Chapter 3: Assessing Opportunities & Threats

Team 2 Presenters: Gabriel Gamez Chris Flockerzy Nancy Nguyen Sarah Doyle Raquel Vasquez Lydia Herschap

Quintin Jordan Monica Del Bosque

Strategic Management in ActionBy Mary Coulter

Introduction

Describe what an external analysis is

Explain how to do an external analysis of an organization’s specific and general environments

Discuss the benefits and challenges of doing an external analysis

Case Study

External analysis of 4 major movie theater competitors in 2008

Regal-AMC-Cinemark-CarmikeQuestions for strategic decision makers

1). How do people want their movies delivered? (Fidelity experience)

2). What is the impression consumers have of the movie-going experience?

3). How to be proactive in avoiding the problems that the music industry faced?

Case Study cont. Overall, the major questions to be answered are:

What do customers want? How do they perceive what you are currently giving them? How can we avoid getting passed by in the industry?

When answered, strategic decision makers can find new ways to make the movie-going experience something special.

Also, it is important to monitor competitor trends, customer tastes and habits, and changes in technology.

External Analysis External Analysis-the process of scanning and

evaluating an organization’s external environment to determine potential opportunities and threats.Opportunities-positive external trends or changes

that may help an organization improve its performance.

Threats-negative external trends or changes that may hinder an organizations performance.

Organizations as Open SystemsOrganizations interact with and respond to

their environment

Inputs outputs distributed in the external environment (departments, units, divisions)

All are interdependent and interrelated

Any change in one affects the others

Perspective on Organizational Environments

Organizational researchers look for ways to describe and understand external environments and their potential impact on organizational performance

Information perspective-where the environment is a source of information for decision making (Stable or Dynamic) (Simple or Complex)

Resource perspective-where the environment is a source of critical resources that management tries to obtain and control (Hostile environments means greater uncertainty)

Environmental Uncertainty-the amount of change and complexity in an organization’s environment

Environmental Scanning & External Analysis

Management and strategic decision makers need to know and evaluate what’s happening in the external environment Environmental Scanning (Is the environment seen

as a source of resources, information, or both?)

An external analysis is needed to identify certain opportunities and threats

External Analysis of an Organization’s Specific and General Environments“What do managers look at in an external analysis?”

“Where can they find information on the external environment?”

“How do they evaluate the information they find?”

“How do managers at different organizational levels do an external analysis?”

An Organization’s External Environment

Specific Environment Includes: Industry and Competitive Variables Industry- “A group/groups of organizations producing

similar/identical products.” Michael Porter’s Five-Forces

Industries: Higher Attraction and Potential Profit Levels Coulter’s Example:

Airbus and Boeing-have higher profits than the airline industry

Strength and Interaction, of the five-forces, specifically influence profit potential.

Strategists use Porter’s five-forces to determine threats and opportunities.

Porter’s Five Forces

Current Rivalry Among Existing Firms

Organizations that are established within the industry are your competition.

Coulter’s Example: Soft drink industry includes:

Coca Cola, PepsiCo, Cott, Dr. Pepper Snapple Group, and Wal-Mart (Sam’s Choice house brand)

How intense is the industry you want to enter?

Factors Affecting the Level of RivalryNumerous/Equally Balanced competitors:

Continuous Competition Equality of firm’s size and resources/higher competitive

actionSlow Industry Growth:

“Market Pie”Less Demand=Stealing Market Share

Coulter’s Example:Newspaper Companies

High Fixed or Storage Costs: Company profits are low because of:

High fixed costsBack and forth price cutting=more competition

Inventory LevelsLow inventory levels=lower storage costs

Factors Affecting the Level of Rivalry

Lack of differentiation or switching costs:

CommoditiesCompetition based on low prices and quality service.High levels of competition

Coulter’s Example:P.F. Chang’s, Romano’s Macaroni Grill, Olive Garden, and

Chili’sAll have themes which have been “created and over-

replicated” Switching Costs

“Actual dollars or the amount of time you’d have to spend to invest to learn about a new product.”

No switching costs = High competition among companies

Factors Affecting the Level of RivalryAddition of capacity in large increments:

Industry overcapacity due to large capacity incrementsLeads to rivalry and price cutting

Coulter’s Example: Cruise Lines:

Average number of passengers = 5,000Royal Caribbean's Oasis of the Seas passenger

capacity = 5,400 If passenger levels drop there is pressure to keep the boat

at max capacity

Diverse competitors: Increased rivalry due to differentiated strategies

High strategic stakes: Companies will do anything to succeed

Factors Affecting the Level of Rivalry

High Exit Barriers: Porter’s definition:

“Economic, strategic, and emotional factors that keep companies competing in businesses even though they may be earning low or even negative returns on investment.”

Coulter’s Example of Exit Barriers:Highly specialized assets that cannot be used in other ways

or that have low liquidation valueLabor agreements that must be honoredManagement’s unwillingness to leave a business because of

pride, fear, or other psychological reasons. Creates a situation where the company can not “exit” their

industry.

Factors of Current RivalryWe need to ask:

“Who are our current competitors?”

Strategic Group: “A group of firms competing within an industry that has similar

strategies, resources, and customers.” Coulter’s Example:

Mercedes-Benz/General MotorsDo not directly compete due to differences in

customers, resources, and strategies. You need to understand who you are directly competing with.

Why should organizations be concerned ?

New organizations bring new capacity to the industry

New organizations gain market share

Could have substantial resources that can be used to launch attacks against current competitors

Potential Entrants

The threat of entrants depends on the barriers to entry and the reaction by current competitors to entrants

Barriers to entry: are obstacles to entering the industry 7 major entry barriers

Barriers to Entry

Economies of ScaleCost disadvantage from other than ScaleProduct differentiationCapital requirements Switching costsAccess to distribution channelsGovernment Policies

7 Major Barriers

Forces organizations to be more innovative in the… Product Work process

Compels companies to be on their toes Effective Efficient

FYIThe Benefits of Competition

How do buyers affect the industry?

High bargaining power Forces prices down Can bargain for higher quality or more

services Play competitors against each other

Bargaining Power of Buyers

What makes a buyer powerful? Whether the buyer purchases large volume

Can make or break a company

If products are standard or undifferentiated

Face little switching costs

Ability to manufacture products themselves

Bargaining Power of Buyers

Bargaining Power of Suppliers

Suppliers can raise or reduce the number of services provided or the quality of products that the industry purchases.

An Industry’s Suppliers (Provider of Resources):

Raw Material Sources Equipment Manufactures Labor Sources Financial Institutions

Bargaining Power of Suppliers continued…Identifying whether an industry’s

suppliers are powerful.1. Are the suppliers few and selling to an industry that is

fragmented i.e. small and not very powerful? 2. Are there any substitute products?3. Is the industry an important customer?4. Is the supplier’s product important to your industry? 5. Are the products differentiated or is the customer

switching cost? 6. Do the supplier’s have the ability to provide the

products that your industry is currently providing?-Example: Liz Claiborne

Substitute Product The threat of a substitute product.

Example: Customer wanting something to drink

Few or no substitutes = Low Threat Few good or several not so good substitutes

= High Threat, not favorable for your industry and hurts your profitability

General Environment The external factors affecting the

industry: Economy Demographics Sociocultural Political-LegalTechnology Sectors

Trends in these sectors: Positive Impact (Opportunity)Negative Impact (Threat)

External changes not always an opportunity or threat: Example: Interest rates

Economics Looking at what’s happening in the overall economy is

important to determine how the shareholders of the company, and ultimately the company’s performance will be impacted. Evaluate current and future macroeconomic variables to see if

they pose a threat or create an opportunity for your organization. Interest rates, GDP, consumer debt levels, inflation rates etc.

Industries are affected differently, but organizations within each industry face the same economic trends and changes.

Companies should specifically focus on volatile factors because these could significantly affect

strategic decisions.

Macroeconomic Variables

Demographics Use demographics, data and shifts in population

characteristics, to see what positive or negative trends affect the organization, in order to make strategic decisions.

Demographic information is useful for understanding current customers as well as targeting potential customers.

Regardless of operating domestically or globally, it is important to have as much demographic information as possible to accurately assess the external environment and to create an appropriate strategy.

Sociocultural “Measuring and interpreting people’s opinions, values, attitudes,

likes and dislikes.”

What the sociocultural sector includes:TraditionsLifestyle valuesBeliefsTastesPatterns of behavior

Its important for strategic decision makers to recognize both the current status and trends in the sociocultural sector.

Evaluating the Sociocultural Sector

Look at values and attitudes

Values influence people’s behavior in the way they shop, work, raise their families, and live their lives.

People’s attitudes can also influence behavior. Ex: Openness v. privacy on the internet (i.e. Facebook)

Also want to look at changes or trends in people’s activities, behavior, and purchases.

Ex: Healthier snack foods

Political-Legal Includes various laws, regulations, judicial decisions, and political forces currently in effect at the federal, state, and local levels of government.

Example: New bankruptcy laws

Other major concerns include: Taxation Minimum wage Product labeling safety laws Political changes

Aspects of the Global political environment: Be aware of changes of who or what political party is in power and

new laws and regulations Various trade alliances

NAFTA, ASEAN, and African Union

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 U.S. Economic Espionage Act of 1996 Sarbanes-Oxley Act of 2002

Table 3.3, p. 83, Strategic Management in Action, Marry Coulter

Significant Federal Laws and Regulations for Businesses

Technological Look for scientific or technological innovations that create

opportunities and threats.Two organizational areas most affected are:

Product research and development Organizational work processes

Innovations in Technology: Computerization

Ex: EDI Medicine

Coulter’s Ex: X-StaticNew technological innovations could be opportunities and threats to

different industries, but the impact of these innovations will be different for different industries.

Finding and Evaluating Information on the External Environment

Informal and unscientific observations Formal systematic searchExternal Information System

Identify potential trends

Responsibilities for External Analysis at Different Managerial LevelsSmall OrganizationsEveryone should monitor changes in

the external environment

Large OrganizationsMid-managers gather informationTop Level managers use information to

create strategy

Why do an External Analysis?

Benefits!!!Provides the information for strategic managers

Planning Decision Making Strategy Formulation

Realization that today’s external environment is increasing

Differences Maker?

Why do an External Analysis?

Challenges: Environment ChangingThe Amount of TimeShort Comings of Forecasts

Points to Take Away

Porter's five-forces model helps a company analyze their specific environment.

Do not underestimate the power of your buyers and suppliers.

Strategic groups help a company realize who they directly compete with.

Your approach to doing an external analysis can range from informal to formal.

Works Cited:Coulter, Mary K. Strategic Management in Action. Upper Saddle River, N.J: Prentice Hall, 2010. Print.

Kim, W. Chan, and Renée Mauborgne. Blue Ocean Strategy How to Create Uncontested Market Space and Make Competition Irrelevant. New York: Harvard Business School, 2005. Print.

Belch, George E., and Michael A. Belch. Advertising and Promotion An Integrated Marketing Communications Perspective. 8th ed. New York: McGraw-Hill Irwin, 2009. Print.

Economic Research Federal Reserve of St. Louis http://research.stlouisfed.org/fred2/