Chapter two: External and Internal
Analysis
External Environment
Macro/ Mega
Task/Industry Environment
Internal Environment
External Environment: Macro
events that take place outside of the organization and are harder to
predict and control.
composed of dimensions in the broader society that influence an
industry and the firms within it
can be more dangerous for an organization given the fact they are
unpredictable
they are classified as demographic, economic, political/legal,
sociocultural, technological, and physical(Ecological).
They affect the firms indirectly through the task environments
firms cannot directly control them. But, they gather
the information needed to understand all segments and
their implications for selecting and implementing the
firm’s strategies
Note: Analyzing external environment is to identify opportunities
and treats (external strategic factors)and develop the strategy
to make use of the strategy and defend the treats
Macro Factors with their Elements-
Demographi Population size Ethnic mix
c Age structure Income
Geographic distribution
distribution Level of
education
Economic Inflation rates Personal
Interest rates savings rate
Trade deficits or Business
surpluses savings rates
Budget deficits or Gross domestic
surpluses product
Political/ Taxation laws Educational
Legal Regulations in import policies
and export political
Finical regulations ideology,
laws on hiring
and promotion,
Sociocultura Workforce diversity Shifts in work
l Attitudes about the and career
Macro Factors with their Elements-
Technolog Product R&D expenditures
ical innovations New communication
Applications of technologies
knowledge
Global Important political Different cultural and
factors events institutional attributes
Critical global
markets
Physical Energy Availability of water
Environm consumption as a resource
ent Practices used to Availability of forests
develop energy and wildlife , climate
sources
Renewable energy
How to efforts
identify them and make
Minimizing
a firm’s
ourselves ready to use the opportunities
environmental
exist and minimize the challenges ?
footprint
Identifying External Strategic Factors
The origin of competitive advantage lies in the
ability to identify and respond to environmental
change well in advance of competition.
One way of doing this is through developing
issue priority matrix.
The issue priority matrix is used to
identify
and analyse developments in the external
environment
Issue priority matrix-----
This can be done as follows
Identify a number of likely trends emerging in the
environments.
Assess the probability of these trends actually
occurring, from low to medium to high.
Attempt to ascertain the likely impact (from low to high)
of each of these trends on the corporation being
examined
Each element has the probability to happened as opportunity
and threat and are included in strategy formulation.
This model can also be used the industry environment
analyses
External environment---
External Environment: Industry
An industry is a group of firms producing products
that are close substitutes
The industry environment is also called task or
immediate environment
It refers to those elements or groups that directly
affect the corporation and, in turn, are affected by it.
It is typically the industry within which the firm
operates.
These are local communities, suppliers, competitors,
customers, creditors, employees/labor unions and
trade associations.
How to identify and analyse? The two options among
others:
Priority issue matrix
Porter’s Five-Forces Model
Industry Environment Analysis
Porter’s Five-Forces Model of competitive
analysis is a widely used approach for
developing strategies in many industries:
Threats of new entrants
Rivalry among competing firms
Threats of substitute products
Bargaining power of suppliers
Bargaining power of consumers
Industry Environment Analysis -----
1. Threats of new entrants
New entrants to an industry typically coming up
with new capacity, a desire to gain market
share, and substantial resources. They are,
therefore, threats to an established corporation.
The threat of entry depends on the presence of
entry barriers and the rivalry(retaliations) from
existing competitors.
An entry barrier is an obstruction that makes it
difficult for a company to enter an industry.
Industry Environment Analysis -----
possible barriers to entry are:
Economies of scale: are derived from incremental
efficiency improvements through experience as a firm grows
larger. Therefore, the cost of producing each unit declines as
the quantity of a product produced during a given period
increases
Product differentiation( through promotion, quality
improvement, etc.)
Capital requirements
Access to distribution channels
Government policy
Switching cost: If switching costs are high, a new entrant
must offer either a substantially lower price or a much better
product to attract buyers. Usually, the more established the
relationships between parties, the greater are switching costs.
Industry Environment Analysis
-----
2. Rivalry among existing firms
A competitive move through lowering prices,
enhancing quality, adding features, providing
services, extending warranties, and increasing
advertising. have a noticeable effect on its
competitors
According to Porter, intense rivalry is related to the
presence of several factors, including:
Similar capability of firms competing
Falling demand for the industry’s products
Falling product/service prices in the industry
When barriers to entering the market are low
When rivals have excess capacity
When barriers to leaving the market are high
Industry Environment Analysis -----
3. Threat of Substitute Products or
Services
A substitute product is a product that appears
to be different but can satisfy the same need
as another product.
Examples of substitute products are: tea is a
substitute for coffee; e-mail is a substitute for
the fax; bottled water is a substitute for a cola.
If the price of coffee goes up high enough,
coffee drinkers will slowly begin switching to
tea. The price of tea thus puts a price
ceiling on the price of coffee.
Industry Environment Analysis -----
4. Bargaining power of the buyers
Buyers affect an industry through their ability to
force down prices, bargain for higher quality or
more services, and play competitors against each
other.
A buyer or a group of buyers is powerful if some of
the following factors hold true:
A buyer purchases a large proportion of the seller’s
product or service
buyer has the potential to integrate backward by
producing the product by itself
Alternative suppliers are plentiful because the product is
standard or undifferentiated
The purchased product can be easily substituted without
affecting the final product adversely
Industry Environment Analysis -----
5. Bargaining power of the suppliers
Suppliers can affect an industry through their
ability to raise prices or reduce the quality of
purchased goods and services. This can
happen when the following condition happen
Few suppliers and many buyers
Its product or service is unique
Substitutes are not readily available
Suppliers are able to integrate forward and
compete directly with their present
customers
When the buyer is small buyer
Questions
Why is it important for a firm to study and
understand the external environment?
What are the differences between the
general environment and the industry
environment? Why are these differences
important?
How do the five forces of competition in an
industry affect its profit potential? Explain
How the macro environment affects a
firm( directly of indirectly through industry
environment??
Can a firm control the external
Internal environmental
Analysis
The Internal environment
Internal Environmental analysis
Internal analysis is an approach to identify
internal strategic factors (critical strengths
and weaknesses) that are likely to determine
whether a firm will be able to take advantage
of opportunities while avoiding threats.
Internal factors includes tangible and
intangible resources
Such strategy enhance distinctive competency
and the competitve advantage
The Internal environment---
Distinctive competences and
Competitive advantage
Distinctive competences
A firm’s strengths that cannot be easily
matched or imitated by competitors are called
distinctive competencies.
Strategies are designed in part to improve on a
firm’s weaknesses, turning them into strengths
—and may be even into distinctive
competencies.
The Internal environment---
Competitive advantages
It is a condition or circumstance that puts a
company in a favorable or superior business position
A superiority gained by an organization when it can
provide the same value as its competitors but at a
lower price, or
Competitive advantage results from matching core
competencies to the opportunities.
These conditions allow the productive entity to
generate more sales or superior margins than its
competition
Weaknesses ⇒ Strengths ⇒ Distinctive Competencies ⇒
Competitive Advantage
Value chain and Resource based are approaches to
analysis weakness and strength
Value Chain analysis
The focus of value-chain analysis is to
examine the corporation in the context
of the overall chain of value-creating
activities, of which the firm may be only
a small
A typical part.
value chain of manufacturing product is as follows:
Kinds of value chain analysis
Industry Value-chain Analysis
The value chains of most industries can be split into two
segments, upstream and downstream segments.
In the petroleum industry, for example,:
upstream refers to oil exploration, drilling, and moving
of the crude oil to the refinery,
downstream refers to refining the oil plus transporting
and marketing gasoline and refined oil to distributors
and gas station retailers
Amoco, for example, had strong expertise downstream in
marketing and retailing. British Petroleum, in contrast, was
more dominant in upstream activities like exploration. That’s
one reason the two companies merged to form BP-Amoco.
Kinds of value chain analysis
2. Corporate Value-chain Analysis
Porter proposes that a manufacturing firm’s
primary activities and supportive activities are
as follows:
Support activities
Primary activities
• Procurement
• Inbound logistics
• Technology development
• Operations
• Human resource management
• Outbound logistics
• Firm infrastructure
Internal Resource based view (RBV)
This approach emphasizes the internal resource:
physical resources, human resources, and
organizational resources.
Physical resources include all plant and
equipment, location, technology, raw materials,
machines;
human resources include all employees,
training, experience, intelligence, knowledge,
skills, abilities; AND
organizational resources include firm
structure, planning processes, information
systems, patents, trademarks, copyrights,
databases, and so on.
Resource based view---
According to RBV theorists, when other firms are
unable to duplicate a particular strategy, then the
focal firm has a sustainable competitive advantage.
For a resource to be valuable, it must be either (1)
valuable 2) rare, (3) hard to imitate, (4) not
easily substitutable or
Often called empirical indicators, these characteristics
of resources enable a firm to implement strategies that
improve its efficiency and effectiveness and lead to a
sustainable competitive advantage.
The more a resource(s) is valuable, rare, hard to
initiate, non-substitutable and durable, the stronger a
firm’s competitive advantage will be and the longer it
will last.
Resource based view---
1. Valuable
allow the firm to exploit opportunities or
neutralize threats in its external environment
By effectively using competence to exploit
opportunities, a firm creates value for
customers.
A key question to be answered when
evaluating this criterion is “Does it provide
customer value and competitive advantage”?
Resource based view---
RBV theory asserts that resources are actually
what help a firm exploit opportunities and
neutralize threats.
The basic premise of the RBV is that the mix,
type, amount, and nature of a firm’s internal
resources should be considered first and
foremost in devising strategies that can lead to
sustainable competitive advantage.
Managing strategically according to the RBV
involves developing and exploiting a firm’s
unique resources and capabilities, and
continually maintaining and strengthening
Resource based view---
2) Rare: to sustain a competitive advantage, it is more
advantageous if the resource(s) is also rare.
are capability that few, if any, competitors possess.
A key question to be answered when evaluating this criterion is,
“How many rival firms possess these valuable capabilities?”
Even if a firm employs resources that are rare, a sustainable
competitive advantage may be achieved only if other firms
cannot easily obtain these resources
Capabilities possessed by many rivals are unlikely to be sources
of competitive advantage.
.
Resource based view---
3) Hard to imitiate
It is also important that these same resources be
difficult to imitate.
are capabilities that other firms cannot easily develop.
A key question to be answered when evaluating this
criterion is “Is it costly for others to imitate”?
If firms cannot easily gain the resources, say RBV
theorists, then those resources will lead to a competitive
advantage more so than resources easily imitable.
Resource based view---
4) Not easily substitutable
are capabilities that do not have strategic equivalents
A key question to be answered when evaluating this
criterion is “is it non substitutable”?
If the answer to questions 1 to 4 is ‘yes’ for a
particular capacity, it is considered to be strength and
thus a distinctive competence.
Thisshould give the company a competitive
advantage and lead to higher performance
