Chapter

2
External Analysis
Learning Outcomes
❖ develop your understanding why we need to

analyse the external business environment

❖ understand how frameworks can help us to

make sense of changes in the external

environment
❖ understand how these forces are dynamic

and should be used to help us with strategic

2

decisions
2.1 Key Questions
Why? – What is the Purpose of External analysis?

If your analysis
doesn’t do this then
it is of minimal use!! To find out the issues (negative and
positive) facing the company now
and in the future and (most
importantly) to help to make
strategic decisions about what the
company should do
 ‘Standard’ Approach

PESTEL 5 Forces SWOT

I very often see three tools used that merely

describe what is happening and are not
connected in any way – Result = USELESS

Critical Evaluation

How useful is this really?

It is only useful to help us think and to make connections and predictions

5 forces

PESTEL SWOT
TIPs:
•There are many other ways to do the analysis.
Use them properly!!!!!!! •You should always try to work out how one
thing affects another.
•Use the tools to investigate and select only
those things that are important and relevant
to your company
Exhibit 2-2 Components of External Environment
 2.2 External Environment
2.2.1 The General Environment/Macro-Environment
❖Is the broad environmental context in which a firm’s industry is
situated.
❖Includes strategically relevant components over which the firm
has no direct control.
✓ General economic conditions
✓ Immediate industry and competitive environment
 2.2 External Environment
2.2.1 The General/Macro-Environment
a. Political-Legal
✓ Government type and stability
✓ Freedom of the press, rule of law and levels of bureaucracy
and corruption
✓ Regulation and de-regulation trends
✓ Social and employment legislation
✓ Tax policy, and trade and tariff controls
✓ Environmental & consumer-protection legislation
✓ Likely changes in the political environment
 3.2. External Environment
2.2.1 The General/Macro-Environment
b. Economic
✓ Stage of a business cycle
✓ Current and projected economic growth, inflation and
interest rates
✓ Unemployment and supply of labor, labor costs
✓ Levels of disposable income and income distribution
✓ Impact of globalization
✓ Likely impact of technological or other changes on the
economy
✓ Likely changes in the economic environment
 3.2. External Environment
2.2.1 The General/Macro-Environment
c. Sociocultural
✓ Cultural aspects, health consciousness, population growth rate,
age distribution.
✓ Organizational culture, attitudes to work, management style,
staff attitudes.
✓ Education, occupations, earning capacity, living standards.
✓ Ethical issues, diversity, immigration/emigration, ethnic/religious
factors.
✓ Media views, law changes affecting social factors, trends,
advertisements, publicity.
✓ Demographics: age, gender, race, family size.
 3.2. External Environment
2.2.1 The General/Macro-Environment
d. Technological
✓ Maturity of technology, competing technological developments,
research funding, technology legislation.
✓ Information technology, internet, global and local
communications.
✓ Technology access, licensing, patents, potential innovation,
replacement technology/solutions, inventions, research,
intellectual property issues, advances in manufacturing.
✓ Transportation, energy uses/sources/fuels,
associated/dependent technologies, rates of obsolescence,
waste removal/recycling.
 3.2. External Environment
2.2.1 The General/Macro-Environment
e. Demographic
✓ Population growth rate
✓ Age distribution.
✓ Gender
✓ Race
✓ Family size.
 3.2. External Environment
2.2.1 The General/Macro-Environment
f. Global
✓ Economic recession/integration
✓ War, terrorism
✓ Tensions between countries
✓ Emerging Economies
✓ MNC expansions
✓ Global advancements in technologies and
telecommunications
✓ Global Marketing & Distribution Channels
✓ International Strategic Alliances
PESTEL Analysis
 Key aspects of PESTLE Analysis

✓ Don’t just list environmental factors; derive

implications for the industry

✓ Focus on the key drivers of change

✓ Focus is on future impact of environmental

factors
✓ Consider the combined effect of

environmental factors
✓ Environmental factors would be different
 PESTLE and SWOT

❖ The PESTEL Analysis essentially provides the

basis for identifying many of the

Opportunities and Threats for the SWOT
Analysis.

❖ Whereas, Strengths and Weaknesses are

considered INTERNAL to the organisation,

Opportunities and Threats are EXTERNAL.