This document summarizes several models for analyzing a company's external environment and strategic position:
1. PEST/PESTEL analysis categorizes macroenvironmental influences into political, economic, social, and technological factors.
2. Porter's Five Forces model examines industry-level competitive forces like rivalry, new entrants, substitutes, supplier power and buyer power.
3. Porter's Diamond framework analyzes national-level determinants of competitive advantage like factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry.
These models segment environmental factors to aid closer strategic analysis, but must be followed by considering business responses. Technological changes like digitalization now strongly influence markets
2. STRATEGY:
is concerned with the ability of the organisation to fit with, or cope with, its
environment.
ENVIRONMENT:
all the factors outside of management control outside the organisation which
can affect the performance of the business and the success of its strategies.
CIMA Official Terminology: ENVIRONMENTAL IMPACT ASSESSMENT
A study which considers potential environmental effects during the planning
phase before an investment is made or an operation started.
3. …by helping to answer critical questions
When entering a Competing in an Divesting/Exiting
new market existing market a market
• Is this a • How can we • How are the
sensible market make sure that future
for us to enter? we perform prospects of the
• Is this market a better than our industry likely
source of competitors? to be affected
superior profits? and how does
that affect my
decision to sell?
4. 1. PEST/PESTEL Analysis: Macro
2. Porter’s Five Forces: Micro
3. Porter’s Diamond:National
These models separate the mass of factors that have an impact on the
firm into groups, or segments, to aid closer analysis.
5. Useful way of summarizing the external influences on the
environment in which a business operates.
PEST PESTEL DEEPLIST
•Political/Legal •Political •Demographic
•Economic •Economic •Economic
•Social •Social •Environment
•Technological •Technological •Political
•Ecological/Ethical •Legal
•Legal •Informational
•Social
•Technological
Must be followed up by consideration of how a business should respond
to these influences.
6. Potential
Entrants
Rivalry among Threat of New
Existing firms Entrants
Bargaining
Competitors Bargaining
Sellers Buyers
The firm
Power of Sellers Power of Buyers
Threat of Substitute
Product or Service
Substitutes
The collective strength of these forces determines the profit potential
(long run return on invested capital) of the industry.
7. 1. Digitalization
2. Globalization
3. Deregulation
Today’s markets are highly influenced by technological progress, especially in information
technology. Therefore, it is not advisable – if not to say impossible – to develop a strategy
solely on the basis of Porter’s models.
Source: Larry Downes: Beyond Porter, 1997
8. Define the industry
Linkages
Government
Source: Financial Management, Feb 2005
DIGITALIZATION:As power of information technology grows, all players in a market will have access to far more information.Totally new business models will emerge in which even players from outside the industry are able to vastly change the basis of competition in a market.E.g. Electronic shopping malls operated by credit card companiesGLOBALIZATIONImprovements in distribution logistics and communications have allowed nearly all businesses to buy, sell and cooperate on a global level.Customers, meanwhile, have the chance to shop around and compare prices globally.Competitive advantages emerge now from the ability to develop lasting relationships to more mobile costumers and to manage far-reaching networks of partners for mutual advantage.DEREGULATIONDramatic shrinking of government influence in many industries like airline, communications, utilities and bankingOrganizations in these industries were able and forced to completely restructure their businesses and to look out for alternatives.Globalization: even locally orientated mid-sized companies find themselves in a global market, even if they do not export or import themselves.
Need to carefully define the industry - boundaries are not always clear:Competitors vs. Substitutes; Vertically integrated companiesImportant factors tend to be linked – listing them separately may be counterproductive:Economic policies affected by political realities; Technological factors will have an impact only if they are socially accepted and permitted politically.Factor in role of Government – could be more powerful than all other forces:If the government acts as a supplier, buyer or substitute, then it should be analysed under those categories.A government can affect an industry in a number of ways in its own right by developing new policies
Degree of Ambiguity facing companies in the sector:A dynamic sector is more difficult to forecast because it will be in a constant state of flux. (e.g., Biotech)The Complexity of the industry:The diversity and number of industry inputs and outputs that the firm must take into account when making decisions (e.g., Electronics)Stage of the industry Lifecycle:Industries are not static and evolve over time – Birth, Growth & Adaptation, Growth & Maturity, Maturity & DeclineDifferent kinds of activities will occur at different stages of the cycle, so it’s always worth assessing which stage the industry is in.
