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Assessing Opportunities and Threats: Doing an External Analysis

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1 Assessing Opportunities and Threats: Doing an External Analysis
Chapter 3 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

2 Chapter Three Learning Outcomes
3.1 Describe an external analysis 3.2 Explain how to do an external analysis of an organization’s specific and general environments 3.3 Discuss the benefits and challenges of doing an external analysis Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

3 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Learning Outcome 3.1 Describe What an External Analysis External analysis is the process of scanning and evaluating an organization’s external environment It is how strategic managers evaluate the threats and opportunities facing their organization An external analysis is the process of scanning and evaluating an organization’s external environment. It’s how strategic managers determine the opportunities and threats facing their organizations. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

4 Learning Outcome 3.1 – cont’d
Opportunities Positive external trends or changes that may help an organization improve performance Threats Are negative external trends or changes that may hinder an organization’s performance Understanding the external environment is essential to creating adaptive strategies Opportunities are positive external trends or changes that may help an organization improve its performance. Threats are negative external trends or changes that may hinder an organization’s performance. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

5 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Figure 3.1 shows how external analysis fits into the overall strategic management process. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

6 Organizations as Open Systems
Organizations are open systems They interact and respond to their environment They are interrelated and interdependent, but function as a whole Change in one part creates change in another Take inputs and process them creating outputs Outputs are distributed into the environment Organizations are open systems, which means they interact with and respond to their environment. As systems, organizations take inputs and process those inputs into outputs. as systems, organizations have interrelated and interdependent parts (departments, units, divisions, etc.) that function as a whole. Any change in any part (or subsystem) can affect the other parts. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

7 Perspectives on Organizational Environments
Studies of organizational interaction with their environment can be summarized from two different perspectives The environment as a source of information The environment as a source of resources Because organizations interact with their environment, organizational researchers have looked for ways to describe and understand those environments and their potential impact on organizational performance. These studies can be summarized from two different perspectives: (1) the environment as a source of information and (2) the environment as a source of resources. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

8 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

9 Environment as Information Perspective
The environment provides organizations with a source of decision making Environmental uncertainty is a key element This is the amount of change and complexity in an organization’s environment The amount of change can be dynamic or stable Dynamic environment is changing rapidly A stable environment is one that change is slow or minimal In this approach, the environment is viewed as a source of information for decision making. A key element is the idea of environmental uncertainty, which is defined as the amount of change and complexity in an organization’s environment. The amount of change occurring in an organization’s environment can be either dynamic or stable. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

10 Environment as Information Perspective – cont’d
Example of dynamic changing organizational environment Cell phone industry Example of slow changing organizational environments Oil industry For instance, the environmental changes taking place in the oil-refining industry are not as rapid as those, say, in the cell phone industry. Therefore, the cell phone industry would be considered more dynamic than the oil-refining industry. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

11 Environment as Information Perspective – cont’d
Environments can also be simple or complex If the number of components in the environment are few, it is simple If the number of components are many, it is complex The more complex and dynamic the environment, the more uncertain it is; requiring more information for strategic decision making This necessitates greater external analysis Decision makers must monitor a number of components in the environment, that environment is complex. If the number of environmental components is few, it’s a simple environment. The more complex and dynamic the environment, the more uncertain it is and the more information decision makers need about the environment to make appropriate decisions. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

12 Environment as Source of Resources Perspective
The environment is viewed as a source of scarce and necessary resources The more hostile the environment the scare the resources and the greater the uncertainty Managers are challenged to acquire and control critical resources It demands monitoring the environment and making adaptive decisions In this approach, the environment is viewed as a source of scarce and necessary resources sought by competing organizations. As the environment becomes more “hostile” (i.e., resources become harder to obtain and control), organizations are subjected to greater uncertainty. Given these uncertain conditions, managers look for ways to acquire and control those critical resources. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

13 Environmental Scanning and External Analysis
Environmental scanning is to know and evaluate what is happening in the external environment Whether the environment is a source of information Whether the environment is a source of scarce resources Or, whether it is both Managers need to do both an external analysis and identify the opportunities and threats facing the organization. For example, look back at the chapter-opening case. Based on their analysis of customer and competitor trends, strategic decision makers at the movie theater chains have chosen strategies they hope will exploit the opportunities and neutralize or avoid the threats in their environment Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

14 Table 3.1 Summary of Two Perspectives on the 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 requires information Amount of uncertainty determines amount and types of information needed Information obtained by analyzing environment The main points of each approach are summarized in Table 3.1. Although these two perspectives provide us with a basic understanding of what’s involved with an external analysis, how can managers determine what’s happening in the external environment? That’s where environmental scanning comes in. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

15 Table 3.1 Summary of Two Perspectives on the Environment
Environment as Source of Resources Environment is source of scarce and valued resources Organizations depend on the environment for these resources Resources are sought by competing organizations Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

16 Learning Review: Learning Outcome 3.1
What is an external analysis and what does it show managers? How does the concept of an organization as an open system relate to external analysis? What does each perspective on organizational environments say? What role does environmental uncertainty play in external analysis? Why do managers need to do more than just scan the environment? Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

17 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Learning Outcome 3.2 Explain How to Do an External Analysis of an Organization’s Specific and General Environments What do managers look for in an external analysis? Where can they find information? How do they evaluate it? How do managers at different levels do analysis? Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

18 External Environment Sectors
The external environmental sectors comprises the specific environment and the general environment The specific environment includes customers, competitors, suppliers, other industry competitive variables The general environment includes economic, demographic, socio-cultural, political-legal, and technological sectors The external environmental sectors comprise the specific environment and the general environment. The specific environment includes customers, competitors, suppliers, and other industry competitive variables whereas the general environment includes economic, demographic, sociocultural, political-legal, and technological sectors. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

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20 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Specific Environment Analyzing the specific environment involves looking at industry and competitive variables Requires looking at the industry and competitors Industry Group or groups of organizations producing similar of identical products Competition for customers to purchase their products Competition to secure necessary resources An industry is a group or groups of organizations producing similar or identical products. These organizations compete for customers to purchase their products and also must secure the necessary resources that are converted into products. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

21 Assessing the Specific Environment
Why assessing the Specific Environment utilizing the Five Forces Model is helpful Some industries are more attractive than others, because the profit potential is higher The five competitive forces influence profit potential A strategic decision maker can determine the opportunities and threats in a specific environment by using this analytical model To assess an organization’s specific environment, we’ll base our approach on Michael Porter’s model and look at five competitive forces. (See Figure 3.4 on page 62.) Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

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23 Current Rivalry among Existing Firms
Porter lists eight conditions that contribute to intense rivalry among competitors within an industry Numerous or balanced competitors With many firms, someone will always be taking action, placing the industry in constant competitive turmoil If competitors are balanced in size or resources, they will be jockeying for position The existing competitors in your industry are your organization’s current competitors that produce and market products similar to yours. What affects the level of rivalry? Porter listed eight conditions that contribute to intense rivalry among existing competitors. If competitors are equal in terms of size or resources, they’ll constantly be jockeying for position, also creating intense competitive action. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

24 Current Rivalry among Existing Firms – cont’d
2. Slow industry growth When consumer demand has leveled off, for a company to grow they will need to steal market share from others This creates intense competition, as firms seek new strategies to achieve growth When industry growth has slowed—in other words, consumer demand for the industry’s products has leveled off—the “market pie” isn’t getting any bigger. For your company to keep growing, you’ll have to steal market share away from your competitors. Conditions will be ripe for competitors to battle with each other to maintain or increase market share, making the level of rivalry intense. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

25 Current Rivalry among Existing Firms – cont’d
3. High fixed costs When costs are fixed, firms seek to operate at capacity, spreading out those costs over a larger volume Intense rivalry is created when firms cut price If products are difficult to or costly to store, companies seek to sell their products more quickly; again, this leads to price cuts In both cases, price competition keeps profits low If organizations have high fixed costs, they’ll do whatever it takes to operate at capacity and thus spread out those fixed costs over a larger volume. This situation often leads to back-and-forth price cutting by competitors in order to attract customers, which increases competitive rivalry. If the industry’s products are difficult or costly to store, companies will want to sell their products as quickly as possible (keeping inventory at the lowest possible levels) and often resort to price cutting to do so. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

26 Current Rivalry among Existing Firms – cont’d
4. Lack of differentiation or switching costs If an industry/s product is or is perceived to be a commodity (not unique), then customers make purchase decisions largely on price and service The restaurant industry is an example of how a company will seek differentiation through themes or atmosphere, while customers might make purchase decisions based on price If the industry’s product is perceived to be a commodity or like a commodity (i.e., not unique in any way), then customers make their purchase decisions largely because of price and service. if there’s no cost (in actual dollars or time you’d have to invest to learn about a new product) associated with switching from one competitor’s product to another’s, then competitive intensity will be high because competitors will be trying to steal customers away from one another. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

27 Current Rivalry among Existing Firms – cont’d
5. Addition of capacity in large increments With increased capacity, in order to remain competitive, firms will cuts prices Overcapacity will increase competition and the need to effect price cuts The cruise line industry is an example of the intense pressure to keep their boats filled In industries where capacity must be added in large increments in order to be economically feasible, these additions by competitors can create competitive disruptions, because the industry will suffer from overcapacity, leading to price cutting and intense competitive rivalry. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

28 Current Rivalry among Existing Firms – cont’d
6. Diverse competitors When competitors differ in their strategic approaches, circumstances, or philosophy, it is difficult to judge how they will act or react to compete This diversity increases the level of rivalry 7. High strategic stakes Because rivalry will be high, firms may take actions like sacrificing profit in the short term When competitors differ in their strategic approaches, philosophies, or circumstances, it’s hard to judge how they are going to act and react as they compete. This diversity increases the level of rivalry. Industry competitors have strong reasons to want to succeed (such as CEO’s reputation, large dollar investments, etc.) and will do whatever it takes to do so, even going so far as sacrificing short-run profitability. If industry competitors have this perspective, then rivalry will be high Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

29 Current Rivalry among Existing Firms – cont’d
8. High exit barriers Exit barriers are economic, strategic, and emotional factors that keep companies competing in businesses even though they may earn low or negative returns on investment Examples of exit barriers include highly specialized assets that cannot be used in other ways; or, have low liquidation value With high exit barriers, firms may be stuck in the industry and use extreme tactics to compete Porter defines exit barriers as “economic, strategic, and emotional factors that keep companies competing in businesses even though they may be earning low or even negative returns on investment.” s. If there are high exit barriers, the company is, in a sense, “stuck” in that industry and may use extreme tactics to compete. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

30 Current Rivalry among Existing Firms – cont’d
Strategic groups This is more than a group of firms competing in a similar industry; it is firms that have similar strategies, resources, and customers Firms within the same group compete more directly because they have the most potential to affect the profitability of others Obviously, if an industry includes several firms, you may find that not all those firms are your actual direct competitors or competitors that you’d be concerned with. One answer is to look at only the competitors currently in your strategic group, which is a group of firms competing within an industry that have similar strategies, resources, and customers. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

31 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Potential Entrants Organizations have to be concerned with the opportunities and threats presented by current competitors and look for others moving into their industry Threats of new entrants depends on the barriers to entry and the reaction by current competitors to the threats posed by the new entrants The threat of possible competitors depends on the barriers to entry and the reaction by existing competitors to these entrants. Barriers to entry are obstacles to entering an industry. When barriers are high or existing competitors can be expected to take significant actions to keep newcomers out, then the threat of entry is low. A low threat of potential entrants is positive for an industry because profitability won’t be divided up among more competitors. Porter described seven major entry barriers. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

32 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Barriers to Entry Economies of scale – are cost savings realized from producing more volume, as fixed costs drive the cost per unit down Cost disadvantages from other than scale – established firms enjoy cost advantages that cannot be duplicated by new entrants Product differentiation – current competitors have worked hard and spent money to establish unique product identification Possible competitors might think twice because they’d have to come into the industry operating either at a large scale and risk retaliation by existing competitors or at a smaller scale and have a cost disadvantage compared to the others. Established competitors may enjoy cost advantages that possible competitors can’t duplicate even if they can operate at a large volume. If it’s strong enough, brand identity differentiates an organization and leads to loyal customers. To overcome this brand loyalty, possible competitors have to spend heavily on customer research, advertising, packaging, and other marketing activities, resulting in a significant barrier. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

33 Barriers to Entry – cont’d
4. Capital requirements – investments to satisfy customer demands may be difficult for new entrants to make in order to compete 5. Switching costs – one time costs associated with switching from one product to another; the costs may be financial or not 6. Access to distribution channels – an established outlet to sell or distribute the product If an organization has to invest significant financial resources in order to compete, this makes possible competitors think twice about coming into an industry. Switching costs are the one-time costs facing the buyer who switches from one supplier’s product to another’s. If current competitors have secured the logical distribution sources, companies must persuade these sources to accept their product resulting in possible a price breaks or cooperative advertising arrangements, both of which reduce potential profits. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

34 Barriers to Entry – cont’d
7. Government policy – laws and regulations (such as licensing, pollution standards, product safety, product testing, controlling access to raw materials) create barriers that may require additional resources or expertise that have high costs and create a barrier for new entrants to overcome If the government imposes laws and regulations (such as licensing requirements, controlling access to raw materials, air/water pollution standards, product safety standards, product testing time requirements, etc.), it creates a barrier to entry. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

35 Bargaining Power of Buyers
Buyers affect profitability if they can force prices down, bargain for higher quality or more services, or are able to play competitors against one another What makes for a powerful buyer? If buyers have a lot of bargaining power, they can force prices down, bargain for higher quality or more services, or even play competitors against each other trying to see who will give them the best deal. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

36 Bargaining Power of Buyers – cont’d
Factors that can make a buyer powerful: The buyer purchases large volumes of the seller’s goods Products purchased represent a significant portion of their costs or purchases Products purchased are undifferentiated Products require little switching costs If the product does not add to the quality of the buyers products or services One factor is if the consumer purchases large volumes of the seller’s product. Another factor that influences consumers’ bargaining power is whether the products they purchase represent a significant portion of their costs or purchases. Consumers will also have significant bargaining power if the products they purchase are standard or undifferentiated or face little switching costs. Consumers also have bargaining power if the industry’s product isn’t important to the quality of the buyers’ products or services. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

37 Bargaining Power of Buyers – cont’d
Factors that can make a buyer powerful – cont’d: It the product offers low profits The buyer has the ability and resources to access the products, they are buying from other industry sources If they have full information about consumer demand, market prices, and supplier costs Consumers have bargaining power if they have full information about product demand, actual market prices, and supplier costs. The Internet has played a significant role in customers’ access to information. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

38 Bargaining Power of Suppliers
When industry suppliers have bargaining power, they can raise prices, reduce the number of services provided or the quality of products offered for purchase Suppliers can include any providers of raw materials, equipment, labor or financial resources If your industry’s resource providers have bargaining power, they can raise prices or reduce the number of services provided or the quality of products your industry purchases. An industry’s resource providers include raw materials sources, equipment manufacturers, financial institutions, and even labor sources. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

39 Bargaining Power of Suppliers – cont’d
Suppliers are powerful when: Domination by few companies in fragmented industry There are few or no substitute products The industry is not an important customer The product is important to the buyer The supplier’s product is differentiated If resource providers are few in number and are selling to an industry that’s fragmented then these providers will usually be able to exert considerable influence over prices, quality, and sales terms. If the industry is just one of many that the resource provider sells to, then it couldn’t care less whether it keeps you as a customer and is more likely to exert bargaining power. If the resource provider’s product is an important input to the industry. it is, then the resource provider will have more bargaining power. If the resource provider’s products are differentiated or if the industry would experience switching costs, then the resource provider is able to exert more power. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

40 Bargaining Power of Suppliers – cont’d
Suppliers are powerful when: The supplier has ability to provide products that your industry provides (expand into the industry) If the resource provider can do what your industry does (i.e., produce or market your industry’s products) and do it better or cheaper, then this gives the resource provider more bargaining power Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

41 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Substitute Products The last industry force to consider is whether products can be provided by other industries to satisfy the consumer Soft drink substitutes can be provided by fruit and energy drinks, milk or milk products, bottled water, or even alcoholic beverages If there are no or few alternative industry providers for your industry’s product, then this threat isn’t very high. However, if there are a few good alternative industry providers or even several not-so-good alternative industry providers for your product, then this isn’t favorable for your industry’s profitability. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

42 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
General Environment The general environment can have a positive (opportunity) or negative (threat) impact on the industry. It includes the following sectors: Economic Demographic Socio-cultural Political-legal Technological The general environment includes the economic, demographic, sociocultural, political-legal, and technological sectors. The trends in these sectors could have a positive impact (opportunity) or a negative impact (threat) on the organization. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

43 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Economic The economic sector includes macro-economic data that reflect what is happening with the overall economy It includes current statistics and forecasted trends and changes It provides information of both opportunities and threats The economic sector includes macroeconomic data—current statistics and forecasted trends and changes—that reflect what’s happening with the overall economy. The major economic data that might be important to scan and evaluate include interest rates; exchange rates and the value of the dollar; budget deficit or surplus; trade deficit or surplus; inflation rates; gross national product (GNP) or gross domestic product (GDP) levels and the resulting stage of the economic cycle; consumer income, spending, and debt levels; employment-unemployment levels; consumer confidence levels; and workforce productivity rates Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

44 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Demographics Understanding the trends that affect demographics is essential to benefiting or suffering from the outcome of the trends Included in the demographic sector are current statistical data and trends in population characteristics Gender, age, income levels, ethnic makeup, education, family composition, geographic location, birth rates, employment status In the demographics sector, you’ll evaluate current statistical data and trends in population characteristics. It includes the kinds of information that the U.S. Census Bureau gathers such as gender, age, income levels, ethnic makeup, education, family composition, geographic location, birth rates, employment status, and so forth. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

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Demographics – cont’d Population statistics require interpretive analysis to enable understanding of what trends might mean for the business: US population is increasing It is aging, there are more people over 30 than under It is becoming more educated It is becoming more disabled The largest minority is group is Hispanics Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

46 The Hourglass Phenomenon
Demographic Information shapes society and helps identify opportunities and threats If the US population was stacked by age in a pyramid, it would be shaped more like an hourglass as boomers would occupy more of the top, with the largest generation of young people – Generation Y – would be at the bottom How might decision makers use this information? Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

47 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Sociocultural Refers to a country’s culture and includes: Traditions Lifestyles Values Attitudes Beliefs Tastes Patterns of behavior There’s more to understanding your current and potential customers than just their demographic characteristics. It’s also important to know what’s going on with them culturally. In other words, what’s a country’s culture like, and how is it changing? What are the traditions, lifestyles, values, attitudes, beliefs, tastes, patterns of behavior, and how are these changing? Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

48 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Political-Legal In this sector, various laws, regulations, judicial decisions, and political forces at the federal, state, and local levels of government are analyzed Examples of this sector include: Changes in bankruptcy laws that made it tougher for individuals to wipe out debt; which helped credit card companies reduce write-offs Trade agreements between countries In this general environmental sector, various laws, regulations, judicial decisions, and political forces currently in effect at the federal, state, and local levels of government are analyzed. (Some of the more significant federal laws and regulations for businesses are shown in Table 3.3.) Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

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Technological The tech sector looks for scientific or technological innovations that create opportunities and threats Two areas most affected by technology are Product research Development and organizational processes Within the technological sector, we look for scientific or technological innovations that create opportunities and threats. The two organizational areas most affected by technology are product research and development and organizational work processes. How will changing technology affect your organization’s products? Likewise, how will these changes affect the way you produce and deliver your products (your work processes)? Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

50 Finding Information on the External Environment and Evaluating it
Finding valuable information and interpreting it is essential to organizational success. Examples include: Data specific to the context Statistics Analyses Trends Predictions and forecasts Inferences or statements by experts External information can be found using informal and unscientific observations or by using a more formal, systematic search. A thorough and comprehensive external analysis requires more of a systematic, deliberate search. In fact, having some type of formal approach is the key to identifying specific opportunities and threats. An external information system is an information system that provides managers with needed external information on a regular basis. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

51 Responsibilities for External Analysis at Different Managerial Levels
In smaller and medium sized companies, all employees should monitor changes in the specific industry and competitive environment In small companies, front line employees have the greatest interaction with customers and suppliers Such interactions provide valuable information for strategic decision makers In smaller and medium-sized organizations, all employees should monitor changes in the specific (industry-competitive) environment. In fact, in many smaller organizations, frontline employees often have the most direct interactions with customers and supplier representatives and may have some contact with competitors’ employees Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

52 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Responsibilities for External Analysis at Different Managerial Levels – cont’d In large organizations, doing a single analysis for the entire organization can be insufficient The large structure, with its many units and functions, creates varying needs for information The value of the information will depend on the organizational level and function The role of different level managers will vary based on whether their role is to gather, disseminate, or utilize the information gathered In large organizations, doing a single external analysis for the entire organization isn’t likely to provide good enough information for making strategic decisions. s. In larger organizations, it’s the managers who are likely to be responsible for monitoring external trends or changes and identifying potential opportunities or threats. Their responsibilities for the external analysis process will vary somewhat depending on their organizational level. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

53 Learning Review: Learning Outcome 3.2
What does the five-forces model look at and how is it used? What is examined in each of the five components and the general environment? How is external analysis done for a company that is doing business globally? How is information on the external environment found and evaluated? Describe the different responsibilities for doing an external analysis. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

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Learning Outcome 3.3 Discuss the Benefits and Challenges of Doing an External Analysis Benefits of Doing an External Analysis Challenges of Doing an External Analysis Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

55 Benefits of Doing an External Analysis
Enables managers to be proactive, not reactive Anticipate change Create plans for those changes Influence the organizational performance External analysis is key To providing information to use in planning, decision making, and strategy formulation By deliberately and systematically analyzing the external environment, a manager can be a proactive manager—that is, a manager who anticipates changes and plans for those changes, instead of just simply reacting to them. An external analysis also provides the information that strategic managers use in planning, decision making, and strategy formulation Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

56 Benefits of Doing an External Analysis – cont’d
External analysis enables strategies to Adapt to opportunities and threats Neutralize competitor moves Improve organizational opportunities Altering strategies should align the organization based on information about: Markets Customers Technology Because an organization’s environment is changing continually, having information about the various external sectors is important in formulating strategies that “align” the organization with its environment Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

57 Benefits of Doing an External Analysis – cont’d
Environment is a source of resource The ability to acquire and control needed resources depends on understanding the environment and taking advantage of the resources available Dynamic environment requires awareness of Turbulent and fragmented markets Changing customer tastes Innovative technologies An organization’s ability to acquire and control needed resources depends on having strategies that take advantage of the environment’s abundant resources and strategies that cope with the environment’s limited resources. All sizes and all types of organizations are facing increasingly dynamic environments. In order to effectively cope with these changes, managers need to examine the external environment. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

58 Benefits of Doing an External Analysis – cont’d
Intense global competition makes it imperative to complete an external analysis Research shows that firms doing an external analysis have higher performance Performance evaluated on financial measures like return on assets or increased profit does an external analysis really make a difference in an organization’s performance? The answer is that it does appear to make a difference. Research studies generally have shown that in organizations in which strategic decision makers did external analyses, performance was higher. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

59 Challenges of Doing an External Analysis
Rapidly changing environment Keeping track of current situation and changing trends can be a challenge New technology New competitors New laws New customers Rapid change is happening in many industries, not just in high-tech industries. Just keeping track of the current situation and changing trends can be a challenge Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

60 Challenges of Doing an External Analysis – cont’d
Doing an external analysis is time consuming Key is making the process efficient and effective Requires making value judgments about what to monitor and evaluate No process of analysis provides perfect information Forecasts are not fact Analysis that is flexible and open is more likely to be able to create adaptive strategies Systematically scanning and evaluating the environment is important, yet it takes time, and most strategic decision makers are busy managing and don’t feel they have the time. Forecasts and trend analyses are a significant part of the external analysis but forecasts aren’t facts: they’re the best predictions experts have about what they believe is going to happen. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

61 Learning Review: Learning Outcome 3.3
List some benefits of doing an external analysis Discuss the challenges associated with doing an external analysis Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

62 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall


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