Lecture 2: External Environmental Scanning Sajid Syed
Lecture 2: External Environmental Scanning Sajid Syed
Sajid Syed
The external environment of an organisation
can be divided into the general and the
competitive environment
We shall consider the following components
of the environment in our analysis
The general environment
The Industrial environment
The competitive environment
Aim is to identify the future opportunity and
threats in the external environment
A good reader uses judgement with his
experience
The opportunity cost is the time, effort and
resources devoted to processing the
information, time which could be used for
other purposes
PEST stands for Political, Economic, Social
and Technological and roughly defines the
scope of what is required
The underlying thinking of the PEST
analysis is that the enterprise should react
to the changes in its external environment
This reflects the idea that strategy requires
a fit between the capabilities and the
external environment and so it is necessary
for an enterprise to react to changes.
Political Environment
Changes in legislation tend to occur in a cycle
extended over several years.
Most regulation is announced some years before
it becomes effective and future trends become
apparent even before legislation is formulated
Should include the changes in
the domestic political climate
Change in the government
Special legislation and regulations
Again political change may affect certain
industries more than the others
For instance cigarette industry
Analyst should consider
How stable is the political environment?
Will government policy influence laws that
regulate or tax your business?
What is the government's position on
marketing ethics?
Analyst should consider
What is the government's policy on the
economy?
Is the government involved in trading
agreements such as EU, NAFTA, or others?
ecological/environmental issues
current legislation home market
future legislation
European/international legislation
regulatory bodies and processes
government policies
government term and change
trading policies
funding, grants and initiatives
home market lobbying/pressure groups
international pressure groups
wars and conflict
Likely to include the effects of
Economic cycles
Patterns of world trade
currency conversion rate changes
changes in capital markets
labour markets and rates
Almost all businesses would be affected, except
those which are counter cyclical
Some may be hit early while some may recover
late
Eg. of counter cyclical industries may include
insolvency practitioners and perhaps book
selling (because reading is cheaper than some
other forms of entertainment
Each recession tends to have slightly different
characteristics. Simple extrapolation from the
last recession is not enough?
home economy situation
home economy trends
overseas economies and trends
general taxation issues
taxation specific to product/services
seasonality/weather issues
market and trade cycles
specific industry factors
interest and exchange rates
international trade/monetary issues
includes the effects of
demographic patterns,
tastes and habits and
concerns about the environment and sustainable
development.
Demographic trends change slowly
Demographic trends are more predictable than long
term social trends
Changes in tastes and habits on the other
hand may occur very fast and may be totally
unpredictable
Eg. Fashion businesses tend not to attempt
the future but rather rather to gear
themselves to be able to react fast to changes
as it occurs.
Factors that should be considered include
What is the dominant religion?
What are attitudes to foreign products and
services?
How much time do consumers have for leisure?
What are the roles of men and women within
society?
How long are the population living?
lifestyle trends
demographics
consumer attitudes and opinions
media views
law changes affecting social factors
brand, company, technology image
consumer buying patterns
fashion and role models
major events and influences
ethnic/religious factors
advertising and publicity
ethical issues
Covers the effects of technological change
Products,
processes and
distribution cycles
Changes in telecommunications and
information technology have a wider impact
and are likely to affect almost all enterprises
The impact of the internet and E-Commerce
is the latest wave of change derived from
technological advance in this field.
Helps to bring about
Product innovation
Process innovation
Product innovation tends to be particularly
important for young and high technology
businesses.
Process innovation may be more important in
more mature businesses where rate of
change in the product has decreased.
Transport and communication affect
distribution
competing technology development
associated/dependent technologies
replacement technology/solutions
maturity of technology
manufacturing maturity and capacity
information and communications
consumer buying mechanisms/technology
technology legislation
innovation potential
technology access
global communications
ecological/environmental issues
current legislation home market
future legislation
European/international legislation
regulatory bodies and processes
government policies
government term and change
trading policies
funding, grants and initiatives
home market lobbying/pressure groups
international pressure groups
wars and conflict
Focus on those changes that may affect the
enterprise
Collection of relevant information
Global or geographically dispersed
enterprises will have to conduct separate
PEST analyses for the different regions as
trends occur at different rates in different
places.
Describes a starting point for discussion and
analysis
• Draws on people’s sense of ‘what is really
going on’
• Provides information about the origins of
the current situation
• Contributes to a better understanding of
‘what we’re up against’ (challenges faced and
barriers to be overcome)
Focuses on analysing the competitors
In some industries(such as insurance
industry) very detailed information is made
available by an industry association or
independent monitoring agencies.
In other industries such as the chemical
industry and management consulting, there
is less systematic and public collection of
information.
If there is enough data then it may be useful
in analyzing the competitors using the
internal analysis technique
just as analyzing out own capabilities informs
our own strategies.
Kenichi Ohmae is Japanese and was head of
the managing consulting firm Mckinsey in
Tokyo for many years
Strategic Triangle
the company and its competitors are
competing on both cost and value in offering
a product or service to customers
how the pool of customer’s is fragmented so
that the total market is divided between
separate competitors
Intensifying functional differentiation.
Identify key success factors and inject resources in
the most important business function.
Aim is to invest in that part of the company which
matters the most
Compare products with the competitors
Invest selectively either to improve the
attractiveness of the product or to reduce the
cost.
The aim is to invest in improving the product
in a way that it matters to the customers.
This requires challenging prevailing wisdom and
practices by asking fundamental questions
Effective aggressive initiatives result from giving
new answers to old questions.
One example is of Dr. Land, the inventor of the
Polaroid Camera, being asked by his young
daughter,’ Daddy’ why do we have to wait for
photographs to be developed?’ This led to the
invention of the instant development camera.
Requires defining the strategic degrees of freedom,
which affect the outcome to the customer and which
are within the control of the provider
One example here is the taste of coffee is critical to
coffee drinkers. The taste of coffee depends
principally on the quality of the water and on freshly
ground beans. A manufacturer could be exploiting
strategic degrees of freedom if he built a percolator
that integrated these factors into design. This is an
interesting example in that it is clear that coffee
drinkers must also have other needs as simpler and
cheaper coffee machines still exist.
Difficulties in defining the industry
do brewers compete in a beer industry, in a
beverages industry, or in the leisure industry?
a beer drinker chooses between one make of beer
and another
drinkers may also choose between beer and tea to
quench their thirst so some beer brands may
emphasize the benefits of beer against tea
Another example includes Coca Cola
Defining the industry
Does coca cola compete with Pepsi?
Does it also compete with Lucozade?