The result of the external environmental analysis is the information that is presented in a form of a detailed and a relevant business study faced by companies around the world. These types of information is required for business decision making and more preferred for business strategy formulation.
The external environmental factor could affect any type of business and therefore businesses are subjected to respond to these situations by formulating new or revising and making alteration to the existing strategies to improve the business by capitalizing on the opportunities created in the external environment or to minimize the impacts of threats .
Therefore attempting to formulate a new strategy will require sufficient knowledge and understanding of the prevailing situation. The absence of which is like making a decision without knowing why and uncertain of the consequences. Unfortunately in today’s era most businesses are appreciated when making quick decisions without proper understanding of the situation as it is appreciated by the management to find a quick fixes but these will merely be sufficient for the short term and could lead to severe unexpected results in the future.
Market/ Industry/ Sector Analysis
In Market analysis the company management tries to understand the attractiveness of the market and sub markets. Most investment decisions will be made on market analysis.
Market analysis will provide your business with the information on industry profitability, growth potential, major rivals and success factors and other industry dynamics.
There are 3 key areas of investigation for a market analysis and I have briefly described what these 3 essential components are:
The market will consist of actual and potential buyers of a particular product or service.For Example: Those already using an Executive Search company for their recruitment purposes and those who are actively looking to partner with a search company to carry out their duties on behalf of them.
Therefore you will have to define the relevant market for analysis. A business may have a wide range of products catering for different product markets within a large market (Not all customers will require the same type of service as of another). So you will be required to be conducting a market analysis at several levels.
For example the passenger car division of Toyota has cars ranging from those selling for $20,000 to those in excess of $100,000. Now at the SBU level of analysis the management of the company will have to be concerned with a fairly large portion of the total car market which includes all types of buyers seeking cars in this range and the competitors offering cars in this range.
Simultaneously at the product market level the management will concentrate on a car model and be concerned with sub market analysis and thereafter the strategy for this product. The sub market will consist of the model’s target market and rivalry models.
Profitability of the market
Profitability of the industry will determine the profitability of the business. Therefore most investment decision including resource allocation is based on the expected return on investment (ROI).
Michael Porter’s Five Force is a useful model to analyse the profitability of the industry. Briefly the following criteria will be taken into consideration when assessing the profitability of the market:
- Nature of current competition –If your business operates in a an industry which has aggressive competition will force businesses to lower price levels and thereby increase the costs thus affecting the profitability of the industry.
- Threat of potential entrants -Imposing high barriers to entry can limit the amount of competitors which affects the profitability.
- Threat of substitutes –the emergence of substitute products in your market will have an adverse effect on the profitability and also the size of the market.
- Bargaining power of customers –In the event if the customer is able to demand more or force prices to lower it’ll affect the profitability of your business.
- Bargaining power of suppliers –If the supplier is capable ofr influencing cost of supplies or the inputs it can affect the profitability as well.
Critical Success Factors (CSF) for a business to survive in a highly competitive market
When a business evaluates or examines the industry dynamics it can identify that success factors of an industry can be substantially different from those of another. Even in the same industry the CSF can vary from one product market to another.
There are 2 types of competencies that your business will require to survive the storm.
This is the least what a business must have in order to even consider operating in an identified market. Businesses that operate just with minimum skill and asset will usually remain the market followers.
On the other hand businesses that have superior competencies (strategic strength) will have a competitive advantage and they usually will be the market leaders.
First of all when conducting customer, competitor and market analysis the environmental trends, events and forces are most likely that they have been already addressed. However customer analysis will largely focus on socio cultural and economic issues. The political, legal issues and technological trends will be addressed in market analysis.
In some situations you can treat these environmental factors individually.
Reactive approach views are largely uncontrollable environmental forces. For example the relationship between economic condition and civil unrest in Syria.
A proactive approach is somewhat controllable to an extent and it can be manipulated by an industry to its advantage, while some large businesses will attempt to influence these forces to their benefit.
This involves the current and emerging demographic cultural trends. Common observations may include:
- The change in cultural values
- Environmental concerns
- The urban population
- Age structure
The effects of technology on society and business are a major influence on the decision to adopt new technology and capacity to use it can result in providing a competitive advantage.
The economy of a society has a direct impact on the business as it can determine the purchasing power of customers.
Political and legal trends
This will cover the laws and government policies affecting the business environment. Businesses have to be aware of the government economic and trade policies as it can have after reaching affects on the business, industry and the economy. These policies can be in the form of foreign trade policies and the fiscal and monetary policy of the government.