Types Of External Market Analysis

An analysis of the external environment is undertaken in order to discover the opportunities and threats that are evolving and that need to be addressed by the organisation.

An analysis of the external environment can be broken down into three key steps each becoming more specific to the organisation.

The first step is an analysis of the macro-environmental influences that the organisation faces. This is followed by an examination of the competitive (micro) environment, also called the industry the organisation operates within. Finally, a specific competitive analysis is undertaken.

Macro Environmental Market Analysis

The macro-environment audit examines the broad range of environmental issues that may affect the organisation. This will include the political/legal issues, economic factors, social/cultural issues and technological developments. This is normally referred to as a PEST (Political, Economic, Social and Technological) analysis.

The aim of this analysis is to identify the critical issues in the external environment that may affect the organisation. Before moving on to judge the impact they may have on the organisation.

Click here to view a video that explains the PESTLE analysis.

Industry Analysis

An organisation has to understand the nature of the relationship within its industry, in order to allow the enterprise to develop strategies to gain the advantage of the current relationships.

A useful framework, that can be utilised when undertaking this analysis, is Porter’s ‘five forces’ model of establishing industry attractiveness for a business. This analysis should be conducted at the level of the individual strategic business unit (SBU) rather than at the level

of the organisation as a whole, otherwise the range of relationships facing a company with several divisions, causes the analysis to lose focus.

Porter identified five factors that affect the level of competition and therefore profitability within an industry:

Suppliers

The power of suppliers is liable to be strong where:

• Control over supplies is concentrated into the hands of a few players.
• Costs of switching to a new source of supply are high.
• The supplier has a strong brand.
• The supplier is in an industry with a large number of smaller disparate customers.

Buyers

The power of buyers is liable to be strong where:

• A few buyers control a large percentage of a volume market.
• There are a large number of small suppliers.
• The costs of switching to a new supplier are low.
• The supplier’s product is relatively undifferentiated, effectively lowering barriers to alternative sources of supply.

Potential Entrants

The threat of potential entrants will be determined by a number of barriers to entry that may exist in any given industry.

Substitutes

Substitution can arise in a number of ways:

• A new product or service may eradicate the need for a previous process. Insurance services delivered directly by producers over the phone or Internet are substitutes for the services of the independent insurance broker.
• A new product replaces an existing product or service. Cassette tapes replaced vinyl records, only to be replaced by compact discs.
• All products and services, to some extent, suffer from generic substitution. Consumers may choose to substitute buying a car in order to purchase an expensive holiday instead.

Competitive Rivalry

The intensity of competition in the industry will be determined by a range of factors:

• The stage of the industry life cycle will have an effect. Natural growth reaches a plateau once an industry reaches maturity; the only way an organisation can continue to grow in the industry is to take market share off its rivals.
• The relative size of competitors is an important factor. In an industry where rivals are of similar size, competition is likely to be intense as they each strive for a dominant position. Industries that already have a clear dominant player tend to be less competitive.
• In industries that suffer from high-fixed costs, companies will try to gain as much volume throughput as possible, this may create competition based on price discounting.

There may be barriers that prevent companies withdrawing from an industry. This may be plant and machinery that is specialist in nature and therefore cannot be transferred to other uses. The workforce may have non-transferable specialist skills. If the industry is in maturity, moving towards decline and rivals cannot easily leave the industry then competition inevitably will increase.

This model allows an organisation to identify the major forces that are present in the industry sector. This can be related to the critical factors that were identified by the PEST analysis. Several issues then need to be considered:

What is the likelihood that the nature of the relationships identified by the ‘five forces’ model will change given the trends in the external environment? Are there ways of benefiting from these potential changes?

What actions can the organisation undertake that will improve its position against the current forces in the industry? Can the company increase its power, relative to suppliers or buyers? Can actions be taken to reduce competitive rivalry, or are there ways of building barriers to dissuade companies from considering entering the industry? Are there ways of making substitute products less attractive?

The organisation will also need to consider their competitors. Given the forces in the industry, what is the relative position of the organisation’s rivals? Do conditions favour one particular operator? Could conditions change in favour of one particular competitor?

Click here to view a video that explains Porter’s five forces model.

Competitor Analysis

The ‘five forces’ analysis has examined the overall industry and is a starting point in assessing a company’s competitive position. This is likely to be a rather broad definition of an industry and contains a number of companies that would not be direct competitors. Toyota is likely to have a number of natural direct competitors, Aston Martin is not likely to be one of them, although both companies are in the car industry. Toyota’s scale is global and manufacture cars across the full range, Aston Martin is a specialist, low-volume prestige sports car manufacturer. Companies that are direct competitors in terms of products and customer profiles are seen as being in a strategic group. The car industry would be made up of a number of strategic groups.

Strategic Groups

Strategic groups are made up of organisations within the same industry that are pursuing equivalent strategies targeting groups of customers that have similar profiles. Aston Martin’s strategic group is likely to contain Ferrari, Lotus, Lamborghini, etc. All these companies are following similar strategies and facing similar strategic questions.

There is a range of attributes that can be used to identify strategic groups. Some examples are as follows:

• Size of the company
• Assets and skills
• Scope of the operation
• Breadth of the product range
• Choice of distribution channel
• Relative product quality
• Brand image

For many companies, analysing every competitor in its generic industry, would be a difficult task in terms of management time and company resources. Defining an organisation’s strategic group allows a company to concentrate its analysis on its direct competitors and to examine them in more detail.

Click here to download a handout that explains competitor information to obtain and analyse.

Click here to view a video that explains the competitive matrix.

Market Data Collated

A market analysis will be made up of a range of factors relevant to the particular situation under review, but would normally include the following areas:

Actual and potential market size: Estimating the total sales in the market allows the organisation to evaluate the realism of particular market share objectives. Identifying the key sub-markets of this market, and potential areas of growth, is crucial to developing a marketing strategy, as is establishing if any areas are in decline.

Trends: Analysing general trends in the market identifies the changes that have actually taken place. This can help to uncover the reasons for these changes and expose the critical drivers underlying a market.

Customers: The analysis needs to identify whom the customer is and what criteria they use to judge a product offering. Information on where, when and how customers purchase the product, or service, allows an organisation to begin to understand the needs of the customer Identifying changing trends in consumer behaviour may begin to signal potential market developments and opportunities.

Customer segments: Identifying current market segments and establishing the benefits each group requires allows an organisation to detect if it has the capability to serve particular consumer’s needs.

Distribution channels: Identifying the changes of importance between channels of distribution, based on growth, cost or effectiveness, permits a company to evaluate its current arrangements. Establishing the key decision makers in a channel of distribution also helps to inform strategic decisions.