External analysis of the company means an evaluation of the environment of the industry in which the company operates. The macro environment of the company is necessary to be evaluated to grab the opportunities and threats imposed by external factors. The proper analysis and timely measures of opportunities and threats imposed will drive more profitability, growth, and volatility to the company. major areas for external analysis are:
Industry: Industry is the combination of various firms or companies providing close substitute products to the consumers. The example of the industry is the textile industry, pharmaceutical industry etc. industry put pressure on companies and they have to work with accordance with rules and procedures of the industry.
Market segment: The market segment is a different group of customers in the market having related demands. The attributes of customer's choice are related to each other, thus they are constituted as segment and companies focus on a certain segment, where they can provide better goods and services.
To conduct the external analysis of a company, the researcher has to evaluate various factors of the market that can impose a threat or provides opportunities to the company.
Competitive analysis: Every Company face competition in the market from the companies dealing in the same or substitute products. So, they have to analyze the extent of competition in the market to formulate effective strategies to be in a favorable position. Competition analysis requires an evaluation of various parameters of competition. Thus, the level of competition can be evaluated by six factors, which are as follows:
- The intensity of industry rivalry: The intensity of industry rivalry can be measured by product homogeneity, brand loyalty and switching cost of the consumer.
- Potential entrants: it measures the level of difficulty faced by new entrant companies in the market. The difficulty is determined through brand loyalty, the production capacity of the company and regulations formulated by the government.
- Buyer’s power: It measures the influencing power of buyer that determine prices of goods and services in the market. A buyer has the power to influence the market when a number of companies and substitutes are available in the industry.
- Supplier power: A supplier can influence the prices of the market when companies do not have any other supplier. Thus, price inelasticity is high on the purchaser side.
- Substitution threat: The threat is imposed on the company when substitute products are available at low prices.
- Power of service provider: the demand of product also gets influenced from the complementary goods or services, if the compliments are weak, they can become a threat for the industry contrarily will add more value to the products in the industry.
Pest analysis: The external analysis requires the analysis requires an evaluation of political, economic, socio-demographic and technological environment of the macro environment.
- Political: political environment studies the factors influenced by political factors of the economy, laws, and regulations formulated by political parties.
- Economic: economic environment consists of financial parameters of an economy such as interest rates, exchange rates, and inflation.
- Socio-demographic: socio-demographic factors such as demographics of the population, culture values etc. determines the demand for goods and services of a company.
- Technological: The technological environment studies new innovations in technology invented in the economy and its impact on business operations.
The external analysis also required the analysis of the life cycle of the industry. Various stages of lifecycle will be evaluated. The stages are as follows: