Topic 3 External Analysis

Topic 3 External Analysis

1. This topic

   • External environmental analysis
     • PESTEL (multiple versions of this tool)
       • Hubbard et al.pp 69-74
       • Political
       • Economic
       • Social
       • Technological
       • Environmental
       • Legal
     • Porter's 5 Forces
   • Focussed on the Industry - Specific definition of the industry is essential
   • Identify trends which will impact the future growth of the industry

2. PESTEL Process

   • Identify issues likely to influence the future growth of the industry using the PESTEL or similar approaches as a guide to the type of issues that may arise
   • Make a judgement on whether the impact will be - or +
   • Determine whether the trend will likely have a major or minor impact
   • Summarise the +s and -s and determine an overall trend
   • Use this to identify opportunities and threats for the industry

3. Porter's 5 Forces

   • Threat of new entrants
     • Threat of entry determined by 
     • Barriers to entry
     • Reaction from existing competitions
     • Six major barriers to entry
       • Economies of scale
       • Product differentiation
       • Capital Requirements
       • Access to distribution channels
       • Cost disadvantages independent of scale
       • Government Policy
   • Bargaining power of buyers
     • Dependent on 
     • Concentration or scale of purchase
     • Product purchases represents a significant percentage of its own costs
     • Products are standard or undifferentiated
     • Low switching costs
     • Earning low profits
     • Can backward integrate
   • Substitutes
     • Pressure from substitutes
     • Similar products
     • Products satisfying same need
     • Key substitute threats
       • Those that are subject to trends improving their price/performance trade off with the industry's product
       • Those that are produced by industries earning high profits
   • Bargaining power of suppliers
     • Power determined by:
     • Domination by a few companies and more concentrated than the buying industry
     • Few substitutes
     • Low importance of industry as a buyer
     • Products are differentiated
     • Threat of foward integration
   • Intensity of rivalry
     • Rivalry occurs due to pressure or opportunity
     • Price competition
       • May lower returns for the whole industry
     • Advertising competition
       • May expand industry
     • High Exit Barriers
     • Specialised assets
     • Fixed costs
     • Strategic interrelationships
     • Emotional barriers
     • GOvernment and social restrictions
     • Changes in rivalry :
       • Industry matures=declining growth rate = declining profits