Chapter 3 Strategic Planning Process

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Strategic Management
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Chapter 3

Strategic Planning
Process: The External
Environmental Analysis

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Learning Objectives
After reading this chapter, you should be able to:
Explain the key external environmental forces.
Describe the nature of the industry environment.
Discuss the five forces that make up the industry
environment.
Discuss the importance of monitoring the external
and industry trends and events.
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External Environment
The external environment represents factors which
are beyond the control of an organization.

It is divided into two categories:
1. General environment
2. Industry environment
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The General and Industry
Environments
The general environment, also known as the macro
environment, includes the environmental factors
that have an impact on all organizations and firms
within the company.
Easily remembered by the simple acronym PESTEL
P : Political factors
E : Economic factors
S : Socio-cultural factors
T : Technological factors
E : Ecological factors
L : Legal factors
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EXHIBIT 3.1 The Firm Embedded in Its External Environment
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The General and Industry
Environments (cont.)
The industry environment or the micro
environment refers to factors that directly affect
the firm and its competitive responses.
These factors have the ability to affect the firms
profitability and shape the competition in an
industry.
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External Environmental
Analysis
This analysis provides information to managers
regarding the key trends and changes in the
external environment, such as the following:
Population shifts
Changing demographics (e.g. aging population)
Information technology
New government regulations
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Analysis (cont.)

External environmental analysis reveals:
Opportunities: External environment factors which
can help the organization improve its performance and
achieve its strategic objectives
Threats: External environment factors which can
hinder an organizations performance and prevent the
organization from achieving its strategic objectives

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Analysis (cont.)
Based on the external environmental analysis,
managers formulate strategies that:
Take advantage of opportunities
Avoid/reduce impact of threats
Sources of information for external environmental
analysis include customer surveys, market surveys,
periodicals, journals, reports, books, newspapers,
conferences and the Internet.

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Factors in the General
Environment
1. Political and Legal Factors
Looks at how the government can influence
organizations
Examples:
employment laws
environmental regulations
competitive regulations
government leadership
tax policies
quotas on goods produced
consumer protection laws
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Environment (cont.)
2. Economic Factors
Unemployment rates
Inflation rates
Consumer and investor confidence
Currency exchange rates
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Environment (cont.)
3. Socio-cultural Factors
Concerned with societys attitudes, cultural values
and demographic changes
Include factors such as:
Demographic factors (e.g. population size and
distribution, age distribution, education levels)
Attitudes towards materialism, capitalism, free
enterprise
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Environment (cont.)
4. Technological Factors
Include factors such as:
Rate of technology transfer
Energy use and cost
New products and services of competitors
Changes in Internet
Changes in mobile technology
Technological breakthroughs can create new
industries or create new products and services
which might render existing products and services
redundant.
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Ecological Variables
Global Warming
Sustainable Economic Growth
Fossil Fuel Consumption
Pollution of air & water
Toxins in food and products
Business Sustainability Video
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Legal Variables
Minimum wages
Price control act
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Factors in the Industry
Environment

A set of factors that directly affects a firm
Also known as micro environment
These factors are analysed to assess how the
forces of the organizations immediate
environment affect the attractiveness or
profitability potential of the firm.
Michael Porters Five Forces Model (1980) is one
of the most widely used and best known
conceptual frameworks to assess the industry
environment.

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Industry Environment Analysis/Competitive Analysis:
Michael Porters Five-Forces Model
Potential development
of substitute products
Rivalry among
competing firms
Bargaining power
of suppliers
Potential entry of new
competitors
Bargaining power
of consumers
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Environment (cont.)
1. Threat of New Entrants
New entrants to an industry can raise the level of
competition
The threat of new entrants depend on the barriers
to entry
Barriers of entry can be affected by economies of
scale, product differentiation, capital requirements,
switching costs and government regulations.

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Environment (cont.)
2. Bargaining Power of Suppliers
A supplier group is powerful when
the suppliers goods are critical to the buyers
marketplace success.
the inputs required by the buyers are unique,
making it costly to switch suppliers.
the buyers inputs do not represent a significant
portion of the suppliers business.
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Environment (cont.)
the buyers inputs are only available from a small
group of suppliers.
the suppliers can sell directly to the firms customers,
bypassing the need for the firm.

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Environment (cont.)
3. Bargaining Power of Buyers
Customers (or buyer groups) have the most power
when
they are large and purchase most of the industrys
output.
the industry has many small suppliers supplying the
product and the buyers are large.
the products represent a relatively large expense
for customers and sales of the product being
purchased account for a significant portion of the
sellers annual revenues.

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they have access to sufficient information and are
able to evaluate the competitive offerings.
the customers could switch to another product without
incurring significant switching cost because the
suppliers products are not unique or undifferentiated.
the customers could possibly make the product
themselves.
Environment (cont.)
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4. Substitute Products
Substitute products can be a threat when
the product is undifferentiated and customers can
easily switch away from one supplier to another
supplier with little or insignificant switching costs.
the customers or buyer groups are price sensitive
and customers have little brand loyalty.
there is no real benefit offered by the products in the
industry and consumers can do without the product
offered by the industry.
Environment (cont.)
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5. Rivalry Among Competitors
Rivalry among competitors is the strongest of the
five competitive forces and can vary widely among
industries.
If rivalry among the competitors is intense,
companies in the industry may need to enhance
their product offerings to keep customers and firms
may earn less profit.
Environment (cont.)
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Rivalry among competitors can be most intense
when
the industry has two or three dominant firms which
are battling to be the dominant firms in the industry.
there are numerous competitors in the industry.
the competitors are relatively equal in size and
power.
the firms are competing in a slow or shrinking
industry.
Environment (cont.)
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there are high fixed costs of production.
the products are undifferentiated and are viewed by
customers as commodities.
there are high costs for exiting the business.
Environment (cont.)
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USING THE PORTERS FIVE FORCES, DISCUSS
INDUSTRY ATTRACTIVENESS FOR BOOK
PUBLISHING INDUSTRY

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