External analysis

The external environment of an organisation is the physical and intangible region from which an organisation's resources are drawn and revenue is generated, and in which competitors battle for both of these. Although the external environment can be defined or categorised in different ways, it is
commonly agreed that it consists of: a macroenvironment, an industry context, customers, competitors, other stakeholders. A major challenge to strategic management is the degree of change or turbulence in the external environment of an organisation. Developing an ability to manage and respond to this turbulence is a key aspect of effective strategic management. The analysis of the external environment should provide the information necessary to enable an organisation to align its activities with the opportunities and threats that have been identified predict future opportunities, threats and trends.

The analysis of the external environment will enable managers to identify significant issues and trends which have implications for the future strategy of an organisation. These issues and trends are referred to as opportunities or threats when conducting a SWOT analysis. The major elements of the macroenvironment are: political, economic, socio-cultural, technological, environmental (sustainability), legal issues. A macroenvironmental analysis considering these issues is often referred to as a PESTEL analysis.

Scenarios are hypothetical situations that has a number of specifically selected key characteristics that an organisation can use to identify its likely responses and ability to cope. Because scenarios are hypothetical, they are excellent for planning purposes. Scenario planning is a particularly useful tool in situations where an organisation has a high level of sensitivity to small environmental changes, as this type of change can be predicted with some degree of accuracy.

An industry is a group of organisations that produce products or services that are close substitutes for each other. Some industry members will often have a strong influence on competitive rules for organisations operating within that industry and will also influence the strategies that are potentially available to an organisation. We will consider three forms of industry analysis: five forces analysis, strategic group analyses, life-cycle analysis.

Porter (1980) developed a competitive-force-based framework for industry analysis called the five forces model. The external forces exerted by potential entrants, suppliers, substitutes and customers impact on all organisations within an industry, while the internal rivalry between organisations will direct forces on an organisation from specific competitors.

Strategic groups are clusters of organisations in an industry that have similar sets of key characteristics, such as cost and quality or product range and brand image. These groups are interesting because they give us useful information about the business and product/service characteristic combinations required for success in the industry. For example, if a strategic group has a large share of the overall market, the characteristics that those group members share are important for success in the industry.

Following and understanding the position of each of the significant cyclical factors in the environment is very important for long-term strategic planning. Strategic plans should never be based on the current conditions. They should be based on anticipated conditions, such as economic prosperity at the time when it is believed the strategies will have been completely implemented. Some important cycles to be considered are: economic growth (local), economic growth (global), customer spending patterns (critically important for retail businesses), political stability and bias (e.g. right or left wing), technology developments, trade arrangements (e.g. free trade and trade grouping agreements).