© Prentice-Hall Strategic Management in Action 3 Assessing Opportunities and Threats: Doing an External Analysis Mary Coulter

© Prentice-Hall Learning Outline What is an external analysis? Differentiate between external opportunities and threats. Describe how organizations are open systems. Distinguish between the environment as information perspective and the environment as source of resources perspective. Explain how an external analysis is more than scanning the environment. How do you do an external analysis? Describe the components in an organization’s specific environment. Explain each of the forces in Porter’s five forces model.

© Prentice-Hall Learning Outline (contd.) Describe the components in an organization’s general environment. Discuss what types of external information strategic managers need and where they might find this information. Describe the type of external information managers at different levels might need. Why do an external analysis? Explain the benefits and challenges of doing an external analysis.

© Prentice-Hall W HAT I S AN E XTERNAL A NALYSIS ? External Analysis Scan and evaluate various external environmental sectors impacting performance Opportunities Positive external environmental trends that improve the organization’s performance Threats Negative external environmental trends that hinder the organization's performance

© Prentice-Hall Organizations as Open Systems  Organizations function as systems (Barnard, 1938)  Affect and impact environment Open System Interacts with and responds to its external environment

© Prentice-Hall Figure 3.2 Organizations as Open Systems Environment Organization Inputs ProcessesOutputs Resources: Physical Capital Human Information Organization Functions: Production-Operations Marketing Financial-Accounting Human Resource Mgt. Research and Development Information Systems Managerial Activities: Planning Organization Leading Controlling Goods Services Performance Measures: Financial Productivity Achieve Goal

© Prentice-Hall Table 3.1 Summary of Two Perspectives on 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 means obtaining information Amount of uncertainty determines amount and types of information needed Information obtained by analyzing external environment

© Prentice-Hall Table 3.1 (contd.) Environment as Source of Resources Environment viewed as source of scarce and valued resources Organizations depend on the environment for these resources Resources are sought by competing organizations Dependency is determined by difficulty of obtaining and controlling resources Reducing dependency means controlling environmental resources Controlling environmental resources means knowing about the environment and attempting to change or influence it

© Prentice-Hall External Environmental Sectors Specific Environment External sectors that directly impact the organization’s strategic decisions by opening up opportunities or threats General Environment External sectors that indirectly affect the organization’s strategic decisions and which may pose opportunities and threats

© Prentice-Hall Organization Specific Environment Industry-Competitors Substitute Products Bargaining Power of Suppliers Bargaining Power of Buyers Potential Entrants Current Rivalry General Environment Technological Political-Legal Sociocultural Demographic Economic Figure 3.3 An Organization’s External Environment

© Prentice-Hall Specific Environment Industry Group(s) of organizations producing similar or identical products Competitive Variables Compete for customers Compete for resources Assess an organization’s specific env. Porter’s five forces model

© Prentice-Hall Figure 3.4 Five Forces Model Industry Competitors Rivalry Among Existing Firms Suppliers Bargaining Power of Suppliers Potential Entrants Threat of New Entrants Buyers Bargaining Power of Buyers Substitutes Threat of Substitute Products or Services

© Prentice-Hall Five Forces Evaluating the Five Forces(from Table 3-2) Current Rivalry among Existing Firms ThreatOpportunity –– Numerous competitors Few competitors Equally balanced competitors One or a few strong competitors Industry sales growth slowing Industry sales growth strong High fixed or inventory storage costs Low fixed or inventory storage costs No differentiation or no switching costs Significant differentiation or switching costs Large capacity increments required Minimal capacity increments required Diverse competitors Similar competitors High strategic stakes Low strategic stakes High exit barriers Minimal exit barriers

© Prentice-Hall Five Forces (contd.) Evaluating the Five Forces(from Table 3-2) Potential Entrants ThreatOpportunity –– No or low economies of scale Significant economies of scale No other potential cost disadvantagesCost disadvantages from other aspects Weak product differentiation Strong product differentiation Minimal capital requirements Huge capital requirements Minimal switching costs Significant switching costs Open access to distribution channels Controlled access to distribution channels No government policy protectionGovernment policy protection

© Prentice-Hall Five Forces (contd.) Evaluating the Five Forces(from Table 3-2) Bargaining Power of Buyers ThreatOpportunity –– Buyer purchases large volumesBuyer purchases small volumes Purchases are significant part Purchases aren't significant part of buyer's costs Purchases standard or undifferentiated Purchases highly differentiated and unique Buyer faces few switching costsBuyer faces significant switching costs Buyer's profits are low Buyer's profits are strong Buyer can manufacture products Buyer can’t manufacture products Industry's products aren't importantIndustry's products are important to quality of buyer's productsto quality of buyer's products Buyers have full informationBuyers have limited information

© Prentice-Hall Five Forces (contd.) Evaluating the Five Forces(from Table 3-2) Bargaining Power of Suppliers ThreatOpportunity –– Supplying industry has few companiesSupplying industry has many companies and is more concentrated and is fragmented Supplier's products don’t have substitutesSupplier's products do have substitutes Industry isn’t an important customerIndustry is an important customer Supplier's product is an important inputSupplier's product isn’t an important input Supplier's products are differentiatedSupplier's products aren't differentiated Significant switching costs Minimal switching costs in supplier's products Supplier has ability to doSupplier doesn't have ability to do what buying industry doeswhat buying industry does

© Prentice-Hall Five Forces (contd.) Evaluating the Five Forces(from Table 3-2) Substitute Products ThreatOpportunity – –– There are few good substitutes There are several not-so-good substitutesThere are no good substitutes

© Prentice-Hall General Environment Economic Demographic Sociocultural Political-Legal Technical Sources of External Influence Sources of External Influence

© Prentice-Hall General Environment Economic All the macroeconomic data, current statistics, trends, and changes Interest rates Monetary exchange rates Budget deficit-surplus Trade deficit-surplus Inflation rates GNP or GDP Consumer income, spending, and debt levels Unemployment levels Workforce productivity

© Prentice-Hall General Environment Demographics Current statistical data and trends in population characteristics Gender Age Income levels Ethnic makeup Education Family composition Geographic location Birth rates Employment status

© Prentice-Hall General Environment Sociocultural Country's culture Society's Traditions Values Attitudes Beliefs Tastes Patterns of behavior

© Prentice-Hall General Environment Political-Legal Federal, state, and local Laws Regulations Judicial decisions Political forces

© Prentice-Hall General Environment Examples of Significant Legislation Affecting Organizations(from Table 3-3)  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

© Prentice-Hall General Environment Technical Improvements, advancements, and innovations that create opportunities and threats Communications Computing Transportation Manufacturing Robotics Biotechnology Medicine and medical Telecommunications Consumer electronics

© Prentice-Hall External Information System An external information system (EIS) is an information system that provides managers with needed external information on a regular basis

© Prentice-Hall Responsibilities for External Analysis at Different Managerial Levels Lower Level Managers/Supervisors Observe and interact Collect and consolidate Middle Managers Coordinate Share with organizational units Gatherer and disseminator Monitor general environmental sectors Make needed strategic changes Upper Management Evaluate opportunities and threats

© Prentice-Hall Benefits of Doing An External Analysis Proactive managers anticipate change and plan accordingly Provide information for Planning Decision making Strategy formulation Acquire and control needed resources Cope effectively with increasingly dynamic environment Make a difference with higher performance

© Prentice-Hall Challenges of Doing an External Analysis Rapid environmental changes are difficult to keep up with Amount of time that analysis can consume Forecasts and trend analyses are not actual fact

© Prentice-Hall Chapter Three Questions