External analysis is the study of competitor analysis, industry analysis and the analysis of the external factors affecting the organization. It also finds out the opportunities and threats around the organization environment. It helps to identify the competitor and the power of their product in the market and the marketing strategy that they use. The main tools used for the external analysis is SWOT analysis and PESTEL analysis.
Political, Economic, Social, Technological, Environmental and Legal analysis are included in PESTEL analysis. It mainly focused on the external environment for the purpose of conducting market research and strategic analysis.
Political factors include government tax policy, trade restrictions, tariffs, political stability and environmental law. This analysis reviews to what extent the government is related to the organization.
Economic growth, interest rates, inflation rate and exchange rates are included in the economic factors.
Social factors include such as age distribution, health consciousness, population growth rate, safety and career attitudes. Changes in social factors also affect the demand of company’s goods and services.
Innovated or latest use of technology, automation and ecological and environmental aspects are included in technological factors. It helps in determining the influence of outsourcing decisions, entry of the competitors and the minimal efficient production level.
Whether or the climatic changes occur in the environment and especially which affects the determination of product and the quality.
Legal factors includes consumer affairs, employment, law related discrimination and health and safety. These factors affect the demand, cost and operation of the product.
- Analysis in an easy and simple
- It is the combination of multi-purpose expertise and skills.
- It helps to exploit new opportunities.
- It reduces the effects on the threats of the helps to enter a new market.
- It oversimplifies the users information for the decision making.
- To become a successful analysis the organization should conduct regularly, so it will cause much more investment.
- Assumptions and decisions are mainly done on the bases of used data’s, there will not be an investigation whether the used data is correct or wrong.
Example for PESTEL analysis (McDonald’s) Political factors
There are many more branches for McDonald’s all over the world due to that they have to obey the rules and regulations which concern with hygiene and health. They also pressure from some of the governments as they were classified as a junk food.
The tax rates and also the purchase of raw material like whether it should be imported or purchased locally, exchange rates and level of unemployment are mainly concerned as the economic factors of McDonald’s.
The change of lifestyle controls or affects the performance of sales. People also like to have their food in a crowded atmosphere.
There is no much more changes can make over with the help of technology in the fast food industry. Although McDonald brings out reduction of time in delivery, scheduling and ordering.
McDonald always bothered to avoid air and water pollution. And also they try to manage plastic waste with increasing use of paper boxes, straws and cups.
McDonald’s always admire the rules and regulations that the government put forward such as employment law, tax requirements and also corporate laws.
PORTER’S FIVE FORCES MODEL
Porter’s five force model is an analysis tool which determines five industry forces. This model was developed by Michael Porter in 1979. And the five industry forces are:
- Rivalry among existing competitors.
- Threat of new entrants.
- Threat of substitute product.
- Bargaining power of suppliers.
- Bargaining power of buyers.
RIVALRY AMONG EXISTING COMPETITORS
This force is the most important in the group. This force focuses on the competitor strength in the market and the strategies that proposed in the market which make them profitable.
THREAT OF NEW ENTRANTS
This force focuses on the entry of a new industry to the market. If a new industry with the same product enters the market it results in the reduction in profit. The top level management should always be bothered or well planned for strategies which the organization can be protected from new entrants.
THREAT OF SUBSTITUTE PRODUCT
In this force it focuses on the products that the consumers get from the market which is a substitute product with attractive price, package and better price.
BARGAINING POWER OF SUPPLIERS
Suppliers will have high bargaining power due there are only some number of suppliers who supply the particular raw material. There is also a chance of getting high price and low quality products.
BARGAINING POWER OF BUYERS
Buyers will have the tendency to bargain for lower price and higher quality products if there is so many competitors in the same market.
- It helps to calculate the strength of competition.
- Helps in deriving strategies like reduction of cost, increase of profit and maximum utilization of resources.
- The forces like bargaining power of suppliers and buyers, helps to create better relationships with the suppliers and buyers.
- In this model it only considers the factors which are needed for the above forces and all others are ignored.
- This model will not be apt for every industry like fashion, consumer taste etc.….cannot be determined with this model.
- The market will not be stable every time, so as the flexibility of the market changes, the results also change. This model cannot be done instantly due long process and time consuming.