EXTERNAL ENVIRONMNENT

OBJECTIVES

1. Explain what is external environment

2. To know what is What is PESTEL?
3. To distinguish the features of environmental scanning.
4. Enumerate the Types of Industry Analysis
5. To discuss Forecsting
 The external business environment
consists of broader forces that not only
affect your start-up, but also other actors
in the micro-environment. These shape
EXTERNAL the characteristics of the opportunities
ENVIRONMENT and threats and are factors that are largely
uncontrollable by you or any other
company.
WHAT IS PESTEL analysis is a framework
PESTEL? that allows the evaluation of the
status of your start-up in relation to
the external environment. It covers
political, economic, social,
technological, legal and
environmental factors
 POLITICAL
• 1. Government stability

• 2. Political values and beliefs shaping policies

• 3. Regulations towards trade and global business

• 4. Taxation policies

• 5. Priorities in social sector

ECONOMIC AND ENVIRONMENTAL

PESTEL 1. GNP trends
• 2. Interest rates/savings rate

• 3. Money supply

• 4. Inflation rate

• 5. Unemployment

• 6. Disposable income

• 7. Business cycles

• 8. Trade deficit/surplus
 SOCIAL
• 1. Population demographics

• 2. ethnic composition

• 3. aging of population

• 4. regional changes in population growth and decline

• 5. Social mobility
PESTEL 6. Lifestyle changes

7. Attitudes to work and leisure

• 8. Education – spread or erosion of educational standards

• 9. Health and fitness awareness

• 10. Multiple income families.

 • Technological

• 1. Biotechnology

• 2. Process innovation

• 3. Digital revolution

• 4. Government spending on research

• 5. Government and industry focus on technological effort

PESTEL • 6. New discoveries/development

• 7. Speed of technology transfer

• 8. Rates of obsolescence
 • Legal

• 1. Monopolies legislation/Antitrust regulation

• 2. Employment law

• 3. Health and safety

• 4. Product safety

PESTEL
 • Political: Politics has a serious impact on the economic
environment of a country.

• Political ideology and political stability or instability strongly

influence the pace and direction of the economic growth.
Also, it contributes to the economic environment which is
conducive for some businesses to grow or remains
indifferent for some businesses and at times is a hurdle.
Subsequent to general elections of 2004 in the country,
there has been a change in the government at the center. A
PESTEL new coalition United Progressive Alliance (UPA) led by the
Congress party and supported by Left is ruling at the center
and the implications on business can be seen through few of
the policy statements announced by the government. Even
though the broad policy direction is in line with the policy of
an open economy and private sector initiative, the Strategic
Analysis Common Minimum Program has identified few
priority areas which is going to have an impact different than
before.
WHAT IS ENVIRONMENTAL SCANNING?
Environmental scanning is the acquisition and
use of information about events, trends, and
relationships in an organization's external
environment, the knowledge of which would
assist management in planning the organization's
future course of action
HOW? 1. Focus Your Scanning - Because we have limited
time, energy and limited resources, always start your
scanning with a focus. Deciding what to scan for will
most likely be linked to those major drivers of change in
the external environment that are likely to have an impact
on your start-up. You should ask yourself the question,
“What is happening in my environment that will affect
the future of my start-up?” Through this analysis, you
should be able to identify emerging issues, uncertainties
and trends (and their driving forces –why is this
happening?) that have important implications for your
business. Remember that you should scan at different
levels:
WHAT ARE 1. what competitors are doing,
THE ISSUES?
2. what is happening in the industry and how
your competitors might respond,

3. what is happening more generally with

industry and government policy, and

4. the broader societal and global trends

2. Who should scan? Scanning the external
environment, either consciously or sub-consciously,
should count with a system to record them formally.
It should have a team of people that contribute to the
scanning process, especially because it involves the
perception, efforts and sharing from different minds.
Make sure to remain open minded, curious and
systematic, welcoming diversity and thinking out of
the box.
3: Starting to Scan - Start by setting up
classification system that lists out the categories
you will use to classify and record what you are
finding. You can use for instance the PESTEL
framework (political, economic, social,
technological, and legal factors), which will
give you an idea of what are you going to look
for. At the end of the scanning, it will help you
to retrieve your findings easily.
• 4: Recording Your Hits

• You need to keep a track of your scanning hits

to make use of this information in the future.
How to do it would depend on your
preferences. The options are manifold: word,
excel, bookmarks, a simple notebook, or even
specialized web-machines. Once you have been
scanning regularly for a couple of months, you
will find that some hits will start showing some
similarities AND TRY TO DIG MORE.
5: Analyzing Your Scanning Output

“At this stage, you have started to identify trends and you can
see some interdependencies among those trends. What does it
all mean?

In order to evaluate how the current affairs, emerging issues

and trends could affect the future of your start-up, you could
make use of the External Factor Analysis Summary (EFAS).
This tool indicates whether the company is able to effectively
take advantage of existing opportunities along with minimizing
the external threats.
INDUSTRY •Industry analysis is conducted
ANALYSIS by the business entity or
specifically an entrepreneur to
identify the factors which are
influencing the sector that they
have already or thinking about
investing in.
The industry analysis helps the owner to
know about the various opportunities as
well as threats that face the business so that
they can take steps to combat them and
gain competitive advantage.

Understandingthe environment surrounding
the industry and the factors that are
influencing them helps to anticipate future
trends and gives you the weapon to take
the required direction with confidence.
TYPES OF • There are three commonly used and important methods
of performing industry analysis. The three methods
INDUSTRY are:
ANALYSIS
1. Competitive Forces Model (Porter’s 5 Forces)
2. Broad Factors Analysis (PEST Analysis)
3. SWOT Analysis
PORTER’S FIVE FORCES MODEL

Porter’s five forces

framework is utilized for
strategic industry analysis,
and focus on the
following:
Buyer Power – The
Barriers to Entry – The
leverage held by buyers in
difficulty in partaking in
being able to negotiate
the industry as a seller.
lower prices.

Supplier Power – The Competitive Rivalry –

Threat of Substitutes –
ability of a company’s The intensity of the
The ease at which a
suppliers to increase the competition within the
certain product/service
prices of its inputs (e.g. industry – i.e. number of
can be replaced, typically
raw materials participants and the types
with a cheaper variation.
for inventory). of each.
 POTENTIAL BARRIERS TO ENTRY INCLUDE:

• Economies of Scale – Upon achieving greater scale, the cost of producing

one unit declines, which provides a competitive advantage to the company.
• Differentiation – By offering unique products/services to meet targeted
customer needs, the greater the barrier to entry (i.e. higher customer
retention, loyal customer base, more technical product development).
• Switching Costs – Even if a new competitor offers a better product/service,
the cost of switching to a different provider can deter the customer from
switching (e.g. monetary considerations, inconvenience).
POTENTIAL BARRIERS TO ENTRY INCLUDE:

• Patents / Intellectual Property (IP) – Proprietary technology can

protect competitors from attempting to steal market share and
customers.
• Initial Required Investment – If the upfront cost of entering the
market is high (i.e. significant capital expenditures required), fewer
companies will enter the market.
• Bargaining Power of Buyers
 SWOT ANALYSIS

SWOT Analysis stands for Strengths,

Weaknesses, Opportunities, and
Threats. It can be a great way of
summarizing various industry forces and
determining their implications for the
business in question.
 Forecasting concerns estimating those future events
that would have a significant impact upon the work to
be performed by the management and upon the
objectives to be pursued by them. In effect, it
anticipates probable occurrences rather than waiting
FORECASTING for them to happen and merely reacting to them.

Forecasting aims to reduce the uncertainty of the

future. A number of techniques have been developed
with which corporate planners can effectively predict
the various components of the external environment
and can know the future with certainty.
FORECASTING

With the development of more

sophisticated forecasting
techniques, along with the advent Every manager MUST have the
of computer, especially the ability to use very sophisticated
proliferation of the personal data analysis techniques for
computer and associated software, forecasting purposes.
forecasting has received more and
more attention.
 An understanding of these techniques
is now essential for business
managers. For the same reason, users
of forecasts (managers) must be
FORECASTING cautious to the improper use of
forecasting techniques as inaccurate
forecasts can lead to poor decisions.
FOUR TYPES OF FORECASTING METHODS

Technique Use Math involved Data needed

1. Straight line Constant growth rate Minimum level Historical data

2. Moving average Repeated forecasts Minimum level Historical data

3. Simple linear Compare one independent Statistical knowledge A sample of relevant

regression with one dependent variable required observations

4. Multiple linear Compare more than one Statistical knowledge A sample of relevant
regression independent variable with one required observations
dependent variable
Thank you for listening!

Maam Julz