Tools for External Analysis

 

 

I.                   PEST Analysis

As an aid to identifying all the external forces, a PEST analysis (or STEP analysis) invites you to list all the relevant external forces using four headings: Political, Economic, Sociological and Technological. These are useful headings; it doesn’t matter that some items might be both political and economic (eg taxation and exchange rates).

       I.a PESTEL is an external environment analysis framework that helps guide your prospecting in the political, economic, social, technological, environmental, and legal spheres of an organization’s external environment. Working inward to the focal organization, we discussed the broad dimensions of the stakeholders feeding into the firm.

If you're not sure where to begin, a great tool for conducting an external environmental scan is Porter's 5 Forces or PESTEL. These frameworks will help you analyze your organization's environment and the different factors that will affect your profitability and growth prospects. You'll then be able to adjust your strategy accordingly.

    I.b. However, to look in eight rather than four directions, use the ICEDRIPS checklist:

·         Innovation including new technology and the Internet (of course) but other innovations too which may be particular to an industry.

·         Competitors. Not only direct rivals but threats from substitute products, new entrants to the market, the changing power of suppliers and the changing power of customers. (These five factors are known as the Five Forces of Competition.)

·         Economic factors such as inflation, exchange rates, downturns in the industry, public spending etc.

·         Demographics. The relevant statistics of age, gender, geography, social class etc, and changes in these.

·         Regulatory environment, ie laws, regulations, agreements and conventions.

·         Infrastructure such as telecommunications networks, transport, public services and utilities.

·         Partners. Strategic alliances with other companies or organisations.

·         Social trends, including acceptance of technology, use of leisure time, fashions and changing beliefs.

NB: The factors above are not in order of importance, the checklist merely provides an easy to remember acronym.

The best way to use ICEDRIPS is to jot down lots of ideas quickly – maybe in a group – and without pondering or challenging them at first. Afterwards you should sift through them to identify the important few factors from the trivial many.

According to the 95:5 Rule, it’s likely that just 5% of opportunities and threats could have 95% of the positive or negative effects on your business.

Since the external environment in which the enterprise operates is constantly changing, the External Analysis needs to be repeated frequently and ideally constantly. In this way, the enterprise will be able to identify opportunities and threats more quickly.

II.                Supply Chain

In order to conduct a thorough external analysis, the company needs to analyze its supply chain. A company’s supply chain is the system involved in converting a product or service from raw materials into finished goods and then transporting finished goods from the supplier to the consumer. All logistical issues and steps are part of the supply chain.

Consider the supply chain for a smartphone. Raw materials such as glass, lithium, and aluminum are obtained from suppliers. Manufacturers take these raw materials and build smartphones at plants. The completed phones are then distributed and sold at retail locations (Best Buy, Walmart, Staples). The phones are sold to consumers from these retail locations.

     ii.a  Supply Chain for e-Commerce

The supply chain for e-Commerce companies differs from the traditional supply chain of brick and mortar stores. As the following graphic shows, we begin with the e-Commerce domain. Consumers select the products they want to purchase, and the payment is dealt with through a third-party payment manager (e.g., PayPal). The selected products are moved to a warehouse wherein they are prepared for shipping. The products are shipped to customers who return to the same site and continue the cycle again. This is the common supply chain cycle for e-Commerce companies such as Amazon or Alibaba.

    III. Strategic Groups Analysis

Strategic groups within an industry can be identified by factors such as:

• Choice of distribution channels
• Market segments
• Level of product quality
• Technological leadership
• The degree of vertical integration
• Pricing policy

 

A strategic group exists if the performance of a firm in anindustry group is a function of group characteristics, controlling firm and industry characteristics. Customers tend to view products of companies in the same strategic group as direct substitutes for each other (Coke vs. Pepsi). Different strategic groups can have different relationships with each of the competitive forces. Thus, each strategic group may face a different set of opportunities and threats.

An initial step to identifying strategic groups is to build a strategic group map. A strategic group map plots clusters of rivals in a two-dimensional matrix using strategically relevant dimensions, which help identify the most probable competitively relevant companies. It is also useful for realizing mobility barriers that inhibit the repositioning of firms within industries from one strategic group to another.

 

IV  Scenario planning - a technique that builds various plausible views of possible futures for a business.

 

Scenario planning is a process pioneered by the U.S. military, which today runs exercises looking up to 20 years out to guide R&D efforts.

For businesses, scenario planning enables decision-makers to identify ranges of potential outcomes and estimated impacts, evaluate responses and manage for both positive and negative possibilities. From projecting financial earnings and estimating cash flow to developing mitigating actions, scenario planning is more than just a financial planning tool — it’s an integrated approach to dealing with uncertainty.

Scenario planning is making assumptions on what the future is going to be and how your business environment will change overtime in light of that future.

More precisely, Scenario planning is identifying a specific set of uncertainties, different “realities” of what might happen in the future of your business.

Steps in Scenario Planning

 

a.       Step 1: Brainstorm Future Scenarios. In the very first step you need to decide a time frame.

b.      Step 2: Identify trends and driving forces.

c.       Step 3: Create A Scenario Planning Template.

d.      Step 4: Develop a Scenario.

e.       Step 5: Evaluate a Scenario.

f.       Step 6: Update Strategies and Policies Accordingly

 

Benefits of Scenario Planning

 

• Scenario planning helps decision-makers identify ranges of potential outcomes and impacts, evaluate responses and manage for both positive and negative possibilities
• By visualizing potential risks and opportunities, businesses can become proactive versus simply reacting to events
• There are a number of templates and formalized frameworks for scenario planning, as we’ll discuss. What’s important is choosing a method that works for your team
• We’ll look at two fictional firms, a software company and a wholesale distributor, to illustrate the planning process

If anything magnifies the value of scenario planning, it’s a pandemic — even if most companies didn’t have “economy grinds to a halt” in their modeling. In the context of a business, scenario planning is a way to assert control over an uncertain world by identifying assumptions about the future and determining how your organization will respond.

 

V.        Critical Success Factor analysis - a technique to identify the areas in which a business must succeed in order to achieve its objectives. It is also known as Key drivers analysis.

Critical success factor (CSF) is a management term for an element that is necessary for an organization or project to achieve its mission. The concept of CSFs (also known as Key Results Areas or KRAs) was first developed by management consultant D. Ronald Daniel, in his article, "Management Information Crisis."

John F. Rockart, of MIT's Sloan School of Management, built on and popularized the concept almost two decades later. He defined CSFs as: "The limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization. They are the few key areas where things must go right for the business to flourish. If results in these areas are not adequate, the organization's efforts for the period will be less than desired."

Rockart also concluded that CSFs are "areas of activity that should receive constant and careful attention from management."

The Four Main Types of Critical Success Factors

Rockart identified four main types of CSFs that businesses need to consider:

1.      Industry factors result from the specific characteristics of your industry. These are the things that you must do to remain competitive within your market. For example, a tech start-up might identify innovation as a CSF.

2.      Environmental factors result from macro-environmental influences on your organization. For example, the business climate, the economy, your competitors, and technological advancements. A PEST Analysis  can help you to understand your environmental factors better.

3.      Strategic factors result from your organization's specific competitive strategy. They might include the way your organization chooses to position and market itself. For example, whether it's a high-volume, low-cost producer; or a low-volume, high-cost one.

4.      Temporal factors result from your organization's internal changes and development, and are usually short-lived. Specific barriers, challenges and influences will determine these CSFs. For example, a rapidly expanding business might have a CSF of increasing its international sales.

Critical Success Factors(CSF) Vs.  Key Performance Indicators(KPI)

The term "Critical Success Factor" is often used interchangeably with the term "Key Performance Indicator." But they are actually very different.

Critical success factors are derived from your organization's mission and objectives. They set out what you need to do to be successful and tend to be universal across organizations. For example, they might include things like:

• ·         Increasing profits.
• ·         Improving employee engagement.
• ·         Improving talent acquisition and retention.
• ·         Becoming more environmentally-friendly.

Once you've identified your CSFs, you can use them to develop more specific Key Performance Indicators (KPIs). These are the specific criteria that managers and organizations use to measure performance, and they often differ from organization to organization.

KPIs provide the data that enable a business to decide whether CSFs have been met, and if goals have been achieved. KPIs can also be used at different levels of a business – they can be used to clarify strategic, business-wide targets, or even to drill down into team and personal objectives.

KPIs are typically more detailed and quantitative than CSFs. For example, the CSF "Increase sales in Asian markets" could generate the KPI "Increase sales revenue in Asian markets by 12 percent year-on-year."

VI.       The Porter’s 5 Five Forces - a framework for looking at the strength of five important factors that affect competition - potential entrants, existing competitors, buyers, suppliers and alternative products/services. Using this model, you can build a strategy to keep ahead of these influences.

The difference between external analysis and internal analysis is the area of focus. External analysis focuses on how external factors such as industry trends affect a business and its success. In contrast, an internal analysis focuses on the internal processes of a business, such as company culture and employee onboarding and how those factors affect the success of the business.