Additional Slides

UP School of Management
Master in Management
By Glory Dee A. Romo

External Analysis
UP School of Management Master in Management
Importance of environmental/ external analysis

→ To determine the development and trends in the macroeconomic
(demographic, economic, judicial-political, technological, sociocultural)
environment that affects the business and its industry at most
→ To understand the powers that affect competition in the industry

(new businesses, customers, suppliers, substitutes, competitors,
government, financial institutions, etc)
→ To anticipate the trends that these powers could create for the
industry
Source: Butuner, 2015

Environmental analysis
→ Considers the general trends in the world, changes in the
environment in which the business operates and particularly the
expectations of the group served by the industry
→ Does not only identify the current status but also lays basis for
future forecasts or creation of scenarios
→ As long as a business that is in interaction but cannot control many

processes in the environment fails to follow up this change, strategic
planning would not make much sense

Key considerations:
→ Current global status and development trends in the field of
business
→ Current domestic status and development trends in the field of the

business
→ Critical issues that closely concern the business among the basic
trends and problems in the world and in the country
- how and in what direction these issues will affect the industry in
which the business operates
→ Basic negativities and uncertainties faced by the conditions of the

industry Source: Butuner, 2015
Source: White, n.d.

Four parts of external analyses
1) Scanning:
→ The study of all segments in the general environment; through scanning, firms
identify early signals of potential changes in the general environment and detect
changes that are already underway
→ Scanning often reveals ambiguous, incomplete, or unconnected data and

information. Environmental scanning is challenging but critically important for
firms, especially those competing in highly volatile environment.
→ Many firms use special software to reduce the trade-off between an

important missed event and false alarm rates. Also, the internet provides
significant opportunities for scanning.
Source: White, n.d.
2) Monitoring:
→ analysts observe MEANINGFUL environmental changes to see if an

important trend is emerging from among those spotted through scanning
→ Effective monitoring requires the firm to identify important stakeholders

and understand its reputation among these stakeholders as the foundation
for serving their unique needs.
→ Scanning and monitoring are particularly important when a firm competes

in an industry with high technological uncertainty.
Source: White, n.d.

3) Forecasting:
→ Feasibility projections developed for what might happen, and how quickly, as
a result of the changes and trends detected through scanning and monitoring,
both of which focus on events at a point in time
→ Technology trends are continually driving product life cycles shorter, which
makes forecasting demand for new technological products that much more
challenging.
→ During an economic downturn, forecasting becomes more difficult and

more important.
Source: White, n.d.

4) Assessing:
→ determining the timing and significance of the effects of environmental trends

that have been identified; specifying the implications of the understanding
gathered in the previous stages
→ Interpretation is key. Even if formal assessment is inadequate, the

appropriate interpretation of that information is important.
→ Gathering and organizing information is important, but appropriately

interpreting that intelligence to determine if an identified trend in the external
environment is an opportunity or threat is paramount.
Source: White, n.d.


Macroeconomic analysis:
→ The review should primarily be conducted at a global scale, and

then regional, and country scales
→ After collecting information about the present state, efforts must be

made to identify trends in variables and future continuation of these
trends
→ Presents the effects of developments on all stakeholders of the
business and assists in presenting the future picture of the industry
more clearly


First column - stakeholders

First row - trends
Elements of the matrix – the anticipated effect of the trends
on the stakeholder Source: Butuner, 2015
→ The macroeconomic analysis form summarizes the status of the
variables with respect to customers’, government’s, financial
institutions’, suppliers’, shareholders’, and employees’ point of views
→ If the macroeconomic factor will:
- Turn into a better condition, then mark as +
- Remain unchanged, then leave it blank
- Turn into a worse condition, then mark as -

Demographic variables
→ Sociocultural and demographic variables may directly affect the
living, working, producing, and consuming patterns and methods of the
society
- Population growth rate

- Distribution of age
- Regional distribution of population
- Birth and mortality rates
- Literacy level
Economic variables
→ Economic variables and elements may directly or indirectly affect
market and industry structure, consumption patterns, and business
structures
- Change on gross national product - Unemployment rate

- Income distribution - Exchange policy
- Interest rates - Savings
- Money supply - Inflation rate

Judicial-political variables
- Tax laws - Trade laws

- Competition laws - Political stability
- Incentives - Environmental laws

Technological variables
→ Changes and developments in product and production technology
may affect the product/ service offering of the business, suppliers,
competitors, customers
- R&D expense - Rate of presentation of new products

- Innovation opportunity - Efficiency increase by automation
- New products - Technological change rate

Sociocultural variables
- Change on lifestyle - Change on family structures

- Career expectation - Change on values and beliefs

Competition analysis
- Porters’ Five-Forces Model
Potential
development of
substitute products
Bargaining power of Rivalry among Bargaining power of

suppliers competing firms consumers
Potential entry of
new competitors
- The effect of these five forces determine the strength of competition within the industry.
Competition analysis

Industry:
- A group of business entities which produce similar products/ services
Some questions that will help you draw out information about the
industry?
- What is value-added chain in the industry?

- What are the inputs and outputs of each ring of the value-added
chain?
- What are the trends and developments which drive the industry?
- Who are the clients?
- Under how many segments are clients gathered?

Industry:
- A group of business entities which produce similar products/ services
Some questions that will help you draw out information about the
industry?
- What are the legal, political, economic, demographical, and

technological changes?
- What are the critical success indicators of the industry?
- In what direction is the industry moving?
- What is the annual turnover and growth rate of demand in the
industry?
Rivalry among existing companies
- What are the factors that affect success and failure in the industry?
- Who are the leaders in the industry?
- Which business entities have the most advanced technology?
- Which business entities produce goods or offer services at the lowest
cost?
- Which customer segments are largely captured by the business

entities?
- What are the characteristics affecting the choice of business

(compare price, service, etc)?
- Are some of the products imported? Assess the price and quality of
each of the products.
- What are the market shares of each of the products?
- How would you classify products in terms of product life cycle?

- How is product differentiation in the industry?
- Is product differentiation a major factor in pricing variation?
- What are fixed and variable costs of business entities in the industry?
- What is the capacity utilization rate in the industry?
- What is the impact of capacity utilization rate in the industry?
- Are there business entities leaving the industry?

- Have there been mergers in the industry recently?
Competition in the industry is high if:
- The number of active business units is high

- The characteristics of products/ services are not very different
- Cost of leaving the industry is high

Threat of potential new entrants
- Which are the new entrants in the industry?
- How much investment capital is necessary for entering the business?
- Are there existing multinational business entities or entities that are

planning to enter the industry?
- How does the learning curve impact on the business?

Threat of potential new entrants

- What are the trends, opportunities, restrictions, and investments in
the industry?
- Cost of exit from the industry?
Entry of barriers are high on the following
- Low costs due to the size of the companies within the industry
- Established brands within the industry
- High investment requirement
- Accessibility to distribution channels is hard
- Assess the learning curve of the potential entrants
- Various limitations imposed by the government

Bargaining power of customers

- Who are the customers?
- Under how many segments are customers grouped?
- What are the first five expectations of the customers in order of
importance?
- To what extent can these expectations be met?
- In what areas do customers/ clients operate?
- What are the characteristics of the customers?
- What are critical success factors in the industry?
- What are the reasons for customers’ complaints?
- What is the geographical distribution of the customers?

The customer is powerful if:

- the purchase is in large quantities
- there are alternative suppliers
- the cost of changing the supplier is not high
- the product/ service is not very important for the customer
- the customer is sensitive to price and service variations

Threat of substitutes
- Are there substitutes that can replace existing products in the industry?
- How is the development trend of substitutes in the industry?
- Who are the customers of these substitutes?
- What is the cost of product replacement for customers?
- What is the impact of price of the substitute to the business?
→ Substitutes are products/ services that offer the same customers’
requirements in different ways. Companies have lower profit in the
industry where there are many substitutes and customers have low
switching costs.

Bargaining power of suppliers

- Who are the suppliers?
- What is the likelihood that the suppliers will venture into vertical
integration?
- Has any of the suppliers purchased a business similar to your entity?
- Are there any partnerships between suppliers and business entities in
your industry?
- What is the importance of your business entity based on the

suppliers’ perspective?
- To what extent can the suppliers meet expectations?

Suppliers are powerful if

- The industry has limited suppliers.
- Their products/ services are unique and exclusive.
- There is no substitute in the market.
- They have the potential to compete with current customers through
vertical integration.
- The purchase of the business entity comprises a small percentage of
the suppliers’ income.

Evaluation of the competitive forces (redesigned from Porter, 1978)

Evaluation of the competitive forces (Porter, 1978 as cited in Butuner, 2015)

Industry cycle (Vernon, 1979 as cited in Butuner, 2015)

External Analysis
A. PEST (Political, Economic, Social, Technological)
a) Political
- ecological/environmental issues
- current legislation home market
- future legislation
- international legislation
- regulatory bodies and processes
- government policies
External Analysis
a) Political
- government term and change
- trading policies
- funding, grants and initiatives
- home market lobbying/pressure groups
- international pressure groups
- wars and conflict
External Analysis
b) Economic
- home economy situation
- home economy trends
- overseas economies and trends
- general taxation issues
- taxation specific to product/services
- seasonality/weather issues
- Availability of credit
External Analysis
b) Economic
- market and trade cycles
- specific industry factors
- market routes and distribution trends
- customer/end-user drivers
- interest and exchange rates
- international trade/monetary issues
- level of disposable income
External Analysis
c) Social
- lifestyle trends
- demographics
- consumer attitudes and opinions
- media views
- law changes affecting social factors
- brand, company, technology image
External Analysis
c) Social
- consumer buying patterns
- fashion and role models
- major events and influences
- buying access and trends
- ethnic/religious factors
- advertising and publicity
- ethical issues
External Analysis
d) Technology
- competing technology development
- research funding
- associated/dependent technologies
- replacement technology/solutions
- maturity of technology
- manufacturing maturity and capacity
External Analysis
d) Technology
- information and communications
- consumer buying mechanisms/technology
- technology legislation
- innovation potential
- technology access, licencing, patents
- intellectual property issues
- global communications
External Analysis
B. Competitive Forces – Porter’s Five-Forces Model
a) Rivalry among competing firms

b) Potential entry of new competitors
c) Potential development of substitute products
d) Bargaining power of suppliers
e) Bargaining power of consumers
External Analysis

- Usually the most powerful of the five
- Intensity of rivalry increases:
increase in no. of competitors
competitors become more equal in size and
capability
demand for the industry’s product declines
price cutting becomes common
External Analysis

brand switching easy
barriers to leave the market are high
fixed costs are high
product is perishable
External Analysis

rival firms are diverse in strategies, origins,
and culture
mergers and acquisitions are common
External Analysis

- Entry of new firms – intensity of
competitiveness increases
- Barriers to entry:
economies of scale, strong consumer
loyalty, technology and specialized
know-how, lack of experience, strong
brand preferences, large capital
requirements
External Analysis

- Barriers to entry:
lack of adequate distribution channels,
government regulatory policies, lack of
access to raw materials, possession of
patents, undesirable locations, potential
saturation of the market
External Analysis
c) Potential development of substitutes

- competitive pressure increases as the relative
prices of substitute products decline and as
consumers’ switching costs decline
External Analysis
d) Bargaining power of suppliers

- Backward integration may be pursued
- Often in the best interest of both suppliers and
producers to coordinate
External Analysis
e) Bargaining power of consumers

- when consumers are concentrated or large,
their bargaining power is high
- bargaining power of consumers is higher if the
products are standard or differentiated
External Analysis
Potential
development of
substitute products
Bargaining power of Rivalry among Bargaining power of

suppliers competing firms consumers
Potential entry of
new competitors
Example
Enterprise
UP School Management
of Management Master in Management
External Analysis
Opportunities
➢ Market developments?
➢ Competitors' vulnerabilities?
➢ Industry or lifestyle trends?
➢ Technology development and innovation?
➢ Global influences?
➢ New markets, vertical, horizontal?
Enterprise
External Analysis (ex.)

Threats
➢ Impact of the legislation
➢ Environmental effects would favor larger
competitors.
➢ Existing core business distribution risk.
➢ Market demand very seasonal.
➢ Retention of key staff critical.
➢ Could distract from core business.
Enterprise
External Analysis (ex.)

Threats
➢ Possible negative publicity.
➢ Vulnerable to reactive attack by major
competitors.

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UP School of Management

By Glory Dee A. Romo

Importance of environmental/ external analysis

→ To understand the powers that affect competition in the industry

Source: Butuner, 2015

→ As long as a business that is in interaction but cannot control many

Source: Butuner, 2015

→ Current domestic status and development trends in the field of the

→ Basic negativities and uncertainties faced by the conditions of the

Source: White, n.d.

Four parts of external analyses

→ Scanning often reveals ambiguous, incomplete, or unconnected data and

→ Many firms use special software to reduce the trade-off between an

Four parts of external analyses

→ analysts observe MEANINGFUL environmental changes to see if an

→ Effective monitoring requires the firm to identify important stakeholders

→ Scanning and monitoring are particularly important when a firm competes

Source: White, n.d.

Four parts of external analyses

→ During an economic downturn, forecasting becomes more difficult and

Source: White, n.d.

Four parts of external analyses

→ determining the timing and significance of the effects of environmental trends

→ Interpretation is key. Even if formal assessment is inadequate, the

→ Gathering and organizing information is important, but appropriately

Source: White, n.d.

Source: Butuner, 2015

→ The review should primarily be conducted at a global scale, and

→ After collecting information about the present state, efforts must be

Source: Butuner, 2015

Source: Butuner, 2015

First column - stakeholders

Source: Butuner, 2015

- Population growth rate

- Change on gross national product - Unemployment rate

Source: Butuner, 2015

- Tax laws - Trade laws

Source: Butuner, 2015

- R&D expense - Rate of presentation of new products

Source: Butuner, 2015

- Change on lifestyle - Change on family structures

Source: Butuner, 2015

Bargaining power of Rivalry among Bargaining power of

Source: Butuner, 2015

- What is value-added chain in the industry?

Source: Butuner, 2015

- What are the legal, political, economic, demographical, and

Rivalry among existing companies

- Which customer segments are largely captured by the business

- What are the characteristics affecting the choice of business

Rivalry among existing companies

- How would you classify products in terms of product life cycle?

Rivalry among existing companies

- Are there business entities leaving the industry?

Competition in the industry is high if:

- The number of active business units is high

Source: Butuner, 2015

Threat of potential new entrants

- Which are the new entrants in the industry?

- How much investment capital is necessary for entering the business?

- Are there existing multinational business entities or entities that are

Source: Butuner, 2015

Threat of potential new entrants