Assessing Opportunities
and Threats: Doing an
External Analysis
Strategic Management in Action: Chapter 3
What is an external analysis?
• Pet care spending has more than doubled to 3.2
billion over the last 5 yrs.
• Referred to as nonessential expenditures
• External analysis: process of scanning and
evaluating an organizations external environment.
• Strategic managers determine the opportunities and
threat facing their organizations.
• Opportunities: positive external trends or changes
• Threats: negative external trends or changes
Organizations as Open
Systems
• Open systems: interact with and respond to their
environment.
• Example- inputs have to come from somewhere and
outputs must be distributed somewhere.
• The somewhere is the external environment.
• Organizations are interrelated and interdependent.
• Chester Barnard, management theorist, first suggested
this in 1938.
Organization as an Open
System
Perspectives on Organizational
Environments
• Organizations interact with their environment in two
ways:
• The environment as a source of information
• The environment as a source of resources
Environment as Information
Perspective
• Environmental uncertainty: the amount of change
and complexity in an organization’s environment
• Dynamic: changing rapidly; more uncertain
environment
• Stable: minimal and slow;
• Strategic decisions made by doing an external
analysis.
Resources Perspective
• Environment viewed a source of scarce and valued
sources.
• Organizations depend on the environment for these
resources.
• Reducing dependency means controlling
environment resources.
• Means knowing about the environment and attempting
to change or influence it.
• Example: Toyota hybrid vehicles.
Determine What's Happening in
the External Environment
• Environmental scanning and analysis.
• Identify the opportunities and threats facing the organization.
How to Conduct an External
Analysis
• Specific Environments- Customers, Competitors,
Suppliers, other Industry-competitive Variables
-Whereas-
• General Environments- Economic, Demographic,
Sociocultural, Political-legal, Technological Sectors
An Organization’s External
Environment
Five-forces Model(Specific
Environments)
Conditions Contributing to
Rivalries
• Numerous or Equally Balanced competitors
• Slow Industry Growth
• High Fixed or Storage Costs
• Lack of Differentiation or Switching Costs
• Addition of capacity in large increments
• Diverse competitors
• High Strategic stakes
• High Exit Barriers
Barriers to Potential Entrants
• Economies of Scale
• Cost Disadvantages
• Product differentiation
• Capital Requirements
• Switching costs
• Access to Distribution Channels
• Government Policies
Bargaining Power
• Power Struggle between Buyers vs. Suppliers
• Factors That Contribute to either side
• Differentiates between industries and markets
• Examples
• Wal-mart as a buyer
• UPS holds a “supplier” advantage for their service
• Buyers of their service have few choices, and are therefore
forced to pay UPS’s price.
Substitute Products
• An alternative product that can satisfy the
consumer’s need that our industry is satisfying
• Examples
• Soft Drink industry
General Environment
• Economics
• Demographic
• Sociocultural
• Political-Legal
• Technological
Finding and Evaluating
Information
• Informal approach vs. Formal Approach
• External Information System- formal approach that
provides managers with needed external information
on a regular basis
• Having too much information
Responsibilities at Different
Managerial Levels
• Small to medium-sized organization
• Large organizations
• Lower level supervisors
• Middle management
• Top Level Management
Benefits of Doing an External
Analysis
• Proactive Manager- a manager who anticipates
changes and plans for those changes, instead of
reacting to them.
• “Environment as source of resources”
• Ability to acquire and control needed resources
depends on having strategies that take advantage of
environment’s abundant resources and the limited
resources.
Benefits Continued
•
Depending on the industry, today’s external
environment is increasingly dynamic.
• Does an external analysis make a difference?
• Research studies have shown that in organizations in
which strategic decision makers did external analyses,
performance was higher.
• Evaluated using a financial measure such as return on
assets or growth in profitability.
Challenges of Doing an
External Analysis
• The environment might be changing more rapidly
than realistically can be kept up with.
• Amount of time it can consume.
• Forecasts and trend analyses are a significant part of
the external analysis, they are not perfect.