External Environment Analysis: Chapter 3 Presentation for Business

This presentation, prepared by Assoc. Prof. Dr. Lê Thái Phong, Dean of the Faculty of Business Administration at Foreign Trade University, provides a comprehensive overview of external environment analysis. It covers key concepts such as macro environments (political, economic, sociocultural, and technological factors), industry environments (including the Five Forces model), competitor intelligence, strategic groups, and industry life cycles. The presentation also explores various models and frameworks for analyzing the external environment, offering valuable insights into how these factors impact business strategy and decision-making. The content is organized with clear learning objectives, diagrams, and examples to facilitate understanding of complex business concepts. This presentation is a valuable resource for students studying business administration and strategic management, offering a practical guide to analyzing the external environment and its implications for business success.

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Chapter 3
External Environment Analysis
Assoc Prof. Dr. Lê Thái Phong
Dean, Faculty of Business Administration
Foreign Trade University
E: [e-mail]
T: 0975.055.299
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Learning objectives
1. Macro environments
2. Industry environments
3. Competitor intelligence
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THE
MACRO-ENVIRONMENT
THE
INDUSTRY
External and Internal Analysis
THE
COMPANY
STRATEGIC GROUPS
INDUSTRY STAGE of DEVELOPMENT
5 FORCES MODEL (Plus 1)
• Rivalry
• Barriers to entry
• Suppliers
• Buyers
• Substitutes
• Complementors
EXTERNAL
Macroeconomics
Economic
Political & Legal
Technology
Socio-cultural
Demographic
EXTERNAL
COMPANY STAGE of DEVELOPMENT
VALUE CREATION
• Efficiency
• Innovation
• Customer Responsiveness
• Quality
INTERNAL
STRENGTHS and
WEAKNESSES
OPPORTUNITIES
and THREATS
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Environment analysis
• Macro environment analysis
• Industry environment analysis
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Macro environment
• Driving economic, political/legal, and
technological conditions and changes ->
creating both opportunities and threats
• PEST = ...............
• Political
• Economic
• Sociocultural
• Technological
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Political
• influencing the nature of
competition -> creating
opportunities and threats
• Political system: stable – unstable
• Political risks
• De/regulation
• Competition law
• Labour law
• Tax system
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Economic
• affecting how difficult or easy to be unsuccessful
and profitable any time
• Economic system
• GDP growth rate
• GDP per capita
• Inflation
• Interest rate
• Exchange rate
• Trade deficit or surplus
• Budget deficit or surplus
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sociocultural
• Environment concern
• Workforce diversity
• Work-life quality view
• Shift in product/quality preferences
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Technological
• Including the institutions and activities
involved with creating new knowledge and
translating that knowledge into new outputs,
products, processes, and materials.
• R&D expenditure
• Product innovation
• Knowledge resources
• Process innovation
• New communication technologies
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The world now
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Industry environment
• A group of companies offering products
and/or services that are close substitutes
• For example:
• The boundary might change:
– Customers and technology
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Computer manufacturing sector
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Industry analysis
• The set of factors that directly influences a
firm, it’s competitive actions & competitive
responses:
– Can be strong or weak
– Can be changed if conditions change
– Weak force => opportunity => profit
– Strong force => threat => reduce profit
The stronger the force, the more limited to sell
products with high price and earning high profit.
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Industry analysis: models
• .....................
• .....................
• .....................
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• Industry Profitability
• The industry’s rate of return on invested capital
relative to its cost of capital
• An industry’s profitability results from
interaction among:
• Suppliers
• Buyers
• Competitive rivalry among organisations
currently in the industry
• Product substitutes
• Potential entrants to the industry
Michael Porter
The Five Forces Model
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5 forces (+1)
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Threat of new entrants
• Link with Entry barriers: Minimum cost that
enterprise has to spend when entering any
industry
• Depend on:
– ..............................
– Brand loyalty
– Capital investment requirements
– ...............................
– Absolute cost advantages (cheaper fund, learning curve, control inputs)
– Government policy
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Threat of new entrants: low, when:
• Small numbers of potential competitors
• Current competitors struggle to gain profit
• The prospect of industry is risky
• The growth of industry is slow & standstill
• Competitors react violently (retaliation)
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2-20
* Dominated by a few firms.
* Buyer is not an important customer.
* Suppliers’ product is an important input.
* Suppliers’ products are differentiated.
Suppliers are likely to be powerful if:
* Suppliers’ products: high switching costs.
* Supplier poses threat of forward integration.
Suppliers exert power in
the industry by:
* Threatening to raise
prices or to reduce quality
Powerful suppliers can
squeeze industry
profitability if firms are
unable to recover cost
increases
Suppliers’ products have few substitutes.*
Bargaining Power of Suppliers
*
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2-21
* Playing firms off of
each other
Buyers compete
with supplying
industry by:
* Bargaining down prices
* Forcing higher quality
Buyer groups are likely to be powerful if:
* Many small sellers and few large buyers.
* Buyers purchase in large quantities.
* A single buyer is a large customer to a firm.
* Buyers can switch suppliers at low cost.
* Buyers purchase from multiple sellers
at once.
* Buyers can easily vertically integrate to
compete with suppliers.
* Buyer has full information
Bargaining Power of Buyers
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Threat of substitutes
• Replaced products and services of other
industries that can satisfy the same needs of
customers
• Product with similar function limits the price
that firm can charge
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2-23
Products
with similar
function limit
the prices
firms can
charge
* Products with improving price /
performance tradeoffs relative to
present industry products
Keys to evaluating substitute products:
For Example:
Electronic security systems in place of
security guards
Fax machines or e-mailed
attachments in place of
overnight mail delivery
Threat of Substitute Products
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Rivalry among competitors
• Competition between companies within an
industry in order to take other competitors’
market share.
• Reduced rivalry means greater profitability
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