This document discusses analyzing an organization's external environment. It covers frameworks for analyzing the macro environment like PESTEL and identifying key drivers of change. It also covers industry analysis including defining the relevant industry, Porter's Five Forces model, economies of scale and scope, strategic group analysis, and critical success factors. The overall aim is to understand opportunities and threats in the external environment to inform strategic decision making.

1. ANALYSIS OF THE EXTERNAL ENVIRONMENT:
MACRO AND INDUSTRY FACTORS
Tiju Kodiyat

2. MARKET-BASED VIEW OF STRATEGY
• The external context - or external environment - refers to all aspects of an
organisation which exists beyond the boundaries of its direct control.
• A focus on the external context and its importance as a determinant of
organisational strategy is often referred to as a market-based view (MBV) of
strategy.
• It is also known as an ‘outside-in’ perspective on strategy and organisational
performance.
• The MBV has its roots in industrial economics theory, which holds that
organizational conduct in the external environment, relative to its competitors,
can create competitive advantage, and will be a key determinant of its
survival and success in the long run.

3. MARKET-BASED VIEW OF STRATEGY
Ecosystem interpretations of organisational external context. Based on Tsujimoto, M., Kajikawa, Y., Tomita, J., and Matsumoto, Y. (2018). A review of the
ecosystem concept towards coherent ecosystem design. Technological Forecasting and Social Change, 136, 49–58.
The business environment
External environment
Internal environment

4. MACRO ENVIRONMENT ANALYSIS

5. THE PESTEL FRAMEWORK
• Political: the local, national, and supra-regional political trends that shape the operating environment for the organisation.
This will take into consideration how the political will of powerful individuals, political parties, campaign groups, and local,
national, and regional governments might have a direct or indirect impact on the operating environment for the organisation.
• Economic: the health and trends (often cyclical) of economic activity which have an impact on organisational activity. This
will address factors such as energy prices, interest rates, foreign exchange, national growth, etc. in the economic settings in
which the organisation operates.
• Social: trends in attitudes and demographics within society at large which shape the products, services, and way of operating
of the organisation. Reviewing macro-social conditions will consider how customer demands and needs are evolving in the long
term and how employee expectations and availability are shifting.
• Technological: developments in product, process, and service-enabling technologies, and the associated possibilities and
impacts on the value the organisation creates and how it operates. This will consider how technological developments in all
walks of life and locations might cross over to the domain of the organisation.
• Environmental: a macro-review of how the changing state of the natural environment will affect the activities of all within an
organisation’s ecosystem. Broadly, this will address the implications of climate change on the natural environment and
acceptable organisational practices, regulation of environmental impact (e.g. waste, emissions, carbon footprint), and incentives
and opportunities for progressive environmental practices.
• Legal: direction of travel and scheduled developments in the laws, legislation, and regulation affecting all stakeholders in the
localities in which an organisation operates. By considering the current, and likely, future, formal parameters within which an
organisation operates, decisions can be made about how to optimally organise activity, and how to reconfigure
products/services to exploit opportunity and avoid the costs of non-compliance presented by the legal context.

6. KEY DRIVERS FOR CHANGE
• PESTEL helps to provide a list of potentially important macro-level factors
influencing strategy.
• Analysing these factors, together with their interrelationships, can produce long
and complex lists of issues. Rather than getting overwhelmed by a multitude of
details, it is necessary to identify the key drivers for change in a particular
context.
• Key drivers for change are environmental factors that are likely to have a high
impact on industries and sectors, and impact on the success or failure of
strategies within them.
• Identifying key drivers for change in an industry or sector helps managers to
focus on the PESTEL factors that are most important and which must be
addressed most urgently. Without a clear sense of the key drivers for change,
managers will not be able to take the strategic decisions that allow for effective
responses.

7. APPLYING THE PESTEL FRAMEWORK
• Research the PESTEL factors. Use data to support the points, and
analyse trends using up-to-date information.
• Apply selectively – identify specific factors which impact on the industry,
market and organisation in question.
• Identify factors which are important currently but also consider which will
become more important in the next few years. Prioritise the macro
trends identified based on potential future impact  key drivers for
change
• Develop organisational implications for these priority trends.
• Identify macro-level opportunities and threats. Identify options for action
in response to organisational implications.

8. INDUSTRY AND COMPETITOR ANALYSIS

9. DEFINING THE INDUSTRY
• An industry is a group of firms producing products and services that are
essentially the same. For example, the automobile industry and the airline
industry.
• A market is a group of customers for specific products or services that are
essentially the same (e.g. the market for luxury cars in Germany).
• A sector is a broad industry group or a group of markets (e.g. the agricultural
sector, divided into industries for wheat, sugar, coffee, tea, and so on).
• The industry must not be defined too broadly (too wide to be meaningful) or too
narrowly (thus excluding important competitors).
• Industries can be analysed at different levels, for example, different
geographies, markets and even different product or service segments within
them(e.g. airline markets).

10.  What industry is Ferrari in?
• The motor vehicle industry (SIC 371)?
• The automobile industry (SIC 3712)?
• The sports car industry?
• Is its industry global, regional (Europe) or national (Italy)?
 Key criterion: SUBSTITUTABILITY
– On the demand side: are buyers willing to substitute between
types of cars and across countries
– On the supply side: are manufacturers able to switch production
between types of cars and across countries
We may need to draw industry boundaries differently for different types of
decisions
Drawing industry boundaries
DEFINING THE INDUSTRY: EXAMPLE

11. ANALYSING INDUSTRY ATTRACTIVENESS: PORTER’S FIVE FORCES
FRAMEWORK
• The Five Forces framework
explains and analyses the effect
of market structure on profitability,
and therefore attractiveness of the
industry.
• It is not merely about defining a
market as attractive or not, but
rather modelling the structure and
dynamics of the market so that
you can better understand options
for remaining and influencing in a
market, or exiting it at the
appropriate time.
Porter, M.E. (2008). The five competitive forces that shape competitive performance. Harvard Business Review, January

12. FIVE FORCES: THE
STRUCTURAL
DETERMINANTS OF
COMPETITION
Five Forces insights are highly
dependent on where the market
boundaries are drawn.
Apply the model at the most
appropriate level – not necessarily
the whole industry. For example,
the European low-cost airline
industry rather than airlines
globally.

13. UNDERSTANDING ECONOMIES OF SCALE AND SCOPE
• Economies of scale
• Economies of scale occur when the cost per unit of output decreases as
output increases.
• When average costs start falling as output increases, economies of scale
are occurring.
• One possible source of economies of scale is that the firm may be able to
purchase inputs at a lower cost per unit when they are purchased in large
quantities.
• Economies of scope
• Economies of scope are associated with the joint production of two or more
products.
• Achieving economies of scope can have an impact upon cost if, for
example, they permit the sharing of primary activities, such as marketing or
operations, or support activities, such as human resources or IT functions.

14. STRATEGIC GROUP ANALYSIS
• Strategic group analysis is a method which identifies direct competitors that
should be studied as part of micro-level analysis.
• A strategic group is defined as the collection of organisations adopting broadly
the same strategy to service the needs of the same group of customers.
• Understand competition – enables focus on direct competitors within a strategic
group, rather than the whole industry.
• Analysis of strategic opportunities – helps identify attractive ‘strategic spaces’
within an industry.
• Strategic groups can be identified by mapping the position of competitors in an
industry against two competitive criteria.

15. STRATEGIC GROUPS: EXAMPLE AND CHARACTERISTICS
An example of strategic group analysis
for the UK airline industry
Some characteristics for
identifying strategic groups

16. COMPLEMENTARY METHODS OF ANALYSIS, NOT STANDALONE

17. CRITICAL SUCCESS FACTORS
• Critical success factors are those factors that are either particularly valued
by customers or which provide a significant advantage in terms of cost.
• Critical success factors are likely to be an important source of competitive
advantage if an organisation has them (or a disadvantage if an organisation
lacks them).
• Different industries and markets will have different critical success factors
(e.g. in low-cost airlines the CSFs will be punctuality and value for money,
whereas in full-service airlines it is all about quality of
service).

18. IDENTIFYING CRITICAL SUCCESS FACTORS

19. OPPORTUNITIES AND THREATS
The critical issue in undertaking environmental analysis is the
implications that are drawn from this understanding in guiding
strategic decisions and choices.
Identifying opportunities and threats from the external
environment is extremely valuable when formulating strategic
options and strategic choices.
Opportunities and threats form one half of the SWOT analysis
that shapes strategy.