Assessing Opportunities and Threats: Doing an External Analysis

Team 2:Jennifer, Marlee, Amy, Logan, Corbin, Josh

What is External Analysis?

How to create an External Analysis?

What are the benefits and challenges of doing an External Analysis?

Brief Overview

The process of scanning and evaluating an organization’s external environment. ◦ Ex: How managers determine the opportunities

and threats facing the organization.

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.

3.1 External Analysis

Threats: Negative external trends or changes that may hinder an organizations performance. ◦ Ex: Apple vs. Motorola/Samsung with cell phones

3.1 External Analysis

Organizations are “open systems” which means they interact with and respond to their environment. ◦ Ex: Apple iPhone was a success then came the

iPad.

As systems, organizations take inputs and turn them into outputs.

INPUTS Organizations OUTPUTS

Open Systems

External Analysis

Environmental Uncertainty 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.

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

Expanding on dynamic Vs. Stable

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

Complex Vs. Simple Environment

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

What does this mean?

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.

Application of Uncertainty

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

Good to Great

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

Job Market

3.2 External Analysis of an Organization’s Specific and General Environment

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?

Specific Environment◦ Customers, competitors, suppliers, and other

industrial-competitive variables

◦ Example Apple- customers, Google, Research in Motion, HP, individual computer component suppliers…

General Environment◦ Economic, demographic, socioculteral, political-

legal, and technological sectors

External Environmental Sectors

An Organizations External Enviornment

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,

Porters 5 Forces to assess the specific environment

Specific Environment

Porters 5 Forces

Existing firms in your industry◦ Already in industry and produce similar products◦ Soft Drinks-Coke, Pepsi, Dr. Pepper, Wal-Mart

Analyze Intensity of the Rivalry◦ Cut throat or Polite?

More competitive, the more profitable the industry, the more the companies profitability will suffer

Current Rivalry among Existing Firms

1. Numerous or Equally Balanced Competitors

◦ Unnoticed actions due to many ◦ Equal size/resources continuous jockeying

2. Slow Industry Growth◦ Level consumer demand◦ Steal others piece of the pie to grow

3. High Fixed or Storage Costs◦ Large costs yield larger volume to spread cost◦ Expensive Items=Expensive to Store◦ Price wars

Porters 8 Conditions that Contribute to Intense Rivalry

1. Lack of Differentiation or Switching Costs◦ Commodity Products◦ Decision on price and service◦ Lack of Switching Costs (Restaurant Industry)

2. Addition of Capacity in Large Increments◦ Increased Production->over production in

industry◦ Price Cuts/Wars

3. Diverse Competitors◦ Diversity=unknown reactions◦ Increased Rivalry

Porters 8 Conditions that Contribute to Intense Rivalry

1. High Strategic Stakes◦ Reputations◦ Sacrifice short term profitability◦ Mindset=Increased Rivalry

2. High Exit Barriers◦ Economic, strategic, emotional factors◦ Specialized assets no other use◦ Labor agreements

Porters 8 Conditions that Contribute to Intense Rivalry

Who are our current competitors?◦ Numerous Competitors…identify who…◦ Direct Competitors◦ Those that worry you

Strategic Group◦ Organizations with similar strategies, resources

and customers

Mercedes and GM◦ Not direct competitors

Rivalry Clarification

Threat to entry depends on…Barriers to Entry◦ Obstacles to entering the industry◦ Low threat positive to industry

Porters 7 entry barriers

Potential Entrants

1. Economics of Scale◦ Cost saving of large scale…large fixed costs◦ Large scale=retaliation from competition◦ Small scale to high of costs

2. Cost Disadvantages from other than Scale◦ Protected technology◦ Favorable access to suppliers◦ Lack of knowledge

3. Product Differentiation◦ Product Identification◦ Loyal Customers

Porters 7 Entry Barriers

1. Capital Requirements◦ High start up Costs◦ Ski Resorts

2. Switching Costs◦ One time cost facing customers from one supplier

to the next◦ PC users to Mac

3. Access to Distribution Channels◦ Industry Leaders corner supply and distribution

channels◦ 1948 Tucker Sedan

4. Government Policy◦ Laws and regulations

Porters 7 Entry Barriers

Brief Review

Power leads to◦ Decreased prices ◦ Higher quality or services◦ Play competitors against each other for deals

Bargaining Power of Buyers

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

Factors that lead to Increased Power

Suppliers include but not limited too…◦ Raw material sources◦ Equipment manufacturers◦ Financial institutions◦ Labor sources

Bargaining Power of Suppliers

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

Factors that lead to Increased Power

Can another industry satisfy your industries product?

You’re a soft drink company◦ Fruit drinks◦ Energy drinks◦ Alcoholic beverages◦ milk

Substitute Products

External environmental sector that includes the following sectors: ◦ Economic◦ Demographic◦ Sociocultural◦ Political-legal◦ Technological

Changes in sectors can be positive (opportunity), negative (threat), or have no effect on organization

General Environment

Includes macroeconomic data such as:◦ Interest rates◦ Inflation rates◦ Budget deficit/ surplus◦ GDP level◦ Consumer spending◦ Unemployment rate

Look at current information as well as forecasted trends and changes

Economic

Different industries are affected differently by economic trends◦ Ex: Rising interest rates are favorable for credit

card industry and less favorable for housing industry

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 price-conscious consumers while other companies were threatened by the economy

Evaluating current statistical data and trends in population characteristics◦ 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

Demographics

What is a country’s culture like and how is it changing?◦ 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

Sociocultural

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

Political-Legal

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.) Apple- technological advances can be an

opportunity to improve existing products or create new products, or can be a threat if utilized by competitors

Technological

Finding Information on the External Environment 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

External Information System 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

How often decision markers need information depends on how complex the environment is

The more complex and dynamic the environment, the more often information should be gathered

External Analysis At Each Managerial LevelSmall 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

External Analysis At Each Managerial LevelRole 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.

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

3.3 Benefits and Challenges of doing an External Analysis

◦ 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

Benefits cont.

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

Forecasts and trend analyses aren’t perfect

Challenges of Doing an External Analysis

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

Benefits vs. challenges◦ Ex: proactive managers, but rapidly changing

environment

Main Concepts from Chapter Three