EXTERNAL

ENVIRONMENT
ANALYSIS

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“Analysis is the critical starting
point of strategic thinking.”

Kenichi Ohmae
“Quote”

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 What Is Situation Analysis?
 Focuses on two considerations
 A company’s INTERNAL
ENVIRONMENT
 Its competencies,
capabilities, resource
strengths and weaknesses,
and competitiveness
 A company’s EXTERNAL
ENVIRONMENT
 Industry and competitive
conditions
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 Strategic Management Model

Environmental Strategy Strategy Evaluation

Scanning Formulation Implementation and Control
Mission
External
Reason for
Societal
existence
Environment Objectives
General Forces
What results
to
Task Strategies
accomplish
Environment
by when Plan to
Industry Analysis
achieve the
Policies
mission &
Internal objectives Broad
guidelines for Programs
Structure decision Process
Chain of Command making Activities to monitor
needed to performance
Culture Budgets and take
accomplish
Beliefs, Expectations, a plan corrective
Cost of the
Values action
programs
Procedures
Resources
Sequence
Assets, Skills
of steps
Competencies,
needed to
Knowledge do the job Performance

Feedback/Learning
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 Environmental Scanning

Definition
Monitoring and interpreting sweep of social,
political, economic, ecological, and technological
events to spot budding trends that could
eventually impact industry
Purpose
 Raise consciousness of managers about potential
developments that could
 Have important impact on industry conditions
 Pose new opportunities and threats
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 Common Types of Driving Forces
 Changes in long-term industry growth rate
 Changes in who buys the product and how
they use it
 Product innovation
 Technological change/process innovation
 Marketing innovation
 Entry or exit of major firms
 Diffusion of technical knowledge
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 Common Types of Driving Forces
 Increasing globalization of industry
 Changes in cost and efficiency
 Market shift from standardized to
differentiated products (or vice versa)
 New regulatory policies and/or government
legislation
 Changing societal concerns, attitudes, and
lifestyles
 Changes in degree of uncertainty and risk
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 Analyzing Driving Forces

1. Identify those forces likely to exert

greatest influence over next 1 - 3
years
 Usually no more than 3 - 4
factors qualify
2. Assess impact
 What difference will the
forces make (favorable?
unfavorable?)
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 Scanning the External Environment

Analysis of Societal Environment

Economic, Sociocultural, Technological, Political-Legal Factors

Market
Analysis

Customer Competitor
Analysis Analysis

Supplier
Analysis
Selection of
Interest Group Strategic Factors Governmental
Analysis Analysis
• Opportunities
• Threats

Prentice Hall, 2000 Chapter 3 59

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 Identifying External Strategic Factors

 One way to identify and analyze the development in the external environment is
to use the issue priority matrix in this way:

• Identify a number of likely trends emerging in the societal and task

environment
• Assess the probability of these trend actually occurring from low to high
• Attempt to estimate the likely impact from low to high of each of these trends
on the industry of corporation being examined

 A corporation external strategic factors are those key environment trends that
are judged to have both a medium to high probability of occurrence and a
medium to high of impact on the organization.

 Those environmental trends judged to be a corporation’s strategic factors are

then categorized as opportunities and threats and are included in strategy
formulation.
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 Environmental Scanning
Probable Impact on Corporation

High Medium Low

High High Medium

High Priority Priority Priority
Probability
of Occurrence
Medium High Medium Low
Priority Priority Priority

Medium Low Low

Low Priority Priority Priority

Issues Priorities Matrix 11

The Components of a Company’s Macro-
Environment
MACROENVIRONMENT
The Economy
at Large
Le
gi
gy Re sla
o lo gu tio
hn la n a
c Suppliers Substitutes tio n
Te n d

COMPANY
Rival Buyer
Firms s

So New
c Entrants
an ietal tion s
dL V
ife alue  p ula phic
sty s IMMEDIATE INDUSTRY Po ogra
les m
AND COMPETITIVE
ENVIRONMENT
De

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 Some Important Variables in
Global and Domestic Remote Environments

Economic Technological Political Sociocultural

Economic development Regulation on technology Form and stability of the Customs, norms, values
per capita income transfer government

GDP trends Energy availability/cost Political ideology Demographics

Interest rate Natural resource availability Tax law Life expectancies

Inflation rates Transportation net work Trade regulations Social institutions

Monetary and fiscal policies Skill level of work force Foreign policies Life-style

Unemployment level Patent-trademark protection Legal system Religious beliefs

Currency convertibility Information flow infrastructure Wage levels Human rights

Nature of competition Total government and industry Government attitude towards Age distribution of
spending for R&D foreign companies population

Membership of regional New product Antitrust regulations Growth rate of the

economic association population

New development in technology Language

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 What is Competition Like & How Strong
Are the Competitive Forces?

 To identify
Main sources of
competitive forces
Strength of these forces
 Key analytical tool
Five Forces Model
of Competition
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 Five Forces
Model of Competition
Substitute Products
(of firms in
other industries)

Rivalry
Suppliers
Among
of Key Buyers
Competing
Inputs
Sellers

Potential
New
Entrants
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Analyzing the Five Competitive Forces:
How to Do It
 Assess strength of each competitive force
(Strong? Moderate? Weak? )
 Rivalry among competitors
 Substitute products
 Potential entry
 Bargaining power of suppliers
 Bargaining power of buyers
 Explain how each force acts to create competitive
pressure
 Decide whether overall competition is brutal,
fierce, strong, normal/moderate, or weak
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 Rivalry Among Competing Sellers
 Usually the most powerful of the five forces
 Check which weapons of competitive rivalry
are most actively used by rivals in jockeying
for position
 Price
 Quality
 Performance features offered
 Customer service
 Warranties/guarantees
 Advertising/promotions
 Dealer networks
 Product innovation
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 Competitive Force of Potential Entry
 Seriousness of threat depends on
 Barriers to entry
 Reaction of existing firms to entry
 Barriers exist when
 Newcomers confront obstacles
 Economic factors put potential
entrant at a disadvantage relative
to incumbent firms
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 Common Barriers to Entry
 Economies of scale
 Inability to gain access to specialized
technology
 Existence of learning/experience curve effects
 Strong brand preferences and customer loyalty
 Capital requirements and/or other specialized
resource requirements
 Cost disadvantages independent of size
 Access to distribution channels
 Regulatory policies, tariffs, trade restrictions
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Principle of Competitive Markets

Threat of entry is stronger when:

 Entry barriers are low
 Sizable pool of entry candidates
exists
 Incumbents are unwilling or unable to
contest a newcomer’s entry efforts
 Newcomer can expect to earn
attractive profits
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 Competitive Force of
Substitute Products

Substitutes matter when customers are attracted

to the products of firms in other industries

 Eyeglasses vs. Contact Lens

 Sugar vs. Artificial Sweeteners
 Plastic vs. Glass vs. Metal
 Newspapers vs. TV vs. Internet
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 How to Tell Whether Substitute
Products Are a Strong Force

 Sales of substitutes are growing rapidly

 Producers of substitutes are planning
to add new capacity
 Their profits are up

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 Principle of Competitive Markets

The competitive threat of substitutes

is stronger when they are:
 Readily available
 Attractively priced
 Believedto have comparable or better
performance features
 Customer switching costs are low
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 Competitive Force of Suppliers
 Suppliers are a strong competitive force when:
 Item makes up large portion of product costs, is
crucial to production process, and/or significantly
affects product quality
 It is costly for buyers to switch suppliers
 They have good reputations and growing
demand
 They can supply a component cheaper than
industry members can make it themselves
 They do not have to contend with substitutes
 Buying firms are not important customers
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Principle of Competitive Markets

Suppliers are a stronger force the

more they can exercise power over:
 Prices charged
 Quality/performance of items
supplied
 Amounts and delivery times
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 Competitive Force of Buyers
 Buyers are a strong competitive force when:
 They are large and purchase a sizable
percentage of industry’s product
 They buy in volume quantities
 They can integrate backward
 Industry’s product is standardized
 Their costs in switching to substitutes or other
brands are low
 They can purchase from several sellers
 Product purchased does not save buyer money

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Principle of Competitive Markets

Buyers are a stronger competitive

force the more they have
leverage to bargain over:
 Price
 Quality
 Service
 Other terms and conditions of sale
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 Strategic Implications of the
Five Competitive Forces
 Competitive environment is
unattractive when:
 Rivalry is strong
 Entry barriers are low
 Competition from
substitutes is strong
 Suppliers and customers have
considerable bargaining power
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 Strategic Implications of the
Five Competitive Forces
 Competitive environment is ideal
when:
 Rivalry is moderate
 Entry barriers are high
 Good substitutes do
not exist
 Suppliers and customers are
in a weak bargaining position
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Industry or Competitive Intelligence
Purpose : Gain information and understanding about:
• Overall industry
• Specific other firms, as a basis for our own strategy
analysis
• Market share, Product line, Pricing and advertising policy,
Capacity, Production cost, Experience, Caliber of personnel,
etc..

Open Sources:
• Trade press, shows, websites and company publications
• Annual reports, companies press releases
• Industry conferences

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 Industry or Competitive Intelligence
Semi-Open Resources: Specialized industry consultants
• Having comprehensive information on volumes, prices etc.
• Analyzing trends& scenarios
• Cannot disclose all information on specific company

Your Own Resources: In interaction between your company and

other industry firms
• Marketing contracts
• Purchasing contracts
• Technical people at conferences
• Professional association
• Beware of ethical issues; reciprocal informal issues
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 The Role of Forecasting

Present Forecasting Assumptions

Environmental for Strategic
Trends and Future Trends
Scanning Planning and
Fashions and Fashions
Decision Making

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 The Role of Forecasting
• Extrapolation (more than 70% use this technique)
• Extension of present trends into the future
• Time- series methods are approaches of this type
• Use with caution

• Brainstorming
• Non-quantitative approach
• Emphasis on creativity
• Through out ideas first, evaluate later

• Expert opinion
• Non-quantitative approach
• They should know
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 The Role of Forecasting
• Statistical modeling
• Quantitative approach to find causal association between
quantified variables (Regression analysis, etc..)
• Based on historical data. As the patterns of relationship
change, the accuracy of the forecast
deteriorates.

• Scenario writing
• Widely used after trend extrapolation
• Not really forecast, but alternative possible stories

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Industry Matrix - Key success factors
Those factors that can affect significantly the overall competitive positions of all
companies within any particular industry

Industry Matrix

Key Success Company A Company A Company B Company B

Factors Weight Rating Weighted Score Rating Weighted Score

1 2 3 4 5 6

Total 1.00

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External Factors Analysis Summary EFAS
Synthesis of External Factors
To summarize the external factors into generally accepted categories of opportunities and threats
the so called EFAS table can be established.
External Factors Analysis Summary (EFAS): Maytag Corporation

External Factors Weight Rating Weighted Comments

Score
1 2 3 4 5
Opportunities

Threats

Total Score

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