Assessing Opportunities and Threats: Doing an External Analysis Strategic Management in Action: Chapter 3.

Assessing Opportunities and Threats: Doing an External Analysis

Assessing Opportunities and Threats: Doing an External AnalysisStrategic Management in Action: Chapter 31What is an external analysis?Pet care spending has more than doubled to 3.2 billion over the last 5 yrs. Referred to as nonessential expendituresExternal analysis: process of scanning and evaluating an organizations external environment.Strategic managers determine the opportunities and threat facing their organizations.Opportunities: positive external trends or changes Threats: negative external trends or changes

2Organizations as Open SystemsOpen systems: interact with and respond to their environment.Example- inputs have to come from somewhere and outputs must be distributed somewhere.The somewhere is the external environment.Organizations are interrelated and interdependent.Chester Barnard, management theorist, first suggested this in 1938.3Organization as an Open System

4Perspectives on Organizational EnvironmentsOrganizations interact with their environment in two ways:The environment as a source of informationThe environment as a source of resources5Environment as Information PerspectiveEnvironmental uncertainty: the amount of change and complexity in an organizations environmentDynamic: changing rapidly; more uncertain environmentStable: minimal and slow;Strategic decisions made by doing an external analysis.

6Resources PerspectiveEnvironment viewed a source of scarce and valued sources.Organizations depend on the environment for these resources.Reducing dependency means controlling environment resources.Means knowing about the environment and attempting to change or influence it.Example: Toyota hybrid vehicles.

7Determine What's Happening in the External EnvironmentEnvironmental scanning and analysis.Identify the opportunities and threats facing the organization.8How to Conduct an External AnalysisSpecific Environments- Customers, Competitors, Suppliers, other Industry-competitive Variables

-Whereas-

General Environments- Economic, Demographic, Sociocultural, Political-legal, Technological Sectors9An Organizations External Environment

10Five-forces Model(Specific Environments)

11Conditions Contributing to RivalriesNumerous or Equally Balanced competitorsSlow Industry GrowthHigh Fixed or Storage CostsLack of Differentiation or Switching CostsAddition of capacity in large incrementsDiverse competitorsHigh Strategic stakesHigh Exit Barriers12Barriers to Potential EntrantsEconomies of ScaleCost DisadvantagesProduct differentiationCapital RequirementsSwitching costsAccess to Distribution ChannelsGovernment Policies13Bargaining PowerPower Struggle between Buyers vs. SuppliersFactors That Contribute to either sideDifferentiates between industries and marketsExamplesWal-mart as a buyerUPS holds a supplier advantage for their serviceBuyers of their service have few choices, and are therefore forced to pay UPSs price.14Substitute ProductsAn alternative product that can satisfy the consumers need that our industry is satisfyingExamplesSoft Drink industry

15General EnvironmentEconomicsDemographicSocioculturalPolitical-LegalTechnological

16Finding and Evaluating InformationInformal approach vs. Formal ApproachExternal Information System- formal approach that provides managers with needed external information on a regular basisHaving too much information17Responsibilities at Different Managerial LevelsSmall to medium-sized organizationLarge organizationsLower level supervisorsMiddle managementTop Level Management18Benefits of Doing an External AnalysisProactive Manager- a manager who anticipates changes and plans for those changes, instead of reacting to them.Environment as source of resourcesAbility to acquire and control needed resources depends on having strategies that take advantage of environments abundant resources and the limited resources.19Benefits Continued Depending on the industry, todays external environment is increasingly dynamic.Does an external analysis make a difference?Research studies have shown that in organizations in which strategic decision makers did external analyses, performance was higher.Evaluated using a financial measure such as return on assets or growth in profitability.20Challenges of Doing an External AnalysisThe environment might be changing more rapidly than realistically can be kept up with.Amount of time it can consume.Forecasts and trend analyses are a significant part of the external analysis, they are not perfect.

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