External Environment Analysis Industrial Relation Introduction, Meaning, Factors

1. OD MBA 413 T
STRATEGIC MANGEMENT
Topics to be covered : L-3, Unit-A
External Environment Analysis: Strategically Relevant
Components of external environment. Industry Analysis-
Porter’s Five Force Model; External Factor Evaluation
Matrix
Prepared by: Amandeep
Assistant Professor
https://www.linkedin.com/in/amandeep-thakur-7a81942a

2. External analysis
 External analysis means examining the industry
environment of a company, including factors such as
competitive structure, competitive position, dynamics, and
history. On a macro scale, external analysis
includes macroeconomic, global, political, social,
demographic, and technological analysis. The primary
purpose of external analysis is to determine the opportunities
and threats in an industry or any segment that will drive
profitability, growth, and volatility.

3. The Business Environment
(Johnson et al. 2008: 54)
2-3
The
Organisation

4. External analysis stages
 Macro-environment – these are broad trends shaping the
national and international environment in terms of political,
economic, social and technological trends (i.e. PESTEL factors,
key drivers ).
 Micro-environment – this is the operating environment or
industry sector in which the firm competes. It addresses a range
of issues such as suppliers, customers, competitive intensity,
threat of new entry and of substitute products arising (i.e. the
‘five-forces’ analysis).
 Competitor analysis – seeks to understand the rival offers
from other firms seeking to serve the same customers and to
out manoeuvre their managers with our innovation and
competitive moves.
 Market analysis seeks to evaluate the current needs of today’s
customers and the emerging needs of tomorrow’s customers so
new products can be anticipated. These will be different in
different market segments.
Analysing the external environment involves breaking a complex inter-
related reality into sets of issues to make the analysis manageable. The
main sets of issues are usually:

5. The Macro-Environment
 Difficult for the firm to influence
 Changes can be far-reaching
 The media: rich source of both information and
speculation
 Tools for analysing the macro-environment
 The PESTEL (Variants PEST/DEEPLIST)
framework
 Key drivers
 Scenarios

6. The PESTEL Framework
 The PESTEL framework categorises environmental
influences into six main types:
 Political -
 Economic
 Socio-cultural
 Technological
 Environmental
 Legal
 PESTEL analysis evaluates the broad societal trends
that affect many industries. It identifies current and
future developments that will shape the micro-
environments of each industry sector.

7. Good PESTEL Analysis
 Focuses on society wide.
 Based on sound research of actual issues.
 Provides evidence from the research to
validate points made.
 Future oriented.
 Interpretive and not descriptive

8. The Five Forces Framework (Johnson et al. 2008: 60)
Competitive
rivalry
Potential
entrants
Buyers
Substitutes
Suppliers

9. 5
Five forces model – Details
Power of
Suppliers
Power of
Customers
Substitute
Threats of
Potential
entrants
Competitive rivalry
• Capital requirements
• Differentiation
• Switching costs
• Access to
supply/distribution
channels
• Intellectual property
• Expected retaliation
• Legislation/Government
action
• Economies of scale
• Degree of differentiation
• Technological innovation
• Price performance relationships
• Size of purchases
• Undifferentiated product
• Per cent of cost
• Low margins (buyer)
• Threat of forward
integration
• Impact on quality
• Price performance is high
• Size of purchases
• Differentiation in product
• Few substitutes
• A few big suppliers
• Threat of backward
integration
• Competitor balance
• Industry growth rate
• High fixed costs
• High exit barriers
• Low differentiation

10. Evaluation of the Five Force Model
 Identifies drivers of
competitive behaviour.
 Indicates trends in
profitability.
 Highlights strategies to
alter industry
structure. (Lynch 2000)
 Firms industry environment is
a small determinant of that
firm’s profitability
 Suppliers of complementary
products are ignored
 Highlights the need to
disaggregate broad industry
groupings and examine
competition at segment or
strategic group level Assumes
all business relationships are
competitive.
 Assumes industry boundaries
are stable over time, ignoring
innovation and
entrepreneurship. (Grant
2005)
ADVANTAGES DISADVANTAGES

11. Porter’s Five Forces of
Competitive Analysis

13. Introduction
• The Five Forces Model was developed by Michael E. Porter to help
companies assess the nature of an industry’s competitiveness and
develop corporate strategies accordingly.
• The strength of the five forces will determine the level of profit within
an industry that a competitor can expect to make
• Through his model, Porter classifies five main competitive forces that
affect any market and all industries. It is these forces that determine
how much competition will exist in a market and consequently the
profitability and attractiveness of this market for a company. Through
sound corporate strategies, a company will aim to shape these forces
to its advantage to strengthen the organizations position in the
industry.
• Cont…

14. Introduction
• This model aimed to provide a new way to use effective strategy to
identify, analyze and manage external factors in an organization’s
environment.
• Porter’s five forces model is an analysis tool that uses five industry
forces to determine the intensity of competition in an industry and
its profitability level.
• An attractive market place does not mean that all companies will
enjoy similar success levels. Rather, the unique selling propositions,
strategies and processes will put one company over the other.
• The Five Forces were Porter’s conclusions on the reasons for differing
levels of competition, and hence profitability, in differing industries.
They are empirically derived, i.e. by observation of real companies in
real markets, rather than the result of economic analysis.

16. Bargaining
Power of
Suppliers
Bargainin
g Power of
Customers
Threat
of New
Entrant
s
Threat of
Substitut
es
Competiti
ve Rivalry
within an
Industry
Threat of New Entry
- Time and cost of
entry
- Specialist knowledge
- Economics of Scale
- Cost advantage
- Technology protection
- Barriers to entry
Competitive Rivalry
- Number of
competitors
- Quality difference
- Other difference
- Switching costs
- Customer loyalty
Buyer Power
- Number of
customers
- Size of each orders
- Differences between
competitors
- Price sensitivity
- Ability to substitute
- Cost of changing
Supplier Power
- Number of suppliers
- Size of suppliers
- Uniqueness of service
- Your ability to
substitute
- Cost of changing
Threat of Substitute
- Substitute
performance
- Cost of change

17. Threat of New Entrants
• This force determines how easy (or not) it is to enter a
particular industry. If an industry is profitable and there are
few barriers to enter, rivalry soon intensifies. When more
organizations compete for the same market share, profits
start to fall. It is essential for existing organizations to create
high barriers to enter to deter new entrants. Threat of new
entrants is high when:
- Low amount of capital is required to enter a market
- Existing companies can do little to retaliate
- Existing firms do not possess patents, trademarks or do not
have established brand reputation
- There is no government regulation
- There is low customer loyalty
- Products are nearly identical
- Economies of scale can be easily achieved

18. Example of Threat of New Entrant – Entry of Reliance JIO
Telecommunications
1. Jio has grown at a scorching pace:-the network, which has
been adding 1-1.2 million subscribers a day, will likely have 25
million 4G customers.
2. Jio has set off a fierce mobile tariff war in the country:
3. Jio is hurting the balance sheets of other telecom companies:
Airtel saw a 4.9% decline in its Q2 profit following the operator
slashing data tariffs.
4. Jio is forcing the other players to join forces:-Vodafone and
Idea Merger
5. Jio could impact the online content market in India:-The Jio
suite offers more than 300 live streaming TV channels and
hundreds of music albums and movies. This forces other
incumbents to up their game in the online video streaming
space.

19. Bargaining Power of Suppliers
• Strong bargaining power allows suppliers to sell higher
priced or low quality raw materials to their buyers. This
directly affects the buying firms’ profits because it has to pay
more for materials. Suppliers have strong bargaining power
when:
- There are few suppliers but many buyers
- Suppliers are large and threaten to forward integrate
- Few substitute raw materials exist
- Suppliers hold scarce resources
- Cost of switching raw materials is especially high.

20. Example of Suppliers also influence the competiveness
of an industry
• The bargaining power of Toyota’s supplier is Weak
• Toyota has many suppliers in its automotive manufacturing sector.
Resources like metal, raw materials, leather, plastic, computers,
cooling system, electrical system, breaking system and fuel supply
system are all bought from hundreds of different suppliers and
different bargaining prices distributed across the globe.
• One of the competitive advantages of Toyota is its strong relationship
with the suppliers and its efficient manner of monitoring supply
chain places low bargaining power on the suppliers.
• In addition most vehicle manufactures own many interchangeable
suppliers, and also have the ability to produce the components by
their own in the short time. Thus, the suppliers do not own the power
to change the price.

21. Bargaining Power of Buyer
• Customers have the power to demand lower price
or higher product quality from industry
producers when their bargaining power is strong.
Lower price means lower revenues for the
producer, while higher quality products usually
raise production costs. Both scenarios result in
lower profits for producers. Customers exert
strong bargaining power when:
- Buying in large quantities or control many access
points to the final customer
- Only few customers exist
- Switching costs to other supplier are low
- They threaten to backward integrate
- There are many substitutes
- Customers are price sensitive

22. Example of Bargaining power of Buyer
Depends on the marketing channel used for Coca-Cola
1. Super Markets
2. Convenience Stores
3. Soda Shop
4. Vending Machine
5. Restaurant and Food stores
Bargaining power of buyer is high for fountain supermarkets
and mass merchandising because of the low profitability and
strong negotiation power of retail channels but for vending
machine bargaining power is non-existing caused by high
profitability.

23.  This force is especially threatening when buyers can easily find
substitute products with attractive prices or better quality and when
buyers can switch from one product or service to another with little
cost. For example, to switch from coffee to tea doesn’t cost anything,
unlike switching from car to bicycle.
 Determining Factors :-
 First, if the consumer’s switching costs are low
 Second, if the substitute product is cheaper than the industry’s
product
 Third, if the substitute product is of equal or superior quality
compared to the industry’s product, the threat of substitutes is high
 Fourth, if the functions, attributes, or performance of the substitute
product are equal or superior to the industry’s product
reat of Substitutes

24.  EXAMPLE – THE AIRLINE INDUSTRY
 From the point of view of airlines themselves, the flying business is very
competitive. There are hundreds of airlines all trying to get a bigger piece
of the pie. Global recessions have also meant cost cutting exercises for
most airlines in the industry and often less travel in the part of consumers.
 Depending on the nature of the airline’s business, the threat of substitutes
can range from lower on the scale to mid-range.
 For domestic or regional airlines or routes, there is always the option of
taking a car, bus or train. It may take longer but often this consideration is
outweighed by the cost advantages of substitute methods
 There is also no switching cost to deal with.
 In the case of international airlines, the threat of substitutes is almost non-
existent
 On longer routes, a traveler needs to take a flight with no possible
alternates
 Threat here is from competitors who may offer better rewards, better
prices or a better flying experience
 There is also somewhat of a switching cost
Example of Threat of substitutes

25. Competitive Rivalry within an
Industry
• This force is the major determinant on how competitive and
profitable an industry is. In competitive industry, firms have
to compete aggressively for a market share, which results in
low profits. Rivalry among competitors is intense when:
- There are many competitors
- Exit barriers are high
- Industry growth is slow or negative
- Products are not differentiated and can be easily substituted
- Competitors are of equal size
- Low customer loyalty

26. Competitive Rivalry within an Industry - Example
McDonald’s faces tough competition because the fast food restaurant market is already
saturated. This element of the Five Forces analysis tackles the effect of competing firms in
the industry environment. In McDonald’s case, the strong force of competitive rivalry is
based on the following external factors:
High number of firms (strong force)
High aggressiveness of firms (strong force)
Low switching costs (strong force)
The fast food restaurant industry has many firms of various sizes, such as global chains like
McDonald’s, KFC and local fast food restaurants and road side stops (vada pav) . Also, most
medium and large firms aggressively market their products. In addition, McDonald’s
customers experience low switching costs, which means that they can easily transfer to other
restaurants. Thus, this element of the Five Forces analysis of McDonald’s shows that
competition is among the most significant external forces on the business.

27. Importance of The Porter’s Five Forces
What
Strategy
to Use ?
Basic
Knowledge of
Business
Strategy & that
influence the
design making
Industry
Analysis
- Industry
relevance
- Industry
players
- Industry
structure
- Future changes
Strategies
- Competitive
advantage
- Cost advantage
- Marketing
dominance
- New product
development
- Contraction /
Diversification
- Price leadership
- Global
- Re-engineering
- Downsizing
- Restructuring
Measure and
Monitor strategy
effectiveness
How to Deal with Competition

28. External Factor Evaluation

29. What is EFE
 External Factor Evaluation (EFE) matrix method is
a strategic-management tool often used for assessment
of current business conditions. The EFE matrix is a
good tool to visualize and prioritize the opportunities
and threats that a business is facing.
 EFE is an acronym of the External Factor
Evaluation. EFE Matrix is an analytical technique
related to the SWOT analysis. EFE Matrix evaluates
the external position of the organization or its strategic
intent.

30. Contd...
 Rate factors: Assign a rating to each factor. Rating should be between 1 and
4. Rating indicates how effective the firm’s current strategies respond to the
factor.
1 = the response is poor.
2 = the response is below average.
3 = above average.
4 = superior.
 Weights are industry-specific. Ratings are company-specific. The Ratings
are company based.
 Multiply weights by ratings: Multiply each factor weight with its rating.
This will calculate the weighted score for each factor.
 Total all weighted scores: Add all weighted scores for each factor. This will
calculate the total weighted score for the company.

31. About external factor evaluation
 EFE matrix can be defined as the strategic tool to evaluate external
environment or macro environment of the firm include economic, social,
technological, government, political, legal and competitive information.
 External Factor Evaluation (EFE) matrix method is a strategic-
management tool often used for assessment of current business
conditions. The EFE matrix is a good tool to visualize and prioritize the
opportunities and threats that a business is facing.
 EFE Matrix is an analytical technique related to the SWOT
analysis. EFE Matrix evaluates the external position of the organization
or its strategic intent.

32. Rating
Rating in EFE matrix represent the response of firm toward the
opportunities and threats. Highest the rating better the response of the firm
to exploit opportunities and defend the threats. Rating range from 1.0 to
4.0 and can be applied to any factor whether it comes under opportunities or
threats.
There are some important point related to rating in EFE matrix.
 Rating is applied to each factor.
 The response is poor represented by 1.0
 The response is average is represented by 2.0
 The response is above average represented by 3.0
 The response is superior represented by 4.0

33. Weight
 Weight attribute in EFE matrix indicates the relative importance of factor
to being successful in the firm’s industry. The weight range from 0.0
means not important and 1.0 means important, sum of all assigned
weight to factors must be equal to 1.0 otherwise the calculation would
not be consider correct.
Weighted Score
 Weighted score value is the result achieved after multiplying each factor
rating with the weight.

34. Total Weighted Score
 The sum of all weighted score is equal to the total weighted score, final
value of total weighted score should be between range 1.0 (low) to
4.0(high).
 The average weighted score for EFE matrix is 2.5 any company total
weighted score fall below 2.5 consider as weak.
 The company total weighted score higher then 2.5 is consider as strong
in position.

35. Nextel EFE Matrix
As the results shows that Nextal Communication is respoding above average to the enviroment for
exploiting opportunties and to overcome threats.