Assessing Opportunities and Threats: Doing an
External AnalysisStrategic Management in Action: Chapter 3
What is an external analysis?
• Pet care spending has more than doubled to 3.2 billion over the last 5 yrs. • Referred to as nonessential expenditures
• External 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
Organizations as Open Systems
• Open 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.
Organization as an Open System
Perspectives on Organizational Environments
• Organizations interact with their environment in two ways:• The environment as a source of information• The environment as a source of resources
Environment as Information Perspective
• Environmental uncertainty: the amount of change and complexity in an organization’s environment• Dynamic: changing rapidly; more uncertain
environment• Stable: minimal and slow;
• Strategic decisions made by doing an external analysis.
Resources Perspective
• Environment 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.
Determine What's Happening in the External Environment
• Environmental scanning and analysis.• Identify the opportunities and threats facing the
organization.
How to Conduct an External Analysis
• Specific Environments- Customers, Competitors, Suppliers, other Industry-competitive Variables
-Whereas-
• General Environments- Economic, Demographic, Sociocultural, Political-legal, Technological Sectors
An Organization’s External Environment
Five-forces Model(Specific Environments)
Conditions Contributing to Rivalries
• Numerous or Equally Balanced competitors• Slow Industry Growth• High Fixed or Storage Costs• Lack of Differentiation or Switching Costs• Addition of capacity in large increments• Diverse competitors• High Strategic stakes• High Exit Barriers
Barriers to Potential Entrants
• Economies of Scale• Cost Disadvantages• Product differentiation• Capital Requirements• Switching costs• Access to Distribution Channels• Government Policies
Bargaining Power
• Power Struggle between Buyers vs. Suppliers
• Factors That Contribute to either side• Differentiates between industries and
markets• Examples• Wal-mart as a buyer• UPS holds a “supplier” advantage for their
service• Buyers of their service have few choices, and are
therefore forced to pay UPS’s price.
Substitute Products
• An alternative product that can satisfy the consumer’s need that our industry is satisfying• Examples• Soft Drink industry
General Environment
• Economics• Demographic• Sociocultural• Political-Legal• Technological
Finding and Evaluating Information
• Informal approach vs. Formal Approach• External Information System- formal
approach that provides managers with needed external information on a regular basis
• Having too much information
Responsibilities at Different Managerial Levels
• Small to medium-sized organization• Large organizations• Lower level supervisors• Middle management• Top Level Management
Benefits of Doing an External Analysis
• Proactive Manager- a manager who anticipates changes and plans for those changes, instead of reacting to them.
• “Environment as source of resources”• Ability to acquire and control needed
resources depends on having strategies that take advantage of environment’s abundant resources and the limited resources.
Benefits Continued
• Depending on the industry, today’s 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.
Challenges of Doing an External Analysis
• The 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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