1. CHAPTER 3
ASSESSING THE
EXTERNAL ENVIRONMENT

2. 3.1. Introduction: Aims and Learning
Outcomes
In this chapter we will be examining some of the
techniques used by organizations to explore the
complex and uncertain external environment over
the short, medium and long term.
So, by the end of this chapter you will be able to
 identify a number of techniques for
assessing the external environment facing
an organisation.
 undertake a STEEPLE analysis
 carry out a 5 forces analysis
 scenario planning
 demonstrate awareness of the complexities
involved in assessing dynamic environments.

3. 3.2. Viewing the environment
 It is important to understand the nature of the
external environment facing the organization.
 The environment refers to those political,
economic, social, technological, environmental and
legal forces that come to bear on organizations
through time.
 These forces create complexity in our
understanding of the current world in which the
organization finds itself.
 These forces also have a momentum that breeds
uncertainty for decision takers.

4. 3.2. Viewing the environment
 For example, who could have predicted the
collapse of Communism in the late 1980s and
early 1990s and the impact it would have on
global institutions and organisations?
 What impacts will demographic changes have on
consumer demand for public, private and
charitable sector goods and services?
 How will the internet develop? What will be the
response of governments and citizens to
environmental damage?

5. 3.2. Viewing the environment
 These are what strategic managers might refer to
as long term drivers of change but the long term
is also made up of a series of short terms for
which organisations have to plan.
 For example, what impact will a rising trend in
interest rates have on resource allocation within
the organization and what are the implications of
this for medium term strategy?

6. 3.2. Viewing the environment
 In recognising the dynamic complexity of the
organisation’s position a better understanding of
what the economist Robin Marris termed the
‘super-environment’ can be obtained.
 Adaptation to the environment is crucial for
organisational survival and development.
Adaptation will involve some painful changes
and so must be carefully managed.

7. 3.2. Viewing the environment
In this chapter we concentrate on some of the
techniques for scanning and monitoring the
environment. Such boundary spanning provides
a means of buffering for the organisation that
has to survive in environments of varying rates
of change and degrees of complexity.

8. 3.2. Viewing the environment
Ginter and Duncan (1990) suggest that such
‘macro environmental analysis’ involves
 scanning
 s monitoring
 m forecasting as well as
 f assessing current and future trends

9. 3.2. Viewing the environment
Bryson (1995) notes that external analysis
helps
 to provide information on emerging
issues and trends.
 to develop networks and partnerships
among the scanners and their
organisations.
 to educate the participants about the
scanning function and about specific
issues and trends.
 to provide useful information for the
strategy process.

10. 3.2. Viewing the environment
However, some pragmatism is required. Thus, it
is important that
 a record of events is kept.
 the organisation focuses on key issues.
 organisations understand the issues cycle.
That is, they know when the environment
affects an organisation’s
 mandate, mission and values;
 product or service level mix;
 relationship with customers, clients,
users, payers or partners;
 costs, financing, management or
organisational design.

11. 3.3. Techniques for the short to medium term
What techniques could be employed?
The answer seems to lie in blending
traditional, quantitative, techniques with
qualitative, judgmental, assessments. To
look to the future as well as understand the
present. It is in this respect that whole
rafts of techniques appear, including
experience and learning.

12. 3.3. Techniques for the short to medium term
PEST
 Managers could use a PEST (sometimes
called STEP, or STEEPLE to include
educational, environmental and legal as well
as Political, Economic, Social and
Technological factors) analysis to assess the
‘super-environment’.

13. 3.3. Techniques for the short to medium term
(PEST Analysis)
Political Factors
Political factors include government
regulations and legal issues and define both
formal and informal rules under which the
firm must operate. Some examples include:
 tax policy
 employment laws
 environmental regulations
 trade restrictions and tariffs
 political stability

14. 3.3. Techniques for the short to medium term
(PEST Analysis)
Economic Factors
Economic factors affect the purchasing power of
potential customers and the firm's cost of
capital. The following are examples of factors in
the macroeconomy:
 economic growth
 interest rates
 exchange rates
 inflation rate

15. 3.3. Techniques for the short to medium term
(PEST Analysis)
Social Factors
Social factors include the demographic and
cultural aspects of the external macro
environment. These factors affect customer
needs and the size of potential markets.
Some social factors include:
 health consciousness
 population growth rate
 age distribution
 career attitudes
 emphasis on safety

16. 3.3. Techniques for the short to medium term
(PEST Analysis)
Technological Factors
Technological factors can lower barriers to
entry, reduce minimum efficient production
levels, and influence outsourcing decisions.
Some technological factors include:
 R&D activity
 automation
 rate of technological change

18. 3.3. Techniques for the short to medium term
 Broadly speaking it involves a ‘first look’ at
events. However, if done properly it can provide
valuable information.
 External consultants can undertake PEST analysis
but it can be a valuable internal communication
tool. Managers might be put into workshops to
discuss particular elements of the environment.

19. 3.3. Techniques for the short to medium term
 By analyzing the impact of the external
environment managers can have a greater
understanding of the constraints that face
organizations in the implementation of strategy.
 Further, PEST analysis can be useful if Scenarios
of the future are required or if SWOT analysis
(next chapter) is to be carried out.

20. 3.3. Techniques for the short to medium term
Porter's Five Forces Model
 There are other typologies for analysing the
super-environment.
 It is often used to examine the private sector.
 However, there is no reason why certain public
service functions could not be examined in a
similar way.

21. 3.3. Techniques for the short to medium term
( Porter's Five Forces Model )
Porter explains that there are five forces that
determine industry attractiveness and long-
run industry profitability. These five
"competitive forces" are
 The threat of entry of new competitors (new
entrants)
 The threat of substitutes
 The bargaining power of buyers
 The bargaining power of suppliers
 The degree of rivalry between existing
competitors

22. 3.3. Techniques for the short to medium term
( Porter's Five Forces Model )
Threat of New Entrants
New entrants to an industry can raise the level
of competition, thereby reducing its
attractiveness. The threat of new entrants
largely depends on the barriers to entry. High
entry barriers exist in some industries (e.g.
shipbuilding) whereas other industries are
very easy to enter (e.g. estate agency,
restaurants). Key barriers to entry include
 Economies of scale
 Capital / investment requirements
 The likelihood of retaliation from existing
industry players.

23. 3.3. Techniques for the short to medium term
( Porter's Five Forces Model )
Threat of Substitutes
The presence of substitute products can lower
industry attractiveness and profitability
because they limit price levels. The threat of
substitute products depends on:
 Buyers' willingness to substitute
 The relative price and performance of
substitutes
 The costs of switching to substitutes

24. 3.3. Techniques for the short to medium term
( Porter's Five Forces Model )
Bargaining Power of Suppliers
Suppliers are the businesses that supply
materials & other products into the industry.
If suppliers have high bargaining power over a
company, then in theory the company's
industry is less attractive. The bargaining
power of suppliers will be high when:
 There are many buyers and few dominant
suppliers
 Suppliers threaten to integrate forward into
the industry (e.g. brand manufacturers
threatening to set up their own retail outlets)

25. 3.3. Techniques for the short to medium term
( Porter's Five Forces Model )
Bargaining Power of Buyers
Buyers are the people / organizations who
create demand in an industry
The bargaining power of buyers is greater
when
 There are few dominant buyers and many
sellers in the industry
 Products are standardized
 The industry is not a key supplying group for
buyers

26. 3.3. Techniques for the short to medium term
( Porter's Five Forces Model )
Intensity of Rivalry
The intensity of rivalry between competitors in an
industry will depend on:
 The structure of competition - for example, rivalry is
more intense where there are many small or equally
sized competitors; rivalry is less when an industry
has a clear market leader
 Degree of differentiation - industries where products
are commodities (e.g. steel, coal) have greater
rivalry; industries where competitors can
differentiate their products have less rivalry
 Exit barriers - when barriers to leaving an industry
are high (e.g. the cost of closing down factories) -
then competitors tend to exhibit greater rivalry

28. 3.4. Auditing the Future
Most analysis focuses on analysing the
environment over the next year or few
years. However, many organisations are
looking even further into the future.
Here we analyse the Delphi Method and
Scenario Planning. These approaches are
attempts to assess where the organisation
might be in 10 to 20 year’s time.

29. 3.4. Auditing the Future
The Delphi method
This long range forecasting technique relies
upon a panel of experts answering questions
about the future.
It was developed by the Rand Corporation in
Santa Monica in the 1950s to predict future
opportunities in the defence industry.
The Delphi method is a systematic,
interactive forecasting method which relies
on a panel of experts. The experts answer
questionnaires in two or more rounds.

30. 3.4. Auditing the Future
The Delphi method
• After each round, a facilitator provides an
anonymous summary of the experts’
forecasts from the previous round as well as
the reasons they provided for their
judgments.
• Thus, experts are encouraged to revise their
earlier answers in light of the replies of other
members of their panel.
• It is believed that during this process the
range of the answers will decrease and the
group will converge towards the "correct"
answer.

31. 3.4. Auditing the Future
The Delphi method
• Finally, the process is stopped after a pre-defined
stop criterion (e.g. number of rounds,
achievement of consensus, stability of results)
and the mean or median scores of the final
rounds determine the results.
• Figure on next slide reflects the processes
involved.
• In doing so this method may exclude key internal
groups who have to be committed to any
organisational changes that develop. It may be
seen then as extenuating divisions within the
organisation as to the ownership of the strategy
process.

33. 3.4. Auditing the Future
Scenario Planning
 Scenario planning, also called scenario thinking or
scenario analysis, is a strategic planning method
that some organizations use to make flexible long-
term plans.
 The oil company, Shell, is probably the most
famous user of this technique. However, it is now
extensively used in both public and private sector
organisations.
 The technique encompasses internal as well as
external stake holding groups as well as
independent experts.

34. 3.4. Auditing the Future
Scenario Planning
The technique attempts to develop a small
number of scenarios about an uncertain world
based on a set of internally agreed facts and
likely possibilities. It is part of an on-going
process within organisations and should not
be construed as ‘crystal ball gazing’.
In simple words, Scenario analysis is a
process of analyzing possible future events by
considering alternative possible outcomes
(scenarios).

35. 3.4. Auditing the Future
Scenario Planning
For example, in economics and finance,
a financial institution might attempt to
forecast several possible scenarios for
the economy (e.g. rapid growth,
moderate growth, slow growth) and it
might also attempt to forecast financial
market returns (for bonds, stocks and
cash) in each of those scenarios.

36. 3.4. Auditing the Future
Some Examples:
 Johnson and Scholes (1999, p.112) consider 3
possible future states for book publishing - no
great change; electronic chaos (one where
consumers are confused by IT developments) and
an information society.
 Hadfield (1991) reports 2 scenarios being
developed in Shell in the late 1980s. - response to
global warming would lead to a reconstruction of
the world energy industry, lower energy
consumption and a switch to cleaner fuels.

37. 3.5. Summary
 In this chapter we have reviewed various
methods for assessing the external
environment over the short and the long term.
 We have noted that analysis involves an
understanding of dynamic forces that we need
to constantly re-visit.
 In a later chapter we will look at the concept of
Chaos and Complexity theory as applied to the
management of change and it will show that
strategic managers have to be aware of subtle
changes in the environment along with internal
issues if they are to achieve success.

38. Key Reading
 Bryson JM (1995) Strategic Planning for Public and
Non-profit Organisations, Prentice Hall, Hemel
Hempstead.
 Ginter P & Duncan J (1990) Macroenvironmental
Analysis, Long Range Planning.
 Hadfield P (1991) Corporate Strategies for a
changing environment, Utilities Policy, pp. 381-385.
 Johnson G & Scholes K (1999) Exploring Corporate
Strategy Text and Cases, 5th ed., Prentice Hall,
London. Chapter 3.
 Porter M (1985), Competitive Strategy: Techniques
for Analysing Industry and Competitors, Free Press,
New York