Adobe Systems
Strategic Management
Ondrej Castek
castek@econ.muni.cz
Lecture 2: External Analyses, Stakeholders
PESTEL, Porter‘s Five Forces, Stakeholders.

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Lecture overview
̶Introduction
̶PESTEL
̶Five Forces
̶Stakeholders
̶Recap (KvIS)

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Introduction


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Learning outcomes
LO 3-1 Generate a PESTEL analysis to evaluate the impact of external factors on the firm.
LO 3-2 Differentiate the roles of firm effects and industry effects in determining firm
performance.
LO 3-3 Apply Porter’s five competitive forces to explain the profit potential of different
industries.
LO 3-4 Examine how competitive industry structure shapes rivalry among competitors.
LO 3-5 Describe the strategic role of complements in creating positive-sum co-opetition.
LO 3-6 Explain the five choices required for market entry.
LO 3-7 Appraise the role of industry dynamics and industry convergence in shaping the firm’s
external environment.
LO 3-8 Generate a strategic group model to reveal performance differences between clusters of firms
in the same industry.

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Introduction: Why external analysis
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Do not forget: Analysis = general/macro environment (PESTEL), task/micro/industry environment (Five
forces), internal environment (not this lecture)
External analysis is crucial in strategic management for several reasons:
1.Identifying Opportunities and Threats: It helps organizations identify external opportunities
they can capitalize on and threats they need to mitigate. This includes understanding market
trends, economic conditions, and competitive dynamics.
2.Understanding the Competitive Landscape: By analyzing competitors, companies can understand their
strengths and weaknesses, which helps in developing strategies to gain a competitive edge.
3.Adapting to Changes: The business environment is constantly changing due to technological
advancements, regulatory changes, and shifts in consumer preferences. External analysis helps
companies stay agile and adapt to these changes effectively.
4.Informed Decision-Making: It provides valuable insights that inform strategic decisions, ensuring
they are based on a comprehensive understanding of the external environment.
5.Risk Management: By anticipating potential external risks, companies can develop strategies to
manage or avoid them, thereby safeguarding their interests.
6.Benchmarking: It allows companies to benchmark their performance against industry standards and
best practices, helping them identify areas for improvement.

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External environment
The external environment consists of all factors outside the firm that can affect its potential to
gain and sustain a competitive advantage.

Macro environment – firm‘s actions do not influence macro environment much.
Micro environment – firm‘s actions do influence micro environment a lot.
Internal environment – next week topic.

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PESTEL
External analysis of the macro environment

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PESTEL
■ Political
■ Economic
■ Sociocultural
■ Technological
■ Ecological
■ Legal
...factors that might influence the firm.
A company needs to scan, monitor, and evaluate the important external factors and trends.

To mitigate threats and leverage opportunities.

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Political factors
1.Government Stability and Change of Leadership: A stable government can create a favorable
business environment, while frequent changes in leadership can lead to uncertainty and affect
business operations.
2.Government Policies: Policies related to taxation, trade, and industry regulations can
significantly impact business strategies. For instance, favorable tax policies can encourage
investment, while stringent regulations might increase operational costs.
3.Trade Tariffs and Trade Agreements: Tariffs can affect the cost of importing and exporting
goods. Trade agreements like NAFTA or the EU can open up new markets or impose restrictions1.
4.Tax Policies: Changes in corporate tax rates can influence business profitability and decisions
on where to locate operations.
5.Regulations: Compliance with local, national, and international regulations can affect how
businesses operate. This includes environmental regulations, labor laws, and health and safety
standards1.
6.Social Policies: Policies related to social welfare, healthcare, and education can impact the
workforce and consumer base.
7.International Relations: Geopolitical tensions or strong diplomatic relations between countries
can affect market access, supply chains, and overall business stability.

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Political factors (examples)
The rise of short-term rental platforms like Airbnb and Booking.com has significantly impacted the
housing market in the Canary Islands. These platforms have led to a substantial increase in
property prices and rental rates, making it difficult for local residents to find affordable
housing. For instance, in popular tourist areas like Tenerife and Gran Canaria, rental prices have
surged by over 30% in the past five years. This increase is largely driven by property owners
opting to rent out their homes to tourists at higher rates rather than to long-term residents,
reducing the availability of long-term rental properties.
Moreover, the number of properties listed on short-term rental platforms has skyrocketed. In 2023,
there were over 20,000 active Airbnb listings in the Canary Islands. This shift has not only
inflated housing costs but also contributed to the displacement of local communities. Many
residents have been forced to move to less desirable areas or even leave the islands altogether due
to the lack of affordable housing options. The local government has been grappling with this issue,
implementing regulations to limit the number of short-term rentals, but the impact on the housing
market remains significant.

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Political factors (examples)
BBC: Tens of thousands of people in Spain's Canary Islands have rallied against a model of mass
tourism they say is overwhelming the Atlantic archipelago.

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Economic factors
■ Economic growth rates.
■ Levels of employment.
■ Interest rates.
■ Price stability (inflation and deflation).
■ Currency exchange rates.

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Economic factors (examples)
One example of a positive impact of an economic downturn can be seen in the discount retail
industry. During economic recessions, consumers often become more price-sensitive and look for ways
to save money. This shift in consumer behavior can lead to increased sales for discount retailers
like Dollar General or Aldi.
For instance, during the 2008 financial crisis, Dollar General saw a significant increase in
revenue, with sales rising by 10.5% in 2008 and continuing to grow in subsequent years. This growth
was driven by consumers seeking more affordable options for everyday goods.

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Economic factors (examples)
Additionally, economic downturns can force businesses to become more efficient and innovative.
Companies may streamline operations, cut unnecessary costs, and focus on core competencies to
survive the challenging economic environment. This can lead to long-term benefits, such as improved
operational efficiency and a stronger competitive position once the economy recovers.
For example, during the 2008 recession, many companies in various industries adopted lean
management practices, which helped them reduce waste and improve productivity, ultimately making
them more resilient and competitive in the long run.

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Economic factors (examples)

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Sociocultural factors
1.Demographic Changes: Shifts in population demographics, such as aging populations or increasing
birth rates, can affect market demand for certain products and services. For example, an aging
population may increase demand for healthcare services and retirement homes.
2.Cultural Trends: Changes in cultural attitudes and lifestyles can impact consumer behavior. For
instance, the growing trend towards health consciousness has led to increased demand for organic
foods and fitness-related products.
3.Education Levels: The level of education in a population can influence the types of products and
services that are in demand. Higher education levels often correlate with higher income levels and
a greater demand for luxury goods and services.

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Sociocultural factors
4.Social Attitudes: Social attitudes towards issues like sustainability and corporate social
responsibility can affect business practices. Companies that are perceived as environmentally
friendly or socially responsible may gain a competitive advantage.
5.Income Distribution: The distribution of wealth within a society can impact consumer spending
patterns. In societies with a large middle class, there may be higher demand for mid-range
products, whereas in societies with greater income inequality, there may be higher demand for both
luxury and budget products.
6.Health Consciousness: Increasing awareness of health and wellness can drive demand for healthier
food options, fitness products, and wellness services.
7.Work-Life Balance: Changing attitudes towards work-life balance can influence the demand for
flexible working arrangements, remote work technologies, and leisure activities.

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Sociocultural factors
Q: What is culture?

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Technological factors
1.Innovation and R&D: The pace of technological innovation and investment in research and
development (R&D) can significantly impact industries. For example, companies in the tech sector,
like Apple and Google, continuously invest in R&D to develop new products and stay ahead of
competitors.
2.Automation and AI: The adoption of automation and artificial intelligence (AI) technologies can
improve efficiency and reduce costs. For instance, manufacturing companies using robotics and AI
for production processes can achieve higher productivity and lower labor costs.
3.Digital Transformation: The shift towards digital platforms and e-commerce has transformed how
businesses operate. Retailers like Amazon have leveraged digital technologies to streamline
operations, enhance customer experiences, and expand their market reach.

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Technological factors
4.Cybersecurity: As businesses become more reliant on digital technologies, the importance of
cybersecurity increases. Companies must invest in robust cybersecurity measures to protect
sensitive data and maintain customer trust.
5.Big Data and Analytics: The use of big data and analytics allows businesses to gain insights into
consumer behavior, optimize operations, and make data-driven decisions. For example, companies like
Netflix use data analytics to personalize content recommendations and improve user engagement.
6.Sustainable Technologies: The development and adoption of sustainable technologies, such as
renewable energy sources and eco-friendly products, can influence business strategies. Companies in
the energy sector, like Tesla, are investing in sustainable technologies to meet regulatory
requirements and consumer demand for green products.
7.Communication Technologies: Advances in communication technologies, such as 5G networks, enhance
connectivity and enable new business models. Industries like telecommunications and media benefit
from faster and more reliable communication infrastructure.

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Technological factors (failure examples)

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Ecological factors
1.Climate Change: The impacts of climate change, such as rising temperatures, more frequent and
severe weather events, and shifting precipitation patterns, can affect various industries. For
example, agriculture, tourism, and insurance sectors are particularly vulnerable to these changes.
2.Environmental Regulations: Laws and regulations aimed at protecting the environment can influence
business operations. This includes regulations on emissions, waste disposal, and the use of
hazardous materials. Companies may need to invest in cleaner technologies or alter their processes
to comply with these regulations.
3.Sustainability Initiatives: Increasing consumer demand for sustainable and eco-friendly products
can drive businesses to adopt greener practices. This can include using renewable energy sources,
reducing carbon footprints, and implementing sustainable supply chain practices.

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Ecological factors
4.Energy Consumption: The availability and cost of energy can significantly impact businesses,
especially those in energy-intensive industries. Companies may need to explore alternative energy
sources or improve energy efficiency to manage costs and reduce environmental impact.
5.Waste Management: Effective waste management practices are crucial for businesses to minimize
their environmental footprint. This includes recycling, reducing waste production, and ensuring
safe disposal of hazardous materials.
6.Natural Disasters: The frequency and severity of natural disasters, such as hurricanes, floods,
and earthquakes, can disrupt business operations and supply chains. Companies need to have
contingency plans in place to mitigate these risks.
7.Pressure from NGOs: Non-governmental organizations (NGOs) and advocacy groups can influence
business practices by raising awareness about environmental issues and advocating for more
sustainable practices.

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Ecological factors (failure examples)

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Legal factors
1.Employment Laws: Regulations related to minimum wage, working hours, and employee rights can
impact labor costs and operational practices. For example, changes in minimum wage laws can affect
the profitability of labor-intensive industries.
2.Health and Safety Regulations: Laws ensuring workplace safety can require businesses to invest in
safety equipment and training programs. Compliance with these regulations is crucial to avoid legal
penalties and ensure employee well-being.
3.Consumer Protection Laws: These laws protect consumers from unfair business practices and ensure
product safety. Companies must adhere to these regulations to avoid lawsuits and maintain customer
trust.
4.Environmental Regulations: Laws aimed at protecting the environment can affect how businesses
operate. This includes regulations on emissions, waste disposal, and the use of hazardous
materials. Companies may need to invest in cleaner technologies or alter their processes to comply
with these regulations.
5.Intellectual Property Laws: Protection of patents, trademarks, and copyrights is essential for
businesses to safeguard their innovations and brand identity. Violations of intellectual property
laws can lead to costly legal battles.
6.

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Legal factors
6.Antitrust Laws: These laws prevent monopolistic practices and promote fair competition. Companies
must ensure their business practices do not violate antitrust regulations to avoid fines and legal
challenges.
7.Licensing and Permits: Certain industries require specific licenses and permits to operate
legally. Failure to obtain or renew these can result in business disruptions and legal issues.
8.Data Protection Laws: Regulations like the General Data Protection Regulation (GDPR) in the EU
require businesses to protect personal data and ensure privacy. Non-compliance can lead to hefty
fines and damage to reputation.
9.Trade Restrictions and Tariffs: Laws governing international trade, including tariffs and trade
agreements, can impact the cost and availability of goods. Businesses involved in import/export
must navigate these regulations carefully.
10.Fraud and Corruption Laws: Regulations aimed at preventing fraud and corruption require
businesses to implement robust compliance programs. Violations can result in severe legal and
financial consequences.

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PESTEL
HOW TO APPLY

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PESTEL: Best practices for application
1.Use Up-to-Date Data: Ensure that the data you use is current and relevant. Outdated information
can lead to inaccurate conclusions.
2.Prioritize Relevance: Focus on the factors most relevant to your business or industry. Not all
elements of PESTEL will have the same impact on every organization.
3.Involve Diverse Perspectives: Engage a cross-functional team to gather insights. Different
departments may have unique perspectives on how external factors affect the business.
4.Regular Updates: Conduct PESTEL analysis periodically. The external environment is dynamic, and
regular updates can help you stay ahead of changes.
5.Integrate with Other Analyses: Use PESTEL in conjunction with other strategic tools like SWOT
analysis. This can provide a more comprehensive view of your strategic position.

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PESTEL: What to avoid
1.Overlooking Certain Factors: Avoid ignoring any of the PESTEL factors. Even if some seem less
relevant, they can still have indirect impacts.
2.Relying Solely on Forecasts: While forecasts are useful, they should not be the only basis for
your analysis. Prioritize factual data and historical trends.
3.Superficial Analysis: Avoid conducting a shallow analysis. Dive deep into each factor to
understand its potential impact thoroughly.

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PESTEL: Key points not to forget
1.Contextual Understanding: Always consider the broader context of each factor. For example,
political changes in one country can have global repercussions.
2.Actionable Insights: Ensure that the findings from your PESTEL analysis lead to actionable
strategies. The goal is to inform decision-making, not just to gather information.
3.Documentation and Communication: Document your findings clearly and communicate them effectively
to all stakeholders. This ensures that everyone is on the same page and can act on the insights.

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Porter‘s Five Forces
External analysis of the micro environment

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What explains firm performance

Firm performance is determined primarily by two factors: industry and firm effects. Industry
effects describe the underlying economic structure of the industry. They attribute firm performance
to the industry in which the firm competes. The structure of an industry is determined by elements
common to all industries, such as entry and exit barriers, number and size of companies, and types
of products and services offered. Firm effects attribute firm performance directly to the actions
strategic leaders take.

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Industry
Same suppliers, same buyers.
Same cycle (same macro forces).
Same competition!
The question is, what is your strategic position?

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Five competitive forces
„A framework that identifies five forces that determine the profit potential of an industry and
shape a firm’s competitive strategy.“
-broad view of competition
-profit as a function of the five forces:
1. Threat of entry.
2. Power of suppliers.
3. Power of buyers.
4. Threat of substitutes.
5. Rivalry among existing competitors.

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Porter‘s model of five competitive forces

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Five forces: The threat of entry
A potential of new companies to enter the market.
Such entry would lower profitability in the industy.
Such threat forces the existing companies to spend extra money on building barriers.
Potential entry barriers:
■ Economies of scale.
■ Network effects.
■ Customer switching costs.
■ Capital requirements.
■ Advantages independent of size.
■ Government policy.
■ Credible threat of retaliation.

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Five forces: The power of suppliers
Powerful suppliers, by raising costs and lowering quality or quantity, can significantly reduce the
profitability of our business. This underscores the critical need to understand and manage the
sources of supplier power, which can be:
■ The supplier’s industry is more concentrated than the industry it sells to.
■ Suppliers do not depend heavily on the industry for a large portion of their revenues.
■ Incumbent firms face significant switching costs when changing suppliers.
■ Suppliers offer products that are differentiated.
■ There are no readily available substitutes for the products or services that the suppliers offer.
■ Suppliers can credibly threaten to forward-integrate into the industry.

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Five forces: The power of suppliers
Q: Which suppliers possess superior power today?

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Five forces: The power of buyers
What increases buyers‘ power:
■ There are a few buyers and each buyer purchases large quantities relative to the size of a
single seller.
■ The industry’s products are standardized or undifferentiated commodities.
■ Buyers face low or no switching costs.
■ Buyers can credibly threaten to backwardly integrate into the industry.
What increases buyer‘s price sensitivity:
■ The buyer’s purchase represents a significant fraction of its cost structure or procurement
budget.
■ Buyers earn low profits or are strapped for cash.
■ The quality (cost) of the buyers’ products and services is not affected much by the quality
(cost) of their inputs.

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Five forces: The threat of substitutes
A substitute meets the same basic customer needs as the industry’s product but in a different way.
The threat of substitutes is high when
■ The substitute offers an attractive price-performance trade-off.
■ The buyers cost of switching to the substitute is low.
Q: Give me examples of substitutes.

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Five forces: Rivalry among existing competitors
The intensity of competition: how fast and how large is the response to your own actions (price
changes, quantity changes, communication campaings, new products...).
„The stronger the forces, the stronger the expected competitive intensity,
which in turn limits the industry’s profit potential“.

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Five forces: Rivalry among existing competitors
Determined by the following factors:
■ Competitive industry structure.
■ Industry growth.
■ Strategic commitments.
■ Exit barriers

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Five forces: Competitive industry structure
The structure of an industry is largely captured by
■ The number and size of its competitors.
■ The firm’s degree of pricing power.
■ The type of product or service (commodity or differentiated product).
■ The height of entry barriers.
The four main competitive industry structures are
1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly

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Five forces: Competitive industry structure

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A sixth force: The complements
What is co-opetition?

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Sixth force: Complements and co-opetition
A complement is a product, service, or competency that adds value to the original product offering
when the two are used in tandem.
Co-opetition is cooperation by competitors to achieve a strategic objective.

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Sixth force: Co-opetition examples
Apple and Samsung: Despite being fierce competitors in the smartphone market, Apple and Samsung
have collaborated extensively. Samsung has been a major supplier of components like screens and
chips for Apple’s iPhones.
Ford and Toyota: These automotive giants worked together on hybrid technology. They collaborated to
develop a hybrid system for light trucks and SUVs, combining their expertise to advance the
technology more efficiently.
DHL and UPS: These logistics companies have partnered in certain regions to optimize delivery
networks. By sharing resources and infrastructure, they can improve efficiency and service quality
while still competing in other areas.
Co-opetition allows companies to leverage each other’s strengths while still maintaining their
competitive edge.

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Industry dynamics
New entries, changing the competition landscape

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Industry dynamics
New entrants: how do they decide? (see Exhibit 3.6 Entry choices in the Textbook)
Other industry dynamics:
§Alliances, mergers, acquisitions
§Split-ups (For example, DuPont recently announced plans to split into three separate companies,
each focusing on different sectors: electronics, water solutions, and diversified industrial
products)
§Industry convergence

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Industry convergence examples
1.Automotive and Energy Industries: The rise of electric vehicles (EVs) has led to significant
convergence between the automotive and energy sectors. Companies like Tesla are not only car
manufacturers but also major players in energy storage and solar power.
2.Healthcare and Biotechnology: The development of personalized medicine has brought together the
healthcare and biotechnology industries. This convergence allows for tailored treatments based on
individual genetic profiles, enhancing the effectiveness of medical interventions.
3.Agriculture and Biotechnology: The agricultural sector has increasingly integrated
biotechnological advancements to improve crop yields and resistance to pests and
diseases. Companies like Monsanto (now part of Bayer) have been at the forefront of developing
genetically modified organisms (GMOs) to enhance agricultural productivity.
These examples illustrate how industry convergence can drive innovation and create new
opportunities across different sectors

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Strategic groups
The within-industry differences

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Strategic groups
Strategic group: „The set of companies that pursue a similar strategy within a specific industry“

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Strategic groups: the map
How to create the strategic group map:
■ Identifying the most important strategic dimensions such as expenditures on research and
development, technology, product differentiation, product and service offerings, cost structure,
market segments, distribution channels, and customer service. These dimensions are strategic
commitments based on managerial actions that are costly and difficult to reverse.
■ Choosing two key dimensions for the horizontal and vertical axes, which expose important
differences among the competitors.
■ Graphing the firms in the strategic group, indicating each firm’s market share by the size of the
bubble with which it is represented.

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Strategic groups
■ Competitive rivalry is strongest between firms that are within the same strategic group.
■ The external environment affects strategic groups differently.
■ The five competitive forces affect strategic groups differently.
■ Some strategic groups are more profitable than others.

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Porter‘s Five Forces
HOW TO APPLY

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How to apply the Five forces
1.Define the relevant industry.
2.Identify the key players in each of the five forces and attempt to group them into different
categories.
3.Determine the underlying drivers of each force.
4.Assess the overall industry structure.

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Stakeholders
Stakeholder approach and stakeholder analysis

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Stakeholder vs Shareholder approach
Shareholder approach
A business is an organization, which is supposed to create value for owners.
Stakeholder approach
A business is a place where interests of stakeholders meet – interests of those, who are involved
in or affected by the business operations. The business is then supposed to create value not only
for shareholders, but should be responsible for all stakeholders.

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Who are stakeholders
Freeman and Reed, 1983
Wide:
can affect the achievement of an organization´s objectives or who is affected by the achievement of
an organization´s objective.
Narrow:
on which the organization is dependent for its continued survival.

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Who are stakeholders
Post, Preston, Sachs (2002)
Corporation
Investors: Shareowners and lenders
Supply chain associates
Customers and users
Employees
Regulatory auhorities
Unions
Political groups
Local communities and citizens
Resource base
Industry structure
Joint Venture partners
Social-political environment
Strategic alliances
Governments

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Competitive behaviour
Owners
Employees
Management
Creditors
Suppliers
Customers
State
Company
Company
Company
Company
Company
Company

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Stakeholder analysis
1.Set the goal of the analysis,
2.identify stakeholders,
3.analyze values and segment stakeholders,
4.analyze attributes,
5.analyze possible development of values and attributes,
6.draw a stakeholders map,
7.adopt corresponding measures,
8.analyze effects of these measures and act accordingly.

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Let‘s wrap it up
The KvIS is comming

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KvIS
̶Summary of the lecture
̶Max 1 bonus point (3 questions, 1/3 point for the correct answer)
̶Remember to submit your answer a few seconds ahead (lag)