External Analysis Models

Question 1

What does PESTEL stand for?

Answer 1

• Political - tax policy, government regulations, foreign trade regulations
• Economic - exchange/interest rates, inflation
• Social - income distribution, trends, demographic
• Technological - new products (AI), rate of obsolescence
• Ecological - sustainability, carbon footprint
• Legal - industry regulation, competition legislation, employment law (labour)

Question 2

What is Porter’s Diamond?

Answer 2

• Demand conditions - demanding local consumers force local firms to become more innovative
• Factor conditions (supply-side) - availability of factors of production e.g. human resources, physical resources, knowledge, capital & infrastructure
• Strategy, structure and rivalry - strong domestic rivalry forces firms to become more efficient to survive
• Related and supporting industry - easy access to components (reduced lead times and carriage costs), encourages knowledge sharing -> increases innovation

Question 3

What is the Industry Lifecycle?

Answer 3

• Introduction - first-mover advantage possible
• Growth - market becomes attractive to new entrant & competitive rivalry as market is not very saturated
• Shakeout - market growth begins to slow, weaker players forced to exit or merge
• Maturity - stable period of low growth, becomes more price competitive and smaller competitors (lacking econ. of scale) are shook-out
• Decline - sale volumes start to fall and firms begin to leave

Question 4

What are Porter’s Five Forces?

Answer 4

• Threat of new entrants - how likely is it for new players to enter? Is market attractive, what are the barriers to entry?
• Threat of substitutes - what is the availability of substitutes?
• Bargaining power of customers
• Bargaining power of suppliers
• All of this contributes the level of competitive rivalry in the market.