External Analysis Concept
External Analysis or analysis of the external surroundings consists on an evaluation of several variables of the organizations’ surroundings as a way to evaluate the attractiveness of the sector and as a way to supply clues for the formulation of the organizational goals and to help in the choice of the strategies to follow.
For that analysis were developed several models that seek to synthesize the most important aspects to take into consideration and make an evaluation/characterization of the sector or the markets where the organization takes action. Adriano Freire, for example, proposes the calculation of an indicator that seeks to evaluate the attractiveness of a certain sector or business through the use of three measures of the potential attractiveness: the sales value (V), the sales growth rate (T) and the sales operational profitability (R). Applying the formula V x (1 + T)t x R, in which t represents a certain temporal horizon, is obtained the value of sectorial attractiveness.
Other examples of models well known used for the analysis of the external surroundings are the 5 strengths model of Porter and the BCG mold.
In the case of the 5 strengths model, developed by Michael Porter, this seeks to evaluate the attractiveness of a certain sector or market. According to this model, the attractiveness of a sector is measured by the threat of new competitors’ entrance, by the suppliers’ negotiation power, by the clients’ negotiation power, by the pressure of replaced products and by the competition existent in the sector. It’s the group of these strengths that determines the potential sector’s final profit, which is defined by the long term return over the invested capital.
As to the BCG mold, model used mainly for the planning of business’ portfolios, appeals to two isolated variables to perform the analysis: the market’s growth rate and the market share referent to the company. Depending on the obtained values for each one of these variables, the business is classified in four different types (Questioning, Star, Dairy Cow and Dog) being, for each one of them performed generic recommendations about the strategies to adopt.