Business Analysis External Factors

1. MASTER OF PHILOSOPHY [MPhil]
BUSINESS STRATEGY: UGBS 654
Dr. E. K. Affum 1

2. Lecture 4
External Analysis
2

3. .
Learning Objectives
1. Describe the three tiers of environmental factors
that affect firm performance
2. List and explain the five factors in the remote
environment
3. Give examples of the economic, social, political,
technological, and ecological influences on a
business
4. Explain the five forces model of industry analysis
and give examples of each force
5. Give examples of the influences of entry barriers,
supplier power, buyer power, substitute
availability, and competitive rivalry on a business
6. List and explain the five factors in the operating
environment
7. Give examples of the influences of competitors,
creditors, customers, labor, and direct suppliers
3

4. .
Global Environment
• Globalisation
• Developing Global Corporation: 4 Levels
• Reasons for going global: role of
national culture, proactive vrs reactive
reasons
• Strategic Orientation of global firms: 4
orientations
• Competitive Strategies: Niche Market
Exporting,
• Franchising, Licensing and Contract
Manufacturing, Joint Ventures, Wholly Owned
4

5. .
External Environment
• The factors beyond the control of the
firm that influence its choice of
direction and action, organizational
structure, and internal processes.
5

6. .
External Environment of the Firm
• Comprised of following Components:
6

7. .
Remote Environment
7

8. .
Ex. 4.1 The Firm’s External Environment
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9. .
Remote Environment
• The Factors
• PESTE/PESTLE
9

10. .
Economic Factors
1
2
3
4
5
6
10

11. .
Social Factors
• Present in the external environment:
1.
2.
3.
• Developed from:
 Cultural conditioning
 Ecological conditioning
 Demographic makeup
 Religion
 Education
 Ethnic conditioning.
11

12. .
Three Social Changes
• Entry of large numbers of women into the labor
market
• Accelerating interest of consumers and
employees in quality-of-life issues
• Shift in the age distribution of the population
• Cutting across the above three issues is
concern for individual health
12

13. .
Political Factors
• Political constraints on firms:
1
2
3
4
5
6
13

14. .
Impact of Political Activity
• Political activity has a significant impact
on two governmental functions that
influence the remote environment of
firms:
–Supplier function
–Customer function
14

15. .
Technological Factors
• Technological forecasting helps protect
and improve the profitability of firms in
growing industries.
• It alerts strategic managers to
impending challenges and promising
opportunities.
• The key to beneficial forecasting of
technological advancement lies in
accurately predicting future
technological capabilities and their
probable impacts. 15

16. .
Technological Forecasting
• The quasi-science of anticipating
environmental and competitive
changes and estimating their
importance to an organisation’s
operations.
16

17. .
Ecological Factors
• Ecology refers to the relationships
among human beings and other living
things and the air, soil, and water
that supports them.
17

18. .
Ecological Factors (Contd.)
18
• Threats to our life-supporting
ecology caused principally by human
activities in an industrial society are
commonly referred to as pollution
• Others

19. .
Eco-efficiency
19
• Company actions that produce more
useful goods and services while
continuously reducing resource
consumption and pollution.

20. .
Industry Environment
20
• Harvard professor Michael E. Porter
propelled the concept of industry
environment into the foreground of
strategic thought and business
planning.
• The cornerstone of Porter’s work first
appeared in the Harvard Business
Review, in which he explains the five
forces that shape competition in an
industry.
• Porter’s well-defined analytic
framework helps strategic managers to
link remote factors to their effects on a

21. .
Industry Environment
21
• The general conditions for competition
that influence all businesses that
provide similar products and services.

22. .
Impact of Forces on Competitive
Strategy
22
• The essence of strategy formulation is
coping with competition.
• Intense competition in an industry is
neither coincidence nor bad luck.
• Competition in an industry is rooted in its
underlying economics, and competitive
forces exist that go well beyond the
established combatants in a particular
industry.
• The corporate strategists’ goal is to find a
position in the industry where his or her
company can best defend itself against
these forces or can influence them in its
favor.

23. .
Ex. 4.2 Forces Driving Industry Competition
23

24. .
Threat of Entry Common Barriers to
Entry
24
• Economies of Scale
• Product Differentiation
• Capital Requirements
• Cost Disadvantages Independent of
Size
• Access to Distribution Channels
• Government Policy

25. .
Competitive Analysis – Powerful
Suppliers
25
• A supplier group is powerful if:

26. .
Competitive Analysis – Powerful
Buyers
26
• A buyer group is powerful if:

27. .
Competitive Analysis –
Substitute Products
27
• Placing a ceiling on the prices
• Substitutes also reduce the bonanza an
industry can reap in boom times
• Substitute products that deserve the
most attention strategically are those
that are
• subject to trends improving their price-
performance trade-off with the industry’s
product or
• produced by industries earning high profits

28. .
Competitive Analysis – Competing for
Position
28
• Intense rivalry occurs when:

29. .
Industry Analysis and Competitive
Analysis
29
• Key questions to ask:
1. What are the boundaries of the industry?
2. What is the structure of the industry?
3. Which firms are our competitors?
4. What are the major determinants of
competition?

30. .
Industry Analysis and Competitive
Analysis
30
• An industry is a collection of firms that
offer similar products or services.
• Structural attributes
• Concentration
• Barriers to entry

31. .
Difficulty Defining Industry Boundaries
31
• This comes from three sources:
• The evolution of industries over time
creates new opportunities and threats
• Industry evolution creates industries
within industries
• Industries are becoming global in scope

32. .
Power Curves
32
• Power curves depict the fundamental
structural trends that underlie an
industry.
• This is a new tool that helps strategic
managers assess industry structure –
the enduring characteristics that give
an industry its distinctive character.

33. .
Operating Environment
33
• Factors in the immediate competitive
situation that affect a firm’s success in
acquiring needed resources.

34. .
Operating Environment (Contd.)
34
• Also called competitive or task
environment
• Includes competitor positions and
customer profiling based on the
following factors:
• Geographic
• Demographic
• Psychographic
• Buyer Behaviour
• Also includes suppliers & creditors and
HRM

35. .
HR: Nature of the Labour Market
35
• Access to personnel is affected by 4
factors:
• Firm’s reputation as an employer
• Local employment rates
• Availability of people with the needed
skills
• Its relationship with labor unions.

36. .
Emphasis on Environmental Factors
36
• Differing external elements affect different
strategies at different times and with varying
strengths
• Only certainty is that the effect of the remote
and operating environments will be uncertain
until a strategy is implemented
• Many managers, particularly in less powerful
firms, minimize long-term planning
• Instead, they allow managers to adapt to new
pressures from the environment
• Absence of strong resources and
psychological commitment to a proactive
strategy effectively bars a firm from assuming
a leadership role in its environment

37. .
Take Aways
1.
2.
3.
37

38. .
Key Terms
• Barriers to entry
• Eco-efficiency
• Ecology
• Economies of
scale
• External
environment
• Industry
38
• Industry
environment
• Operating
environment
• Pollution
• Product
differentiation
• Remote
environment
• Technological

39. .
Next Lecture
Long-term Objectives and
Strategies
39