Assessing Opportunities and Threats : Doing an External Analysis

3-1Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Assessing Opportunitiesand Threats:

Doing an External Analysis

Chapter 3

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall


Chapter Three Learning Outcomes

3.1 Describe an external analysis3.2 Explain how to do an external analysis of an

organization’s specific and general environments

3.3 Discuss the benefits and challenges of doing an external analysis


Learning Outcome 3.1

Describe What an External Analysis • External analysis is the process of scanning

and evaluating an organization’s external environment– It is how strategic managers evaluate the threats

and opportunities facing their organization


Learning Outcome 3.1 – cont’d

• Opportunities– Positive external trends or changes that may help

an organization improve performance• Threats– Are negative external trends or changes that may

hinder an organization’s performance• Understanding the external environment is

essential to creating adaptive strategies

3-5Copyright © 2013 Pearson Education, Inc. publishing as Prentice HallCopyright © 2013 Pearson Education, Inc. publishing as Prentice Hall


Organizations as Open Systems

• Organizations are open systems– They interact and respond to their environment– They are interrelated and interdependent, but

function as a whole– Change in one part creates change in another– Take inputs and process them creating outputs– Outputs are distributed into the environment


Perspectives on Organizational Environments

• Studies of organizational interaction with their environment can be summarized from two different perspectives– The environment as a source of information– The environment as a source of resources

3-8Copyright © 2013 Pearson Education, Inc. publishing as Prentice HallCopyright © 2013 Pearson Education, Inc. publishing as Prentice Hall


Environment as Information Perspective

• The environment provides organizations with a source of decision making

• Environmental uncertainty is a key element– This is the amount of change and complexity in an

organization’s environment– The amount of change can be dynamic or stable– Dynamic environment is changing rapidly– A stable environment is one that change is slow or

minimal


Environment as Information Perspective – cont’d

• Example of dynamic changing organizational environment– Cell phone industry

• Example of slow changing organizational environments– Oil industry


Environment as Information Perspective – cont’d

• Environments can also be simple or complex• If the number of components in the

environment are few, it is simple• If the number of components are many, it is

complex– The more complex and dynamic the environment,

the more uncertain it is; requiring more information for strategic decision making

– This necessitates greater external analysis


Environment as Source of Resources Perspective

• The environment is viewed as a source of scarce and necessary resources– The more hostile the environment the scare the

resources and the greater the uncertainty– Managers are challenged to acquire and control

critical resources– It demands monitoring the environment and

making adaptive decisions


Environmental Scanning and External Analysis

• Environmental scanning is to know and evaluate what is happening in the external environment– Whether the environment is a source of

information– Whether the environment is a source of scarce

resources– Or, whether it is both


Table 3.1 Summary of Two Perspectives on the Environment

Environment as Source of Information– Environment viewed as source of information– Environments differ in amount of uncertainty– Uncertainty is determined by complexity and rate

of change– Reducing uncertainty requires information– Amount of uncertainty determines amount and

types of information needed– Information obtained by analyzing environment


Table 3.1 Summary of Two Perspectives on the Environment

Environment as Source of Resources– Environment is source of scarce and valued

resources– Organizations depend on the environment for

these resources– Resources are sought by competing organizations


Learning Review: Learning Outcome 3.1

– What is an external analysis and what does it show managers?

– How does the concept of an organization as an open system relate to external analysis?

– What does each perspective on organizational environments say?

– What role does environmental uncertainty play in external analysis?

– Why do managers need to do more than just scan the environment?



• Explain How to Do an External Analysis of an Organization’s Specific and General Environments– What do managers look for in an external

analysis?– Where can they find information?– How do they evaluate it?– How do managers at different levels do analysis?


External Environment Sectors

• The external environmental sectors comprises the specific environment and the general environment– The specific environment includes customers,

competitors, suppliers, other industry competitive variables

– The general environment includes economic, demographic, socio-cultural, political-legal, and technological sectors



Specific Environment

• Analyzing the specific environment involves looking at industry and competitive variables– Requires looking at the industry and competitors

• Industry – Group or groups of organizations producing similar

of identical products– Competition for customers to purchase their

products– Competition to secure necessary resources


Assessing the Specific Environment

• Why assessing the Specific Environment utilizing the Five Forces Model is helpful– Some industries are more attractive than others,

because the profit potential is higher– The five competitive forces influence profit

potential– A strategic decision maker can determine the

opportunities and threats in a specific environment by using this analytical model



Current Rivalry among Existing Firms

Porter lists eight conditions that contribute to intense rivalry among competitors within an industry

1. Numerous or balanced competitors– With many firms, someone will always be taking

action, placing the industry in constant competitive turmoil

– If competitors are balanced in size or resources, they will be jockeying for position


Current Rivalry among Existing Firms – cont’d

2. Slow industry growth– When consumer demand has leveled off, for a

company to grow they will need to steal market share from others

– This creates intense competition, as firms seek new strategies to achieve growth



3. High fixed costs– When costs are fixed, firms seek to operate at

capacity, spreading out those costs over a larger volume

– Intense rivalry is created when firms cut price– If products are difficult to or costly to store,

companies seek to sell their products more quickly; again, this leads to price cuts

– In both cases, price competition keeps profits low



4. Lack of differentiation or switching costs– If an industry/s product is or is perceived to be a

commodity (not unique), then customers make purchase decisions largely on price and service

– The restaurant industry is an example of how a company will seek differentiation through themes or atmosphere, while customers might make purchase decisions based on price



5. Addition of capacity in large increments– With increased capacity, in order to remain

competitive, firms will cuts prices– Overcapacity will increase competition and the

need to effect price cuts– The cruise line industry is an example of the

intense pressure to keep their boats filled



6. Diverse competitors– When competitors differ in their strategic

approaches, circumstances, or philosophy, it is difficult to judge how they will act or react to compete

– This diversity increases the level of rivalry

7. High strategic stakes– Because rivalry will be high, firms may take actions

like sacrificing profit in the short term



8. High exit barriers– Exit barriers are economic, strategic, and

emotional factors that keep companies competing in businesses even though they may earn low or negative returns on investment

– Examples of exit barriers include highly specialized assets that cannot be used in other ways; or, have low liquidation value

– With high exit barriers, firms may be stuck in the industry and use extreme tactics to compete



Strategic groups– This is more than a group of firms competing in a

similar industry; it is firms that have similar strategies, resources, and customers

– Firms within the same group compete more directly because they have the most potential to affect the profitability of others


Potential Entrants

• Organizations have to be concerned with the opportunities and threats presented by current competitors and look for others moving into their industry

• Threats of new entrants depends on the barriers to entry and the reaction by current competitors to the threats posed by the new entrants


Barriers to Entry

1. Economies of scale – are cost savings realized from producing more volume, as fixed costs drive the cost per unit down

2. Cost disadvantages from other than scale – established firms enjoy cost advantages that cannot be duplicated by new entrants

3. Product differentiation – current competitors have worked hard and spent money to establish unique product identification


Barriers to Entry – cont’d

4. Capital requirements – investments to satisfy customer demands may be difficult for new entrants to make in order to compete

5. Switching costs – one time costs associated with switching from one product to another; the costs may be financial or not

6. Access to distribution channels – an established outlet to sell or distribute the product


Barriers to Entry – cont’d

7. Government policy – laws and regulations (such as licensing, pollution standards, product safety, product testing, controlling access to raw materials) create barriers that may require additional resources or expertise that have high costs and create a barrier for new entrants to overcome


Bargaining Power of Buyers

• Buyers affect profitability if they can force prices down, bargain for higher quality or more services, or are able to play competitors against one another

• What makes for a powerful buyer?


Bargaining Power of Buyers – cont’d

• Factors that can make a buyer powerful:– The buyer purchases large volumes of the seller’s

goods– Products purchased represent a significant portion

of their costs or purchases– Products purchased are undifferentiated– Products require little switching costs– If the product does not add to the quality of the

buyers products or services


Bargaining Power of Buyers – cont’d

• Factors that can make a buyer powerful – cont’d:– It the product offers low profits– The buyer has the ability and resources to access

the products, they are buying from other industry sources

– If they have full information about consumer demand, market prices, and supplier costs


Bargaining Power of Suppliers

• When industry suppliers have bargaining power, they can raise prices, reduce the number of services provided or the quality of products offered for purchase

• Suppliers can include any providers of raw materials, equipment, labor or financial resources


Bargaining Power of Suppliers – cont’d

• Suppliers are powerful when:– Domination by few companies in fragmented

industry– There are few or no substitute products– The industry is not an important customer– The product is important to the buyer– The supplier’s product is differentiated


Bargaining Power of Suppliers – cont’d

• Suppliers are powerful when:– The supplier has ability to provide products that

your industry provides (expand into the industry)


Substitute Products

• The last industry force to consider is whether products can be provided by other industries to satisfy the consumer– Soft drink substitutes can be provided by fruit and

energy drinks, milk or milk products, bottled water, or even alcoholic beverages


General Environment

• The general environment can have a positive (opportunity) or negative (threat) impact on the industry. It includes the following sectors:– Economic– Demographic– Socio-cultural– Political-legal– Technological


Economic

• The economic sector includes macro-economic data that reflect what is happening with the overall economy– It includes current statistics and forecasted trends

and changes– It provides information of both opportunities and

threats


Demographics

• Understanding the trends that affect demographics is essential to benefiting or suffering from the outcome of the trends

• Included in the demographic sector are current statistical data and trends in population characteristics– Gender, age, income levels, ethnic makeup,

education, family composition, geographic location, birth rates, employment status


Demographics – cont’d

• Population statistics require interpretive analysis to enable understanding of what trends might mean for the business:– US population is increasing– It is aging, there are more people over 30 than

under– It is becoming more educated– It is becoming more disabled– The largest minority is group is Hispanics


The Hourglass Phenomenon

• Demographic Information shapes society and helps identify opportunities and threats– If the US population was stacked by age in a

pyramid, it would be shaped more like an hourglass as boomers would occupy more of the top, with the largest generation of young people – Generation Y – would be at the bottom

• How might decision makers use this information?


Sociocultural

• Refers to a country’s culture and includes:– Traditions– Lifestyles– Values– Attitudes– Beliefs– Tastes– Patterns of behavior


Political-Legal

• In this sector, various laws, regulations, judicial decisions, and political forces at the federal, state, and local levels of government are analyzed

• Examples of this sector include:– Changes in bankruptcy laws that made it tougher

for individuals to wipe out debt; which helped credit card companies reduce write-offs

– Trade agreements between countries


Technological

• The tech sector looks for scientific or technological innovations that create opportunities and threats

• Two areas most affected by technology are– Product research– Development and organizational processes


Finding Information on the External Environment and Evaluating it

• Finding valuable information and interpreting it is essential to organizational success. Examples include:– Data specific to the context– Statistics– Analyses– Trends– Predictions and forecasts– Inferences or statements by experts


Responsibilities for External Analysis at Different Managerial Levels

• In smaller and medium sized companies, all employees should monitor changes in the specific industry and competitive environment– In small companies, front line employees have the

greatest interaction with customers and suppliers– Such interactions provide valuable information for

strategic decision makers


Responsibilities for External Analysis at Different Managerial Levels – cont’d

• In large organizations, doing a single analysis for the entire organization can be insufficient– The large structure, with its many units and

functions, creates varying needs for information– The value of the information will depend on the

organizational level and function– The role of different level managers will vary

based on whether their role is to gather, disseminate, or utilize the information gathered



• What does the five-forces model look at and how is it used?

• What is examined in each of the five components and the general environment?

• How is external analysis done for a company that is doing business globally?

• How is information on the external environment found and evaluated?

• Describe the different responsibilities for doing an external analysis.



• Discuss the Benefits and Challenges of Doing an External Analysis– Benefits of Doing an External Analysis– Challenges of Doing an External Analysis


Benefits of Doing an External Analysis

• Enables managers to be proactive, not reactive– Anticipate change– Create plans for those changes– Influence the organizational performance

• External analysis is key– To providing information to use in planning,

decision making, and strategy formulation


Benefits of Doing an External Analysis – cont’d

• External analysis enables strategies to– Adapt to opportunities and threats– Neutralize competitor moves– Improve organizational opportunities

• Altering strategies should align the organization based on information about:– Markets– Customers– Technology



• Environment is a source of resource– The ability to acquire and control needed

resources depends on understanding the environment and taking advantage of the resources available

• Dynamic environment requires awareness of– Turbulent and fragmented markets– Changing customer tastes– Innovative technologies



• Intense global competition makes it imperative to complete an external analysis

• Research shows that firms doing an external analysis have higher performance– Performance evaluated on financial measures like

return on assets or increased profit


Challenges of Doing an External Analysis

• Rapidly changing environment– Keeping track of current situation and changing

trends can be a challenge– New technology– New competitors– New laws– New customers


Challenges of Doing an External Analysis – cont’d

• Doing an external analysis is time consuming– Key is making the process efficient and effective– Requires making value judgments about what to

monitor and evaluate • No process of analysis provides perfect

information– Forecasts are not fact– Analysis that is flexible and open is more likely to

be able to create adaptive strategies



• List some benefits of doing an external analysis

• Discuss the challenges associated with doing an external analysis


Assessing Opportunities and Threats : Doing an External Analysis

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