3.4 External environment analysis

Because organisations fit in the constant changing environment, they need to make sure they take in account the external changes that will affect them.

For this matter, the following framework tool can be used for assessing the organisation's broad environment:

• PESTLE analysis

Can be called : PESTEL / STEEP / STEEPL and is used to identify external interaction that stimulates/impacts the organisation :
Political (trade unions)
Economic (unemployment, competitors, interest rates...)
Sociocultural (demographics, social mobility, working practises...)
Technological (reduction of barriers to entry..)
Legal (regulation, employment law..)
Environmental (waste, energy efficiency...)

The PESTLE analysis is not a simple checklist as it should be used in a strategic assessment and identify the key factors that will affect the organisation and how they will evolve in order to lower down the unpredictibility.

• Porter’s five forces model

Established by Michael E. Porter, this analysis aims to assess competitive intensity and therefore attractiveness of a market.

Combination of these following five forces acts to drive down overall profitability:

Threat from new entrants: Before entering a new market, any new entrants will look if:

• economies of scale can be achieved.
• substantial investment is required.
• product differentiation requires to be high and therefore costly.
• access to distribution channel is not too constrained,
• patented process exists.
• regulatory approval is needed,

Bargaining Power of Suppliers: Supplier power limits opportunity for costs reductions when there is:

• a concentration of suppliers.
• too high costs switching from a supplier to another.
• existing suppliers have a too high and powerful brand.
• customers to get are fragmented.

Bargaining Power of Buyers: Customer power is high when 

• there are many suppliers and too much alternative sources of supply 
• switching costs are low.

Threat from Substitute Products: is high when:

• product substitution from new technologies is more convenient.
• the need for the product can be replaced by meeting a different need.
• it is possible to do without it.

Industry competitors: High competitive rivalry exists when

• there are many competing firms.
• buyers can easily switch from a firm to another.
• the market is growing only slowly or not at all.
• the industry has high fixed costs
• products are not well differentiated 
• the cost of leaving the industry are high.

The only weakness on using the Porter's five forces is that it doesn't take in account the role of government.