The External Environment

Lecture Outline
Analysis of Macro Environment
PESTEL

Industry analysis
5 Forces Model

Life-Cycle Model

Understanding the EnvironmentIssues

Diversity
Many different influences

Complexity
Interconnected influences eg Information Technology changes the nature
of work- changes lifestyles- alters consumer
behaviour

Speed of change
Particularly ICT means more and faster change

Layers of the business environment

Macro-environment PESTEL (1)

Macroenvironment PESTEL (2)

Political
Government stability
Taxation policy
Foreign trade
regulations
Social welfare
policies

Economic

Business cycles
GNP trends
Interest rates
Money supply
Inflation
Unemployment
Disposable income

Macroenvironment PESTEL (3)

Sociocultural

Technological

Population
demographics
Income distribution
Social mobility
Lifestyle changes
Attitudes to work and
leisure
Consumerism
Levels of education

Government spending on
research
Government and industry
focus on technological
effort
New discoveries
/developments
Speed of technology
transfer
Rates of obsolescence

Macroenvironment PESTEL (4)

Environmental
Environmental
protection laws
Waste disposal
Energy consumption

Legal

Competition law
Employment law
Health and safety
Product safety

Key Aspects of PESTEL Analysis

Not just a list of influences
Need to understand key drivers of change
Focus is on future impact of environmental
factors
Combined effect of some of the factors likely
to be most important

Likely Future Trends

Portable Information Devices
Alternative Energy Sources Geothermal, hydroelectric

GM foods and farming

Growth of Woofies
Environmental Awareness

External Environment
Issues Priority Matrix

Identify likely trends:

Societal and task environments
Strategic environmental issues

Assess probability of trends occurring

Low to High

Ascertain likely impact of trends on the

corporation
Low to High

Issues Priority Matrix

Medium

Low

High

High
Priority

High
Priority

Medium
Priority

Medium

Probable Impact on Corporation

High
Priority

Medium
Priority

Low
Priority

Medium
Priority

Low
Priority

Low
Priority

Low

Probability of Occurrence

High

Porters Diamond
PESTEL factors differ from country to
country their competitive impact will
differ from country to country
Porters (1990) suggests reasons why
some countries are more competitive
than others

Porters Diamond
The Determinants of National Advantage

Source: M. Porter, Competitive Advantage of Nations, Macmillan, 1990.

Porters Diamond
Factor conditions
Education, infrastructure, cash, eg, Taiwan

Demand Conditions, eg, Japanese

demand for quality.
Firm Strategy, Structure & Rivalry. Eg,
Taiwans SME sector
Supporting Industries, eg Italy, leather,
Silicon Valley computer related industry

Scenario Analysis
How the business environment might develop
in the future based on key environment
changes around which there is a high degree
of uncertainty.
Newspaper Industry
Influence of electronic media

Energy Industry
Environmental issues
Middle East Situation

Industry Analysis
Industry
A group of firms producing a similar
product or service, such as soft drinks
or financial services.

Industry Analysis

Industry Analysis (1)

Threat of New Entrants -Barriers to entry:

Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Size
Government Policy

Industry Analysis (3)

Threat of Substitute Products/Services
Substitute Products:
Those products that appear to be
different but can satisfy the same need as
another product. To the extent that
switching costs are low, substitutes can
have a strong effect on an industry.

Industry Analysis
Bargaining Power of Buyers -Buyer is powerful when:

Buyer purchases large proportion of sellers products

Buyer has the potential to integrate backward
Alternative suppliers are plentiful
Changing suppliers costs very little
Purchased product represents a high percentage of a buyers
costs
Buyer earns low profits
Purchased product is unimportant to the final quality or price
of a buyers products

Industry Analysis
Bargaining Power of Suppliers -Supplier is powerful when:
Supplier industry is dominated by a few companies but sells
to many
Its product is unique and/or has high switching costs
Substitutes are not readily available
Suppliers are able to integrate forward and compete directly
with present customers
Purchasing industry buys only a small portion of the
suppliers goods.

Industry Analysis
The collective strength of these forces
determines the ultimate profit potential
of an industry.
The stronger each of these forces the
more limited industries are in their
ability to raise prices and increase
profits

The Life Cycle Model

Develop- Growth
ment

Shakeout

Maturity

Users/
buyers

Few:
Early
adopters

Growing
adopters:
Trial of
product

Growing
Saturation
selectivity of Repeat
purchase
purchase
reliance

Drop-off in
usage

Competitiv
e
conditions

Few
competi tors

Competitor
entry
Fight for
share
Undifferentiated

Many:
Price-cutting
Shakeout of
weakest

Exit of
some
competitor
s

Fight to
maintain
share
Emphasis on
low cost

Decline