1. BU 111: Fall 2012
Course Model &
Environmental Analysis Models

2. Opening Thoughts
“It is not the strongest of the species that
survive, nor the most intelligent, but the one
most responsive to change.”
Charles Darwin

3. Learning Objectives
• Understand the relationship between the firm and its
external environment
– Course model
– Diamond-E model
• Describe what an external analysis is
• Explain how to do an external analysis
– PEST factors
– Porter’s five forces model
– Data sources
• Understand the benefits and challenges of doing an
external analysis

4. Planning Organizing
Critical Success Factors
Stakeholders
Economic Marketing
EX Top Management
TE
L
RN
NA
AL Social Vision Operations Finance
Political
R
TE
IN
Mission Human
Technological Resources
Strategy
Middle Management
First-Line Management
Controlling Directing

5. Critical Success Factors
• Achieving financial performance
• Meeting customer needs
• Building quality products and services
• Encouraging innovation and creativity
• Gaining employee commitment
• Creating a distinctive competitive advantage

6. Diamond-E Framework
• Identifies key variables to be considered in
strategic analysis
Management
Preferences
Organization Strategy Environment
Resources

7. Strategy-Environment linkage
• Strategy: what opportunities the business is pursuing
– determines needed resources, organizational capabilities, and
management preferences
• critical linking variable
• each variable related to the rest
• any variable can either drive or constrain strategy
• Principal logic – CONSISTENCY or alignment
• First task - deal with strategy-environment linkage
– Assess forces at work and their implications

8. Principal Logic
• Importance of Consistency between variables
• Examples:
– P&G Strategy in 2000 (inconsistency)
– Ikea Strategy (consistency)
• Note: Absolute alignment is not realistic

9. Strategy-Environment Linkage
• First task: Deal with strategy-environment linkage
• Assess forces at work and their implications
Examples:
- Digital Camera Market: Canon vs. Kodak

10. Quick Review: Course Model
& Diamond-E
• What factors make up the external environment?
• What are the components of the Diamond-E
model?
-What is the most important linkage within it?

11. External analysis

12. How to do an external analysis
• General environment
– PEST model – considers political, economic,
social/demographic, and technological factors
– Identifies general trends and changes
• Specific environment
– Porter’s Five Forces - analyzes five important sources
of competitive pressure and intensity; predicts
profitability of industry
• Look for data, statistics, trends, forecasts, expert
opinions, etc.

13. PEST - Political-Legal
Elements:
• Laws, regulations
• Taxes
• Trade agreements or conditions
• Political system
• Political stability
Government can create incentives, constraints, or support/bail
out when needed
Affects uncertainty, risk, and costs faced by firm

14. PEST – Economic
Elements:
• Economic growth – GDP and standard of living
• Economic stability – inflation, unemployment &&
• Trade balance – importing vs. exporting
• National debt – government borrowing
• Interest rates - the higher, the less ppl buy
• Exchange rates
Influences costs, potential sales, and financial uncertainty

15. PEST – Social
Elements:
• Customs, values, attitudes, and demographic characteristics
• Influences customer preferences
• Influences worker attitudes and behaviours
• Influences standards of business conduct
• Ethics, social responsibility, stakeholder management
Affects how we live, work, consume and produce

16. PEST – Technological
Elements:
• Internet affects buying, selling, communication
• Information technologies affects information access,
inter-firm cooperation, cycle times
• Computer technologies have changed our products and how
we design and build
• Not limited to computers and information
Affects what we produce/what it can do, affects how we produce
and how we sell
Demands constant learning and scanning

17. Questions to answer from PEST
• Do the economic conditions support my business?
• What legal protection do I have or laws do I have to
consider?
• What demographic and social trends affect my
business and how?
• What technological forces affect me now and in the
future? How do they assist or constrain?
• What opportunities or threats does the environment
possess?

18. Porter’s Five Forces
POTENTIAL
ENTRANTS
INDUSTRY
COMPETITORS
SUPPLIERS BUYERS
Rivalry Among
Existing Firms
SUBSTITUTES

19. Porter’s Five Forces
• Suppliers
– Fewer suppliers, high switching costs, low attractiveness of
substitute suppliers, high threat of forward integration
means = increased bargaining power (ex. Our choice of
only bell or rogers)
– Bargaining power increases costs of inputs
– Use strategic alliance or internal supply
• Potential Entrants
– Can cause big changes
– Ease of entry = more intense competition
– Barriers = capital intensity, technology, know-how/who,

20. Porter’s Five Forces
• Substitutes
– Many substitutes = increased competition
– Puts ceiling on price that can be charged
– Pressure increases as price of substitutes and switching
costs decline
• Buyers perspective
– Few or concentrated buyers, standardized products, low
switching costs, discretionary purchases = increased
bargaining power
– Reduces price that you can demand

21. Porter’s Five Forces
• Rivalry among existing firms
“Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map.” - Wayne
Calloway
– Results in price competition and increased costs
– Most powerful of five forces
– Causes:
• Many competitors of equal size/capability
• Growth rate of industry
• Consumers switching costs
• Products are commodities or are perishable
Caveat: Power and relevance of a force will vary by industry

22. Value of Five Forces Model
http://www.youtube.com/watch?v=mYF2_FBCvXw

23. Questions to answer with
Five Forces analysis
1. Is the industry a realistic place for a new venture to
enter? If yes, then...
2. Can we do a better job than incumbents at avoiding
or diminishing factors that suppress industry
profitability?
3. Is there a unique position we can pursue?
4. Is there a superior business model that incumbents
would find hard to duplicate?

24. Sources of Information
Some library databases:
• Standard and Poors NetAdvantage –
– Provides Industry Trends, Industry Ratios, and lots of key
industry data
• GMID – market share data by company and brand;
industry growth data
• DataMonitor – five forces analysis and SWOT
• FPInfomart – Canadian data

25. Benefits of External Analysis

26. Challenges of External Analysis

27. Learning Objectives Summary
• Understand the relationship between the firm and its
external environment
– Course model
– Diamond-E model
• Describe what an external analysis is
• Explain how to do an external analysis
– PEST factors
– Porter’s five forces model
– Data sources
• Understand the benefits and challenges of doing an
external analysis