External factors are beyond the company’s control. It is important to follow or avoid the factors in the market.
An opportunity is the chance to introduce a new product or service that can generate superior returns.
Opportunities can arise when changes occur in the external environment. Many of these changes can be perceived as threats to the market position of existing products and may necessitate a change in product specifications or the development of new products in order for the firm to remain competitive.
Changes in the external environment may be related to:
1. Customers (The trend of living standard, income, purchasing power of the customer, the demographic change or psychological change, preference change of the customer)
2. Competitors
a. How strong is the competition?
b. What kind of products/service are they offering?
c. How innovative or creative are they?
d. Are you different from or just follow suit of your competitors?
3. Market trends
a. How is the market growth?
b. Is it is the introduction stage, growth stage?
c. Maturity stage or declining stage? You must know which stage the market is in)
4. Suppliers
a. What about suppliers, is it easy to get the required raw materials?
b. Do they have high or low bargaining power?
c. Do you have any contract with them? How long?
d. How efficient and reliable are they in delivering the products?
5. Partners
a. Who are your business partners?
b. They are easy to work with?
c. Can you leverage each other’s resources mutually and effectively?
d. Are you so dependent on them?
6. Social changes
a. What about the social environment of your customers?
b. Does your product/service match your customers’ social life? (Life style)
7. New technology
a. Can you follow the technological advancement?
b. How efficient can you use technology to support your business?
c. What kind of technology are your competitors using?
d. You are better of them or lagged behind?
8. Economic environment
a. What about the economic environment of your customers and your self?;
b. Do your customers have purchasing power to match your product/service price?
c. How much are your raw material?
d. Is your product is luxury or commodity?
e. Do your target customers need your product this time?
9. Political and regulatory environment,
a. Is there political stability in the country you are in?
b. Is the government in favor of your product or service?
c. Does the government have Free Trade Agreements (FTA) with other countries? How big is it?
d. What about the government’s Foreign Direct Investment (FDI) Policy?
e. Are there any incentives/subsidies from the government for your field of business?
f. Is your government free trade oriented or domestic trade oriented?
g. Are there any tough regulations from the government regarding your products especially for such products as (cigarette or alcohol or beverage?)
Depending on the answers to the above questions, one can distinguish the opportunity and threat from the market. Therefore, the management must act on the answers of these questions and prepare to avoid the threats and leverage the opportunities.
After you have answered all these questions, I hope you will be able to understand what is good and what is bad for the company. The good is opportunity and the bad is threat for the company.
The point of this analysis is that the company will set strategy and use its strength from internal analysis and resources to leverage the opportunities found in the market analysis and it will also set strategy and use its resources to avoid the threat or overcome it unhurt.
These external analysis are very very similar to PEST and Five Forces analysis. These two will be presented very soon too.
Figure (1) Diagram for external analysis
An opportunity is the chance to introduce a new product or service that can generate superior returns.
Opportunities can arise when changes occur in the external environment. Many of these changes can be perceived as threats to the market position of existing products and may necessitate a change in product specifications or the development of new products in order for the firm to remain competitive.
Changes in the external environment may be related to:
1. Customers (The trend of living standard, income, purchasing power of the customer, the demographic change or psychological change, preference change of the customer)
2. Competitors
a. How strong is the competition?
b. What kind of products/service are they offering?
c. How innovative or creative are they?
d. Are you different from or just follow suit of your competitors?
3. Market trends
a. How is the market growth?
b. Is it is the introduction stage, growth stage?
c. Maturity stage or declining stage? You must know which stage the market is in)
4. Suppliers
a. What about suppliers, is it easy to get the required raw materials?
b. Do they have high or low bargaining power?
c. Do you have any contract with them? How long?
d. How efficient and reliable are they in delivering the products?
5. Partners
a. Who are your business partners?
b. They are easy to work with?
c. Can you leverage each other’s resources mutually and effectively?
d. Are you so dependent on them?
6. Social changes
a. What about the social environment of your customers?
b. Does your product/service match your customers’ social life? (Life style)
7. New technology
a. Can you follow the technological advancement?
b. How efficient can you use technology to support your business?
c. What kind of technology are your competitors using?
d. You are better of them or lagged behind?
8. Economic environment
a. What about the economic environment of your customers and your self?;
b. Do your customers have purchasing power to match your product/service price?
c. How much are your raw material?
d. Is your product is luxury or commodity?
e. Do your target customers need your product this time?
9. Political and regulatory environment,
a. Is there political stability in the country you are in?
b. Is the government in favor of your product or service?
c. Does the government have Free Trade Agreements (FTA) with other countries? How big is it?
d. What about the government’s Foreign Direct Investment (FDI) Policy?
e. Are there any incentives/subsidies from the government for your field of business?
f. Is your government free trade oriented or domestic trade oriented?
g. Are there any tough regulations from the government regarding your products especially for such products as (cigarette or alcohol or beverage?)
Depending on the answers to the above questions, one can distinguish the opportunity and threat from the market. Therefore, the management must act on the answers of these questions and prepare to avoid the threats and leverage the opportunities.
After you have answered all these questions, I hope you will be able to understand what is good and what is bad for the company. The good is opportunity and the bad is threat for the company.
The point of this analysis is that the company will set strategy and use its strength from internal analysis and resources to leverage the opportunities found in the market analysis and it will also set strategy and use its resources to avoid the threat or overcome it unhurt.
These external analysis are very very similar to PEST and Five Forces analysis. These two will be presented very soon too.
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