External environment analysis

1. Strategic Analysis: Analyzing External Environment
Session 06
Dr. Rukmal Weerasinghe
Historical analysis
Forecasting
Decentralization
Experience &
Learning
Scenario planning
Simple
Environmental Conditions
Complex
Static
Dynamic
Environmental
Conditions

3. Strategic analysis
Assess the nature of the organization’s environment:
static/change, simple/complex
Scanning of environmental influences: political, economic,
social and technological, and construct possible futures
Identify key competitive forces (Competitive environment)
Assessing of firm’s competitive position (strategic group
analysis, analysis of market segments, competitor analysis,
attractiveness analysis
Identify key strategic factors: SWOT

4. Components of Internal Analysis
Discovering Core
Competencies
Resources
• Tangible
• Intangible
Capabilities
Core
Competencies
Competitive
Advantage
Strategic
Competitiveness
Four Criteria
of Sustainable
Advantages
• Valuable
• Rare
• Costly to Imitate
• Non-substitutable
Value
Chain
Analysis
Corporate Culture
R & D
Capital Situation
Technology
Marketing Mix

5. IMPORTANT DEFINITIONS
● General Environment
Dimensions in the broader society that
influence an industry and the firms within it
● Industry Environment
Set of factors that directly influences a firm
and its competitive actions and response
● Competitor Environment
Focuses on each company against which a
firm directly competes
MICRO
MACRO

6. Selecting analytical tools
 Vast range of tools available
 Usually use several tools but choice is important
 Choice depends on:
 Data available
 Nature of issues to be resolved
 Time and skills available

7. External Environmental Analysis
A continuous process which includes
 Scanning: Identifying early signals of environmental
changes and trends
 Monitoring: Detecting meaning through ongoing observations
of environmental changes and trends
 Forecasting: Developing projections of anticipated outcomes
based on monitored changes and trends
 Assessing: Determining the timing and importance of
environmental changes and trends for firms’ strategies and
their management

8. Strategic
position
Assess the nature of the
environment
Audit environmental
influences
Identify key
competitive forces
Identify key
opportunities
and threats
Identify
competitive position
Strategic
position
Steps in Eenvironment Aanalysis

9. External Environment
General
Environment
Technological
Political
Industry
Environment
Threat of new entrants
Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry
Competitor
Environment

10. General Environment
 Dimensions in the broader society that influence and
industry and the firms within it
 Political
 Economic
 Sociocultural
 Technological
 Environment
 legal

11. General Environment (cont’d)
The Political
Political stability
Policy initiatives and strategies
Educational philosophies and policies
Special incentives
Foreign trade regulations and FDI
Bribery and corruptions
Party politics

12. General Environment (cont’d)
The Economic Segment
 Inflation rates
 Interest rates
 Trade deficits or surpluses
 Budget deficits or surpluses
 Personal savings rate
 Business savings rates
 Gross domestic product
 GNP trends
 Money supply
 Unemployment levels
 Wage/price controls
 Devaluation/revaluation of money
 Energy availability and cost

13. General Environment (cont’d)
The Sociocultural Segment
Women in the workplace
Workforce diversity
Attitudes about quality of work-life
Concerns about environment
Shifts in work and career preferences
Shifts in product and service preferences
Life style changes
Career expectations
Consumer activism

14. General Environment (cont’d)
The Technological Segment
 Product innovations
 Applications of knowledge and IPs
 Focus of private and government-supported R&D expenditures
 New communication technologies
 Virtual businesses
 BPO and KPO
 Productivity improvements through automation
 Partnerships

15. General Environment (cont’d)
Natural Environment Segment
 Sustainability
 Green Concepts
 Environmentalists
 Rules and regulations
 World moments
 Social concern

16. General Environment (cont’d)
Legal Segment
Antitrust laws
Taxation laws
Deregulation philosophies
Labor training laws

17. PESTEL Analysis
 Select a particular industry and apply PESTEL analysis to understand the
macro environment of it.
1. Tea industry
2. Banking industry
3. Garment
4. Tourism
5. Education
6. Paddy industry
7. Manufacturing
8. Food and beverage

18. General Environment (Additional)
The Demographic Segment
 Population size
 Age structure
 Geographic distribution
 Ethnic mix
 Income distribution
 Rate of family formation
 Growth rate of population
 Age distribution of population
 Regional shifts in population
 Life expectancies
 Birth rates

19. What is the result of analyzing macro
environment?

20. Key Drivers of Change
General forces likely to affect the structure of an
industry, sector or market
Examples:
 Pandemics
 Climatic changes
 Carbon footprint
 Terrorism
 Energy crisis
 Food shortages and crisis
 Chindia phenomena
 Economic power of Asia
 Regional and global alliances

21. Internationalization of the Business
International Business Environment
International/ Multinational/Global strategies

22. General Environment
The Global Segment
New global markets
Changing existing markets
Important international events
Critical cultural and institutional characteristics
of global markets
Regional and global agreements and clusters
Deregulation in global trade
Electronic business

23. FACTOR CONDITIONS
DEMAND
CONDITIONS
RELATING AND
SUPPORTING
INDUSTRIES
STRATEGY, STRUCTURE,
AND RIVALRY
Porter’s Diamond Model
1. FACTOR CONDITIONS—“Home grown” resources/capabilities more important
than natural endowments.
2. RELATED AND SUPPORTING INDUSTRIES—Key role of “industry clusters”
3. DEMAND CONDITIONS—Discerning domestic customers drive quality & innovation
4. STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.

24. Resource commitment
TRANSACTIONS DIRECT INVESTMENT
Spot
sales
Exporting
Foreign
agent /
distributor
Licensing
Franchising
Joint venture
Marketing &
Distribution
only
Long-
term
contract
Licensing
patents &
other IP
Fully
integrated
Wholly owned
subsidiary
Marketing&
Distribution
only
Fully
integrated
Low High
Alternative Modes of Overseas Market Entry

25. Decision Making Process
Scan
External
Environment
- Societal
- Tasks
Scan
Internal
Environment
- Structure
- Culture
- Resources
Select
Strategic
Factors
- Opportunities
- Threats
Select
Strategic
Factors
- Strengths
- Weaknesses
Analyze
Strategic
Factors
(SWOT)
in light of
Current
Situation

26. The Matching Stage: SWOT Matrix
Four Types of Strategies
Strengths-Opportunities (SO):
Use a firm’s internal strengths to take advantage of external
opportunities
Weaknesses-Opportunities (WO):
Improving internal weaknesses by taking advantage
of external opportunities
Strengths-Threats (ST):
Use a firm’s strengths to avoid or reduce the impact of external threats.
Weaknesses-Threats (WT):
Defensive tactics aimed at reducing internal weaknesses and avoiding
external threats

27. SWOT Matrix
Leave Blank
Strengths – S
List Strengths
Weaknesses –
W
List Weaknesses
Opportunities –
O
List Opportunities
SO Strategies
Use strengths to take
advantage of
opportunities
WO Strategies
Overcoming
weaknesses by taking
advantage of
opportunities
Threats – T
List Threats
ST Strategies
Use strengths to avoid
threats
WT Strategies
Minimize weaknesses
and avoid threats

28. Strategy Development - TOWS
TOWS Analysis Opportunity Threat
Strength O/S Strategies T/S Strategies
Weakness O/W Strategies T/W Strategies
Identify strategies that
focus the organization’s
strengths on
opportunities
Identify strategies that
shore up weaknesses
Identify strategies that
shore up weaknesses to
allow the pursuit of
opportunities
Identify strategies
that focus strengths
against threats

29. 30
Develop a new
employee benefits
package
=
Strong union
activity (threat)
+
Poor employee morale
(weakness)
Develop new products for
older adults
=
Decreasing numbers of
young adults (threat)
+
Strong R&D (strength)
Pursue horizontal integration
by buying competitor's
facilities
=
Exit of two major
foreign competitors
from the industry
(opportunity)
+
Insufficient capacity
(weakness)
Acquire Cellfone, Inc.
=
20% annual growth in
the cell phone industry
(opportunity)
+
Excess working capacity
(strength)
Key Internal Factor Key External Factor Resultant Strategy
Matching Key Factors to Formulate Alternative
Strategies
Which types of strategies, e.g. intensive diversification…, are referred to above

30. SWOT Example – Bicycle Co.
 Strengths
– Innovation
– Quality
– Brand in segment
– Flexible
manufacturing
 Weaknesses
– Cost
– Financial size
 Opportunity
– International growth
– Dirt bikes
 Threats
– Lower cost, higher
quality competition
– Flattening demand

31. TOWS Example – Bicycle Co.
TOWS Analysis Opportunity
• International
• Dirt bikes
Threat
• Flat demand
• Lower cost, higher quality
Strength
• Innovation
• Quality
• Brand in segment
• Flexible manufacturing
O/S Strategies T/S Strategies
Weakness
• Cost
• Financial size
O/W Strategies T/W Strategies
• Grow international
• Develop/enter dirt bikes
• Grow international
• Develop/enter dirt bikes
•Grow international to
increase economies of
scale
•Int’l alliances
• Grow international
• Develop/enter dirt bikes

32. Limitations with SWOT Matrix
 Does not show how to achieve a competitive advantage
 Provides a static assessment in time
 May lead the firm to overemphasize a single internal or external factor in
formulating strategies