The External Environment

BSM374 Performance Planning and Decision-Making

 Topic Themes

Theme 1: The External Environment Context

Theme 2: PESTEL Analysis
Theme 3: Porters Five Forces Model
Theme 4: SWOT Analysis
 The External Environment Context
External
When we consider the Environment
environment in which an Geography

organisation exists, there are

a number of factors which
Technology Demographics
can impact it.
While we can control many
factors for the internal
environment of an
organisation (e.g. strategy, Industry
operations efficiency), an Other
organisation will have limited Political
industries
influence for changing factors
within the external
environment (diagram right)
so will have to react to these
Social Cultural
forces the best it can.
Example Economy (The UK)

Taking the UK as an
example (diagram to the
right) we can see how
an organisation (firm)
does not exist in
isolation. It is not only
product markets and
competitors that it faces
but is actually part of a
wider circular flow of
relationships that
impact its operations.
 Why Study the External Context?

A key question for an organisation while striving to gain competitive advantage and
improve its operations is…why study the external context?
There can be a tendency within business to focus primarily on factors which the
organisation can control (the internal environment and operations). To be able to make
informed decisions for strategy and positioning it is critical that there is an awareness
and analysis conducted for the external environment in which an oraganisation exists.
This is because:
• Organisations depend on their environment for inputs and to take outputs.
• Managers act on assumptions about:
– competitive environment
– general environment
– stakeholders
• Affects how they shape the role (task and process)
• Are those assumptions correct, and what alternative actions could an alternative
interpretation support?
 “Foresighting” or “ Scenario Planning”

• “an act or the power of foreseeing; an act of

looking forward” (Merriam Webster)

• “undertaking a disciplined method for

imagining and examining possible futures”
(Worthington and Britton)

• Is  methodical planning for future

possibilities

• Is Not  prediction of one future

Source: Worthington and Britton, 466-480

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 Environmental influences
This diagram from Boddy (2014)
highlights the link between the
internal environment and the
external environment. We can see
that this external environment is
made up of 6 factors which
influences it. These influences
make up the acronym PESTLE and
they represent:

• Political
• Economic
• Social/Cultural
• Technological
• Ecological
• Legal

Boddy Figure 3.1 6th ed. 2014

Environmental influences on the organisation
 Navigating the Macro-environment through PESTEL Analysis

“… nothing else but the world in which [the organisation] operates” (Clegg et al., 2011)

PESTEL is a framework for analysing the external environment which provides

information for reviews of opportunities and threats. It Can be used as a basis for
strategic planning, foresighting, and scenario planning.
PEST, PESTE, PESTEL, STEEPLED are variations of the same thing
Political Economical Social Technological Environmental Legal
• Taxation • Industry growth • Disposable • Discoveries/ • Regulation • Changes to
• Regulation • Credit and income developments and employment
• Gov. attitude interest rates • Education • Technology protection law
• Political • Foreign • Demographic transfers • Consumer • Regulation of
alliances exchange • Labour • Internet awareness competition
• Incentives • Min. wage mobility • Energy use • H&S
• Stability • Business cycle • Lifestyle • Obsolescence regulation
• Public • GDP/inflation changes • Transport • Antitrust
spending • Consumer • Attitudes to costs regulation
• Trade confidence work • Scientific • Quotas (e.g.
balances • (Un) • Fashion advances fishing)
employment • Health • Access to • Consumer
material protection

Common PESTEL responses for conducting analysis.

 The PESTEL Components
Political factors define the regulatory
parameters within which firms must operate.
Business activity is shaped by the
economic context and vice versa
society
Organisations exist within a and
within changing demographics
Technology changes products, process
and human interactions
Business operates within a natural ecology
and exploits non sustainable resources
The legal environment deserves a
category….
Tax policy, fiscal policy, trade regulations,
policy on employment health and education.
Government stability and reduction in
uncertainty. Influence of business on policy?
Credit, disposable income, GDP and growth
rates, foreign exchange, inflation and
interest rates, income distribution,
employment rates, international trade
Beliefs and values, multiculturalism,
education attainment, age distribution,
savings and spending trends, migration,
health
New products, new processes, fundamental
science, impact on industry and society
skills and education
Environmental impact, sustainability,
prosperity without growth, climate change
In complex external environments, complex
mediation, enforcement of judgments, etc.
Navigating the Macro-environment: Political Factors

“… nothing else but the world in which [the organisation] operates” (Clegg et al., 2011)

• Political Factors: For example, Government Direct State Involvement

H
policies, taxation changes, foreign trade e.g. defence e.g. canals
regulations, political risk in foreign markets, Political Exposure
changes in trade blocks. H L

– Can be measured along political exposure and e.g. food e.g. hotel
L
state involvement.
– Political environment can be influenced
through the will of the people. For example, in
the UK in 2008 the banking
industry because politically
exposed, which ended in direct state
involvement (and ownership).
Navigating the Macro-environment: Economic Factors
“… nothing else but the world in which [the organisation] operates” (Clegg et al., 2011)
• Economic Factors: For example,
business cycles, interest rates,
personal disposable income,
exchange rates, unemployment
rates, GDP trends.
– For instance, higher interest
rates may defer investment
because it costs too much to
borrow
– Inflation can provoke higher
wage demands, therefore
increasing costs.
• GDP
– the Gross Domestic Product excluding the value
of net income earned abroad
• GDP per capita
– the gross domestic product excluding the value
of net income earned abroad….divided by the
population
• Purchasing Power Parity (PPP)
–
The adjustment required on the exchange
rate between two countries in order for the
exchange to be equivalent to each
currency's purchasing power.
– This means the exchange rate adjusts so
that the same good in two different
countries has the same price when utilising
the same currency. 
Navigating the Macro-environment: Social / Technological Factors

“… nothing else but the world in which [the organisation] operates” (Clegg et al., 2011)

PESTEL
• Socio-cultural Factors: For example, population changes, income distribution,
lifestyle changes, consumerism, changes in culture and fashion
– For instance, the aging population in some countries has led some
organisations to close pension funds to new entrants.
– New ethical attitudes and awareness are causing a concern for those
organisations reliant on fossil fuels.

• Technological Factors: For example, new discoveries and technology

developments, ICT innovations, rates of obsolescence, increased spending on
Research and Development.
– The development of internet technology has meant opportunity for some
(Amazon) and threat for others (traditional book sellers)
– Technological advancements can also impact on the organisational process.
Many new technologies exist now which reduce cost and speed up process
time.
Navigating the Macro-environment: Environmental / Legal Factors

“… nothing else but the world in which [the organisation] operates” (Clegg et al., 2011)

PESTEL
• Environmental Factors: Green issues, such as pollution, waste and climate change
– These can impose additional costs, for instance, pollution controls. However,
they may also provide opportunity, for example, firms dealing with waste and
recycling, and green/hybrid transport.
– Also, the growing desire to protect the environment is impacting buying
behaviour, which in turn impacts demand and business opportunity.

• Legal Factors: considers legislative and regulatory constraints or changes

– For example, restriction on mergers or acquisitions, or changes to tax
treatment of profit from overseas.
– Also can include, health and safety legislation, equal opportunity legislation,
and recycling legislation. Each will have considerable impact on an
organisation's costs and ability to manoeuvre in the marketplace.
 Applying PESTEL
“… nothing else but the world in which [the organisation] operates” (Clegg et al., 2011)

Applying PESTEL…
• Identify key drivers for change:
– The environmental factors likely to have a high impact on the success
or failure of strategy.
– Typically key drivers vary by industry or market.
• 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.
• Use data to support the points and analyse trends using up-to-date
information.
• Identify opportunities and threats – the main point of the exercise!
 An example PESTEL: Car Manufacturer

Political Economical Social Technological Environmental Legal

• Transport • Maturity of • Call to ban ‘gas • Development of • Drive for low- • Legal
policy industry guzzlers’ GPS carbon framework
• Public • Growth of • Growth in road • Use of SMART alternatives on CO2
transport demand in traffic slowing tech in-car • Green policies emissions
infrastructure China, India, • Demand for • Parking sensors among of all new
• Efficient road Brazil, Russia more ‘green’ • In-car employers car fleet.
maintenance • Scarcity of oil cars entertainment • Change in the
• Vehicle Excise • Low • Acceptance of • Hybrid and low- types of
Duty consumer other carbon engines emissions that
• Congestion confidence technologies are dangerous
charges

• It can be useful to think of PESTEL factors along a timeline. Think of changes in recent
years and try to spot a trend.
 Organisations and Competition

• All organisations are looking for a favourable position in

their industries - their unique area.

• This is shaped by how well they understand their

industry.

There are some academic models which try to conduct

analysis in this area and allow organisations to have
increased visibility of external factors. This allows them to
produce valuable information for decision making (to
respond and react) within competitive markets.
 Porters Five Forces

Porters Five Forces model

indicates that when
considering the external
environment, the rules of
competition are governed
by five competitive forces.
These are:
• Entry of new competitors
• Threat of substitutes
• Bargaining power of
buyers
• Bargaining power of
Suppliers
• The rivalry between
existing competitors
Industry Structure Dynamics: Questions for Porters Five Forces

• What are the key forces at work in the competitive

environment?
• Are there underlying issues driving the competitive
forces?
• Will competitive forces change?
• What are the strengths and weaknesses of the
competitors in relation to the competitive forces?
• Can competitive strategy influence the competitive
forces? (e.g. by building barriers to entry or reducing
competitive rivalry).
 Structure of Porters Five Forces Model

Porter’s Five Forces model facilitates

a broad and sophisticated analysis of
competitive position, as might be
used when creating a project strategy
and plan. Typically this Five Forces
model is shown as a series of five
boxes in a cross formation (diagram
opposite).

Note that the Five Forces apply in the

immediate competitive environment
of an organization, its competitors,
customers and suppliers. The
PESTEL factors apply an outer level,
known as the ‘Macro’ environment.
Applying Porters Five Forces: Suppliers
Applying Porters Five Forces: Buyers
Applying Porters Five Forces: Substitutes
Applying Porters Five Forces: New Entrants
Applying Porters Five Forces: Industry Competitors / Rivalry
 Conducting a Five Forces Analysis

• Define the industry, what are the produces and who are the players?
• Assess the underlying drivers of each competitive force to determine
which forces are strong and which are weak and why.
• Why is the level of profitability what it is?
• Which are the controlling forces for profitability?
• Is the industry analysis consistent with actual long-run profitability?
• Are more-profitable players better positioned in relation to the five
forces?
• Identify recent and likely future changes in each force, both positive and
negative.
• Identify aspects of industry structure that might be influenced by
competitors, by new entrants, or by your company.
 Porters Five Forces Industry Example Video

Hover over this image to play this video.

YouTube video: Porter's Five Forces - A

Practical Example. Link can be accessed at:
https://www.youtube.com/watch?v=OCnlArFuU-E
 Implementing PESTLE into a SWOT Analysis

Ok – so you have now completed your external

environment analysis via a PESTEL.

Now What?
The next step is a SWOT analysis.

• A SWOT analysis is an important tool for auditing the overall strategic

position of a project and its environment. Once key strategic issues
have been identified, SWOT analysis can be used in conjunction with
other tools for audit and analysis (e.g. PESTEL analysis and Porter’s Five
Forces analysis). Normally a PESTEL and Five Forces would be done
firstly, with the outputs/conclusions from these feeding into the SWOT.
 SWOT
• What is a SWOT analysis?

S STRENGTHS: what are the organisation’s key strengths?

W WEAKNESSES: what are the organisation’s key weaknesses?

O OPPORTUNITIES: what are the organisation’s main opportunities?

T THREATS: what are the organisation’s biggest threats?

 SWOT Analysis

• How do we identify strengths, weaknesses,

opportunities and threats?
• Opportunities and threats can be derived from a
PESTEL analysis: focus on the key factors.
• Strengths and weaknesses can be identified by
looking at an organisation’s capabilities:
– Resources:
• Tangible
• Intangible
– Competences
 SWOT Analysis
• Resources: the assets of an organisation
• Competences: how assets are used
Resource(s) Type Competence(s)
Machines, buildings, materials, Physical Production, efficiency,
patents etc. productivity etc.
Balance sheet, cash flow, Financial Fund-raising, cash flow
funders etc. management etc.
Managers, employees, Using skills, motivating,
suppliers etc. Human innovating etc.

Brand awareness, trust etc. Corporate Marketing, public engagement,

building brand alliances etc.

Adapted from: Johnson et al (2014) Exploring Strategy: Text and Cases (10th Ed.)
 SWOT Analysis: Strengths
• Strengths might include:
– Market dominance • Past performance
– Customer base • Reputation
– Size • Product/service quality
– Economies of scale • Patents
– Low-cost position • New product skills
– Leadership/management • Distribution links
– Financial resources • Communication
– Equipment • Workforce skills
– Manufacturing ability
 SWOT Analysis: Weaknesses

• Weaknesses might include:

– Market share • Low quality
– Low key skills • Poor reputation
– Old plant and equipment • Lack of business network
– Higher costs • Inappropriate
– Weak finances organisation structure
– Poor cash flow
– Lack of innovation
– Poor leadership/management
 SWOT Analysis: Opportunities

• Opportunities might include:

– Change in legislative / regulatory environment
– Economic upturn
– Positive changes in the competitive environment
– New products
– Diversification opportunities
– Opening of new markets / segments
– Relaxation of trade barriers
– Demographic changes
 SWOT Analysis: Threats

• Threats might include:

– Negative changes in the competitive environment
– Substitutes
– Low market growth
– Economic downturn
– New international barriers to trade
– Increasing price of key resources
– Powerful customers
 SWOT: Example

Source: Aberdeen City Heritage Trust (2007) Business Plan 2007-2010.

 SWOT Analysis

Why do we use SWOT?

• Another valuable planning tool
• Advantages include:
– Provides clarity on (un)favourability of a plan
– Helpful in understanding ‘strategic fit’
– Universality
• Disadvantages / limitations include:
– Danger of listing
– Information overload
 Situational Analysis (SWOT)

External Opportunities Threats

Internal

Strengths
We’re so great! Let’s fight!

Weakness Too bad…. We’re dead.

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 How is it Used?
SWOT Analysis

External Opportunities Threats

Internal

Strengths

Weakness

Assists in designing business strategy

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 How is it Used?
SWOT PESTEL

External Opportunities Threats

Internal

•Renewable energy •Planning

Strengths policy constraints
•Subsidies

Weakness

Plan for the future

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 The Process: Industry Environmental Analysis to Strategy

One example
Define the Mental Scenario
PESTEL SWOT Strategy
industry Mapping Planning
Some General Issues with Environmental Scanning

• The focus is NOT on drawing up a long list of factors, but

agreeing on critical ones that seem most relevant to specific
situation.
• People interpret factors subjectively, as well as noting
objective realities.
• Many pay particular attention to socio-cultural factors, and
how they differ between nations.
 Advantages of Environmental Scanning

• A formal way of monitoring the business

environment.
• Can help predict future patterns and trends.
• Enables opportunities to be capitalised upon
(and potential problems averted).
• Should provide objective information.
• Can provide the basis for strategy development.
• A tool which can be applied to any organisation.
 Problems with Environmental Scanning
• Requires resources and commitment
– people/time/information sources/money
• Requires a level of skill/knowledge/expertise?
• May be difficult to comprehend given issues of complexity
• Information may be unreliable
• Events may be unpredictable,
• Events may not immediately seem relevant
• Some assumptions may be needed
• as the environment increases in scope, so too does complexity
• the task of grasping changes become increasingly demanding
• the variety of information is expanding
• the time interval between scanning efforts needs to be shortened
• filtering of information from voluminous data is a problem
• discerning significant data is problematic
• some signals may be weak, spurious, confusing.