The Strategic Management

External Analysis

The Strategic Management Process

External Analysis Strategic Choice Strategy Implementation Competitive Advantage

Mission

Objectives

Internal Analysis

Topics outcome
External Environment Pest Analysis Porters five forces model Case Study

Purpose of External Analysis

To understand the external environment as it affects the organization. External Analysis requires an assessment of:
- General changes in business environment
Changes within the industry Activities of competitors and other specifics

External Analysis: Opportunities and Threats

Identify strategic opportunities and threats in the operating environment. Opportunities
Conditions in the environment that a company can take advantage of to become more profitable

Threats
Conditions in the environment that endanger the integrity and profitability of the companys business

The Role of the Macroenvironment

Political and Legal Environment Risk of entry by potential competitors Technological Environment

Bargaining power of suppliers

Rivalry Among Established Firms

Threat of substitute products

Bargaining power of buyers

Demographic Environment Social Environment

Macro-Economic Environment

PEST analysis
PEST analysis stands for "Political, Economic, Social, and Technological analysis" and describes a framework of macro-environmental factors Political
Legislation and Regulation International relations - barriers to international trade and investment

Economic
Economic cycles Currency rates, growth rates, interest rates, inflation or deflation rates Capital, labour and commodity markets

Social
Demographics Tastes
Environmental awareness

Technological
Process effect development

Porter's Five Forces Model

(Developed

by Michael E. Porter of the Harvard School of Business Administration) This model focuses on five forces that shape competition within an industry. The risk of new entry by potential competitors The degree of rivalry among established companies within an industry The bargaining power of buyers The bargaining power of suppliers The threat of substitute products

How the Five Forces Shape Competition within an Industry

The stronger that each of these five forces is, the more limited is the ability of established companies to raise prices and earn greater profits within their industry.

A weak competitive force

may be viewed as an opportunity as it allows company to earn greater profits

A strong competitive force

may be viewed as a threat as it depresses industry profits

Strength of forces may change as industry conditions change

 Risk of Entry by Potential Competitors

Barriers to new entrants include:

Economies of Scale
Absolute Cost Advantage

Cost reductions Discounts on bulk purchases Cost advantages/savings well-established customer

preferences Difficult for new entrants to take market share from established brands

Brand Loyalty
Customer Switching Costs

Government Regulation

Accumulated experience Control of particular inputs required for production Lower financial risks

 Rivalry Among Established Companies

Intensity of rivalry is a function of:
Industry Competitive Structure Cost reductions Discounts on bulk purchases Cost advantages/savings Growing demand Declining demand High fixed costs Slow demand and growth
Write-off of investment in assets Economic dependence on industry Maintain assets High fixed costs of exit Emotional attachment to industry Bankruptcy regulations

Demand Conditions Cost Conditions

Height of Exit Barriers

Buyers are most powerful when:

Buyers are dominant

Bargaining Power of Buyers

Buyers are large and few in number. The industry supplying the product is composed of many small companies.
Buyers have purchasing power as leverage for price reductions Buyers purchase a large percentage of a companys total orders

Purchase in large quantities

The industry is dependant on the buyers low switching costs Purchase from several supplying companies at once Threaten to enter the industry themselves

Buyers can play off the supplying companies against each other. Buyers produce themselves and supply their own product.

 Bargaining Power of Suppliers

Suppliers are most powerful when:
The product is vital to the industry and has few substitutes The industry is not an important customer to suppliers Suppliers are not significantly affected by the industry Companies in the industry cannot play suppliers against each other

Significant switching costs

Threaten to enter their customers industry Companies cannot threaten to enter their suppliers industry Suppliers can use their inputs to produce and compete with companies already in the industry

 Substitute Products
The existence of close substitutes is a strong competitive threat Substitutes are a weak competitive force if an industrys products have few close substitutes Substitutes limit the price that companies can charge for their product Other things being equal, companies in the industry have the opportunity to raise prices and earn additional profits

Case Study Air Asia

Analysis on the budget airline industry

1. Bargaining Power of Supplier

power of supplier is high as there are limited (availability of) suppliers (only Boeing and Airbus) the switching cost is high (i.e. airplanes and their maintenance are costly) there are few substitutes for airplanes (i.e. air travel covers longer distances in a shorter period of time).

2. Bargaining Power of Buyer

no switching costs for customers switching from one budget airline to another the bargaining power of buyer is moderately high customers are able to compare prices of budget airline via the Internet, giving them more choices.

3. Threat from Substitutes

Although there are several substitutes (i.e. trains and ships), the geographical structure of Asia has made air travel an efficient, viable, and convenient mode of transportation. substitutes is moderately low.

4. Threat from New Entrants

the entry barriers are high (i.e. capital requirement and government restrictions such as air service agreements) threat from new entrants is moderately high increased deregulation by Asian governments, and growing demand for affordable low fares amongst budget-conscious travelers, competition increased (i.e. more full-service airlines launched their own budget airlines) AirAsias success prompted several incumbents to start or being to consider starting their own budget airlines.

5 Rivalry Intensity

Intensity of rivalry is moderately high due to the increased competition (with more competitors wanting a part of this growing lucrative market), AirAsia also faced competition from a broad range of airlines, ground transportation, and sea services. Below are the opportunities and threats that have been identified using the PESTL model:

PEST Model
Economic Opportunities
Although, economic downturns (e.g. global financial crisis) would result in a downturn in the industry, it can prove to be an opportunity for AirAsia. As a result of the global economic downturn (i.e. worldwide stock market plunge), aircraft leasing costs were reduced by about 40%; creating an environment with lesser competition and enabled AirAsia to lease their aircraft at a cheaper rate (leading to cheaper ticket prices for customers). Fluctuating oil prices Yield and profitability would decrease for AirAsia if fuel prices become too high.

Threats

Social / Culture
Opportunity
rapid economic growth resulted in a burgeoning middle class within Asias large population increased in trade and tourism within and into Asia, demand for air travel increased people were willing to compromise on food and other services in exchange for lower prices

Threats
it could incur an (unnecessary) increase in operation cost in producing value-added services.

Technological
Opportunities Information technology, AirAsia was able to the first airline in Southeast Asia utilize e-ticketing and bypass traditional travel agents. Disintermediation Threats risk of system disruption due to heavily reliance on online sales. contingency plan in the event of a system disruption

Political
Opportunities Privatization and deregulation of governments open-skies agreements between countries presented opportunities for new routes and airport deals permission of the entry of private airlines reducing the constraints for international airlines

Threats result in global uncertainty (i.e. accidents, terrorist attacks, and disaster), which can affect customer confidence. subjected to government interference and regulation on airport deals and passenger compensation AirAsia can only minimize its negative impacts by selecting routes (countries) that are favorable.