External Environment Analysi

Strategic Management
‘Strategy is the direction and scope of
an organization over the long term,
which achieves advantage in a
changing environment through its
configuration of resources and
competencies.’
--Johnson et al. (2009)
External Environment Analysis
A firm’s external environment consists of all the factors that can
affect its potential to gain and sustain a competitive advantage

PESTLE –
macro-
environment

External
Environment
Analysis

Porter’s Five
Forces –
competitor
intelligence
PESTEL Model Analysis
A framework that categorizes and analyzes an important set of
external factors (Political, Economic, Sociocultural,
Technological, Ecological, and Legal) that might impinge upon
a firm. These factors can create both opportunities and threats
for the firm.
Political Factors
Political factors result from the processes and actions of
government bodies that can influence the decisions and
behavior of firms.
Economic Factors
Economic factors in a firm’s external environment are largely
macroeconomic, affecting economy-wide phenomena.
Sociocultural Factors
Sociocultural Factors include age distribution, population
growth rate, employment levels, income statistics, education
and career trends, and religious beliefs, as well as sociocultural
conventions
Technological Factors
Technological Factors capture the application of knowledge to
create new processes and products. Can be broadly divided into
two areas: manufacture and infrastructure
Ecological (Environmental) Factors
Ecological factors involve broad environmental issues such as
the natural environment, global warming, and sustainable
economic growth
Legal Factors
Legal factors include the official outcomes of political
processes as manifested in laws, mandates, regulations, and
court decisions—all of which can have a direct bearing on a
firm’s profit potential
 Porter’s Five Forces Analysis

 Developed by Michael E.
Porter of Harvard Business
School in 1979

 Identifies five key forces

that determined the
fundamental “attractiveness”
of a market or
a sector in the long term

 Provides a model that

enables organizations to
analyze their industry in a
way that takes your
 Porter’s Five Forces Analysis

One of the most crucial aspects of using the Porter’s Five Forces
Model is the organization’s ability to define its market or
industry properly and not defining it too narrowly.
 Threat of New Entrants
 ECONOMIES OF SCALE – cost advantages from producing larger
outputs; spreading fixed costs, employ more efficient technology,
demand better terms
 NETWORK EFFECTS – the value of a product for an individual user
increases with the number of total users
 CUSTOMER SWITCHING COST – incurred by moving from one
supplier to another
 CAPITAL REQUIREMENTS – the “price of the entry ticket” into a
new industry
 GOVERNMENT POLICY – restrictions of government authorities on
new entrants
 ADVANTAGES INDEPENDENT OF SIZE – brand loyalty,
 Threat of Substitutes
The availability of close substitute products can make an industry
more competitive and decrease profit potential for the firms in
the industry

Factors to consider in
evaluating the threat of
substitute:

1.Switching cost to the

substitute
2.Price of the substitute
3.Quality of the substitute
4.Performance of the
substitute
 Bargaining Power of Suppliers
Captures the pressures that industry suppliers can exert on an
industry’s profit potential. Supplier can adversely affect an
industry by demanding higher prices for their inputs or by
reducing the quality of the input factor.

Supplier bargaining power is high when:

 There are few suppliers and many buyers
 The cost of switching between suppliers is high
 Suppliers can begin to produce the buyer’s product
themselves
 The buyer is not price sensitive and uneducated when it
comes to price
 Supplier’s product is highly differentiated
 The buyer does not represent a large portion of the supplier’s
sales
 Unavailability of substitute products
 Bargaining Power of Customers
The power of buyers concerns the pressure an industry’s
customers can put on the producer’s margins in the industry by
demanding a lower price or higher product quality

Customer bargaining power is high when:

 Customers are more concentrated than sellers
 Switching costs for customers are low
 Customers are well educated regarding the product
 Customers are price sensitive
 A large portion of a seller’s sales is made up of customer
purchases
 There is little differentiation between products
 The threat of backward integration is high
 Rivalry Among Existing Competitors
Describes the intensity with which companies within the same
industry jockey for market share and profitability. The other four
forces exert pressure upon this rivalry.

Influencers in the intensity of competitor rivalry

 Number of Firms / Type of Market
 Market Growth
 Fixed Costs
 Storage Cost / Perishability of Products
 Switching Costs
 Product Differentiation
 Exit Barriers – Economic and Social
 Strategic Commitments
 PT Sepatu Bata
External Environment Analysis
PT Sepatu Bata – The External Environment

 Fall in Indonesia’s oil price from 1982 to 1984 had

brought about the 1983 devaluation of 44%
 Increasing trends in GDP, GNP, consumption
expenditure, and per capita income
 Indonesian consumers: first comes food, shelter and
clothing, and then shoes
 Increase in average shoe price for PT Sepatu Bata
 Possibility of the government to reduce budget
deficit by cutting spending and raising taxes
 New entrants in the footwork industry – both
domestic and international
 PT Sepatu Bata to try to produce and export for the
medium-price, medium-quality segment of the
market
 Porter’s Five Forces Analysis – Shoe Industry

Force Rating Comments

Penetration by domestically-owned firms
Minimum government laws and regulations
Threat of New restricting access
HIGH Start up may be costly due to labor and capital
Entrants
requirements
Economies of scale is not an issue for new entrants
Switching cost to substitutes are low, depending on
Threat of MEDIU
price, uniqueness and quality
Substitute M Very easy to replicate a firms own product
Bargaining Firms can switch suppliers quickly without worry
MEDIU
Power of of a significant decrease in quality
M Low differentiation on supplier products
Suppliers
 Porter’s Five Forces Analysis – Shoe Industry

Force Rating Comments

Buyers don’t buy on large quantities
Bargaining MEDIU Low product differentiation
Power of Buyers M Customers are price sensitive and with low
switching cost
Perfect competition type of market; Price is elastic
Rivalry Among Low to moderate product differentiation
HIGH Non-price competition (advertising, customer
Existing Firms
loyalty, etc.)
PT Sepatu Bata – Opportunities

Opportunity Comments
New Advertising
New shopping centers in Jakarta and
and Distribution major cities in Indonesia
Channels
Manufacture and sell products at higher
Offering of quality and cost. These new products can
Premium Products be priced at mid-range to expensive value
Expansion in markets (cities, countries,
Expansion to Other markets) not yet covered by Bata. Extend
Market Segments into previously untapped areas.
PT Sepatu Bata – Threats

Threat Comments
Presence of other well-known brands in
Intense Competition the market; Entry of small-scale
manufacturers
Shortfall of oil revenues and stagnation of
Economic and the economy; Threats of cutting
Political Instability government spending and increase taxes
Presence of
Imitations of brand-name products
Imitations in the flooded the market
Market
Changing
Effects of political and economic events
Consumer on consumer activities
Preferences