal forces that provide opportunities and threats.
Exploring the external environment gives a firm to identify opportunities which
can be used in strengthening the organization’s strategies.
Desired Learning Outcomes At the end of the unit, the students must have:
(DLO) 1. identified the techniques used in developing organizational awareness
to it’s external environment;
2. analyzed the impact of external forces and trends (threats or
opportunities) in strategy formulation;
3. gained skill in analyzing of the organization’s external forces and
trends using one of the frameworks ( PESTLE, Scenario Analysis or
SWOT Analysis)
4. identified the factors affecting industry attractiveness and know how to
apply Michael Porter’s Model in assessing whether the industry is
profitable or not
Required Resources / VII REQUIRED RESOURCES/MATERIALS:
Materials
Learning Activity Packet (LAP)

Learning Resource Packet (LRP)

Power point presentation of Unit III Analyzing the Organization’s

External Environment

Video: The VUCA World

E-Books:

Dess, Gregory G., et al. (2016). Strategic Management: Text and

Cases, 8th Ed. Mc Graw-Hill Education, New York 10121

"The Art of the Long View" by Peter Schwartz. © 1991 Peter Schwartz.
Published by Profile Books, 2003. Reproduced with permission of John Wiley
& Sons Ltd.

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 MARIANO MARCOS STATE UNIVERSITY
College of Business, Economics and Accountancy

Guidelines in Completing This LAP requires you to do the following activities:

the LAP
1. Read and internalize the power point lecture which is uploaded in the
MVLE.
2. Accomplish the individual performance task.
3. For group performance tasks, collaborate with your groupmates, share
insights among each other.
4. Use the activity template to better present your output.
5. Outputs (individual and group) must be submitted on or before the
due in the mvle in pdf form.
Pretest / Pre-assessment Before proceeding to the main topic, students must have identified the
external environment that affect organizations.

Learning Tasks / Activities 1. Individual Performance Task - Insight Paper. This is an insight paper regarding
the video – Leadership in the VUCA World ). Note, the video will be uploaded in
the mvle.

2. Group Performance Task. This activity will allow you to apply the concepts
in actual situations, thereby, attaining the desired learning outcomes and
competency.
Deepening Activities Group Performance Task. External Analysis of an Organization . Using
PELTLE/SWO Analysis or Scenario Analysis as framework in exploring the
general environment of an organization, identify the opportunities and
threats associated from the externa forces associated from political,
economic social, technological, legal (PESTLE) including other forces such
as globalization, natural and demographic environment. Results will
serve as an input in formulating strategies.

Synthesis Group Performance Task: Industry Analysis. From the chosen business,
determine what industry belong. Use Porter’s Five Forces Model of Industry
Competition to analyze the competitive forces of that industry and describe
the impact of industry forces to the profitability of the business. Use the
Activity Guide provide by your professor.

Prepared by:

MARGARITA G. HILARIO, Faculty In-charge

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 MARIANO MARCOS STATE UNIVERSITY
College of Business, Economics and Accountancy

LEARNING RESOURCE PACKET (LRP)

The STRATEGIC MANAGEMENT PROCESS
PHASE I STRATEGY ANALYSIS
Unit III Analyzing the Organization’s External
Environment

Author:
MARGARITA G. HILARIO
Ba 27- Strategic Management Professor

UNIT III Analyzing the Organization’s External Environment

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 MARIANO MARCOS STATE UNIVERSITY
College of Business, Economics and Accountancy

Introduction
“Strategies are not and should not be developed in a vacuum”. In order to formulate effective
strategies, organizations must be proactive in identifying and anticipating the external forces and trends
from its environment by using different techniques. This would allow the leader to be mindful to the
external environment where the business operate.

This module is focused on External Analysis, a component of Strategy Analysis which involves
identifying opportunities and threats from the external environment such political, economic, social,
technological, legal forces that provide opportunities and pose threats to the organization. Some of
the tools for analyzing trends are forecasting, PESTLE, SWOT Analysis and Scenario Analysis, among
others. In the development of forecasts, environmental scanning and environmental monitoring are
important tools to detect key trends and events. Exploring the external environment also gives a firm to
identify opportunities which can be used as bases in developing strategies.

Also, strategic leaders must also be aggressive in gathering data about competitive forces
affecting the attractiveness of an industry. Generally, several firms complete in the same industry.
Gathering industry information and understanding competitive dynamics among the different
companies in the industry is the “key to successful strategic management”.

Desired Learning Outcomes:

At the end of the unit, the students must have:

1. identified the techniques used in scanning and monitoring the external environment of the
business;
2. gained skill in analyzing of the organization’s external forces and trends using the frameworks
(PESTLE, Scenario Analysis or SWOT Analysis), Michael Porter’s Model
3. Identified and analyzed the impact of external forces and trends (threats or opportunities) and
the competitive forces of a given industry

B. Learning Input/Learning Packet

Introduction

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College of Business, Economics and Accountancy

Most firms today face external forces in a highly volatile, uncertain, complex and ambiguous
world. These conditions make business even more difficult for them to stay competitive and sustain its
operations. The degree of the environmental impact varies, it may be low, moderate or at a high level.
To cope up with the ambiguous conditions, managers are challenged to scan and monitor the
environment under which the business operates. The external environments are the possible sources of
opportunities and threats. Opportunities, if exploited can achieve strategic competitiveness. Threats, if
not avoided, may hinder the company’s effort to achieve competitive advantage.

So how do managers become more environmentally aware? Let us start exploring the three (3)
three important processes- scanning, monitoring, and gathering competitive intelligence that a
manager must use in developing forecasts. This is illustrated in Exhibit 2.

Lesson 1 The General Environment of an Organization

The general environment of an organization is composed of dimensions in the broader

society that influence in industry and the firms within it. These factors are beyond the control
of the organization and have dramatic impact to the organizations’ strategy popularly known
as PESTLE (political, economic, technological, social, legal environments). Aside from the
PESTLE, there are also other forces affecting organizations today like globalization/ASEAN
Integration, demography and the impact of natural disasters such as climate change, super
typhoons, African Swine Fever , Covid-19 pandemic, among others.

The following are the six segment of the external environment with the corresponding trends
and events that have dramatic impact on the firm or any form of organization.

1. POLITICAL/LEGAL are laws and regulations that have significant impact on governance of
the corporation
2. ECONOMIC forces refers to the nature and direction of the economy in which
business operates. It has an impact on all industries, from suppliers of raw materials
to manufacturers, retail, government, and non-profit sectors.
 Growth rate of the economy
 Level of interest rates
 Currency exchange rates
 Price inflation
 Interest rates
 Consumer Price Index
 Trend in GDP
 Changes in stock market valuations

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 Unemployment rate

3. SOCIO-CULTURAL are concerned with the society’s attitudes and cultural values
 More women in the workforce
 Increase in temporary workers
 Greater concern for fitness
 Greater concern for environment
 Postponement of family formation

4. TECHNOLOGICAL includes new knowledge, new inputs, new products, processes

and materials that gives an opportunity for an organization to improve its operations
or a threat to others.

Developments in technology lead to new products and services and improve

how they are produced and delivered to the end user. Innovations can create
entirely new industries and alter the boundaries of existing industries.
 Information and Communication Technology
 Artificial Intelligence 4.0 and beyond
 Internet of Things
 Nanotechnology
 Genetic engineering
 Emergence of internet technology
 Computer-aided design/computer-aided manufacturing systems
(CAD/CAM)
 Research in synthetic and exotic materials
 Pollution/global warming
 Miniaturization of computing technologies
 Wireless communications
5. GLOBAL includes important international, cultural and institutional characteristics
and challenges for the firm political events and critical

 Globalization provides both opportunities to access larger potential markets

and a broad base of factors of production such as raw materials, labor, skilled
managers, and technical professionals. It allows a firm to expand their
operations and market reach beyond the borders of their “home” country.
However, such endeavors also carry many political, social and economic risks.

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Hence, strategic leaders need to monitor and analyze the impact of global
trends. Examples are follows:

 Increasing global trade

 Currency exchange rates
 Trade agreements among regional blocs (e.g., NAFTA, EU, ASEAN)
 WTO (leading to decreasing tariffs/free trade in services)

6. DEMOGRAHIC environment is concerned with the population’s size, age, structure,

geographic distribution, ethnic mix, income distribution and other relevant demographic
variables. It is often analyze on a global basis because of their potential effects across
countries’ borders and because many firms are now competing in global market.

Demography is the roots of many changes in society. It includes the following:

 Aging population
 Rising or declining affluence
 Changes in ethnic composition
 Geographic distribution of the population
 Greater disparities in income level

Lesson 3 Frameworks in Analyzing the Organization’s External Environment

Organization’s cannot directly control the general environment, hence, there’s a need to gather
information to understand each segment or trend and its implications for the selection and
implementation of appropriate strategy.

1. PESTLE ANALYSIS is a strategic framework used to evaluate the external

environment of an organization to identify opportunities and threats/risks from political, economic
social, technological, environmental (natural) and legal environment.

Opportunities refers to the condition in the general environment, that if exploited,

helps a company achieve strategic competitiveness. It arises when a company can take
advantage of conditions in its environment to formulate and implement strategies that enable
it to become more profitable.

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Threat is a condition in the general environment that may hinder a company’s effort to
achieve strategic competitiveness. It arises when conditions in the external environment
endanger the integrity and probability of the company’s business.

2. The SWOT Analysis

What is SWOT Analysis?

SWOT analysis is a tool used in assessing strengths, weaknesses (SW

Analysis) on the four aspects business management (marketing, human resources,
production/operations and finance) and explore relevant opportunities and threats from
the external environment (OT Analysis).

To further understand SWOT analysis, click the link:

https://www.mindtools.com/pages/article/newTMC_05.htm. Analyses can serve as an
input in crafting your strategy.

3. Scenario Analysis

Scenario analysis is a method for predicting the possible occurrence of an object

or the consequences of a situation, assuming that a phenomenon or a trend will be
continued in the future (Kishita et al., 2016). (Journal of Cleaner Production, 2017)

Types of Scenarios

Challenging your assumptions about the future, and basing your plans and
decisions on the most likely outcomes means that your decisions will more likely be
sound, even if circumstances change. But what are the most likely outcomes? Author and
corporate strategist Peter Schwartz, one of the pioneers of scenario thinking, identified
the following common scenarios:

 Evolution: All trends continue as expected. Things gently move toward a predictable end
point.
 Revolution: A new, disruptive, factor fundamentally changes the situation
 Cycles: What goes around comes around. Boom follows bust follows boom follows
bust.
 Infinite Expansion: Exciting trends continue. Example, computer industry in the 1950s to
present.
 Lone Ranger: the triumph of the lone hero against the forces of inertia.

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 My Generation: Changes in culture and demographics affect the situation.

4. Industry Analysis : A framework in analyzing the Competitive Forces in an Industry)

Before we explore this model, let us distinguish business from industry.

Business refers to the organized efforts and activities of individuals to produce and sell goods and
services for profit.
Industry refers to the set of businesses offering the same products or services with the
same market and the same level of production.

The “five-forces” model developed by Michael E. Porter has been the most commonly used
analytical tool for examining the competitive environment. It describes the competitive environment in
terms of five basic competitive forces.

1. The threat of new entrants.

2. The bargaining power of buyers.
3. The bargaining power of suppliers.
4. The threat of substitute products and services.
5. The intensity of rivalry among competitors in an industry.

Note: The task of managers is to recognize how changes in the five forces give rise to new
opportunities and threats and to formulate appropriate strategic responses.

1. Threat of Entry by Potential Competitors The threat of new entrants refers to the possibility
that the profits of established firms in the industry may be eroded by new competitors.

The extent of the threat depends on existing barriers to entry and the combined reactions from
existing competitors.

The risk of entry by competitors is in part a function of the height to barriers to

entry, that is, factors that makes it costly for companies to enter an industry. Entry barrier is an
obstruction that makes it difficult for a company to enter an industry.

The greater the costs that potential competitors must bear to enter an industry, the
greater are the barriers to entry and the weaker is this competitive force. The entry barriers
may keep potential competitors out of an industry even when industry profits are high.

According to Joe Bain, an economist who did the classic work on barriers to entry
identified three main sources to new entry:

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1. Product Differentiation When existing competitors have strong brand

identification and customer loyalty, differentiation creates a barrier to entry by forcing entrants
to spend heavily to overcome existing customer loyalties.

2. Absolute advantages.

3. Economies of Scale are the relative cost advantages associated with large volumes of
production that lower a company’s cost structure.

What are the sources of economies of scale?

1. mass producing standardized output

2. discounts on bulk purchases of raw material inputs and component
parts
3. Reduce fixed production costs by producing large volume
4. cost saving associated from spreading marketing and advertising cost

How Competitive Forces Shape Strategy

Forces Driving Industry Competition

Risk of entry by
potential entrants

Intensity of
Bargaining Bargaining
power of rivalry among Power of
suppliers established Buyers
existing firms

Threat of
Substitutes

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Porter’s Five Forces Model

2. The Bargaining Power of Buyers(retailers/wholesalers) refers to the ability of buyers to

bargain down the prices charged by companies in the industry or to raise the costs of companies
in the industry by demanding better product quality and service. By lowering prices and raising
costs, powerful buyers can squeeze profits out of an industry. Thus, powerful buyers can be
viewed as a threat.

The following are conditions where buyers are most powerful:

1. When the buyers purchase in large quantities.

2. When switching costs are low for buyers for a large percentage of its total orders.
3. When it is economically feasible for buyers to purchase an input from several companies at
once so that buyers can play off one company in the industry against another.
4. When buyers can threaten to enter the industry and produce the product themselves and
thus supply their own needs.

3. The Bargaining Power of Suppliers. Suppliers are the organizations that provide inputs into the
industry such materials, services, and labor.

The bargaining power of suppliers refers to the ability of the suppliers to raise input prices, or
to raise the costs of the industry in other ways-for example providing poor quality inputs or poor
service.

According to Porter, suppliers are most powerful in these situations:

1. The product of the suppliers sell has few substitutes and it is vital to the company’s
industry.
2. The profit of the suppliers is not significantly affected by the purchases of
companies in a particular industry
3. Companies in an industry would experience significant switching costs if they moved
to the product of a different supplier
4. Suppliers can threaten to enter their customer’s industry and use their inputs to
produce products that would compete directly with those of companies already in
the industry.

4. Threat of Substitute Products are products of different businesses or industries that can satisfy
similar customer needs. The existence of close substitutes is a strong competitive threat
because this limits the price that companies in one industry can charge for their product, and
thus industry profitability.

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Other entry barriers are:

a. Customer switching costs arise when it costs customer time, energy and money to
switch from the products offered by one established company to the products offered by a new entrant.

b. Access to Distribution Channels The new entrant’s need to secure distribution

for its product create a barrier to entry

c. Government Regulations. The government can limit or even foreclose entry to

industries with such controls as license requirements and limits on access to raw material.

5. Rivalry Among Established Companies

Rivalry refers to the competitive struggle between companies within an industry to gain market
share from each other.

Businesses compete in terms of price, product design, advertising and promotion spending,
direct selling efforts, and after-sales service and support.

The intensity of rivalry among established companies within an industry is largely a function
of three factors:

1. Industry Competitive Structure. This refers to the number and size distribution of
companies in it. Industry structures vary, and different structures have different implications of the
intensity of rivalry.

Fragmented industry consists of a large number of small or medium sized companies, none
of which is in a position to determine industry price.

Consolidated industry is dominated by a small number of large companies (an oligopoly), of

in extreme cases by just one company (a monopoly) and companies often are in a position to
determine industry prices.

2. Demand Conditions

3. The Height of Exit Barriers. Exit barriers are obstruction that makes it difficult for a
company to exit the industry. This include economic, strategic and emotional factors that prevent
companies from leaving an industry.

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If exit barriers are high, companies become locked into an unprofitable industry where overall
demand is static or declining. The result is often excess production capacity, which leads to even
more intense rivalry and price competition as companies cut prices in an attempt to obtain the
customer orders needed to use their idle capacity and cover their costs.

The Common Exit Barriers :

1. Investments in assets such as specific machines, equipment and operating facilities that are
little or no vale in alternative uses or cannot be sold off.
2. High fixed cost of exit, such as severance pay, health benefits and pensions that have been
paid to workers
3. Emotional attachments to an industry, as when a company’s owners or employees are
unwilling to exit from an industry for sentimental reasons or pride.
4. Economic dependence on the industry because company relies on a single industry for its
revenue and profit.

SUMMARY

To understand the business environment of a particular firm, you need to analyze both the
general environment and the firm’s industry and competitive environment. Generally, firms complete
with other firms in the same industry. Gathering industry information and understanding competitive
dynamics among the different companies in your industry is key to successful strategic management.

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