You are on page 1of 19

Levels of external analysis

Environmental analysis of the far or macro

environment affecting all firms, and the industry analysis of near or micro environment which is much more specific.

Benefits of external analysis


Increasing managerial awareness of environmental

changes Increasing understanding of the context in which industries and markets function Increasing understanding of multinational settings Improving resource allocation decisions Facilitating risk management Focusing attention on the primary influences on strategic change Acting as an early warning system

The far or Macro Environment


represents forces that affect all firms across all

industries Political, Economic, Social and Technological influences PEST

Political Factors
Political factors act at three levels: Regional (e.g. ECOWAS),

National, and local level Examples Policies on taxation Policies on healthcare, unemployment, exchange ratios, inflation, economic growth Government employment and the public sector Government agencies regulating competition, pollution and industrial relations Laws of various kinds such as those relating to protection of the environment or the safety of employees in the work place or customer protection The law of contract, forms of business ownership, rules on advertising

Economic Factors
GDP, gross national product
Growth Inflation Consumer Price Index Central bank lending rates Changes in stock market valuation Regional issues like land process and labour rates Currency exchange rates Distribution of economic rewards in society.

Socio-cultural factors
Attitudes, values and beliefs, tastes of people
Culture: attitude to work, savings and investment,

ethics, etc. Demography (Sometimes treated alone) : Size and structure of work of the workforce, population shifts, aging, rising affluence, changes in ethnic composition, geographic distribution of population, differences in income levels

Using the Pest Analysis


Scan the macro-environment for actual or potential

changes in the PEST factors. Assess the importance of the changes for the market, industry and business Analyse each of the relevant changes in detail and the relationships between them Assess the potential impact of the changes on the market, industry and business

Micro or Near Environment


This is the Industry or competitive environmental

analysis of Porter Also known as 5 Forces: The ease with which competitors can enter the industry The bargaining power of customers The bargaining power of suppliers The ease with which substitute products can be introduced The extent of competition among existing firms

Ease of Entry or Barriers to Entry


Economies of scale- entrants must enter the industry on a large scale

and hence must take a great risk in order to gain a foothold in the market Product differentiation- if products have to be differentiated through branding, design and make-ups, entrants will have to spend large sums on advertising and sales promotions Expensive capital equipment is needed before starting production Entrants have limited access to distribution channels and have to invest to establish retail outlets Government policy restricts entry, i.e. licensing arrangements, and so on Other factors that create advantage for existing firms: industry knowledge, favourable locations, easy access to raw materials and similar benefits.

Bargaining power of buyers


Buyer power is likely to be high when: There is concentration of buyers There is a large number of small operators in the industry There are alternative sources of supply. Material costs are high The cost of switching to another supplier is low There is a threat of backward integration by buyer

Bargaining power of suppliers


Supplier power is likely to be high when: There are few suppliers The cost of switching to another supplier is high The brand of the supplier is powerful There is a possibility of forward integration by the supplier The suppliers customers are highly fragmented so their bargaining power is low.

Competitive rivalry
Usually, rivalry is more fierce and intense when there is : No industry leader A large number of competitors High fixed costs High exit barriers Little opportunity to practice product differentiation Slow rates of growth

Criticisms of the theory


It is not possible to know today what tomorrows competitive strategy

could be and firms can copy rivals success One cannot predict with accuracy rival behaviour and could waste resources undertaking such analysis It relies on speculation about rivals intentions and not on hard evidence Sometimes firms have no formal strategies in the early years of their operations and by the time this become formalised the environment has changed and would not necessary need it Businesses change industry in which they operate in. Industry structure is dynamic and the basic unit of analysis is constantly shifting. Companies that score high in terms of the five forces, often fail and vice-versa. Many organisational and efficiency factors determine whether a firm is successful.

Technological factors
Technology transforms inputs into outputs

Examples Production processes Information and communication Genetic engineering, biotechnology and new industries Internet technology Pollution/global warming Wireless communications

Competitor Analysis
Carried out to know their rivals strengths and

weaknesses, costs, culture and management style., systems, strategies carried out by observed behaviour and desk research

Competitor analysis
Pricing history and strategy of competitor and the environmental factors they consider in decisions When competitors conducts promotional campaigns and how this provides information on how they perceive their target market The themes and concepts they use in their promotional materials Information on the strengths and weaknesses of rival firms products and how it compares with the firm in questions Market sectors covered by competitors, packaging, distribution, sales promotions, public events Competitor product development strategies; new product introductions, acquisitions etc. Competitors terms of sale, credit periods, levels of after-sales service etc The financial performance of rival firm Why rival firms compete in certain markets and how they are organised; distribution systems, etc.

Critical Success Factors (CSF)


CSF are the variables that determine whether a company

can beat its rivals in the market concerned Examples: Fast and reliable delivery Product quality and customer care The ease with which a product can be modified, has appealing features, fulfils a clear need and has multiple uses The rate of expansion of the market and whether it is concentrated in accessible areas Brand image and the products life cycle.

Progress Test
What is Critical Success Factor. Give 4 examples of critical

success factors List the components of Porters 5 Forces of competitive strategy Competitor analysis can be carried out by desk research or observation. List 5 things a competitor analyst looks out for in a rival firm What are the 2 levels of external analysis? What are the benefits of external analysis What does the acronym PEST represent? List 4 economic and 3 social factors that affect firms.

You might also like