External Environmental Analysis: PESTE

• External environmental analysis identifies and evaluates trends/events beyond the control of an organisation.
• This analysis reveals opportunities and threats confronting the organisation.
• Continuous external environmental analysis is essential and includes scanning, observing, forecasting, and assessing.
• A PESTE analysis encompasses political, economic, social, technological, and ecological factors.

The External Environment

• Divided into the global, macro, and industry or market environments.
• Organisations can't control segments of the external environment, but should be aware of all dimensions. Elements in the external environment influence organizations.
• The South African environment requires considering cultures, values, policies, past inequalities and international threats.

Macro Environment: Political Factors

• Defines the operational parameters for organisations.
• Organisations attempt influence government; government influences them.
• Political & legal factors present key opportunities and threats for small and large organisations.
• Direction and stability of political factors are major strategy considerations for managers.

Macro Environment: Economic Factors

• Affect individual organisations and industries, requiring organisations to study and identify trends and strategic implications.
• Influence the demand for goods and services.
• Direct impact on the potential attractiveness of various strategies and consumption patterns.
• Organisations must know a country's economic situation.

Macro Environment: Socio-Cultural Factors

• Attitudes and cultural values of a society.
• Social, cultural, and demographic variables shape how people live, work, produce, and consume.
• Culture in South Africa is not homogeneous, consisting of different tastes and preferences among subcultures.
• Social media gives consumers the ability to influence business behaviour.

Macro Environment: Technological Factors

• Emerging Technology includes new products, processes and materials
• Includes activities creating new knowledge, translating it into outputs and can lead to technological innovation and advances
• Organisations must study the technological environment and its threats/opportunities due to rapid technological change.
• No company/industry is insulated against emerging technological developments.

Macro Environment: Ecological Factors

• Involves the relationship between human beings and the physical environment (air, soil and water).
• Key factors include limited natural resources and global climate change.
• Organisations must consider questions regarding the ecological environment and how to avoid negative environmental impact.

Industry or Market Environment

• A group of organisations producing close substitute products, or that customers perceive as substitutable.
• These organizations influence one another in competition.
• Before industry analysis, its important to determine what strategy is possible.

Industry Analysis Variables

• There are four main variables that affect industry analysis
• Concentration
• Economies of scale
• Product differentiation
• Barriers to entry

Identifying Competitors

• Industry analysis requires identifying competitors involved.

Porter's Five Forces Model

• A model used in industry analysis
• Threat of new entrants
• Bargaining power of suppliers
• Threat of substitute products
• Rivalry among competing organisations

Threat of New Entrants

• New entrants threaten existing orgnanisations' market share.
• Whether new organisations enter an industry is influenced by barriers to entry and expected retaliation.
  • Ex: Economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of scale.

Expected Retaliation

• Fierce retaliation can be expected from existing organisations with a major industry share and substantial resources.
• How is it possible for a new entrant to enter an industry?

Bargaining Power of Suppliers

• Suppliers provide an organisation with input resources like raw materials, parts, or labour.
• Suppliers should be evaluated.
• Suppliers can increase prices and/or reduce product quality, impacting an organisation's profitability.

Threat of Substitute Products

• Buyers (customers) look to substitute products or services.
• Conflict always occurs between customer & organisation goals.
• Customers bargain for quality or get competitors to offer better deals.

Substitute product/service

• From another industry perform similar functions. Ex: a generic medicine instead of the original.

Competitor Analysis

• Competitors pose the strongest and most threatening force.
• The most important is to identify all major competitors and their specific strengths and weaknesses.
• It's key to understand
• the future goals of the competitors
• competitors' current strategies
• competitor's believe about the industry (assumptions)
• competitors capabilities are

Strategic group mapping

• a method an organisation uses to identify its competitors
• Consists of organisations that are similar, and have comparable organizational characteristics.

Factors that influence intensity of rivalry include

• Numerous or equally balanced competitors & Slow industry growth
• High fixed or storage costs & Lack of differentiation or low switching costs
• High exit barriers

Common Mistakes in Identifying Competitors

• Overemphasising current/known competitors and ignoring potential new entrants or international competitors.
• Focusing only on large competitors while overlooking the threat of small ones.
• Assuming competitors will behave as they have in the past.

Limitations of Porter's Five Forces Model

• The Model's usefulness for managers in analysing the external environment has some limitations:
• Claims to assess industry profitability and assumes five forces apply equally to all.
• Does not cover product/resource markets and must be applied in isolation.
• Assumes competitors have hostile relationships.

Key Success Factors (KSFs)

• These factors contribute to the organisation's and competitors' success.
• Organisations must identify their industry's KSFs before deciding on strategy.

An organisation answers 2 important questions

• What does our customer want
• What must we do to survive tough competition

The external factor evaluation (EFE) matrix consists of 5 steps

• List 10-15 most important ext factors ID'd in the external audit
• Assign a weight to indicate related importance
• Rate how effectively the org's current strategies respond
• Multiply the weight by the rating of the factor Include comments to make the selected factors clearer