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The External Environment in a Strategic

Management Context• An in-depth understanding of an organisation’s of the external environment is essential

for when developing a business strategy.

Kay (2000) states “Business strategy is concerned with the match between theinternal capabilities of the company and its external environment ”.

• It is essential to understand the scope of the external environment.

Taggart and McDermott (1993) suggest “The (external) environment of international business is regarded as the sum total of all the external factorsworking upon the firm as it goes about its business in foreign and domestic markets” .

• It is essential to understand impact of the degree and rate of change in the environment.

Johnson and Scholes (1993) state “The ability to sense changes in the environment is important because perceived changes in environmental influences signal the possible need for changes in strategy ”.



The External Environment in a Strategic

Management Context

Mission

and

Objectives

Environmental

Scanning

Strategy

Formulation

Strategy

Implementation

Evaluation

and

Control

External Analysis

Internal Analysis



Macro-Economic Environment

The External Environment

Competitive Environment

Organisation

Suppliers

The

public

Competitors

Customers

Distributors and dealers

The

economy

Demography

Cultural forces

Social Factors

Technology

Legal structures

Political structures



Analysis of the Competitive Environment

Porter’s 5 Forces model is the most commonly used tool for the analysis of

the competitive environment.

Threat of Substitute products or

services

Barriers to Entry

Bargaining power of suppliersBargaining power of channels

and end-users.

Intensity of rivalry among

existing competitors.



Analysis of the Competitive Environment

What could current or

future competitors do to

impact the fundamental

structure of the industry,

the market and “our”

strategy?

If there a potential subsitute for our product that has

low switching costs for the customers or would

significantly lower on-going costs for the customers?

Are the barriers to entry high enough in terms of

technology, capital requirements, access to

distribution channels, industry scale to deter

potential new entrants?

Do any suppliers yieldsignificant power because there

only a few large suppliers

serving an industry, are our

switching cost are high,are their

products unique and their use

business critical and is forward

integration a credible

possibility?

Does any one buyer purchase alarge volume of the firm’s or

industry’s output, is our

product cost a large part of the

customer’s expenditure,

do many suppliers exist, is

backward integration a credible

threat?



Analysis of the Macro-Economic Environment

• The macro-economic environment is commonly analysed with a PEST analysis

this considers, Political/Legal, Economic, Socio-Cultural and Technological

factors in the macro-economic environment that can impact an organisation.

Political/Legal•Monopolies legislation.•Taxation policies•Trade regulations•Employment laws•Political structure

Economic•Business cycles•Inflation•Interest rates•Disposable income

Socio-Cultural•Levels of education•Lifestyle changes•Income distribution•Consumerism•Population demographics

Technological•Government spending on technology•New development in technology•Rates of obsolescence•Speed of technology transfer



Environmental Impact Matrix

• The PEST and 5 forces analyses can be summarised in an Environmental

Impact Matrix.

Factor Impact of Factor Opportunity or Threat

Political/Legal Increased legislation on productliability.

Threat

Economic Recession in key overseas markets Threat

Socio-Cultural Increased awareness of environmental issues

Significant opportunity

Technological Little innovation from competitors Neutral

Competition Intense rivalry within industry Critical threat

Buyers Convergence of customer requirements worldwide

Significant opportunity

Suppliers Few suppliers dominate industry Critical threat

New Entrants Industry barriers to entry are low Threat



Change in the External Environment

• Is the external environment static? It could be argued that in many sectors the

competitive environment is relatively static but in others it changes rapidly and

the the macro-economic stability varies on a country by country basis.

• Wilson and Gilligan (1999) illustrate environmental change in the model below.

Time

Pacean

dMag

ni tu

deofChange

Environmental

Stability

Stepped and

largely

predictable

change

Increased

uncertainty

and flux. Crazy days



Change in the External Environment

• Johnson and Scholes (1993) provide a similar model to Wilson and Gilligan but

contrast environmental change with the response in strategic change

AmountofChan

ge

Phase 1

Incremental ChangePhase 2

Flux

Phase 3 / 4

Transformational

Change or Demise

Environmental Change

Strategic change



Secondary

Firm infrastructure

Human Resource Management

Technology Development

Procurement

In-bound

Logistics

Operations

Out-bound

Logistics

Marketing

and Sales

Service

ValueAdded

- Cost

= Margin

Primary

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