Evaluating a Companys External

Environment
All companies operate in a macro
environment shaped by political, economic,
legal, global, industry and competitive
forces.
Thus a companys macro environment
includes all relevant factors and influences
outside the boundaries of a company.
Companies in all industries have to craft
strategies that are responsive to macro
environmental factors relevant to them.

The Role of External Analysis in

Strategic Planning
a

External
Analysis
Scanning
Monitoring
Intelligence
Forecasting
Strategic
Direction
Internal
Analysis
Vision
Mission
Strengths
Weaknesses

Strategi
c Plans

External Analysis Ctd

External analysis is the broader
activity of understanding changing
external environment that may
impact the organisation.
Merged with the internal analysis of
the organisations vision, mission,
strengths and weaknesses, external
analysis assists decision makers in
formulating strategic directions and
strategic plans.

Environmental Scanning
It can be defined as the study (or
surveillance) and interpretation of
the political, economic, social,
technological and global events and
trends which influence a business, an
industry or even a total market.
It thus involves the surveillance of a
firms external environment to
predict changes to come and detect
changes already underway.

Environmental Monitoring
It tracks the evolution of environmental trends,
sequences of events or streams of activities.
These are often uncovered during the environmental
scanning process.
While environmental scanning makes firms aware of
the trends in the environment, these trends require
monitoring.
E.g a firm should monitor how fast its competitors
bring new products to the market than itself.
Monitoring enables firms to evaluate how
dramatically environmental trends are changing the
competitive landscape.

Competitive Intelligence
It includes the collection of data on
competitors and interpretation of such
data for managerial decision making.
It helps firms to define and understand
their industry and identify rivals
strengths and weaknesses.
It helps a company avoid surprises by
anticipating competitors moves and
decreasing response times

Environmental forecasting
It involves making projections about
the direction, scope, speed and
intensity of environmental change.
Its purpose is to predict change.
It asks: How long will it take a new
technology to reach the
marketplace? or Are current lifestyle
trends likely to continue?.

The Components of a Companys

Macroenvironment
Economic
Forces

So
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for ura
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New
Entrants
Supplie
rs

Rival
Firms

Tec
h
al nolog
For
ces ic

Compa
ny

Buyers

Substitute
Products

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a
Leg

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Thinking strategically about a Companys

Industry and Competitive Environment
This entails a companys efforts to answer the
following questions:
1. What are the industrys dominant economic
features.
2. What kinds of competitive forces are
industry members facing and how strong is
each force?
3. What forces are driving industry change and
what impact will these changes have on
competitive intensity and industry profitability?

Thinking strategically ctd

4. What market positions do industry rivals
occupy- who is/or not strongly positioned?
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?

What are the industrys dominant

economic features?

Economic features to consider are:

1. Market size and growth rate
2. Number of rivals
3. Scope of competitive rivalry
4. Number of buyers
5. Degree of product differentiation
6. Product innovation
7. Demand supply conditions
8. Pace of technological changes
9. Vertical intergration
10. Economies of scale
11. Existence of learning/experience curve effects

How strong are Competitive

forces
This can be analysed using Michael Porters five
forces model.
The model postulates that the state of
competition in an industry is a product of
competitive pressures operating in five areas of
the overall market namely:
1. Rivalry among existing competitors
2. Threat of new entrants
3. Threat of substitutes
4. Bargaining power of suppliers
5. Bargaining power of buyers

Michael Porters Five Forces

Model
a

Threat
of
Entry

Bargaini
ng
Power of
Supplier
s

Rivalry
Among
Existing
Firms
Threat
of
Substitut
es

Bargaini
ng
Power of
Buyers

Steps to be followed in using the

model
One should
1. Identify the specific competitive
pressures associated with each of the five
forces.
2. Evaluate the strength of the pressures
comprising each of the five forces (eg
fierce, strong, moderate to normal, or weak)
3. Determine whether the collective
strength of the five competitive forces is
conducive to earning attractive profits

Competitive Forces
The analysis of the collective strength of the
five -competitive forces determine whether the
industry is conducive for good profitability.
Generally the stronger the collective impact of
the competitive forces, the harder it becomes
for industry members to earn attractive profits.
Furthermore, a companys strategy is
increasingly effective the more it provides
some insulation from competitive pressures
and shifts the competitive battle in the
companys favor.

Rivalry Among Existing

Rivalries
A market is regarded as a competitive
battlefield where rivalry competitors
employ whatever weapons to strengthen
their market positions, attract and retain
buyers and earn good profits.
When one firm makes a strategic move
that produces good results, its rivals
usually respond with offensive or
defensive countermoves.

Typical Weapons for Battling Rivals

and Attracting Buyers

Lower prices
More or different features
Better product performance
Higher quality
Stronger brand image
Higher levels of advertising
Better customer service capability
Stronger capabilities to provide buyers
with custom made products

Rivalry Against Existing Competitors

Rivalry is generally stronger when:

Buyer demand is growing slowly
Buyer costs to switch brands are low
The number of rivals increases and rivals are of
roughly equal size and competitive capability
Competing sellers are active in making fresh
moves to improve their market standing and
business performance
The products of rival sellers are commodities or
else weakly differentiated.

Threat of New Entrants

This refers to the competitive
pressures coming from new firms
that want to enter the industry.
The entry of new firms in an industry
is determined by the existence of
entry barriers .
High barriers reduce the competitive
threat of potential entry, while low
barriers make entry more likely.

Threat of new entrants ctd

The most widely encountered barriers that entry candidates
face include:
1. The presence of economies of scale in production or
other areas of operation.
2. Cost and resource disadvantages eg learning curve
effects
3. Strong brand preferences and high degrees of customer
loyalty.
4. High capital requirements
5. Poor distributor/retailer network
6. Restrictive regulatory policies
7. Tariffs and international trade restrictions
8. The retaliating activities of incumbent firms

Threat of New Entrants

Entry threats are stronger when:

1. Entry barriers are low
2. There is a sizeable pool of entry candidates
3. Buyer demand is growing rapidly
4. Profit potentials are high
5. Incumbent firms are unable or unwilling to
vigorously contest a newcomers entry.
The opposite of the above result in weaker
entry theats.

Threat of Substitutes
Substitutes are products or services
that offer a similar benefit to an
industrys products or services, but
by a different process.
Substitutes can reduce the demand
for a particular product as customers
switch to the alternatives.
They also limit the potential returns
of the industry by placing a ceiling on
the prices that can be effectively be
charged.

Threat of Substitutes
Competitive pressures from the sellers of
substitute products are stronger when:
1. When good substitutes are readily available
2. Substitutes are attractively priced
3. When substitutes have comparable or better
performance features.
4. End users have low costs in switching to
substitutes
5. End users grow more comfortable with using
substitutes. (The opposite is true for the
contrary)

Threat of Substitutes
Below are some of the signs that
competition from substitutes is
strong:
1. Sales of substitutes are growing
faster than sales of the industries
being analysed
2. Producers of substitutes are
moving to add new capacity.
3. Profits of the producers of
substitutes are on the rise.

Bargaining Power of
Suppliers
Suppliers refer to those who supply the
organization with what it needs to produce the
product or service.
Competitive pressure from suppliers depend
on 1. Whether the major suppliers can exercise
sufficient bargaining power to influence the
terms and conditions of supply in their favor
2.how closely one or more industry members
collaborate with their suppliers to achieve
supply chain efficiencies.

Bargaining Power of
Suppliers
Factors that determine the ability of suppliers to exert
substantial bargaining power are;
1. The nature and availability of the product supplied
2. Whether a few large suppliers are the primary sources of
a particular item
3. The availability of switching costs to buyers
4. Whether the certain inputs needed are in short supply.
5Whether certain suppliers provide a differentiated input
that enhances the performance or quality of the industrys
product.
6. Whether it makes good economic sense for industry
members to integrate backwards and self manufacture the
items they have been buying from the suppliers.

Bargaining Power of
Suppliers
All in all supplier bargaining power is higher when:
1. Industry members incur high costs in switching their
purchases to alternative suppliers
2. Needed inputs are in short supply (which gives
suppliers more leverage in setting prices)
3. A supplier has a differentiated input that enhances
the quality or performance of sellers products or is a
valuable or critical part of sellers production process.
4. There are only a few suppliers of a particular input.
5. Some suppliers threaten to integrate forward into
the business of industry members and perhaps
become a powerful rival(The opposite is true)

Bargaining Power of Buyers

Buyers refer to the organization's
immediate customers, not
necessarily the ultimate consumers.
Sometimes buyers have such high
bargaining power that industry
members are hard pressed to make
profits at all.

Bargaining Power of Buyer

Buyer bargaining power is stronger when:
1. Buyer switching costs to competing
brands or substitutes are low.
2. Buyers are large and can demand
concessions when purchasing large
quantities.
3. Large volume purchases by buyers are
important to sellers.
4. Buyer demand is weak or declining
5. There are only a few buyers

Bargaining Power of Buyers

6. Identity of buyer adds prestige to the sellers
list of customers.
7. Quantity and quality of information available
to buyers improves.
8. Buyers have the ability to postpone
purchases until later if they do not like the
present deals being offered by sellers.
9. Some buyers are a threat to integrate
backward into the business of sellers and
become important competitors(The opposite is
true)