Strategic Management
External Environment Analysis
Previous Chapter Recap – Key Vocabularies
1. Statements of purpose that distinguish one
A. Strategies
business form the other
B. Vision
2. What do we want to become?
statement
C. External 3. Factors outside an organization that affect
environment its performance and decision-making
D. Mission 4. The means by which long-term objectives
statement will be achieved
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What Influences Firm Profitability?
Profitability of Competitive
the industry 10% 30% advantages
Firm
profitability
Research by Virginia Polytechnic
Institute and State University (2023) External business
60%
http://hdl.handle.net/10919/102735
environment
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1. Levels of Environmental Analysis
Macro Environment / “Socitetal” Environment
PESTEL (Political, Economic, Social,
Technological, Ecological, Legal)
Industry Environment / “Task” Environment
Porter’s Five Forces analysis
Internal Environment
Firm strengths & weaknesses, capabilities, core
competencies, and sustainable competitive
advantage.
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1. Levels of Environmental Analysis
• Why do we need to analyze the
external environmental factors?
• To identify and evaluate the
variables beyond the control of a
single firm that affect the business
strategy
• To develop a finite list of:
• opportunities that could
benefit a firm
• threats that should be avoided
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Strategic Management
External Environment Analysis
Learning Objectives
• Determine the impact of external macro-
environmental trends on an industry [PESTEL]
• Use the Porter’s 5-forces tool to evaluate an industry
1. Be able to define the 5 forces in an industry
2. Be able to draw out implications from a 5 forces
analysis for a specific firm in that industry
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Outline
1 Introduction to External Business Environment
2 Macro-environment - PESTEL
3 Industry Environment – Porter’s Five Forces
4 Summary
5 Questions and Answers
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2. Macro-environment / PESTEL Tool
P
Political
E
Economic
S
Social
T
Technological
E
Environmental
L
Legal
Includes actions Represents Reflects societal Includes Broad Framework of
and broad the nature trends and advancements environmental laws and
interventions and direction behaviors that in technology issues such as regulations
from the of the influence that can the natural that affect
government economy consumer improve or environment, how
that affect the preferences and disrupt market and businesses
economy or the labor practices and sustainable operate and
industries market efficiency economic compete
growth
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2.1. Political Forces
• Taxation
• Trade restriction
• Foreign trade policy
• Political stability
• Corruption
• Infrastructure
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Image source: Dall-E 3
2.1. Political Forces - Examples
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Class Activity – Quiz for discussion
?
In a PESTEL analysis, which one of the following examples specifically
indicate a political force?
A) A change in consumer preferences for products
B) Technological advancements in production processes
C) The government plans to develop highways to foster transportation
D) The government introduces a new privacy law affecting data
collection
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2. Macro-environment / PESTEL Tool (cont.)
P
Political
E
Economic
S
Social
T
Technological
E
Environmental
L
Legal
Represents Encompassing Broad Laws,
the demographics environmental regulations,
performance, , society’s issues such as litigious
nature and attitudes and the natural environment,
direction of cultural values environment, risk
the economy and management
sustainable
economic
growth
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2.2. Economic Forces
• Interest rates
Purchasing power;
• Unemployment Demand & Supply
• Consumer Price index - Inflation
• Trends in GDP – Economic growth
• Changes in stock market valuations
• Exchange rates
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Image source: Dall-E 3
2.2. Economic Forces - Examples
Source: Statista
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2. Macro-environment / PESTEL Tool (cont.)
P
Political
E
Economic
S
Social
T
Technological
E
Environmental
L
Legal
The nature Reflects Broad Laws,
and direction demographics, environmental regulations,
of the societal trends issues such as litigious
economy and behaviors the natural environment,
that influence environment, risk
consumer and management
preferences and sustainable
the labor economic
market growth
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2.3. Sociocultural/Demographic Forces
• Gender distribution
Customers;
• Aging population Labors
• Rising affluence
• Geographic distribution of population
• Greater disparities in income levels
• Greater concern for health/fitness
• Greater concern for environment
• Postponement of family formation
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Image source: Dall-E 3
2.3. Sociocultural/Demographic Forces - Examples
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2. Macro-environment / PESTEL Tool (cont.)
P
Political
E
Economic
S
Social
T
Technological
E
Environmental
L
Legal
The nature Encompassing Includes Broad Laws,
and direction demographics advancements environmental regulations,
of the , society’s in technology issues such as litigious
economy attitudes and that can the natural environment,
cultural values improve or environment, risk
disrupt market and management
practices and sustainable
efficiency economic
growth
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2.4. Technological Forces
• Genetic engineering
• Emergence of generative AI
• Research in synthetic and exotic
materials
• Availability of computing technologies
• Nanotechnology
• Technologies replacing humans
Production;
Operation
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Image source: Dall-E 3
2. Macro-environment / PESTEL Tool (cont.)
P
Political
E
Economic
S
Social
T
Technological
E
Environmental
L
Legal
The nature Encompassing Broad Laws,
and direction demographics environmental regulations,
of the , society’s issues such as litigious
economy attitudes and the natural environment,
cultural values environment, risk
and management
sustainable
economic
growth
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2.5. Environmental/Ecological
• Environmental impact of operations
• Environmental impact of
products/services
• Natural resource availability
• Climate change
• Recycling – Sustainable business models
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Image source: Dall-E 3
2. Macro-environment / PESTEL Tool (cont.)
P
Political
E
Economic
S
Social
T
Technological
E
Environmental
L
Legal
The nature Encompassing Broad Framework of
and direction demographics environmental laws and
of the , society’s issues such as regulations
economy attitudes and the natural that affect
cultural values environment, how
and businesses
sustainable operate and
economic compete
growth
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2.6. Legal Forces
• Business laws
• Property rights
• Intellectual property rights
• Discrimination laws
• Consumer protection laws
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Image source: Dall-E 3
2. Macro-environment / PESTEL Tool (cont.)
PESTEL can be done at:
Industry level or Company level
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2. Advantages and Disadvantages of PESTEL
Advantages of PESTLE
• simple, easy, cost-effective and
straightforward
• offers a deeper understanding of
the business
• raises alertness
• showcases opportunities
• makes the business compliant
• helps in future strategic planning
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2. Advantages and Disadvantages of PESTEL
Disadvantages of PESTLE
• cannot offer the full picture
• is time-consuming
• is data-hungry
• needs regular updates
• risks mishandling information
• isn't necessarily the best tool
because of its simplicity.
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3. Industry Environment / Porter’s Five Forces
Threat of
New Entrants
Supplier Intensity of Customer
Power rivalry Power
Threat of
Substitutes
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Class Activity – Discussion
Which of Porter's Five Forces do you believe has the
most influence on car manufacturers?
A) Bargaining power of suppliers
B) Bargaining power of buyers
C) Threat of new entrants
D) Threat of substitutes
E) Competitive rivalry
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3.1. The Intensity of Rivalry among Competitors
Example of the Automobile industry
Interacting factors lead to intense
rivalry
– Numerous of equally balanced
competitors
– Slow industry growth
– Lack of differentiation
– High exit barriers
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3.2. The Threat of New Entrants
Example of the Automobile industry
The more attractive the industry, the
greater the risk of a threat from new
entrants.
High entry barriers lead to low threat
of new entries:
– Economies of scale
– Capital requirements
– Switching costs
– Access to distribution channels
– Government’s intervention
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3.3. The Threat of Substitute Products & Services
Example of the Automobile industry
A substitute product is a product that
appears to be different but can satisfy
the same need as another product
The threat of substitute products is
high when:
– Readily available alternatives
– Low switching cost
– Changes in customer preferences
– Changes in economic conditions
– Regulatory support for substitute
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3.4. The Bargaining Power of Buyers
Example of the Automobile industry
The ability to force sellers to reduce prices,
increase quality, or provide more services.
A buyer is powerful when:
– It buys large volumes relative to
seller’s sales
– The products it purchases from the
industry are standard or
undifferentiated
– Low brand loyalty
– Low switching costs
– Buyer’s potential to integrate
backward is high
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3.5. The Bargaining Power of Suppliers
Example of the Automobile industry
Ability to force buyers to accept the increase
in price, decrease in quality, or lesser services
provided.
A supplier is powerful when:
– The supplier’s product is an important
input to the buyer’s business
– The supplier’s products are
differentiated
– or it has built up switching costs for the
buyer
– Supplier’s potential to integrate
forward is high
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MbP0uvpCfxd7O9UoGY/edit
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4. External Factor Evaluation (EFE)
The External Factor Evaluation
(EFE) Matrix / External Factor
Analysis Summary (EFAS):
allows strategists to summarize
and evaluate information the
external analysis.
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4. External Factor Evaluation (EFE)
Steps to develop a EFE matrix
1. List key external factors as identified in the external-audit process. Include a total of 15 to
20 factors, including both opportunities and threats, that affect the firm and its industry.
2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very
important). The weight indicates the relative importance of that factor to being successful
in the firm’s industry. The sum of all weights assigned to the factors must equal 1.0
3. Rate effectiveness of the firm’s current strategies
1 = "company's response to the external factor is poor"
2 = "company's response to the external factor is average"
3 = "company's response to the external factor is above average"
4 = "company's response to the external factor is superior"
4. Multiply weight * rating
5. Sum weighted scores
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4. External Factor Evaluation (EFE)
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4. External Factor Evaluation (EFE)
Total weighted score > 2.5
Firm is well responsive to opportunities and threats
Total weighted score < 2.5
Firm’s strategies are weak at capitalizing on
opportunities or avoiding threats
Total weighted score is 2.5
Firm is moderately responsive to opportunities and
threats
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5. Lecture Summary
Macro Micro / Industry
Broad, related to the general
Limit Narrow, related to each industry
condition of the country
Impact Indirect Direct
The speed of change Slow, long lasting Fast and dynamic
Complexity High, many factors Recognizable
Affects the strategic Major influence on corporate Influence on business and
level level strategy functional level strategy
Key takeaways Opportunities and Threats
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6. Group Exercise
Using PESTEL and Porter’s 5
forces to analyse and create an
EFE matrix for dairy industry in
Vietnam.
Hints: Your external factors
should be quantitative and as
actionable as possible. Avoid
vague statements, such as “the
economy is bad”.
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7. Review Questions
1. The corporation's task environment
A. encompasses the physical working areas of the organization.
B. includes those elements or groups within an organization's industry.
C. is an advisory committee to top management.
D. is an accounting of the many jobs within an organization.
2. Which of the following is not an element of the organization's task environment?
A. local communities
B. trade associations
C. governments
D. technological developments
3. Which of the following is not a major force in the societal environment?
A. political-legal forces
B. labor forces
C. economic forces
D. technological forces
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7. Review Questions
4. Which societal force includes demographic trends?
A. political-legal forces
B. labor forces
C. economic forces
D. sociocultural forces
5. According to Porter, the corporation is most concerned with
A. the intensity of competition within its industry.
B. the aggregate level of demand for a product line.
C. a market's position on its life cycle.
D. the amount of pressure from the societal environment.
6. According to Porter's model, a strong or high force is likely to reduce profits and can be regarded as a(n)
A. benefit.
B. opportunity.
C. advantage.
D. threat.
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7. Review Questions
7. The technique recommended by the text to organize an analysis of external strategic factors is called
A. IFAS.
B. EFAS.
C. SFAS.
D. SWOT.
8. Internal analysis enables a firm to determine what the firm
A. can do.
B. should do.
C. will do.
D. might do.
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8. Questions & Answers
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