The External
Assessment
Chapter Three

Lecture Outline
Analysis of Macro Environment
 PESTEL
Industry analysis (Micro Environment)
 5 Forces Model

Layers of the business environment

The Nature of an External Analysis
 The external Analysis is aimed at identifying
key External factors that need actionable
responses.
 Firms should be able to respond to the
external factors by
• formulating strategies that take advantage
of external opportunities or
• that minimize the impact of potential
threats.
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External Factor Evaluation (EFE) matrix
External Factor Evaluation (EFE) matrix
is a strategic-management tool often used
for assessment of current business
conditions.
The EFE matrix is a good tool to describe
and prioritize the opportunities and
threats that a business is facing.
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Gathering Information for External
Environmental Analysis
 Managers need information in order to know and
develop an understanding about what is
happening in the external environment.
 Three approaches to information gathering:
 Scanning: general observation of environmental
changes; looking for early signals of changes.
 Monitoring: close attention to specific
developments that could affect the organization.
 Competitive Intelligence: following actions of
competitors.

Competitive Intelligence Programs
Competitive Intelligence (CI)
 a systematic and ethical process for
gathering and analyzing information about
the competition’s activities and general
business trends to further business’s own
goals.
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Competitive Intelligence Programs
The three basic objectives of Competitive
Intelligence (CI) program are:
1. to provide a general understanding of an industry
and its competitors.
2. to identify areas in which competitors are weak
and to assess the impact strategic actions would
have on competitors.
3. to identify potential moves that a competitor
might make that would risk a firm’s position in the
market.
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The Characteristics of External
Forces
Key external factors should be:
1. Important to achieving long-term and annual
objectives.
2. Measurable.
3. Applicable to all competing firms, and
4. Hierarchical in the sense that some will relate to
the overall company and others will be more
narrowly focused on functional or divisional
areas.
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Macro-environment – PESTEL (1)

Macro-environment – PESTEL (2)
Political
• Government stability
• Taxation policy
• Foreign trade
regulations
• Social welfare
policies.
Economic
• The Economic Growth
Rate.
• Interest rates.
• Money supply.
• Inflation.
• Unemployment.
• Tax Rate.
• Foreign exchange rates.

Macro-environment – PESTEL (3)
Socio-cultural
• Population
demographics.
• Income distribution.
• Lifestyle changes.
• Attitudes to work and
leisure.
• Levels of education.
Technological
• Government spending on
research.
• Government and industry
focus on technological
effort.
• Speed of technology
transfer.

Macro-environment – PESTEL (4)
Environmental
• Environmental
protection laws.
• Waste disposal.
• Energy consumption.
Legal
• Competition law.
• Employment law.
• Health and safety.
• Product safety.

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2. Industry Analysis
 Porter’s Model of Industry Competition,
commonly known as “Porter’s Five Forces”
 Porter’s Model provides a framework for
analyzing the influence of the forces on the
industry to determine the industry’s profitability
and competitiveness.

Porter’s Five Forces model
Porter's Five Forces model is made up by
identification of 5 fundamental competitive
forces:
1. Barriers of New Entrants.
2. Threat of substitutes.
3. Bargaining power of buyers.
4. Bargaining power of suppliers.
5. Rivalry among existing firms.
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Porter’s Five-Forces Model of
Competition
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1. Threat of New Entrants
 Fundamental question: how easy is it for
another company to enter the industry?
 Factors making easy entry to industry:
 Low economies of scale.
 Low product differentiation.
 Low capital requirements.
 No switching costs for buyer.
 Easy access to distribution channels.
 Little government regulation.

1. Threat of New Entrants
 Factors making difficult entry to industry
(Barriers to entry)
 Need to gain economies of scale quickly.
 Lack of experience.
 Strong customer loyalty.
 Strong brand preferences.
 Large capital requirements.
 Lack of access to raw materials.
 Government policies and taxation.
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2. Supplier Power
 Fundamental question: how badly does a
supplier need your business?
 Factors giving power to supplier:
 Supplier industry dominated by few firms.
 Buyer is not important to customer.
 Supplier’s product is important input to buyer’s
product.
 Supplier’s products have high switching costs.
 Supplier can “integrate forward” and become
competitor of buyer.

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3. Threat of Substitutes
 Fundamental question: what other products
or services could perform the same function as
your products or services?
 Factors indicating high threat of substitutes:
 Few switching costs for buyer.
 Price of substitute lower or quality higher than for
your products.
 Firms offering substitutes have high profitability.

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4. Buyer Power
 Fundamental questions: How badly does a
buyer need your products or services?
 Factors contributing to high buyer power:
 Few buyers compared to the number of sellers.
 Buyers purchases high relative to seller’s sales.
 Products are undifferentiated.
 Buyer has low switching costs.
 Buyer has low profits.
 Buyer can “integrate backward” and supply the
product to itself.

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5. Competitive Rivalry
 Fundamental question: how intense is
competition in the industry?
 Factors leading to high competitive rivalry:
 Numerous or equally balanced competitors.
 High fixed costs.
 Slow industry growth.
 Lack of differentiation or switching costs.
 High strategic stakes.
 High exit barriers.