Strategic Analysis

Evaluating a Company’s
External Environment
Managers must first develop a deep understanding of the
company’s present situation.

Two facets of a company’s situation are :

1. Its External Environment - the competitive conditions of

the industry in which the company operates [Threats and
Opportunities]

2. Its Internal Environment - the company’s resources and

organizational capabilities [Strengths and Weaknesses]
 Insightful diagnosis of a company’s external and internal
environments is a prerequisite for managers to succeed in
crafting a strategy that is an excellent fit with the company’s
situation.

 Strategic thinking begins with an appraisal of the company’s

external and internal environments (as a basis for deciding
on a long-term direction and developing a strategic vision)

 Appraisal of the company’s external and internal

environments enable to move toward an evaluation of the
most promising alternative strategies and business models,
and culminates in choosing a specific strategy.
 Strategic Thinking
From Thinking Strategically about the Company’s Situation to Choosing
a Strategy
 External Environment Analysis or
Macro Environment Analysis

• The macro environment affects every business. It

consists of many factors that can destroy a business.

• The purpose of an external analysis is to develop a

finite list of opportunities that could benefit a firm and
threats that should be avoided.

• Firms should be able to respond either offensively or

defensively to the factors by formulating strategies that
take advantage of external opportunities or that
minimize the impact of potential threats.
 What is Macro Environment?

The macro-environment encompasses the broad

environmental context in which a company’s industry is
situated.
• Every company operates in a broad “Macro-
Environment” that comprises six principal components:

− Political factors
− Economic conditions in the firm’s general
environment (local, country, regional, worldwide)
− Sociocultural forces
− Technological factors
− Environmental factors (concerning the natural
environment)
− Legal/regulatory conditions.
Relationships between Key External Forces and an Organization
 Full list of PESTEL Factors
Political Factors Economic Factors
Government stability/instability Growth rate
Corruption level Interest rate
Tax policies Inflation rate
Freedom of press
Exchange rate
Government regulation and deregulation
Special tariffs Availability of credit
Political action committees Level of disposable income
Government involvement in trade unions and Propensity of people to spend
agreements Federal government budget deficits
Competition regulation
Gross domestic product trend
Voter participation rates
Amount of government protests
Unemployment trend
Defense expenditures Stock market trends
Level of government subsidies Price fluctuations
Bilateral relationships
Import-export regulation/restrictions
Trade control
Lobbying activities
Size of government budgets
 Social Factors
Population size and growth rate
Birth rates
Death rates
Number of marriages
Number of divorces
Immigration and emigration rates
Life expectancy rates
Age distribution
Wealth distribution
Social classes
Per capita income
Family size and structure
Lifestyles
Health consciousness
Average disposable income
Attitude towards government
Attitude towards work
Cultural norms and values
Sex roles and distribution
Religion and beliefs
Racial equality
Use of birth control
Education level
Minorities
Crime levels
Attitudes towards saving
Attitude towards investing
Attitudes towards retirement
Attitudes towards leisure time
Attitudes towards product quality
Attitudes towards customer service
Attitudes towards foreign people
Buying habits
Ethical concerns
 Full list of PESTEL Factors
Technological Factors Environmental Factors
Technology incentives Weather
Automation Climate
R&D activity
Technological change
Environmental policies
Access to new technology Climate change
Level of innovation Pressures from NGO’s
Technological awareness Natural disasters
Internet infrastructure Air and water pollution
Communication infrastructure Recycling standards
Life cycle of technology
Attitudes towards green
products
Support for renewable energy
Legal Factors
Discrimination laws
Antitrust laws
Employment laws
Consumer protection laws
Copyright and patent laws
Health and safety laws
Education laws
Consumer protection laws
Data protection laws
• An analysis of the impact of these factors is often
referred to as PESTEL analysis.

• A PESTEL analysis is a framework or tool used by firms

to analyze and monitor the macro-environmental
(external environment) factors that have an impact on
an organization.

• The result of which is used to identify threats and

weaknesses which is used in a SWOT analysis.
• Macro-economic factors affect different industries in
different ways and to different degrees, it is important for
managers to determine which of these represent the most
strategically relevant factors outside the firm’s industry
boundaries.

• By strategically relevant - the decisions the company

ultimately makes about its long-term direction, objectives,
strategy, and business model.

• But even if those factors change slowly or are likely to have

a low impact on the company’s business situation, they still
merit a watchful eye.
 For Example
• The strategic opportunities of cigarette producers to grow their
businesses are greatly reduced by antismoking ordinances, the
decisions of governments to impose higher cigarette taxes, and
the growing cultural stigma attached to smoking.

• Motor vehicle companies must adapt their strategies to

customer concerns about high gasoline prices and to
environmental concerns about carbon emissions.

• Companies in the food processing, restaurant, sports, and

fitness industries have to pay special attention to changes in
lifestyles, eating habits, leisure-time preferences, and attitudes
toward nutrition and fitness in fashioning their strategies.
• As company managers scan the external environment, they
must be alert for potentially important outer-ring
developments, assess their impact and influence, and adapt
the company’s direction and strategy as needed.

• However, the factors in a company’s environment having the

biggest strategy-shaping impact typically pertain to the
company’s immediate industry and competitive
environment.
The Components of a Company’s Macro-Environment
 The Industrial Organization (I/O) View
• The Industrial Organization (I/O) approach to competitive advantage
advocates that external (industry) factors are more important than
internal factors in a firm achieving competitive advantage.

• Proponents of the I/O view, such as Michael Porter, contend that

organizational performance will be primarily determined by industry
forces. Porter’s Five- Forces Model is an example of the I/O perspective

• External factors, in general, and industry in which a firm competes

has a stronger influence on the firm’s performance than do the
internal functional decisions managers make in marketing, finance, and
the like.

• Firm performance is primarily based more on industry properties, such

as economies of scale, barriers to market entry, product differentiation,
the economy, and level of competitiveness than on internal resources,
capabilities, structure, and operations.
 The Industrial Organization (I/O) View

• Effective integration and understanding of both external and

internal factors is the key to securing and keeping a
competitive advantage.

• matching key external opportunities/threats with key internal

strengths/weaknesses provides the basis for successful strategy
formulation.
 Economic Forces
Economic factors have a direct impact on the potential
attractiveness of various strategies.

For example –

• When interest rates rise, funds needed for capital expansion

become more costly or unavailable.

• When interest rates rise, discretionary income declines, and

the demand for discretionary goods falls.

• When stock prices increase, the desirability of equity as a

source of capital for market development increases.

• When the market rises, consumer and business wealth expands

 Social, Cultural, Demographic, and Natural
Environment Forces

• Social, cultural, demographic, and environmental changes have

a major impact on virtually all products, services, markets,
and customers.

• Small, large, for-profit, and nonprofit organizations in all

industries are being staggered and challenged by the
opportunities and threats arising from changes in social,
cultural, demographic, and environmental variables.

• New trends are creating a different type of consumer and,

consequently, a need for different products, different services,
and different strategies.
 Political, Governmental, and Legal Forces

• Federal, state, local, and foreign governments are major

regulators, deregulators, subsidizers, employers, and
customers of organizations.

• Political, governmental, and legal factors, therefore, can

represent key opportunities or threats for both small
and large organizations
 Political, Governmental, and Legal Forces

• For industries and firms that depend heavily on

government contracts or subsidies, political forecasts
can be the most important part of an external audit.

• Changes in patent laws, antitrust legislation, tax rates,

and lobbying activities can affect firms significantly.

• The increasing global interdependence among

economies, markets, governments, and organizations
makes it imperative that firms consider the possible
impact of political variables on the formulation and
implementation of competitive strategies.
 Technological Forces
Revolutionary technological changes and discoveries are having a
dramatic impact on organizations.

Technological forces represent major opportunities and threats

that must be considered in formulating strategies

Technological advancements can dramatically affect organizations’

products, services, markets, suppliers, distributors, competitors,
customers, manufacturing processes, marketing practices, and
competitive position

Technological advancements can create new markets, result in a

proliferation of new and improved products, change the relative
competitive cost positions in an industry, and render existing
products and services obsolete.
 Technological Forces
• Technological changes can reduce or eliminate cost barriers
between businesses, create shorter production runs, create
shortages in technical skills, and result in changing values and
expectations of employees, managers, and customers.

• Technological advancements can create new competitive

advantages that are more powerful than existing advantages.

• Firms should pursue strategies that take advantage of

technological opportunities to achieve sustainable, competitive
advantages in the marketplace.
 Competitive Forces
• An important part of an external audit is identifying
rival firms and determining their strengths, weaknesses,
capabilities, opportunities, threats, objectives, and
strategies.

• Collecting and evaluating information on competitors

is essential for successful strategy formulation

• Competition in virtually all industries can be described

as intense—and sometimes as cutthroat.