The external environment
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The External Environment. Lecture Outline. Analysis of Macro Environment PESTEL Industry analysis 5 Forces Model Life-Cycle Model. Understanding the Environment- Issues. Diversity Many different influences Complexity Interconnected influences-

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Lecture outline
Lecture Outline

  • Analysis of Macro Environment

    • PESTEL

  • Industry analysis

    • 5 Forces Model

  • Life-Cycle Model

The external environment

Understanding the Environment- Issues

  • 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

  • The external environment

    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

    The external environment

    Macroenvironment – PESTEL (3)

    • Sociocultural

    • Population demographics

    • Income distribution

    • Social mobility

    • Lifestyle changes

    • Attitudes to work and leisure

    • Consumerism

    • Levels of education

    • Technological

    • Government spending on research

    • Government and industry focus on technological effort

    • New discoveries /developments

    • Speed of technology transfer

    • Rates of obsolescence

    The external environment

    Macroenvironment – PESTEL (4)

    • Environmental

    • Environmental protection laws

    • Waste disposal

    • Energy consumption

    • Legal

    • Competition law

    • Employment law

    • Health and safety

    • Product safety

    The external environment

    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
    Likely Future Trends

    • Portable Information Devices

    • Alternative Energy Sources-

      • Geothermal, hydroelectric

    • GM foods and farming

    • Growth of Woofies

    • Environmental Awareness

    The external environment

    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

    The external environment

    Probable Impact on Corporation


















    Probability of Occurrence








    Issues Priority Matrix

    Porter s diamond
    Porter’s Diamond

    • PESTEL factors differ from country to country –their competitive impact will differ from country to country

    • Porter’s (1990) suggests reasons why some countries are more competitive than others

    The external environment

    Porter’s Diamond The Determinants of National Advantage

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

    Porter s diamond1
    Porter’s Diamond

    • Factor conditions

      • Education, infrastructure, cash, eg, Taiwan

    • Demand Conditions, eg, Japanese demand for quality.

    • Firm Strategy, Structure & Rivalry. Eg, Taiwan’s SME sector

    • Supporting Industries, eg Italy, leather, Silicon Valley computer related industry

    Scenario analysis
    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

    The external environment

    Industry Analysis


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

    The external environment

    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

    The external environment

    Industry Analysis (2)

    • Rivalry Among Existing Firms --

      • Intense rivalry related to:

        • Number of competitors

        • Rate of Industry Growth

        • Produce or Service Characteristics

        • Amount of Fixed Costs

        • Capacity

        • Height of Exit Barriers

        • Diversity of Rivals

    The external environment

    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.

    The external environment

    Industry Analysis

    • Bargaining Power of Buyers --

      • Buyer is powerful when:

        • Buyer purchases large proportion of seller’s 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 buyer’s costs

        • Buyer earns low profits

        • Purchased product is unimportant to the final quality or price of a buyer’s products

    The external environment

    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 supplier’s goods.

    Industry analysis1
    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