External analysis
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External analysis (external environment analysis) of the company is one of the most important strategic analysis method. It incorporates many management techniques developed in areas of marketing, strategic management and system analysis. Most common external analysis methods are[1]:
- SWOT analysis
- TOWS analysis
- STEEPLE analysis
- Porter's five forces concept
- Strategic portfolio analysis
- Company situation analysis
- Macro environment analysis
- Forecasting
- Sensitivity analysis
- Real options
- Strategic gap analysis
Due to the complexity of areas to analysis, an important task is an integrated - general - view of the entire enterprise, both in terms of its environment and the internal situation. Strategic analysis can therefore be divided into two analyzes: external and internal, which in turn consist of subsequent detailed analyzes. External analysis allows to identify processes and phenomena that do not occur directly in the enterprise but are related to it through impact. They create opportunities or threats, which is why it is important to be able to predict them. To improve the external analysis, it is worth dividing the environment into macro and micro-environment, also known as the competitive environment. The macro-environment consists of further processes and phenomena, global, affecting the enterprise indirectly.
The main elements of micro-environment
Macro-environment which is the most important in external analysis is based on several main elements[2]:
- Economic environment:
- Inflation level - The dynamics of economic growth translates directly into opportunities and threats to the company.
- Unemployment rate - The level of unemployment on the one hand influences the demand, while on the other hand, with low unemployment, demands for wage increases appear, which additionally increases the wage bill and may lead to an increase in inflation.
- Interest rate - An increase in interest rates is a threat to developmental, expansive business strategies. In turn, the opportunity is to lower interest rates. Inflation is inherent in interest rates.
- Political and legal environment - political and legal issues can have a big impact on the company. Legal issues may be particularly interesting. The analysis of trends in changes in the law concerning, for example, orders to apply certain standards may indicate an industry or sector that will develop above average. Legal changes may also apply to tax or employment issues.
- Technological environment - in recent years, the development of the Internet, which has contributed to the emergence of e-business, is of particular importance. The traditional distribution channel was eliminated and a new way of communication appeared. The development of technology has also caused the emergence of new industries, such as biotechnology. Technological progress is also accompanied by the deindustrialisation process.
- Socio-cultural environment - The company operates within the society from which its consumers and employees come from. Therefore, in order to properly assess the situation of the company, its socio-cultural environment should be analyzed. The main factors that should be considered are: civilization progress, lifestyle, views.
- Demographic environment - the demographic environment affects in particular the strategy of the state and many enterprises - it includes factors describing the population of individual countries and changes in the population.
- International environment - this is primarily the impact of the economic, political or legal situation of the rest of the world on the above-mentioned macro-environment in the country where the enterprise is located. In the external analysis of enterprise it include among others: globalization of the economy, armed conflicts, international operations of enterprises
Examples of External analysis
- Porter's Five Forces Analysis: This is a framework used to analyze the competitive environment of an industry. It is based on the idea that certain factors influence the competitive environment, such as the bargaining power of buyers and sellers, the threat of new entrants, the threat of substitutes and the degree of rivalry among existing competitors.
- PEST Analysis: This is a framework used to analyze the external environment of an industry or organization. It stands for Political, Economic, Social, and Technological factors, and it helps to identify the key drivers of change in the environment.
- Industry Analysis: This method is used to evaluate the competitive environment and market potential of a specific industry. It involves analyzing the growth rate, market trends, competitive landscape, and the key industry participants.
- SWOT Analysis: This is a framework used to analyze the internal and external environment of an organization. It stands for Strengths, Weaknesses, Opportunities, and Threats, and it helps to identify the key opportunities and risks associated with a particular strategy.
- Financial Analysis: This method is used to evaluate the financial performance of an organization. It involves analyzing the financial statements, such as the income statement, balance sheet, and cash flow statement, to identify strengths and weaknesses, and to identify areas of financial performance that require improvement.
Advantages of External analysis
External analysis is an important strategic analysis method that incorporates many management techniques developed in areas of marketing, strategic management, and system analysis. The main advantages of external analysis include:
- Establishing an understanding of the external environment – External analysis allows organizations to gain insight into the external environment, which includes the industry, competitors, economic conditions, and other external forces that shape the company’s success. By understanding the external environment, businesses can anticipate trends, develop strategies, and make informed decisions.
- Identifying opportunities and threats – External analysis helps organizations identify opportunities and threats that exist in the external environment. This allows them to create strategies to capitalize on the opportunities and mitigate the potential risks posed by the threats.
- Improving strategic decision-making – By understanding the external environment, businesses can make more informed decisions about their strategic direction. External analysis provides insight into industry trends, competitor activities, and other factors that can influence the success of the organization.
- Facilitating stakeholder engagement – External analysis helps organizations engage with their stakeholders, including customers, shareholders, and the public. Stakeholders can be identified and their needs and interests can be taken into account when making strategic decisions.
- Supporting organizational change – External analysis can be used to support organizational change. By understanding the external environment and the forces that operate within it, businesses can identify areas where changes need to be made and develop strategies to facilitate successful change.
Limitations of External analysis
External analysis is a useful tool for gaining more information about the external environment and the impact of external forces on a particular company. However, there are some limitations to external analysis that need to be taken into account when conducting the analysis. These limitations include:
- Lack of access to complete or accurate data: External analysis relies on data that is often incomplete or inaccurate due to a variety of factors, such as a lack of information or difficulty in collecting data. This can make it difficult to get a complete picture of the external environment.
- Difficulty in predicting potential changes: External analysis can be difficult to use to predict potential changes due to the complexity of the external environment. Factors such as political, economic, and social trends can be difficult to predict and analyze.
- Limited ability to respond to external forces: External analysis can provide insight into the external environment, but it does not necessarily provide the ability to respond to external forces. A company may need to develop strategies and plans in order to respond effectively to external forces.
- Cost of conducting the analysis: External analysis can be expensive to conduct due to the need for data collection and analysis. Companies may need to invest in resources such as expert consultants or software in order to conduct a thorough external analysis.
- PESTLE Analysis: PESTLE stands for Political, Economic, Social, Technological, Legal and Environmental. It is a tool used by businesses to evaluate their external environment and identify the opportunities and threats present in their external operating environment.
- Porter’s Five Forces Analysis: This analysis is based on the five forces model developed by Michael Porter. It looks at the competitiveness of the industry by examining the five forces of competition, including buyers, suppliers, alternative products, substitutes and new entrants.
- Industry Analysis: This analysis looks at the structure and performance of a certain industry and its participants. It examines the factors that influence the performance of firms in the industry, such as industry rivalry, economic conditions, trends in technology, government regulations and demographic changes.
- Competitor Analysis: This analysis involves a detailed study of the competitors in an industry. It looks at their strengths and weaknesses, and the strategies they are using to gain a competitive edge.
- SWOT Analysis: This analysis looks at the internal strengths and weaknesses of a company, as well as the external opportunities and threats present in the operating environment.
In summary, external analysis is important for understanding the external environment in which a company operates and identifying opportunities and threats. The most common methods used for external analysis are PESTLE Analysis, Porter's Five Forces Analysis, Industry Analysis, Competitor Analysis and SWOT Analysis.
References
- Roos, G., Bainbridge, A., & Jacobsen, K. (2001). Intellectual capital analysis as a strategic tool. Strategy & Leadership, 29(4), 21-26.
- Kozlinskis, V., & Guseva, K. (2006). Evaluation of some business macro environment forecasting methods Journal of business economics and management, 7(3), 111-117.
- Cooper, L. G., & Nakanishi, M. (1983). Two logit models for external analysis of preferences Psychometrica, 48(4), 607-620.
Footnotes
- ↑ Roos, G., Bainbridge, A., & Jacobsen, K. (2001). Intellectual capital analysis as a strategic tool. Strategy & Leadership, 29(4), 21-26
- ↑ Kozlinskis, V., & Guseva, K. (2006). Evaluation of some business macro environment forecasting methods Journal of business economics and management, 7(3), 111-117.
Author: Magdalena Lewicka
