This document provides an overview of analyzing an organization's external environment. It discusses the macro and micro external environments, and frameworks for assessing them. The PESTEL framework categorizes macro factors into political, economic, social, technological, environmental, and legal categories. Porter's Five Forces analyzes the micro environment through the lenses of competitive rivalry, potential new entrants, substitution threats, supplier power and buyer power. Understanding how these external forces impact an industry is crucial for strategic planning and decision making.

1. Week 2: The External
Environment
1
Management and Organisations
(MMP_4_MAO)

2. What did you learn last week?

3. What is meant by an organisation’s
business environment?
According to Robbins and Coulter (2020) environment
refers to “ Institutions and forces that affect organizational
performance”
Two classifications of business environment:
1. Internal business environment: the conditions and
forces within an organization - The controllable
environment
2. External business environment: everything outside an
organization’s boundaries that might affect it - The
uncontrollable environment

4. Classifying the organization’s
external business environment?
A business’s external environment is comprised of the
following:
1. The Macro (remote) external environment
2. The Micro (Task/Competitive) external environment

5. The External Environment

6. Business Organisation and
Environment Relationship
• Business environments are constantly changing and
developments are happening all the time
• Changes and developments create uncertainty for
management within business organisation’s
• Management must be willing and able to respond to
these external changes and need to ensure that the
organization is able to adapt to key changes that are
happening now and those that are likely to occur in
the future
• Nokia and Blackberry are examples of organization’s
that have been ineffectual in their responses to
environmental changes – once market leaders in the
mobile phone sectors.
• Can you think of examples from other industries?

7. Environmental Uncertainty, Dynamism
and Complexity
• Environmental change may evolve unexpectedly and or
rapidly such as consumer use of social media sites or
unexpected events may occur e.g. Covid and
unpredictable weather events
• Environmental uncertainty refers to the degree of change
and complexity in an organisation’s environment.
Two dimensions associated with uncertainty
1. Dynamism: This relates to the degree of change and if
environmental changes are occurring rapidly
 Organisations may operate in relatively stable or dynamic external environments
2. Complexity: Concerns the number of components in an
organisation’s environment and the extent of the
knowledge that the organisation has about those
components
 Organisations may operate in relatively stable or dynamic external environments

8. Environmental Uncertainty, Dynamism
and Complexity
• This means that managers may not have sufficient
information about environmental factors to
understand and predict environmental needs and
changes
• Organisations will face different levels of
environmental uncertainty and how they respond
and deal with this can vary significantly
• Environmental changes can have short and long
term impacts on the internal activities and
performance of an organisation
• Environmental changes may combine together to
accelerate the impact of change on an
organisation

9. Environmental Uncertainty Matrix

10. Why Should Managers Be Concerned
With The External Business
Environment?
• Survival of the firm might depend upon the
identification of the key drivers of environmental
change.
• Changing environments present the
organisation with opportunities and threats
• Managers need to anticipate environmental
change and pursue strategies to fully exploit the
opportunities and neutralise as far as possible
the threats.

11. Types of External Environment

12. Analysing the Macro Environment -
The PESTEL Framework

13. The PESTEL Framework (1)
• The PESTEL framework categorises environmental influences into six
main types:
 Political
 Economic
 Social
 Technological
 Environmental
 Legal/regulatory
• A PESTEL analysis can provide a comprehensive list of influence on the
possible success or failure of an organisations business strategy and
strategic priorities and goals
• Can provide insight into possible trends and developments which will
become more important in the next few years.
• Identify OPPORTUNITIES and THREATS - the main point of the exercise!
Watch this video (9 minutes):
https://www.youtube.com/watch?v=bYn4CyL3r5w

14. The PESTEL Framework (2)
Political Environment and Political Factors:
Relates to government preferences and attitudes
towards managing the economy and the activities of
business
• Governments can control, restrict and influence
activities by offering support, restricting business
activities or introducing or amending laws and
regulations
• Examples include government policies on taxation,
changes to foreign trade regulations, political stability
and risk in foreign markets, changes in trade blocks
(EU)
• For business’s that operate in international markets
political relationships and stability are important
• For organisations in the public and voluntary sector
there can be significant implications for funding and
how they operate and deliver services

15. The PESTEL Framework (3)
Economic Environment and Economic Factors:
This refers to the aggregate nature of a country’s
economic system and the economic policies of a
government
• This includes how capital markets are organised, the
characteristics of the business cycle the socio-
economic infrastructure
• Economic factors include for example trends in
Gross Domestic Product (GDP) interest rates,
exchange rates, managing inflation, levels of
personal disposable and issues relating to
unemployment income
• Extent that the economy is globalised
• For organisations in the public and voluntary sector
there can be significant implications for funding and
how they operate and deliver services

16. The PESTEL Framework (4)
Social Environment and Social Factors:
Relates to the value system within a society. Societal customs
and conventions and people’s attitudes
• Highlights the significance of demographic/population changes
• Importance of the characteristics of a population. Factors such
as size of the population, age and sex distribution, racial,
ethnic and religious composition
• Changing attitudes towards work, health, factors such as work-
life balance and the social responsibilities of business
organisations
• Determines work culture and acceptability and suitability of
business decisions
• Changes to factors such as levels of income and income
distribution, changing lifestyles, attitudinal changes that can
alter the nature of people’s needs and their expectations of
service provision
• Changes in the socio-cultural environment can influence the
size of the market for goods/services and consumer tastes and
preferences

17. The PESTEL Framework (5)
Technological Environment and Technological
Factors:
Developments and advances in technology and the
technology adopted within industries and by business
organisations are significant. They affect the nature of
competition and the types of goods and services
offered to customers
• Information and communication technologies have
revolutionised business operations and led to
significant innovations
• They have had an impact on the characteristics of
industries/sectors e.g. Uber
• Accelerated the rate of product obsolescence
• Changed organisational relationships with
consumers and employees e.g organisational
structures, systems, the nature of jobs and working
patterns, skill requirements and people relationships

18. The PESTEL Framework (6)
Environmental (ecological) Factors:
Relates to organisational responsibilities to the wider
environment and ecological system in which it operates
• Highlights concerns relating to business ethics and
the impact and sustainability of business in relation
to the environment
• For example, energy consumption,climate change
and global warming, pollution, waste disposal and
recycling
• Issues relating to corporate social responsibilities
(CSR) beyond the pursuit of profit
• Impact of pressure or interest groups

19. The PESTEL Framework (7)
Legal and Regulatory Environment and Legal
Factors:
Relates to the legislative framework and laws and
regulations that affect how business’s can operate
• For example, competition law and anti-trust
legislation, health and safety law, employment
laws, licensing law
• The role and power of independent regulatory
bodies e.g. Ofwat/Ofcom/OFGEM, the
Competition and Markets Authority etc

20. Using the PESTEL Framework
• Apply selectively –identify specific/key factors which
impact on the industry, market and organisation in
question e.g. the birth rate is a key driver for those
organisations planning nursery and education
provision
• Identify factors which are important currently but also
consider which will become more important in the
next few years.
• Use data to support the points and analyse trends
using up to date information
• Identify opportunities and threats – the main point of
the exercise!
• Remember that the individual forces can combine in
ways that are difficult to predict

21. Understanding the Micro
(Task/Competitive) Environment -
Industries, markets and sectors
An industry is a group of firms producing products
and services that are essentially the same. For
example, automobile industry and airline industry.
A market is a group of customers for specific
products or services that are essentially the same
(e.g. the market for luxury cars in Germany).
A sector is a broad industry group (or a group of
markets) especially in the public sector (e.g. the
health sector)

22. Analysing the Micro
(Task/Competitive) environment -
Porter’s Five Forces framework
Porter’s five forces framework helps identify the nature
of competition and the attractiveness of an industry in
terms of five competitive forces:
• the threat of entry,
• the threat of substitutes,
• the bargaining power of buyers,
• the bargaining power of suppliers and
• the extent of rivalry between competitors.
The five forces constitute an industry’s ‘structure’.

23. The Five Forces Framework
Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter, copyright © 1980, 1998 by The Free Press.
All rights reserved.

24. The Five Forces Framework (1)
The Threat of Entry & Barriers to Entry
The threat of entry is low when the barriers to entry are
high and vice versa
The main barriers to entry are:
• Economies of scale/high fixed costs
• Access to supply and distribution channels
• Differentiation and market penetration costs
• Experience and learning
• Government restrictions – e.g. Licensing
Entrants must also consider expected retaliation from those
already in the market

25. The Five Forces Framework (2)
Threat of Substitutes
Substitutes are products or services that offer a similar
benefit to an industry’s products or services, but by a
different process.
Customers will switch to alternatives (and thus the threat
increases) if:
• The price/performance ratio of the substitute is
superior (e.g. aluminium maybe more expensive than
steel but it is more cost efficient for some car parts)
• The substitute benefits from an innovation that
improves customer satisfaction (e.g. high speed trains
can be quicker than airlines from city centre to city
centre)

26. The Five Forces Framework (3)
The bargaining power of Buyers
Buyers are the organisations immediate customers, not
necessarily the ultimate consumer.
If buyers are powerful, then they can demand cheap prices
or product/service improvements to reduce profits.
Buyer power is likely to be high when:
• Buyers are concentrated
• Buyers have low switching costs
• Buyers can supply their own inputs – the process of
backward vertical integration

27. The Five Forces Framework (4)
The bargaining power of Suppliers
Suppliers are those who provide what organisations need
to produce the product or service
Powerful suppliers can eat erode the organisations profits
Supplier power is likely to be high when:
• Suppliers are concentrated (few of them)
• Suppliers provide a specialist or rare product/service
• Switching costs are high (disruptive or expensive to
change suppliers
• Suppliers can integrate forwards – e.g. low cost airlines
have cut out the use of travel agents

28. The Five Forces Framework (5)
The Rivalry between competitors
Competitive rivals are organisations with similar products
and services aimed at the same customer group and are
direct competitors in the same industry/market (they are
distinct from substitutes).
The degree of rivalry is increased when:
• Competitors are of roughly equal size
• Competitors are aggressive in seeking leadership
• The market is mature or declining
• There are high fixed costs
• The exit barriers are high
• There is a low level of differentiation

29. Implications of Five Forces Analysis
• Watch this video:
https://www.youtube.com/watch?v=ehSQR6oMBH
A
• Identifies the attractiveness of industries – which
industries/markets to enter or leave.
• Identifies strategies to influence the impact of the
forces, for example, building barriers to entry by
becoming more vertically integrated.
• The forces may have a different impact on different
organisations e.g. large firms can deal with barriers
to entry more easily than small firms.
• The Five Forces framework is used to analyse
competition in an industry and CANNOT be used to
analyse an organisation.

30. Questions?