II JAI SRIGURUDEV II

Sri Adichunchanagiri Shikshana Trust

SJB INSTITUTE OF TECHNOLOGY
BGS Health & Education City
Dr. Vishnuvardhana Road, Kengeri, Bengaluru - 560 060.

DEPARTMENT OF MBA

 STRATEGIC MANAGEMENT
20MBA25
II SEM MBA

MODULE-II
External Analysis

Prepared by : Dr Harshini C S

Designation : Associate Professor

CONTENTS
External Analysis
• Strategically Relevant Components of a
Company’s External Environment
• Industry Analysis -Factors Driving Industry
Change and its Impact
• Porter’s Dominant Economic Feature
• Competitive Environment Analysis
• Porter’s Five Forces Model –Key Success Factors
Concept and Implementation.
• Case Study
 Company’s External Environment
• An external analysis focuses on identifying and
evaluating trends and events beyond the
control of a single firm
• An external analysis reveals key opportunities
and threats confronting an organization so
that managers can formulate strategies to take
advantage of the opportunities and avoid or
reduce the impact of threats.
Thinking Strategically About a Company’s Industry and Competitive Environment

– 1: What Are the Industry’s Dominant Economic Features?

– 2: How Strong Are Competitive Forces?
– 3: What Forces Are Driving Industry Change and What
Impacts Will They Have?
– 4: What Market Positions Do Rivals Occupy—Who Is
Strongly Positioned and Who Is Not?
– 5: What Strategic Moves Are Rivals Likely to Make Next?
– 6: What Are the Key Factors for Future Competitive
Success?
– 7: Does the Outlook for the Industry Offer the Company a
Good Opportunity to Earn Attractive Profits?
A Company’s Business Environment
External business environment for an organization
PESTEL ANALYSIS
 External environment Analysis

• Political: government activity, types of laws, political

stability
• Economical: business cycles, inflation, interest rates, income
levels, unemployment rates, supply and demand rates
• Social cultural: society, culture and beliefs
• Technological: the technology imbibed in the organization
• Ecological: environmental factors such as availability of raw
materials, pollution, carbon footprints etc.
• Legal: Discrimination laws, employment related laws,
consumer protection related laws etc
 Economic Environment
• It broadly describes the conditions of money market, manpower markets,
buying power of consumers, supply and demand for goods, etc.
• It represents the size of market, income distributions, taste and preferences
of consumers etc.
• There are many economic indicators or factors to be considered for
strategic planning such as;

• (a) GDP size and growth rate

• (b) Unemployment, Interest, Taxation and Inflation Rates
• (c) Liquidity position and Monetary and Fiscal policies (SLR, CRR,
etc)
• (d) Income Distribution
• (e) Consumption pattern and regional disparity
• (f) Foreign exchange reserve, rates and policies
• (g) Stock market conditions, etc.
 Demographic Environment
Demography means characteristics of
population.
Major factors in demographic environment are:
• a) Population Size
• b) Income Distribution
• c) Education level
• d) Ethnic Mix
• e) Geographic profile in terms of urban and
rural distribution
 Technological Environment
Issues for consideration in selection of technology
• a) Type of technologies used by business
• b) Technologies are developed in-house or procured
externally.
• c) If procured externally will these be always
available or there is a risks of discontinuity
• d) Technologies used are latest and ahead of used by
competitors
• e) Technologies which are must and which require to
be curtailed, etc
 Legal- Political Environment
• There are three important elements organization should analyze
to understand the legal political impact:
• The Government, The Laws and Regulations, and The Political
environment.
• Degree of political impact on business and economic activity.
• Political stability
• Law and order situation
• Legal framework of country and implications of various laws
under which business need to functions
• Effectiveness of implemented laws
• Government policies such as labor, fiscal, EXIM, FDI
(foreign investment) and industrial development
 Social- Cultural Environment

Organizations are an entity only still it responses to

environment similar to human entity and this response can be
in three forms:
• (a) Conservative/Slow-moving: Such enterprises are passive
in their operation and these enterprises react only when
external environment force them to do so e.g. Nationalized
banks, PSU, etc.
• (b) Cautious/Adaptive: These organizations take intelligent
approach to response to environment. e.g. TATA.
• (c) Confident/Aggressive: These organizations work
aggressively and some time converts threats into
opportunities. These are highly dynamics organizations and
known as trend setter or mover and shaker of market. Their
feedback system is highly dynamic, e.g. Reliance.
 Industry Analysis:

• Helps a company to realize it’s potential in the

market amongst its’ competitors.
• It helps the company to invest in it’s strength,
overcome the weakness, expand itself with
the prevailing opportunities in the market.
• This also let the company to know the forces,
industry attractiveness, critical factors that
define company success.
 Industry’s Driving Forces

• [Link] new Internet capabilities and applications

• [Link] globalization
• [Link] in an industry’s long-term growth rate
• [Link] in who buys the product and how they use it
(Music)
• 5. Product innovation
• 6. Technological change and manufacturing process
innovation
• 7. Marketing Innovation
• 10. Change in cost and efficiency (Email)
• 11. Reduction in uncertainty and Business Risk.
• 13. Regulatory Influence and government Policy Changes.
• 14. Changing societal concerns, attitudes, and lifestyles
 Key Success Factors Concept and
Implementation
Key Success Factors :
• Key success factors (KSFs) are those
competitive factors that most affect industry
members’ ability to prosper in the marketplace
• Key success factors are the product attributes
competencies, competitive capabilities, and
market achievements with the greatest impact
on future competitive success in the marketplace
 Common Types of Industry Key Success Factors

• 1. Technology-related KSFs
• 2. Manufacturing-related KSFs
• 3. Distribution-related KSFs
• 4. Marketing-related KSFs
• 5. Skills and capability related KSFs
 Implementation

• Ensuring a good understanding of the

environment, the industry and the company
• Building knowledge of competitors in the
industry
Porter’s Dominant Economic Feature
 Competitive Environment Analysis

The competitor analysis will always be conducted at

the industry level not at the organisational level.
• Helps in identifying the strategies implied by
competitors
• It helps the organization to understand the current
trends
• Identifying competitor’s position
• Size or potentiality
• Trends employed for selling or sales
• Marketing or dominant strategies
Key components of competitor analysis
Porter’s Five Forces Model
 Porter’s Five Forces Model

1. Threat of new entrants

The higher these barriers to entry, the smaller the threat
for existing players.
Examples of barriers to entry are
• The need for economies of scale,
• High customer loyalty for existing brands,
• Large capital requirements
• The need for cumulative experience,
• Government policies,
• Limited access to distribution channels.
 Porter’s Five Forces Model
2. Bargaining power of suppliers

If a firm’s suppliers have bargaining power they will:

Exercise that power
Sell their products at a higher price
Squeeze industry profits
 Porter’s Five Forces Model
3. Bargaining power of buyers
Powerful customers are able to exert pressure to drive down
prices, or increase the required quality for the same price, and
therefore reduce profits in an industry.
Customers tend to enjoy strong bargaining power when:
• There are only a few of them
• The customer purchases a significant proportion of output of
an industry
• Threaten to buy the producing firm or its rivals
• They can choose from a wide range of supply firms
• They find it easy and inexpensive to switch to alternative
suppliers
 Porter’s Five Forces Model
4. Threat of substitute products
Rising of a Substitute Products that satisfy
similar consumer needs. Eg: Elon Musk
 Porter’s Five Forces Model

5. Rivalry among existing competitors

• Number of competitors
• Diversity of competitors
• Quality differences
• Brand identity/loyalty
• Switching costs
• Barriers to exit