Team 2:
Jennifer, Marlee, Amy, Logan, Corbin, Josh
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What is External Analysis?
How to create an External Analysis?
What are the benefits and challenges of doing
an External Analysis?
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The process of scanning and evaluating an
organization’s external environment.
◦ Ex: How managers determine the opportunities and
threats facing the organization.
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Opportunities:
◦ Positive external trends or changes that may help
an organization improve it’s performance.
◦ Example: Apple with iPhone entering the cell phone
market which became “Blue Ocean” strategy
temporarily.
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Threats: Negative external trends or changes
that may hinder an organizations
performance.
◦ Ex: Apple vs. Motorola/Samsung with cell phones
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Organizations are “open systems” which
means they interact with and respond to their
environment.
◦ Ex: Apple iPhone was a success then came the iPad.
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As systems, organizations take inputs and
turn them into outputs.
INPUTS  Organizations OUTPUTS
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Environmental uncertainty is defined as the
amount of change and complexity in an
organizations environment
The amount of change in the environment can be
either dynamic or stable
A dynamic environment is one where change is
very rapid
A stable environment is one where change is
more minimal or slowly occurring.
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Changes Occurring in the oil field are more
stable than changes occurring in the cell
phone industry.
Apple is constantly changing and upgrading
their products in order to stay ahead of their
competition= a dynamic environment
Halliburton on the other hand, is focused on
changes that occur at a slower pace= a stable
environment
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A Complex environment occurs when decision
makers must monitor a number of components
in the environment
A Simple environment occurs when the number
of components decision makers must monitor is
few
The more complex and dynamic the
environment, the more uncertain it is and the
more information decision makers need to make
appropriate decisions
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The perceived uncertainty in the environment or
amount of change and complexity dictates the
amount and types of information that managers
need to know about that environment
Therefore in Apple’s case, Steve jobs needs to
understand the degree of uncertainty within his
industry for him to be able to respond and make
appropriate decisions to stay ahead of the
competition with products on the market as well
as future products
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For organizations to understand the uncertainty
of the environment in which they are in can be a
major step to move from being in a red ocean,
competing with the rest of the market, to a blue
ocean, eliminating the competition.
If you are in a dynamic market, decision makers
can strategize to eliminate competition by
planning future products ahead of competitors. If
you are in a stable market, decision makers can
strategize based on new products that can
enhance the industry and make a dramatic
change, moving your company into a blue ocean.
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Good managers focus on environmental scanning to
gather information, but great managers need to scan
the environment, and also do an external analysis
For organizations to grow they must identify and
understand the opportunities and threats they face
With the knowledge of the company’s opportunities
and threats the company can focus and make
decisions based on how to take advantage of the
opportunities and eliminate or void out the threats
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Scanning the environment and engaging in an
external analysis is also very useful for
graduating seniors
As we enter the job market, we need to identify
the uncertainty of the market and make decisions
according to the conditions we face
With this information we can strategize our
approach to the job market based on the
opportunities and threats so that we can start
developing our careers
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What do managers look at?
Where can they find information and how do
they analyze it?
How do managers at different organization
levels do an analysis?
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Specific Environment
◦ Customers, competitors, suppliers, and other
industrial-competitive variables
◦ Example Apple- customers, Google, Research in
Motion, HP, individual computer component
suppliers…
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General Environment
◦ Economic, demographic, socioculteral, politicallegal, and technological sectors
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Looking at Industry and Competitive Variables
Industry- group or groups of organizations
similar or identical products
◦ Compete for customers and resources to produce
products
◦ Example- Technology Industry in general
 Apple Cult, computer engineers,
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Porters 5 Forces to assess the specific
environment
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Existing firms in your industry
◦ Already in industry and produce similar products
◦ Soft Drinks-Coke, Pepsi, Dr. Pepper, Wal-Mart
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Analyze Intensity of the Rivalry
◦ Cut throat or Polite?
 More competitive, the more profitable the industry, the
more the companies profitability will suffer
Numerous or Equally Balanced Competitors
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Unnoticed actions due to many
Equal size/resources continuous jockeying
Slow Industry Growth
2.
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Level consumer demand
Steal others piece of the pie to grow
High Fixed or Storage Costs
3.
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Large costs yield larger volume to spread cost
Expensive Items=Expensive to Store
Price wars
Lack of Differentiation or Switching Costs
1.
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Commodity Products
Decision on price and service
Lack of Switching Costs (Restaurant Industry)
Addition of Capacity in Large Increments
2.
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Increased Production->over production in
industry
Price Cuts/Wars
Diverse Competitors
3.
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Diversity=unknown reactions
Increased Rivalry
High Strategic Stakes
1.
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Reputations
Sacrifice short term profitability
Mindset=Increased Rivalry
High Exit Barriers
2.
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Economic, strategic, emotional factors
Specialized assets no other use
Labor agreements
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Who are our current competitors?
◦ Numerous Competitors…identify who…
◦ Direct Competitors
◦ Those that worry you
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Strategic Group
◦ Organizations with similar strategies, resources and
customers
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Mercedes and GM
◦ Not direct competitors
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Threat to entry depends on…Barriers to Entry
◦ Obstacles to entering the industry
◦ Low threat positive to industry
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Porters 7 entry barriers
Economics of Scale
1.
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3.
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Cost saving of large scale…large fixed costs
Large scale=retaliation from competition
Small scale to high of costs
Cost Disadvantages from other than Scale
Protected technology
Favorable access to suppliers
Lack of knowledge
Product Differentiation
Product Identification
Loyal Customers
Capital Requirements
1.
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High start up Costs
Ski Resorts
Switching Costs
One time cost facing customers from one supplier
to the next
PC users to Mac
Access to Distribution Channels
Industry Leaders corner supply and distribution
channels
1948 Tucker Sedan
Government Policy
Laws and regulations
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Power leads to
◦ Decreased prices
◦ Higher quality or services
◦ Play competitors against each other for deals
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Buyer purchases large volumes of sellers
product
Purchased products represent a large portion
of their costs or purchases
Purchased products are standard or
undifferentiated
Buyer has low profits or income levels
Buyer has ability to manufacture product
Industries product is not important to quality
of product
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Suppliers include but not limited too…
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Raw material sources
Equipment manufacturers
Financial institutions
Labor sources
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Domination by a few companies and more
concentration than the industry
Lack of substitute products
Industry is not an important client
Suppliers product is important to the industry
Differentiated product or Switching costs
Supplier capability to provide what your
industry offers
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Can another industry satisfy your industries
product?
You’re a soft drink company
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Fruit drinks
Energy drinks
Alcoholic beverages
milk
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External environmental sector that includes
the following sectors:
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Economic
Demographic
Sociocultural
Political-legal
Technological
Changes in sectors can be positive
(opportunity), negative (threat), or have no
effect on organization
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Includes macroeconomic data such as:
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Interest rates
Inflation rates
Budget deficit/ surplus
GDP level
Consumer spending
Unemployment rate
Look at current information as well as
forecasted trends and changes
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Different industries are affected differently by
economic trends
◦ Ex: Rising interest rates are favorable for credit card
industry and less favorable for housing industry
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An organization’s performance is determined
by how it responds to the economic
opportunities and threats
◦ Wal-Mart used current economic conditions as an
opportunity to increase revenues from priceconscious consumers while other companies were
threatened by the economy
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Evaluating current statistical data and trends
in population characteristics
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Gender
Age
Income levels
Ethnic makeup
Education
Businesses use demographics to make
strategic decisions, understand current
customers, and target potential customers
◦ Apple places its retail stores in higher end shopping
areas while also selling lower priced items (ipods,
etc.) at stores like Wal-Mart
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What is a country’s culture like and how is it
changing?
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Traditions
Lifestyles
Values
Attitudes
Beliefs
More difficult to determine than demographic
and economic information
Exampes of current trends are increased use of
technology at work and school, and consumers
purchasing healthier foods
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Analyzes laws, regulations, judicial decisions,
and political forces in effect at the federal,
state, and local levels of government
Can have significant impact on companies’
financial performance
◦ Ex: taxation and minimum wage laws
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Scientific or technological innovations that create
opportunities or threats
Two areas most affected by the technological
sector are product research and development and
organizational work processes
◦ Faster production times and communication (customers,
suppliers, etc.)
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Apple- technological advances can be an
opportunity to improve existing products or
create new products, or can be a threat if utilized
by competitors
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Information about the external environment is
used to evaluate current strategies and to
formulate future strategies
Information can be found through informal
observations or through formal, systematic
findings
Gathering informal information can give
sufficient clues to trends, but having a formal
approach is key to identifying specific threats
and opportunities
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It is an information system that provides managers
with needed external information on a regular
basis
The purpose is to identify potential trends and
changes that could positively or negatively impact
the organization
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How often decision markers need information
depends on how complex the environment is
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The more complex and dynamic the environment,
the more often information should be gathered
Small and medium organizations
 Employees should monitor changes in the
environment because they have the most
direct contact with customers and suppliers
Large Organizations
 Managers are usually responsible for
monitoring external trends or changes and
opportunities or threats
Role of Lower-Level Managers:
-Encourage employees to listen for comments from
customers or suppliers that indicate new trends
Role of Mid-level Managers
-Gather any information from various departments
and share it with the organizational units that may
benefit from it.
Role of Top-Level Managers
-Use external information in formulating corporate
strategies.
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Benefits:
◦ By deliberately and systematically analyzing the
external environment, a manager can be a proactive
manager- a manager who anticipates changes and
plans for those changes, instead of simply reacting
to them
◦ An external analysis provides the valuable
information that strategic managers use in
planning, decision-making, and strategy
formulation
◦ An organization’s ability to acquire and control
needed resources depends on having strategies
that take advantage of the environment’s abundant
resources and strategies that cope with the
environment’s limited resources.
◦ Today’s environment is increasingly dynamic
 Turbulent market conditions, less brand loyalty, etc.
◦ Doing an external analysis makes a difference in an
organization’s performance
 Measured using ROA or profit-growth
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Environment might be changing more rapidly
than realistically can be kept up with
Time-consuming
◦ Solution: make the process as efficient and effective
as possible
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Forecasts and trend analyses aren’t perfect
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External Analysis:
◦ The process of scanning and evaluating the external
environment in order to identify opportunities and
threats
Specific Environment is analyzed using Porter’s
five-force’s model; five sectors are evaluated in
the general environment
◦ Economic, demographics, sociocultural, political-legal,
and technological
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Benefits vs. challenges
◦ Ex: proactive managers, but rapidly changing
environment