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 the
internal 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 factors
working 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

Internal Analysis

Mission Environmental Strategy Strategy Evaluation

and Scanning Formulation Implementation and
Objectives Control

External Analysis
 The External Environment

Macro-Economic Environment
Demography
The Cultural forces
economy

Competitive Environment Competitors

Suppliers Customers
Technology Organisation

The Distributors and dealers

public

Social Factors 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

Intensity of rivalry among Bargaining power of channels

Bargaining power of suppliers existing competitors. and end-users.

Barriers to Entry
 Analysis of the Competitive Environment

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?

Do any suppliers yield

significant 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?
What could current or
future competitors do to
impact the fundamental
structure of the industry,
the market and “our”
strategy?
Does any one buyer purchase a
large 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?

Are the barriers to entry high enough in terms of

technology, capital requirements, access to
distribution channels, industry scale to deter
potential new entrants?
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 Economic
•Monopolies legislation. •Business cycles
•Taxation policies •Inflation
•Trade regulations •Interest rates
•Employment laws •Disposable income
•Political structure

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 product Threat
liability.
Economic Recession in key overseas markets Threat

Socio-Cultural Increased awareness of Significant opportunity

environmental issues
Technological Little innovation from competitors Neutral

Competition Intense rivalry within industry Critical threat

Buyers Convergence of customer Significant opportunity

requirements worldwide
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.
Pace and Magnitude of Change

Stepped and
largely Increased
Environmental predictable uncertainty
Stability change and flux. Crazy days

Time
 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

Environmental Change
Amount of Change

Strategic change

Phase 1 Phase 2 Phase 3 / 4

Incremental Change Flux Transformational
Change or Demise
Secondary
Firm infrastructure

Human Resource Management

Technology Development
Value
Procurement Added
- Cost
In-bound Operatio Out- Marketin Service = Margin
ns bound g
Logistics
Logistics and Sales

Primary