Ch. 3 Assessing Opportunities and Threats Marsha Swink Jonathan McLaurin Paul Shirley

External Analysis What is External Analysis? ▫Opportunities ▫Threats

Open Systems-Two Perspectives Environment as a source of Information ▫Amount of change- dynamic vs. stable ▫Amount of complexity- complex vs. simple Environment as a source of Resources ▫Scarce and necessary resources ▫Hostile= greater uncertainty

External Environmental Sectors Specific Environment- Customers, competitors, suppliers and other competitive factors. General Environment- Economic, Demographic, Sociocultural, Political-Legal, and Technological.

Specific Environment Porter’s Five-Forces Model ▫Rivalry ▫Entrants ▫Buyers ▫Suppliers ▫Substitutions

Rivalry Among Existing Firms Competitors- Few or Many? Sales Growth- Slowing or Progressing Diversity Among Competitors. ▫How similar is your competition to you?

Potential Entrants to the Industry Economies of Scale- High or Low? Capital Requirements- Large or Small? Government Policies- In Place to Help or Harm?

Bargaining Power of Buyers Purchases Large or Small Volumes? Products Purchased are Standard or Unique? Buyer’s Profits- High or Low?

Bargaining Power of Suppliers Are Suppliers Concentrated or Fragmented? Importance of the Industry Being Supplied ▫Is our company important Product is an Important Input to Industry.

Substitute Products Are There any Good Substitutes?

Specific Environment Industry Profitability ▫What does the company have to achieve profitability? ▫What can it develop or create to progress?

General Environment Includes: ▫Economic ▫Demographic ▫Sociocultural ▫Political-Legal ▫Technological Trends positive(opportunity)/negative(threats) Some Changes have no effect on organization

Economic Rising cost of energy and fuels ▫Retailers- consumers lose appetite of spending ▫Exception: Wal-Mart ▫CostCo’s greatest struggle Macroeconomic data ▫Interest rates, GDP, Unemployment levels Global Business analysis won’t change much ▫Biggest challenge is reliable statistics

Demographics Age Gender Income Ethnicity Education Geographic Location Employment Birth Rates Cross Examine Understand current and potential customers Hourglass Phenomenon PeaceBaby BoomersToday

Demographics U.S. ▫24.7 million small businesses ▫24.6 million people married w/children ▫Avg Inc. $48,201 per person CostCo ▫Small Businesses ▫Upper/Middle Class Families ▫ Avg. Inc. Target Market  100,000

Sociocultural Understand Current ▫Culture ▫Lifestyles  Kraft’s healthier food products ▫Traditions ▫Tastes ▫Attitudes What’s “in” ▫Apple’s iPods/Phones/Pads

CostCo’s Sociocultural Forces U.S ▫Shopping convenient, ▫Deliverer organic options ▫Awareness of food allergens Canada ▫Many ethnic groups Japan ▫Freshness ▫Portability

Political-Legal Taxation Minimum wage Product labeling/safety laws International business Trading

Technological Look For ▫Scientific Innovation ▫Technological Innovation Most Affected ▫Product R&D ▫Organizational Work Processes Computerization

CostCo’s Technological Facts Track purchases of members ▫Know which products sell more ▫Restocking inventory ▫Memberships connected w/credit cards

Finding Info on External Environment Customer surveys Trade journals General news External informational systems Problems ▫Too much information

Responsibility for External Analysis Small to Mid-size organizations ▫All should monitor changes Large organizations ▫Managers Everyone is involved

What's the point? Align the organization with the environment Understand what the environment has to offer Ever increasing dynamic environment Makes a difference in performance results Promotion and raises

Challenges Changes are too rapid to evaluate Time consuming Forecast aren't perfect

Take Aways External Environment Industry profitability Stay in line with environment Continually Assess opportunity and threats