Strategic Management in Action
Assessing Opportunities
and Threats:
Doing an External Analysis
WHAT IS AN EXTERNAL ANALYSIS?
External Analysis
Scan and evaluate
various external environmental sectors
impacting performance
• Opportunities
Positive external environmental trends that
improve the organization’s performance
• Threats
Negative external environmental trends that
hinder the organization's performance
Organizations as Open Systems
Environment
Inputs
Processes
Outputs
Resources:
Physical
Capital
Human
Information
Organization Functions:
Production-Operations
Marketing
Financial-Accounting
Human Resource Mgt.
Research and Development
Information Systems
Managerial Activities:
Planning
Organization
Leading
Controlling
Goods
Services
Performance
Measures:
Financial
Productivity
Achieve Goal
Environment
Organization
Environment
Environment
Organization
Perspectives on
Organizational Environments
Environment as Information Perspective
• Environmental uncertainty
Amount of change and complexity in environment
• Environmental stability
Amount of change occurring in an organization’s environment
Dynamic (rapid) versus Stable (minimal or slow)
• Environmental complexity
Number of components in environment decision makers must monitor
Complex (many) versus Simple (few)
Environment as Source of Resources Perspective
• Resource scarcity limits resource control
Environmental Scanning
and External Analysis
Environmental Scanning
• Know what’s happening in external environment
• Recognize and anticipate environmental changes
External Analysis
• Evaluate various data and trends
• Assess impact on the organization
Finding Information on the
External Environment and Evaluating It
• To find information look for
•
•
•
•
•
•
•
•
•
Specific data
Statistics
Analyses
Trends
Predictions
Forecasts
Inferences
Statements made by experts
What's happening or predicted to happen in external sectors
• Evaluate whether this information is good or bad
Finding Information on the
External Environment and Evaluating It
• Methods for collecting information
• Informal
• Customer comments
• Reading trade journals and general news media
• Talking with suppliers' sales representatives
• Formal
• External Information System (EIS)
• Market and customer surveys
Responsibilities for External Analysis
at Different Managerial Levels
• Lower-level or supervisory managers
• Observe and interact
• Collect and consolidate
• Middle managers
•
•
•
•
•
Coordinate
Share with organizational units
Gatherer and disseminator
Monitor general environmental
Make needed strategic changes
• Upper management
• Evaluate opportunities and threats
External Environment
Macro
Environment
Technological
Economic
Industry
Industry
Industry
Industry
Industry
Political-Legal
Demographic
Sociocultural
Macro Environment
Economic
All the macroeconomic data, current statistics, trends, and changes
• Interest rates
• Monetary exchange rates
• Budget deficit-surplus
• Trade deficit-surplus
• Inflation rates
• GNP or GDP
• Consumer income, spending, and debt levels
• Unemployment levels
• Workforce productivity
Macro Environment
Demographics
Current statistical data and trends in population characteristics
• Gender
• Age
• Income levels
• Ethnic makeup
• Education
• Family composition
• Geographic location
• Birth rates
• Employment status
Macro Environment
Sociocultural
• Country's culture
• Society's
•
•
•
•
•
•
Traditions
Values
Attitudes
Beliefs
Tastes
Patterns of behavior
Macro Environment
Political-Legal
• Federal, state, and local
• Laws
• Regulations
• Judicial decisions
• Political forces
General Environment
Examples of Significant Legislation Affecting Organizations
•
•
•
•
•
•
•
•
•
•
•
•
Occupational Safety and Health Act of 1970
Consumer Product Safety Act of 1972
Equal Employment Opportunity Act of 1972
Worker Adjustment and Retraining Notification Act of 1988
Americans with Disabilities Act of 1990
Civil Rights Act of 1991
Family and Medical Leave Act of 1993
North American Free Trade Agreement of 1993
General Agreement on Tariffs and Trade (GATT) of 1994
U. S. Economic Espionage Act of 1996
Bush Tax Reductions
Health Care Reform 2010
Macro Environment
Technical
Improvements, advancements, and innovations
that create opportunities and threats
• Communications
• Computing
• Transportation
• Manufacturing
• Robotics
• Biotechnology
• Medicine and medical
• Telecommunications
• Consumer electronics
External Environment
Macro
Environment
Technological
Substitute
Products
Economic
Competitive
Environment
Organization
Bargaining
Power of
Suppliers Bargaining
Political-Legal
Power of
Buyers
Sociocultural
Current
Rivalry
Potential
Entrants
Demographic
Competitive Environment
Industry
Group(s) of organizations producing similar or identical products
SIC Codes
Competitive variables
Compete for customers
Secure the necessary resources to convert into products
Assess an organization’s specific environment
Porter’s five forces model
Competitive Environment
Potential Entrants
Threat of New Entrants
Porter’s
Five
Forces
Model
Bargaining
Power
of Suppliers
Industry
Competitors
Suppliers
Rivalry Among
Existing Firms
Threat of Substitute Products
or Services
Substitutes
Bargaining
Power
of Buyers
Buyers
Competitive Environment
Evaluating the Five Forces
Current Rivalry among Existing Firms
Threat
Numerous competitors
Equally balanced competitors
Industry sales growth slowing
High fixed or inventory storage costs
No differentiation or no switching costs
Large capacity increments required
Diverse competitors
High strategic stakes
High exit barriers
Opportunity
––
––
––
––
––
––
––
––
––
Few competitors
One or a few strong competitors
Industry sales growth strong
Low fixed or inventory storage costs
Significant differentiation or switching costs
Minimal capacity increments required
Similar competitors
Low strategic stakes
Minimal exit barriers
Competitive Environment
Evaluating the Five Forces
Potential Entrants
Threat
No or low economies of scale
No other potential cost disadvantages
Weak product differentiation
Minimal capital requirements
Minimal switching costs
Open access to distribution channels
No government policy protection
Opportunity
––
––
––
––
––
––
––
Significant economies of scale
Cost disadvantages from other aspects
Strong product differentiation
Huge capital requirements
Significant switching costs
Controlled access to distribution channels
Government policy protection
Competitive Environment
Evaluating the Five Forces
Bargaining Power of Buyers
Threat
Buyer purchases large volumes
Purchases are significant part
Purchases standard or undifferentiated
Buyer faces few switching costs
Buyer's profits are low
Buyer can manufacture products
Industry's products aren't important
to quality of buyer's products
Buyers have full information
Opportunity
––
––
––
––
––
––
––
Buyer purchases small volumes
Purchases aren't significant part of buyer's costs
Purchases highly differentiated and unique
Buyer faces significant switching costs
Buyer's profits are strong
Buyer can’t manufacture products
Industry's products are important
to quality of buyer's products
–– Buyers have limited information
Competitive Environment
Evaluating the Five Forces
Bargaining Power of Suppliers
Threat
Supplying industry has few companies
and is more concentrated
Supplier's products don’t have substitutes
Industry isn’t an important customer
Supplier's product is an important input
Supplier's products are differentiated
Significant switching costs
Supplier has ability to do
what buying industry does
Opportunity
–– Supplying industry has many companies
and is fragmented
–– Supplier's products do have substitutes
–– Industry is an important customer
–– Supplier's product isn’t an important input
–– Supplier's products aren't differentiated
–– Minimal switching costs in supplier's products
–– Supplier doesn't have ability to do
what buying industry does
Competitive Environment
Evaluating the Five Forces
Substitute Products
Threat
Opportunity
–
There are few good substitutes
There are several not-so-good substitutes –– There are no good substitutes