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ExternalAnalysis-MaryCoulter3.ppt© Prentice-Hall 2005
Strategic Management in Action
Mary Coulter
Doing An External Analysis
Assessing Opportunities
and Threats:
© Prentice-Hall 2005
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What is an External Analysis?
External Analysis - Scan and evaluate various external environmental factors impacting performance
Opportunities
Positive external environmental trends that improve the organization’s performance
Threats
Negative external environmental trends that hinder the organization's performance
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Benefits of Doing An External Analysis
Provide information for planning, decision making and strategy formulation
Acquire and control needed resources
Cope effectively with increasingly dynamic environment
Make a difference with higher performance
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
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External Environmental Sectors
An organization’s external environment includes sectors that are directly relevant (specific) to its strategic decisions and sectors that aren’t directly relevant but must be considered (general).
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
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An Organization’s External Environment
The specific environment focuses on the industry. The five sectors shown are the focus of the general environment.
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
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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
General Environment
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Demographics - Current statistical data and trends in population characteristics
Gender
Age
Income levels
Ethnic makeup
Education
Family composition
Geographic location
Birth rates
Employment status
General Environment
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Sociocultural – Includes the country’s culture and society’s culture.
Traditions
Values
Attitudes
Beliefs
Tastes
Patterns of behavior
General Environment
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Political-Legal - Federal, state, and local
Laws
Regulations
Judicial decisions
Political forces
General Environment
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Technical - Improvements, advancements, and innovations
that create opportunities and threats,
Communications
Computing
Transportation
Manufacturing
Robotics
Biotechnology / Medicine and medical
Telecommunications
Consumer electronics
General Environment
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Current Rivalry among Existing Firms
Threat Opportunity
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
Ideas to Get You Thinking
The existing firms in your industry are your current and direct competitors.
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Potential Entrants
Threat Opportunity
No or low economies of scale Significant economies of scale
No other potential cost disadvantages Cost 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 protection Government policy protection
Ideas to Get You Thinking
Potential entrants are a threat because they bring new capacity to the industry, want to gain customers (market share), and may possess substantial resources that can be used to launch competitive attacks against your products.
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Bargaining Power of Buyers
Threat Opportunity
Buyer purchases large volumes Buyer 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 costs Buyer 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 important Industry's products are important to quality of buyer's products to quality of buyer's products
Buyers have full information Buyers have limited information
Ideas to Get You Thinking
If buyers have lots of bargaining power, they can force prices down, bargain for higher quality or more services, or they might even play competitors against each other to lower price.
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Bargaining Power of Suppliers
Threat Opportunity
Supplying industry has few companies Supplying industry has many companies and is more concentrated and is fragmented
Supplier's products don’t have substitutes Supplier's products do have substitutes
Industry isn’t an important customer Industry is an important customer
Supplier's product is an important input Supplier's product isn’t an important input
Supplier's products are differentiated Supplier's products aren't differentiated
Significant switching costs Minimal switching costs in supplier's products
Supplier has ability to do Supplier doesn't have ability to do what buying industry does what buying industry does
Ideas to Get You Thinking
If your industry’s suppliers have bargaining power, they can raise prices or reduce the number of services provided or the quality of products that your industry purchases.
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Substitute Products
Threat Opportunity
There are few good substitutes
There are several not-so-good substitutes There are no good substitutes
Ideas to Get You Thinking
The best way to evaluate the threat of substitutes is to ask whether or not there are other industries that can satisfy the consumer need that your industry is now satisfying. For example, substitutes for the cola (soft drink) industry come from other industries such as fruit drinks, alcoholic beverages, bottled water, etc. They are substitutes because the meet the consumer’s need for something to drink.
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