Strategic Management in Action
ASSESSING OPPORTUNITIES AND THREATS:
DOING AN EXTERNAL ANALYSIS
BEN, CYNTHIA, PEYTON, RUSSELL
Introduction
 This chapter illustrates why strategic decision
makers must pay attention to and monitor changes
in the external environment.
 #1-Describe what external analysis is
 #2-Identify positive and negative aspects of the
environment
 #3-Why doing external analysis is important and
why managers at all levels need to analyze the
environment
Case #1
External factors can significantly affect companies’
strategic decisions and actions:
 Movie theatre attendance was down
 Find ways to make the movie going experience special
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Variable pricing
All-digital approach
On-line ticket sales
Alcoholic beverages
Babysitting
Valet parking
Simulcasts of sporting events and concerts
Describe What an External Analysis Is:
 External analysis-The process of scanning and
evaluating an organization’s external environment
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How managers determine opportunities and threats facing
their organization
 Opportunities-positive external trends
 Will improve and organization’s performance
 Threats-Negative external trends
 Will hinder an organization’s performance
 This is important to know so that new strategies
can be formulated to respond to the opportunities
and threats of the environment
Environment
 Open systems-organizations that interact and
respond with their environment
 Environmental uncertainty-the amount of change
and complexity in an organization’s environment
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The more complex/dynamic the environment, the more
information decision makers need about the environment to
make appropriate decisions
They then do an external analysis and the environment
becomes a source of information
Environment
 Environment is viewed as a scarce and necessary
resources that are sought by competing
organizations
 It is important for strategic decision makers to
engage in environmental scanning
How to do an External Analysis
 External environmental sectors
 Specific environment= customers, competitors, suppliers, and
other industry-competitive variables
 General environment= economic, demographic, sociocultural,
political-legal, and technological factors
 Analyzing involves looking at industry and
competitive variables
 A strategic decision maker can determine the
opportunities and threats in the specific
environment by evaluating the five forces

Potential Entrants, Substitutes, Bargaining power of buyers,
and Suppliers
Current Rivalry Among Existing Firms
 Rivalry exists between organizations to gain
customers and profit.
 Strategic Groups: Group of firms competing with
similar strategies, resources, and customers.
 Example from class about the automotive industry.
8 Conditions of Intense Rivalries
 Porter has 8 ways to determine if the rivalry is intense:
 1. Numerous or equally balanced competitors: In an industry
with many companies, people believe they can do things without
being noticed. Balanced competition leads to jockeying for
position.
 2. Slow industry growth: When industry growth slows, the
“market pie” is not getting any larger, thus for companies to grow
they must steal the market share from others.
 3. High fixed or storage costs: Companies want to spread out
their fixed costs. This leads to price cutting which leads to
intense competition. If the storage costs are high, the companies
will want to sell their products quickly.
 4. Lack of differentiation or switching costs: When there is no
differentiation, consumers make their decision based on price.
Example: Restaurants and copiers.
8 Conditions of Intense Rivalries cont.
 5. Addition of capacity in large increments: Organizations that
want to avoid overcapacity spur intense rivalries by cutting
prices in order to distribute products. Example: Royal Caribbean
cruise ships
 6. Diverse competitors: When competitors differ in strategy and
philosophies their actions are unknown, which intensifies the
rivalry.
 7. High strategic stakes: With a lot of money and time invested
company leaders will do whatever it takes, such as sacrificing
short-term profitability. Example: Wal-Mart
 8. High exit barriers: Exit barriers= “economic, strategic, and
emotional factors that keep companies competing in businesses”.
These barriers make companies feel “stuck” in an industry and
might use extreme tactics Example: specialized assets that
cannot be liquidated, and pride.
Potential Entrants and Barriers to Entry
 Organizations have to be concerned with the
opportunities and threats (OT of SWOT analysis),
but also pay attention to new entrants.
 The threat of new entrants depends on the barriers
to entry.
 Barriers to entry : obstacles to entering an industry.
If barriers to entry are high, then the threat to entry
is low, which is good for the industry.
7 Major Entry Barriers
 1. Economies of scale: The new organization may not be able
to afford to purchase high volume, thus cannot use economies
of scale.
 2. Cost disadvantages from other than scale: Established
competitors enjoy protected technology, favorable access to
raw materials, favorable location, government subsidies,
knowledge and experience. Example: Hollywood studios
digital film standards.
 3. Product differentiation: Current competitors have spent
years to establish unique products and have substantial brand
loyalty connections with consumers.
 4. Capital requirements: Significant financial resources are
necessary in some industries which can shut people out of
consideration. Example: Ski Resorts
7 Major Entry Barriers cont.
 5. Switching costs: Switching costs are the costs
facing a customer who switches from one product to
another. This includes money, and time of searching.
Example: Word processing packages.
 6. Access to distribution channels: The current
competitors may have already secured the logical
distribution sources. The company may have to give
the distributor a price break, thus decreasing profits.
 7. Government policy: Laws and regulations can be
imposed (licensing, pollution standards, etc.) that
may cost a large sum of money to adhere to.
Bargaining Power of Buyers
 The customer is more important to the seller than the seller is
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to the customer because the customer can go elsewhere to
purchase its products. Buyers can play competitors against
each other to find the best price.
Wal-Mart example
Buyers have power if the product is standard and
undifferentiated because they face low switching costs.
Buyer gets the power if they have the ability to manufacture
the products they need. Also, the buyer has power if the
seller’s item is not important to the quality of the buyer’s
product.
Buyers have bargaining power if they have full information
about demand, market prices and supplier costs. The internet
has made this possible. Example: Car and electronic sales.
Bargaining Power of Suppliers
 If suppliers have bargaining power they can raise
prices or reduce the number of services provided.
 Suppliers can reduce the quality of products your
industry purchases.
 Industry suppliers include any resource providers:
raw material sources, equipment manufacturers,
financial institutions, and labor sources.
What makes suppliers powerful?
 If suppliers are few in number and are selling to an
industry that’s fragmented.
 If buyers are small and not very powerful, then
suppliers can influence prices, quality, and sales
terms.
 Often there are no substitutes for the products the
suppliers provide.
Substitute Products
 Companies must look to see if other industries can
satisfy consumer needs.
 If there are many substitutes in your industry, even
not so great ones, it can be very unfavorable for your
industry.
General Environment
 Economic- includes macroeconomic data such as:
current statistics, forecast trends, and changes in the
economy.
 Interest rates, exchange rates, and the value of the
dollar are major parts of economic data.
 Other aspects of economic include GDP, GNP,
deficits and surpluses, consumer income and
spending habits.
Demographic
 Evaluates trends in population characteristics.
 Includes information that the U.S. census bureau
gathers such as age, gender, income levels, ethnic
makeup, education, geographic location, birthrates,
and employment status.
 U.S. population is currently around 305.6 million.
There are more Americans over the age of 30 than
under, and Americans are slowly becoming more
educated.
Sociocultural
 Knowing what is going on with your customer
culturally.
 Knowing what a country’s culture likes and how is
the culture changing.
 What are the traditions, values, beliefs, tastes,
behaviors, and how are they changing
 Look at values and attitudes to determine what is
happening in the sociocultural sector.
Political Legal
 Sector where Laws, regulations, judicial decisions,
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and politics at state and government levels are
analyzed. Some examples include:
Occupational safety and health Act of 1970
Consumer product safety Act of 1972
Civil rights Act of 1991
North American Free trade Agreement of 1993
Political-Legal Sector
 Involves various laws, regulations, judicial decisions,
and political forces at the federal, state, and local
levels of government that have an impact on an
organization.
Equal Employment Opportunity Act of 1972
Americans with Disabilities Act of 1990
Consumer Product Safety Act of 1972
Sarbanes-Oxley Act of 2002
Political-Legal Sector Cont.
 Other major political-legal concerns include
taxation, minimum wage, and product
labeling/product safety laws, all of which can have a
significant impact on an organization’s financial
performance.
 If an organization does business in other countries,
the relevant laws and regulations must be obeyed.
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Multinational corporations and IFRS
Technological Sector
 Scientific or technological innovations that create
opportunities and threats.
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X-Static and the Environmental Protection Agency
 Computerization is one of the most important
technological innovations and continues to affect
both organizational work processes and product
development.
 Many variables determine whether a given
technology will prove to be an opportunity or a
threat to an organization
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Global locations
Finding and Evaluating Information on the
External Environment
When looking for external information look
for
 Data
 Predictions
 Statistics
 Forecasts
 Analysis
 Inferences
 Trends
 Statements
Cont.
 External information can be found using informal and
unscientific observations or by using a more formal,
systematic search.
 Informal – talking to customers and suppliers’ sales
representatives, reading industry trade journals and
general news magazines.
 Formal – using an external information system
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An information system that provides managers with needed
external information on a regular basis.
 Responsibilities
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In smaller and medium sized organizations, external analysis
needs to be done by all employees, especially those on the front
lines.
In larger organizations, external analysis is usually the
responsibility of managers.
Benefits & Challenges of an
External Analysis
 Benefits
 Makes managers proactive
 Provides information used in planning, decision making,
and formulating strategy
 Helps organizations get needed resources
 Helps organizations cope with uncertain environments
 Makes a difference in an organization’s performance
 Challenges
 Rapidly changing environments can be hard to keep up with
 Time consuming
 Forecasts and trend analysis aren’t perfect
Takeaways
 #1-A strategic decision maker can determine the
opportunities and threats in the specific
environment by evaluating the five forces: Potential
Entrants, Substitutes, Bargaining power of buyers,
and Suppliers
 #2-Determining if a rivalry is intense or not is an
important decision. An intense rivalry is a sign of a
red ocean industry
Takeaways cont.
 #3-How can you tell whether an industry's supplier
is powerful?
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One thing to look for is domination by a few companies and
more concentration than the industry. If your industry is just
one of many that the supplier sells to than you won't be a
priority to the supplier, and they will exhort bargaining power
over you.
 #4-It is important to find information on the
external environment and evaluate it to formulate
future strategies.
 #5-When looking for external information, look for
data, statistics, trends, etc. made by experts.