Ch2. Market Environment Analysis — PEST, SWOT, and Competitive Analysis

PEST Macro-Environment Analysis

Political / Legal:
Regulatory and legislative changes
Government policy and taxation
Trade barriers and tariffs

Economic:
Business cycles and growth rates
Interest rates, exchange rates, inflation
Consumer purchasing power

Social / Cultural:
Demographic shifts
Lifestyle trends
Cultural values

Technological:
Speed of technological innovation
Digital transformation
R&D investment trends

SWOT Analysis

Internal Factors:
S (Strengths):     Sources of competitive advantage
W (Weaknesses):    Areas requiring improvement

External Factors:
O (Opportunities): Environmental changes that can be leveraged
T (Threats):       Risks that need to be addressed

Strategy Matrix:
SO: Use strengths to seize opportunities
ST: Use strengths to overcome threats
WO: Use opportunities to address weaknesses
WT: Minimize both weaknesses and threats

Porter’s Five Forces

Determinants of Industry Profitability:

Rivalry Among Existing Competitors:
  Competitive intensity and concentration
  Level of product differentiation

Threat of New Entrants:
  Entry barriers (economies of scale, brand loyalty, capital requirements)

Threat of Substitute Products:
  Products from other industries that can fulfill the same need

Bargaining Power of Buyers:
  Concentration, switching costs, access to information

Bargaining Power of Suppliers:
  Supplier concentration, availability of alternative sources

Competitor Analysis

Types of Competitors:
Brand competitors:   similar products targeting the same customers
Industry competitors: within the same industry
Generic competitors: competing for the same budget
Total budget competitors: competing for all consumer spending

Benchmarking:
Learn from the best-practice competitors
Analyze performance gaps → drive improvement

Competitive Strategies (Porter):
Cost leadership: standard products at lower cost
Differentiation: premium pricing through unique value
Focus: concentration on a specific segment

Key Concept Cards

PEST = Political · Economic · Social · Technological ★★★★★ : The four dimensions of macro-environment analysis. Memory tip: PEST — think of the pest that disrupts your plans from the outside

SWOT = Strengths · Weaknesses · Opportunities · Threats ★★★★★ : Internal (S/W) and external (O/T) factors. Memory tip: internal first, external second

Porter’s Five Forces ★★★★☆ : Rivalry, New Entrants, Substitutes, Buyers, Suppliers — five forces that determine industry profitability. Memory tip: RNSBS — five forces, five letters

Practice Quiz

Q. What is a WO strategy in SWOT analysis?

WO strategy (Weakness + Opportunity): use external opportunities to compensate for internal weaknesses. Example: a company lacking technology capabilities can leverage a wave of technological advancement by forming partnerships or making acquisitions. A resource-constrained startup growing through strategic alliances during a market expansion phase is also a WO strategy.

Q. Under what conditions does buyer bargaining power increase?

Buyer concentration: a small number of large customers. Low switching costs: easy to change suppliers. High buyer information: rich knowledge of prices and quality. Many substitutes: can shift to other suppliers. Threat of backward integration: buyers could produce the product themselves. The opposite conditions increase supplier bargaining power.