CHAPTER 2

STRATEGIC ANALYSIS (I): EXTERNAL ANALYSIS

STRATEGIC MANAGEMENT
UAB
 Index
2.1. Mission, vision, and strategic objectives
2.2. External analysis
2.2.1. External environment concept and its levels
2.2. 2. Analysis of the general environment
2.2.3. Analysis of the industry and the competitive environment
2.2.4. Segmentation of demand. Strategic groups.
 External
analysis

Strategy
Mission, Design of
evaluation
vision, and SWOT strategic
options
and Implementation Control
objectives
of the firm analysis selection

Basic focus of Internal

analysis Organizational
the firm and of Suitability, structure,
the Strategic Corporate and planning, and Review of the
Management Strategic feasibility,
competitive strategies functional SM process
process diagnostics acceptability strategies

STRATEGIC ANALYSIS STRATEGIC FORMULATION STRATEGIC IMPLEMENTATION

2.1. Mission, vision, and strategic objectives

• Reflects the identity and personality

of the firm; why it exists.
MISSION
• What is the essence of the business
and what do we want it to be?

• Future perceptions
VISION • What will we be, what should we be,
and what do we want to be in the
future?
2.1. Mission, vision, and strategic objectives
2.1. Mission, vision, and strategic objectives

• Help overcome the gap between the future the firm

STRATEGIC pursues and its present reality
OBJECTIVES • How will we become what we want to be?

ORGANIZATIONAL VISION

Strategic
Objectives
2.2. External analysis

OBJETIVE: DETECT THREATS AND OPPORTUNITIES FROM THE ENVIRONMENT

2.2.1. External environment concept and its levels

✓CONCEPT: The environment refers to all the factors outside the

company, that cannot be controlled, and that affect the results and
success of its strategies.

What are the characteristics of the current business environment?

✓LEVELS OF THE ENVIRONMENT:

General environment and competitive environment
2.2. External analysis
2.2.1. External environment concept and its levels

LEVELS OF THE ENVIRONMENT

General
Economic context environment
Political Ecological
context context

Competitors

Technological Customers FIRM

context
Specific
environment
Suppliers

Legal context
Socio-cultural context
2.2. External analysis
2.2.2. Analysis of the general environment

▪ OBJETIVE: Identify what factors from the socio-

economic system affect firm’s operations and
performance.

▪ Different methods of analysis. We focus on two of

them:

1. PESTLE analysis
2. Industrial districts
2.2. External analysis
2.2.2. Analysis of the general environment

STRATEGIC PROFILE – PESTLE ANALYSIS

Stages for analysis:

1) To define the limits of the environment (geographic)

2) Identify the key variables to be considered within each critical

dimension of the environment: Political, Economic, Socio-cultural,
Technological, Ecological, Legal (PESTEL)

3) Develop the strategic profile (list all the factors, assess them from 1-5,
highlight threats and opportunities).
 STRATEGIC PROFILE –
PESTLE ANALYSIS

➢ Simple and easy to use

➢ Subjective and qualitative

Source: Navas and Guerras (2013: 85)

2.2. External analysis
2.2.2. Analysis of the general environment

STRATEGIC PROFILE OF THE ENVIRONMENT

Example: Terrorist
➢ Aspects to bear in mind:
attacks - Effects in
✓ Similar characteristics of the environment different industries?
may have different effects in different
industries

✓ The impact the general environment has

varies also even among companies from
the same industry.

✓ Not all the variables in the general

environment have a significant impact on
a specific firm/industry.
2.2. External analysis
2.2.2. Analysis of the general environment

Industrial districts

Concept: Group of similar firms and institutions, connected by the same

economic activity, located in a specific geographic environment.

Institutions
TYPES OF AGENTS
providing
support

Distributing
Suppliers Firms in the same business firms and
customers

Firms from related industries providing products that complement the main one
2.2. External analysis
2.2.2. Analysis of the general environment

Industrial districts

Why is it important to study industrial districts?

To determine how companies’ location affects their competitiveness

The location in an industrial district can improve firm

competitiveness for the following reasons:

▪ Increase in productivity
▪ Innovation
▪ New start-ups development
2.2. External analysis
2.2.2. Analysis of the general environment

Industrial districts

The Jewellery industrial district in Córdoba (Spain)

-“Parque Joyero” opened in 2005

- Total area of 140,500 square meters
- 93 leading firms in the jewellery sector, 29 ancillary
businesses, 24 firms that provide related services. Also,
there are other institutions and agencies that support
the district, such as “Centro Tecnológico Andaluz”.

Navas & Guerras (2013)

2.2. External analysis
2.2.3. Analysis of the industry and the competitive environment

✓The specific environment inclueds all the external factors related to

the industrial sector in which the company operates.

Objective: Examine industry attractiveness

(a factor that conditions the profitability of
the firm)

Steps of the analysis:

✓ Specific environment 1. Establish boundaries of the competitive

analysis environment
2. Assess industry attractiveness
3. Identify those segments that represent
more specific competitive
environments Industry
4. Analyze the practices and behaviors of
rival firms
2.2. External analysis
2.2.3. Analysis of the industry and the competitive environment

1. Delimit the competitive environment

¿WHO ARE OUR MAIN COMPETITORS?

 Industry concept: Group of companies that offer products or services that are close substitutes for each
other (Hill and Jones, 2009).

Technological (supply side)

Two criteria to establish

industry boundaries Market (demand side)

Industry classifications: CNAE (Spain), NACE (international)

2.2. External analysis
2.2.. Analysis of the industry and the competitive environment

1. Establish the boundaries of the competitive environment

From a strategy point of view, what matters is

to define the competitive environment of the
firm  It includes competitors, customers,
and suppliers.
2.2. External analysis
2.2.3. Analysis of the industry and the competitive environment

2. Analyze industry attractiveness

✓OBJECTIVE: Analyze competitive forces in an industry to identify opportunities and threats

 effects on firm profitability .

PORTERS’ FIVE FORCES

MODEL

Hill & Jones, (2009). Adapted from Porter (1982, 24)

2.2. External analysis
2.2.3. Analysis of the industry and the competitive environment

PORTERS’ FIVE FORCES

MODEL
1. INTENSITY OF RIVALRY

The greater the intensity of competition, the lower the possibility of obtaining higher
returns. Therefore, the attractiveness of the industry decreases

1. Number of competitors and equilibrium among them

2. Industry growth rate
Factors that 3. Mobility barriers
condition the 4. Exist barriers
intensity of 5. Product diferentiation
6. Costs due to change in suppliers
competition 7. Cost structure of the firm
8. Competitors diversity
9. Strategic interests
2.2. External analysis
2.2.3. Analysis of the industry and the competitive environment

PORTERS’ FIVE FORCES

MODEL
2. THREAT OF NEW ENTRANTS

Higher entry of new competitors in an industry  Greater

intensity of competition

Industry attractiveness
Factors that
condition the
entry of potential Barriers to entry
(absolute/relative)
competitors
How easy/difficult it is to entry
in the industry Established competitors’
reactions
2.2. External analysis
2.2.3. Analysis of the industry and the competitive environment
PORTERS’ FIVE FORCES
MODEL

1. SUBSTITUTE PRODUCTS

Greater number of subsitutes  lower industry attractiveness

- Satisfy the same customers’ needs (even better)

¿When do substitute
products constitute - Substitute products are offered at lower prices
a threat?
- Add obsolescence to the products in the industry

- Low costs of switching to alternative products

2.2. External analysis
2.2.3. Analysis of the industry and the competitive environment

PORTERS’ FIVE FORCES

MODEL
4. y 5. BARGAINIG POWER OF SUPPLIERS AND BUYERS

Greater the bargaining power of suppliers and customers  Lower

industry attractiveness

SUPPLIERS BUYERS
Concentrated suppliers Concentrated buyers
Small-scale purchases Large-scale purchases
Differentiated products Low switching costs
High switching costs Real threat of backward integration
Real threat of forward integration There are substitute products
There are no substitute products Product not very important
Product important Buyer has complete information
Supplier has complete information
2.2. External analysis
2.2.3. Analysis of the industry and the competitive environment

PORTERS’ FIVE FORCES

MODEL

LIMITATIONS

▪ Static image of the competition.

▪ It does not take into account the existence of complementary

products.

▪ It does not consider other stakeholders or agents that may affect

industry attractiveness.

▪ Not all the forces have the same importance.

▪ Excessive emphasis on the structure of the industry to explain firm

performance  Relevance of the internal analysis
2.2. External analysis
2.2.4. Segmentation of demand. Strategic groups

Industry segmentation  Identification of smaller competitive areas

CLASSICAL MODEL (DEMAND SIDE): Based on the

characteristics of products or customers to identify
segments  then study segment attractiveness.

SEGMENTATION

STRATEGIC GROUPS: Group of firms in an industry

following the same strategy along the strategic
dimensions of reference (quality, cost structure...).
2.2. External analysis
2.2.4. Segmentation of demand: Strategic groups

Strategic groups in the urban hotel industry

STEPS FOR THE ANALYSIS:

1. Identify relevant strategic

dimensions (price, quality...)

2. Develop a map of strategic

groups.

3. Analyze each strategic

group applying the 5 forces
model (group level).
REFERENCES
• GRANT, R. (2010) Contemporary Strategy Analysis, 7th
edition, Wiley: London.

• NAVAS, J.E.; GUERRAS, L.A. (2013): Fundamentals of

Strategic Management. Thomson Reuters-Civitas: Madrid.

• THOMPSON, A.; STRICKLAND A.J. (2009) Crafting and

Executing Strategy: Text and Readings. 17th edition,
McGraw-Hill: London.