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Strategic Management

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Ch. 3: 1

Chapter 3
Strategic Planning Process: The External Environmental Analysis

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Ch. 3: 2

Learning Objectives
After reading this chapter, you should be able to: Explain the key external environmental forces. Describe the nature of the industry environment. Discuss the five forces that make up the industry environment. Discuss the importance of monitoring the external and industry trends and events.

Strategic Management
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Ch. 3: 3

External Environment
The external environment represents factors which are beyond the control of an organization. It is divided into two categories:
1. General environment 2. Industry environment

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Ch. 3: 4

The General and Industry Environments


The general environment, also known as the macro environment, includes the environmental factors that have an impact on all organizations and firms within the company. Easily remembered by the simple acronym PESTEL
P : Political factors E : Economic factors S : Socio-cultural factors

T : Technological factors E : Ecological factors L : Legal factors


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Ch. 3: 5

EXHIBIT 3.1 The Firm Embedded in Its External Environment

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Ch. 3: 6

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The General and Industry Environments (cont.)


The industry environment or the micro environment refers to factors that directly affect the firm and its competitive responses. These factors have the ability to affect the firms profitability and shape the competition in an industry.

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Ch. 3: 7

External Environmental Analysis


This analysis provides information to managers regarding the key trends and changes in the external environment, such as the following:
Population shifts Changing demographics (e.g. aging population) Information technology New government regulations

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Ch. 3: 8

External Environmental Analysis (cont.)


External environmental analysis reveals:
Opportunities: External environment factors which can help the organization improve its performance and achieve its strategic objectives Threats: External environment factors which can hinder an organizations performance and prevent the organization from achieving its strategic objectives

Strategic Management
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Ch. 3: 9

External Environmental Analysis (cont.)


Based on the external environmental analysis, managers formulate strategies that:
Take advantage of opportunities Avoid/reduce impact of threats

Sources of information for external environmental analysis include customer surveys, market surveys, periodicals, journals, reports, books, newspapers, conferences and the Internet.

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Ch. 3: 10

Factors in the General Environment


1. Political and Legal Factors Looks at how the government can influence organizations Examples:
employment laws environmental regulations competitive regulations government leadership tax policies quotas on goods produced consumer protection laws
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Ch. 3: 11

Strategic Management
Oxford Fajar Sdn. Bhd. (008974-T) 2010

Factors in the General Environment (cont.)


2. Economic Factors Unemployment rates Inflation rates Consumer and investor confidence Currency exchange rates

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Ch. 3: 12

Factors in the General Environment (cont.)


3. Socio-cultural Factors Concerned with societys attitudes, cultural values and demographic changes Include factors such as:
Demographic factors (e.g. population size and distribution, age distribution, education levels) Attitudes towards materialism, capitalism, free enterprise

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Ch. 3: 13

Factors in the General Environment (cont.)


4. Technological Factors Include factors such as:
Rate of technology transfer Energy use and cost New products and services of competitors Changes in Internet Changes in mobile technology

Technological breakthroughs can create new industries or create new products and services which might render existing products and services redundant.
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Ch. 3: 14

Ecological Variables
Global Warming Sustainable Economic Growth Fossil Fuel Consumption Pollution of air & water Toxins in food and products

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Business Sustainability Video

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Ch. 3: 15

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Legal Variables
Minimum wages Price control act

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Ch. 3: 16

3-

Factors in the Industry Environment


A set of factors that directly affects a firm Also known as micro environment These factors are analysed to assess how the forces of the organizations immediate environment affect the attractiveness or profitability potential of the firm. Michael Porters Five Forces Model (1980) is one of the most widely used and best known conceptual frameworks to assess the industry environment.
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Ch. 3: 17

Industry Environment Analysis/Competitive Analysis: Michael Porters Five-Forces Model


Potential development of substitute products

Bargaining power of suppliers

Rivalry among competing firms

Bargaining power of consumers

Potential entry of new competitors

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Ch. 3: 18

Factors in the Industry Environment (cont.)


1. Threat of New Entrants New entrants to an industry can raise the level of competition The threat of new entrants depend on the barriers to entry Barriers of entry can be affected by economies of scale, product differentiation, capital requirements, switching costs and government regulations.

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Ch. 3: 19

Factors in the Industry Environment (cont.)


2. Bargaining Power of Suppliers A supplier group is powerful when
the suppliers goods are critical to the buyers marketplace success. the inputs required by the buyers are unique, making it costly to switch suppliers. the buyers inputs do not represent a significant portion of the suppliers business.

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Ch. 3: 20

Factors in the Industry Environment (cont.)


the buyers inputs are only available from a small group of suppliers. the suppliers can sell directly to the firms customers, bypassing the need for the firm.

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Ch. 3: 21

Factors in the Industry Environment (cont.)


3. Bargaining Power of Buyers Customers (or buyer groups) have the most power when
they are large and purchase most of the industrys output. the industry has many small suppliers supplying the product and the buyers are large. the products represent a relatively large expense for customers and sales of the product being purchased account for a significant portion of the sellers annual revenues.
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Ch. 3: 22

Factors in the Industry Environment (cont.)


they have access to sufficient information and are able to evaluate the competitive offerings. the customers could switch to another product without incurring significant switching cost because the suppliers products are not unique or undifferentiated. the customers could possibly make the product themselves.

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Ch. 3: 23

Factors in the Industry Environment (cont.)


4. Substitute Products Substitute products can be a threat when
the product is undifferentiated and customers can easily switch away from one supplier to another supplier with little or insignificant switching costs. the customers or buyer groups are price sensitive and customers have little brand loyalty. there is no real benefit offered by the products in the industry and consumers can do without the product offered by the industry.

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Ch. 3: 24

Factors in the Industry Environment (cont.)


5. Rivalry Among Competitors Rivalry among competitors is the strongest of the five competitive forces and can vary widely among industries. If rivalry among the competitors is intense, companies in the industry may need to enhance their product offerings to keep customers and firms may earn less profit.

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Ch. 3: 25

Factors in the Industry Environment (cont.)


Rivalry among competitors can be most intense when
the industry has two or three dominant firms which are battling to be the dominant firms in the industry. there are numerous competitors in the industry. the competitors are relatively equal in size and power. the firms are competing in a slow or shrinking industry.

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Ch. 3: 26

Factors in the Industry Environment (cont.)


there are high fixed costs of production. the products are undifferentiated and are viewed by customers as commodities. there are high costs for exiting the business.

Strategic Management
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Ch. 3: 27

USING THE PORTERS FIVE FORCES, DISCUSS INDUSTRY ATTRACTIVENESS FOR BOOK PUBLISHING INDUSTRY

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Ch. 3: 28