Lecture 3. External Analysis
An External Analyis (or Environmental Analysis) is an objective assessment of the changing world in which an enterprise operates, in order to have an ‘early warning system’ for identifying potential threats and opportunities.

All businesses and organisations operate in a changing world and are subject to forces which are more powerful than they are, and which are beyond their control. Just as a ship at sea is subject to powerful natural forces of which it needs to be aware and deal with, organisations are influenced by forces in their external business environment.

Any business strategy needs to take account of all these forces so that opportunities and threats can be identified and the organisation can navigate its way to success by matching its internal strengths to external opportunities. (A SWOT Analysis can help here.) As an aid to identifying all these external forces, a couple of acronyms come in handy.

A PEST analysis (or STEP analysis) invites you to list all the relevant external forces using four headings: Political, Economic, Sociological and Technological. These are useful headings; it doesn’t matter that some items might be both political and economic (eg taxation and exchange rates).

However, to look in eight rather than four directions, use the ICEDRIPS checklist:

Innovation including new technology and the Internet (of course) but other innovations too which may be particular to an industry.

Competitors. Not only direct rivals but threats from substitute products, new entrants to the market, the changing power of suppliers and the changing power of customers. (These five factors are known as the Five Forces of Competition.)

Economic factors such as inflation, exchange rates, downturns in the industry, public spending etc.

Demographics. The relevant statistics of age, gender, geography, social class etc, and changes in these.

Regulatory environment, ie laws, regulations, agreements and conventions.

Infrastructure such as telecommunications networks, transport, public services and utilities.

Partners. Strategic alliances with other companies or organisations.

Social trends, including acceptance of technology, use of leisure time, fashions and changing beliefs.

NB: The factors above are not in order of importance, the checklist merely provides an easy to remember acronym.

The best way to use ICEDRIPS is to jot down lots of ideas quickly – maybe in a group – and without pondering or challenging them at first. Afterwards you should sift through them to identify the important few factors from the trivial many.

According to the 95:5 Rule, it’s likely that just 5% of opportunities and threats could have 95% of the positive or negative effects on your business.

Since the external environment in which the enterprise operates is constantly changing, the External Analysis needs to be repeated frequently and ideally constantly. In this way, the enterprise will be able to identify opportunities and threats more quickly.

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