DIAGRAM 1: AN OVERVIEW OF THE GROUP OF FACTORS

Macro- • PEST
environment Framework

Industry • Five Forces

sector
Competitors • Strategic groups

Market
analysis

An analysis of the external environment is undertaken in order to discover the

opportunities and threats need to be addressed by the organization.
In the external environment, there are 4 main groups of factors which are Macro-
environment, and Micro-environment included Industry sector, Competitors and Market.
In each group of factors, we also mention the framework. Within the Macro-environment,
the framework conducted is PEST. In the industry sector, the Porter’s Five Forces is the
framework. And the group of competitors is focused on strategic groups.

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 DIAGRAM 2: THE GROUP OF FACTORS IN DETAIL

•Political / Legal Issues

Macro-environment •Economic
(PEST Framework) •Social / Culture Issues
•Technology

•Suppliers
Industry / Sector •Buyers
•Potential entrants
(Porter's Five Forces) •Substitutes
•Competitive rivalry

•Competitors objectives
Competitors •Current and past strategies
•Competitor’s capabilities
(Strategic groups) •Competitors future strategies and
reactions

• Actual and potential market size

• Customers
Market analysis • Customer segments
•Distribution channels

The layer of these groups of factors here also has a meaning.

The general environment is the outer layer that is widely dispersed and affects organizations
indirectly. These events do not directly change day to day operations, but do affect all
organizations eventually.

Macro Environment: ranks the highest level, consisting of the general and global factors which
might influence the lower layers the economic activities (dimensions in the broader society that
influence an industry and the firms within it)
- PEST framework is favored in this condition to comprehend fully the whole picture of
the market.
+ P stands for Political / Legal issues such as taxation policy, monopoly controls,
employment laws, foreign trade agreements...
+ E stands for Economic factors such as interest rates, inflation rates, money supply,
unemployment or GNP à concerned with the allocation of resources

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 + S stands for Social / Culture issues such as levels of education, family structures,
distribution of income, attitudes and values à central to changes in consumer behavior
+ T stands for Technological factors such as focus on government research, state of
technology transfer, materials, developing technological processes à service customers’
needs more completely or economically

The task environment is closer to the organization and includes the sectors that conduct
day to day transactions with the organization and directly influence its basic operations,
performance. It is generally considered to include competitors, suppliers and customers.
This is the external environment closest to the organization itself. It is the business
industry environment in which your organization operates. It includes your customers/clients,
suppliers and partners. It also includes competitors, those organizations that compete for your
customers or offer alternative approaches to your services.
Analysis of this environment requires a good look at who your customers are and what
they really want, at your competitors (and potential competitors), at your collaborators and the
opportunities that these relationships present. Your findings and judgements can then be used to
help you to achieve your business goals.

Industry sector: the set of factors directly influences firm and its competitive actions and
competitive responses (with a group of companies producing the same products and services).
- Porter’s Five Forces
+ Power of suppliers: is strong where control over supplies is concentrated into the
hands of a few players, or suppliers have a strong brand, hands of few players.
+ Power of buyers: is strong where a few buyers control a large percentage of a volume
market, a large number of small suppliers, the cost of switching a new supplier is low,
lower batteries to alternative sources of supply.
+ Potential entrants: determined by a number of barriers to entry that may exist in any
given industry. Example: the capital investment necessary to enter the industry can be
very high in areas such as electrical power generation or chemical production.
+ Substitutes: can arise a number of ways such as a new product replaces an existing
product or service, a new product or service may eradicate the need for a previous
process.
+ Competitive rivalry: the intensity of competition in the industry will be determined by
a range of factors: an effect of industry life cycle, the relative size of competitors,
competition based on price discounting.
à By studying these forces, the firm finds a position in an industry where it can influence the
forces in its favor or where it can buffer itself from the power of the forces to achieve strategic
competitiveness and earn above-average returns

Competitors Analysis takes into consideration of Strategic Groups.

- Strategic Groups are defined as organizations within an industry or sector with similar
strategic characteristics, following similar strategies or competing on similar bases. The
understanding of strategic groups can help better understand the competition and then
figure out strategic opportunities

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Market Analysis: made up of a range of factors relevant to the particular situation
- Actual and potential market size: estimate total market sales in the market à evaluate the
realism of particular market share objectives.
- Trends: identifies the changes that have eventually taken place à uncover reasons for
these changes and expose the critical drivers underlying a market
- Customers: what criteria they use to judge a product offering through identifying who the
customer is. Information on where, when, how customers purchase the product, service
à better understanding the needs of customers
- Customer segments: identifying current market segments and establishing the benefits
each group requires à detect if it has the capability to serve particular customers’ needs
- Distribution channel: à inform strategic decisions

SUMMARY
The external auditing process creates the information and analysis necessary for an organization
to begin to identify the key issues it will have to address in order to develop a successful
strategy.
• The PEST analysis uncovered the critical areas in the external environment that the
organization needed to consider.
• The industry analysis revealed the structure and strengths of players in the industry that
any strategy will be required to address.
• The competitor analysis disclosed the relative position of the direct competitors in the
strategic group.
• The market analysis began to explore current trends and areas of growth. More
importantly it began to build a picture of the consumer.