Classes 11 & 12 - Assessing the External Environment

Purpose of external assessment

To understand opportunities and threats in the environment and ensure the organization adapts to them effectively.

Three layers of the business environment

Macro-environment layer; Industry (sector) layer; Competitors and markets layer.

Onion metaphor

Describes the organization surrounded by environmental “layers” that influence its strategy.

Macro-environment layer

Analyzes social, economic, environmental, political, legal, and technological forces (PESTEL).

PESTEL framework

Political, Economic, Social, Technological, Environmental, and Legal factors.

Purpose of PESTEL

Provides a list of external issues influencing strategy; helps identify key drivers for change and develop scenarios.

Political factors

Role of government policy, taxation, trade regulations, political risk, state ownership, etc.

Economic factors

Business cycles, interest rates, disposable income, exchange rates, unemployment, and growth rates.

Social factors

Cultural shifts, demographics, lifestyle changes, consumerism, values, and fashion.

Technological factors

New discoveries, digital transformation, innovations, and emerging materials or production methods.

Environmental (ecological) factors

Green issues such as pollution, climate change, energy use, recycling, and sustainability.

Legal factors

Competition law, employment law, IP law, safety, and trade liberalization.

Who focused on the macro layer in The Big Short

Dr. Michael Burry – “The Outsider.”

Burry’s key macroeconomic drivers

High household debt, low income, legal but risky mortgage market, government inaction, flawed CDO technology.

Industry layer

Analyzes competitive forces that determine industry attractiveness and guides entry or exit decisions.

Industry defined

A group of firms producing the same principal product or service.

Frameworks for industry analysis

Porter’s Five Forces, Value Net, and Industry Life Cycle.

Industry life cycle

Industries evolve through stages: introduction, growth, maturity, and decline.

Value Net concept

Map showing organizations that cooperate and compete; identifies complementors that create mutual value.

Complementor definition

A firm whose product increases the value of another’s product (e.g., sausages + mustard, Boeing + airlines).

Who focused on the industry layer in The Big Short

Cornwall Capital / Brownfield Fund – “Outsiders that wanted to get inside.”

Competitors and markets layer

Focuses on identifying strategic groups, market segments, and strategic customers.

Strategic groups

Firms within an industry that follow similar strategies or compete on similar bases.

Strategic customers

People or entities who most influence purchase decisions for an organization’s goods or services.

Market segments

Groups of customers with similar needs that differ from other parts of the market.

Who focused on the competitors and markets layer in The Big Short

Steve Eisman / Mark Baum (FrontPoint Partners) – “The Insider.”

Key drivers for change

External trends with high impact on organizational success or failure.

Scenario

An evidence-based, plausible view of how the environment might develop based on key drivers of change.

Importance of scenarios

They help organizations prepare for multiple possible futures under uncertainty.

Megatrend

A long-term, large-scale shift that shapes the environment for decades (e.g., aging population).

Inflection point

A sharp change in trend direction (e.g., post-stagnation growth).

Weak signals

Early indicators of future shifts (e.g., early mortgage defaults before 2008 crisis).

Porter’s Five Forces

Threat of new entrants; Threat of substitutes; Bargaining power of buyers; Bargaining power of suppliers; Competitive rivalry.

Threat of entry

Low when barriers to entry are high (e.g., scale, regulation, differentiation costs).

Threat of substitutes

Occurs when alternative products offer similar benefits with better price/performance ratios.

Bargaining power of buyers

Increases when buyers are concentrated, switching costs are low, or backward integration is possible.

Bargaining power of suppliers

Increases when suppliers are few, switching costs are high, or forward integration exists.

Competitive rivalry

Intensity of competition among existing firms in an industry.

Using PESTEL and Five Forces together

Combines macro and industry analysis to identify key external drivers and opportunities or threats.

Key drivers of change in The Big Short

Relaxed lending standards, rising consumer debt, government inaction, and repackaging of mortgages into securities.

External analysis for Goodwill Niagara

Apply PESTEL and Porter’s Five Forces to evaluate the thrift-store and recycling industry.

Goodwill’s strategic groups and markets

Recyclers, thrift stores, and charities; markets divided by private vs non-profit customers.

Purpose of external analysis

Identify key drivers and build scenarios to support better strategic decision-making.