Chapter 6. External Analysis

Chapter 6. External Analysis

1. The examination by a company of the things outside the company, such as the economy, the competition, and new opportunities, that might affect its success

2. The far or macro environment

   • The PEST factors
     • There are common issues such as the Polticial, Economic Social and Technological influences
   • Government active areas include
     • + Policies on healthcare, unemployment, exchange rates, inflation, economic growth. + Government employment and the public sector generally. + Fiscal policies on taxation.
   • Economic factors refer to
     • GDP (gross national product) + Growth, + Inflation, + Central Bank lending rates. + Currency exchange rates. + Fiscal policy + Regional issues.
   • Social factors refer to
     • + Attitudes, values and beliefs tastes of held by people including ethnic minorities. + Culture: Attitude to work. + Demography: Size and structure of the workforce, population shifts.
   • Technological factors
     • + Goods and services. + Production processes. + Transport and distribution. Information technology, computing and associated implications for production.
   • How to use the analysis tools:
     • 1- Scan the macro-environment for actual or potential changes in the PEST factors. 2- Assess the importance of the changes for the market, industry and business. 3- Analyse each of the relevant changes in detail and the relationships between them. 4- Assess the potential impact of the changes on the market, industry and business.
   • Represents forces that affect all firms across all industries.

3. The ‘near’ environment

   • Barriers to entry
     • + The capital requirement of entry. + Access to distribution channels. + Cost advantages independent of size. + Expected retaliation.
   • This is the ‘Industry or competitive environment analysis.
   • Competitive rivalry
     • + No industry leader, + A large number of competitors, + High fixed costs, + High exit barriers, + Little opportunity to practise product differentiation.
   • Supplier power
     • + There are few suppliers. + The cost of switching to another supplier is high. + The brand of the supplier is powerful. + There is a possibility of forward integration by the supplier.
   • Buyer power.
     • + There is concentration of buyers. + There is a large number of small operators in the industry. + There are alternative sources of supply. + Material costs are high.
   • Threat of substitutes
     • + Product-for-product substitution. + Substitution of need. + Generic substitution. + Product not a necessity.