Chapter 3: Evaluating a Company's External Environment

macro-environment

The macro-environment encompasses the broad environmental context in which a company is situated and is comprised of six principal components: political factors, economic conditions, sociocultural forces, technological factors, environmental factors, and legal/regulatory conditions.

PESTEL analysis

PESTEL analysis can be used to assess the strategic relevance of the six principal components of the macro-environment: political, economic, sociocultural, technological, environmental, and legal forces.

The components of a company's external environment

Macro environment

industry and competitive environment

company

Political factors

political policies and processes, including the extent to which a government intervenes in the economy.

economic conditions

general economic climate and specific factors such as interest rates, exchange rates, the inflation rate, unemployment rate, rate of economic growth, trade deficits or surpluses, savings rates, per capita domestic product.

sociocultural forces

societal values, attitudes, cultural factors, and lifestyles that impact businesses, as well as demographic factors such as the population size, growth rate, and age distribution.

technological factors

pace of technological change and technical developments that have the potential for side-ranging effects on society, such as genetic engineering and nanotechnology.

environmental forces

ecological and environmental forces such as weather, climate, climate change, and associated factors such as water shortages.

legal and regulatory factors

regulations and laws with which companies must comply such as consumer laws, labor laws, antitrust laws, and occupational health and safety regulations.

Five Forces Model of Competition

buyers

substitute products

supplier

new entrants

rivalry among competing sellers

Rivalry among competing sellers

buyers

Rivalry among competing sellers

substitute products

Rivalry among competing sellers

suppliers

Rivalry among competing sellers

suppliers of resource inputs

Rivalry among competing sellers

new entrant

Rivalry among competing sellers

Rivalry among competing sellers

driving forces

Driving forces are the major underlying causes of change in industry and competitive conditions.

Industry's Driving Forces

changers in an industry's long-term growth rate

increasing globalization

changes in who buys the product and how they use it

product innovation

technological change and manufacturing process innovation

marketing innovation

entry or exit of major firms

diffusion of technical know-how across more companies and more countries

changes in cost and efficiency

growing buyer preferences for differentiated products instead of a standardized commodity product

regulatory influences and government policy changes

changing societal concerns, attitudes, and lifestyles

strategic group mapping

Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms occupy in the industry.

strategic group

A strategic group is a cluster of industry rivals that have similar competitive approaches and market positions.

Procedures for constructing a strategic group map

1. Identify the competitive characteristics that delineate strategic approaches used in the industry

2. plot firms on a two-variable map based upon their strategic approaches

3. assign firms occupying the same map location to a common strategic group

4. draw circles around each strategic group, making the circles proportional to the size of the group's share of total industry sales revenues.

Two reasons why some positions can be more attractive than others

1. Industry driving forces may favor some strategic groups and hurt others.

2. Competitive pressures may cause the profit potential of different strategic groups to vary.

key success factors

Key success factors are the strategy elements, product attributes, competitive capabilities, or intangible assets with the greatest impact on future success in the marketplace.

common types of industry key success factors

technology related KSFs

Manufacturing related KSFs

Distribution related KSFs

Marketing-related KSFs

Skills-and capability-related KSFs

Other types of KSFs