External Analysis-The Business Environment

Module 3

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Learning Objectives

 Concept of Environment

 Components of External Environment

 External Environment Analysis

 Industry Analysis- Porter’s Model

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Takeaways

 Explain the concept of Environment in the Business Context

 List the factors of External Environment

 Describe the concept of External Environment Analysis

 Discuss Industry Analysis using Porters Model

 Analyse external Environment-Case

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 Concept of Environment
 The term Environment means external and internal factors that
affect the Business operations of any organization.

Internal Factors
Organizational
Government Policies
External

Structure and culture

Factors

and Legal
Capabilities
Social and Cultural

Technological Resources

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Organizational Forces for Growth

Customer Demands customized products and attention

Competition
Drives out inferior products from the markets

Change in
Leads to innovation and introduction of new products and
Market services
Needs

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Environment Characteristics
 Internal and external changes in the environment affect the functions
and objectives of the Organization. The major characteristics are:
1. Complexity: Environment is a difficult concept to comprehend
because it consists of Various Interdependent factors , events and
influences.
2. Vibrancy: Implies the dynamic nature of the organization’s
environment where the situation changes over a period of time
3. Ambiguity: Refers to mindset of a person that perceives the
change in the environment as positive, while others consider it
negative.
4. Uncertainty: Refers to the unpredictable nature of the environment
that strategist try to deal with and set their goals .
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Types of Environments

 External Environment: That represents opportunities for and threats to

the Organization

 Internal Environments: Which represent the Strengths and Weaknesses

of the Organization.

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 Environmental Scanning
 It’s is a process of finding and utilizing information on occasions,
patterns , trends and relationships within the internal and external
environment of an organization.
 It starts with Internal Analysis of the environment:
1. Assessing interactions of employees with each other, between
employees and Management, among managers and between
Management and shareholders
2. It also involves analyzing factors such as access to natural
resources, brand awareness, efficiency of the Organizational
Structure, skills of the employees, operational potential etc.

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Environmental Scanning

 An organization faces rapid changes in the External Environment

with increased levels of competition.

 External environment analysis involve assessing factors that are

beyond the control of an organization such as Competitor activities,

technology, market swings, and preferences.

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 Levels of Environment Analysis
 External environment scanning is performed at 3 levels:
1. Industry or immediate Environment: It helps examine the
competitive structure of the industry in which it operates.
2. National or Globally Competitive environment: Involves
appraising whether the national Frame work of a country
supports the strategy of the organization and enables the
organization to achieve sustainable competitive advantage in
the globalized environment.
3. Remote or macro environment: This includes exploring the
Social, Government , legal, technological and international
factors that may influence the environment.
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Components of the External Environment
 There are 6 components of the Organization’s external Environment

Ecological Political

Economic Legal

Socio -
Technological Cultural

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Political Environment

Political environment
consists of factors
Positive Factors like such as laws related
Negative are Strict Govt.
Govt incentives, to public affairs, govt.
Regulations, increase in
subsidies that favor Policies, fair trade
tariffs and duties etc.
the Business decisions, tax
regulations and
subsidy policy.

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Impact of Politics

All organizations operate in various political environment and are not

free from the influence of the Governments

The future uncertainties faced by organizations are termed as

Political Risks

Tax rates, subsidy polices, Foreign investment policies, divestment

policies, and other economic policies affect the Organization

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Economic Environment

National Income
and Foreign trade
balance

Foreign exchange
Per Capita Income
fluctuations

Economic Factors

Availability of
Credit and interest GDP and inflation
Rates

Employment
Levels

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Additional Economic Factors that Impact

 Demand and Consumption Pattern

 Wage rates

 Imports and exports of Good and Services.

1. Therefore its is crucial for an organization to analyze at all

times the varying economic factors prevailing in the country.

2. The better understanding of the above enables an organization

to plan the expansion footprint of an organization
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Socio-Cultural Environment

Values and Life

styles of a
society

Attitudes and
Opinion of a
Socio-Cultural Culture of a
society
society environment

Beliefs of a
society

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 Factors affecting the Socio-Cultural environment
Demography

Social Customs

Family Structure
• Population, its • Beliefs, rituals and • Family values and

Social Concerns
• Malpractices
density, and practices followed role of different such as
composition, by society. family members in
corruption,
• Distribution that • Taste and the society
and
thereby effects the preferences of • Family ties in Japan consumerism
demand. consumers. are strong.
prevalent in a
• Each state or • Buying behavior • Mc Donald’s society
country may depends on their therefore created a
therefore have a social customs. family • Foreign
variable demand environment in companies
Japan to Boost deter to invest
sales. or raise stakes
in a corrupt
environment.

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Technological environment

 The technological environment includes new inventions for improving

business processes of an Organization .

 They include:

1. Production

2. Communication

3. Distribution

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Factors that influence the Technical environment

 Technological developments

 Research and Development

 Technological impact on society

 Rate of change of society

 Rate of technology adoption

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Ecological Environment
 It signifies the Natural Environment
 More consumers are switching to eco friendly products to
reduce pollution
 Both Governmental and NGO’S are putting pressure on
businesses to reduce their carbon footprint and produce more
eco friendly product.
 World over farmers are protesting and local people who get
affected by environmental damage caused by businesses are
in tow.
 Continuous effort has to be made by the organization to
reduce carbon footprint and add value.

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Legal Environment

 The legal environment comprises

of laws and regulatory framework,
which directly or indirectly affects
the Organization

 Every organization has to abide

by the laws of that city, state or
country.

 If violated, they face a serious

consequence and impact
business survival or growth.

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External environment Analysis
 It is the process of monitoring the organizations eternal
environment to identify opportunities and threats affecting the
strategic decisions of the Organization.
1. Events: These are specific occurrences that take place in
different environmental components
2. Trends: These are ways in which an external environment
shapes. Trends occur as a result of some event
3. Issues: The concerns that arise due to the events and trends
4. Expectations: Expectations of the stake holders affects the
external environment of the organization.

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Approaches of External Environment Analysis

 Environmental Appraisal:
1. Systematic Approach

2. Processed From Approach and

3. Ad-hoc Approach

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Techniques of External Environment Analysis
 2 commonly used techniques are:
1. Scenario Planning : Its is used in SM process for long terms
assessments for an organization
a. Identify a focal point
b. Conducting workshop
c. Drawing best ideas
d. Sketching out rough scenarios
e. Give early warning signs
f. Evaluating scenarios.
 ETOP( Environmental Threat and Opportunity Profile)
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ETOP-Environmental threat and opportunity Profile

 An Organization can monitor its relevant opportunities or threats

which affect it’s business decisions in the Long term.

 Advantages are its consolidates the position of the organizations

and strengthens it.

 Helps formulate better strategies for the organization.

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 Factors affecting the External Environment Analysis
 Strategist related factors:-Personal characteristics like age ,
education, experience, motivation levels and responsibilities of
strategies.
 Organization related factors:-Nature of the business of the
Organization, its size, complexity, type of products and services,
technologies and Processes used.
 Environment related factors:-Complexity, volatility and diversity of
the organizations environment which affects it positively or
otherwise.

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Industry Analysis-Porters Model
 Set of organizations that deliver a similar product or service is
known as Industry. They compete with one another to get
greater market share.
 HCL, INFOSYS, Tech Mahindra, TCS etc.
 Michal. E .Porter , a Harvard Professor developed and effective
model for industry analysis called “ Porters 5 forces Model.”
 “Profitability depends on the Level of competition in the
Field”
 He said, “the collective strength of the five competitive
forces determine the ultimate profit potential of an
industry.”

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 Porter’s 5 forces model

New Ability of It affects the

Rivalry amongst competition

Bargaining Power of Suppliers

Bargaining power of Buyers

entrants supplier to profitability Products Intensity
Threat of new entrant

keep you on manipulate of the that of rivalry

Threat of substitutes
your toes the price of Industry satisfy the within
and the product substantially same an
guessing. supplied to needs of industry
an the
Big impact if organization customer
not
anticipated

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