Starting an External Environmental Analysis

Our organizations exist within environments. Elements of the environment are largely (but not entirely) out of an organization’s control. Despite this lack of control, strategies must be developed and executed with the environment in mind. If, for example, we implemented a strategy for reaching customers in different states or different countries, we would need to consider laws in those states or countries that might impact what we’re selling (these are Political factors), or we may choose to avoid areas of the world with economies so poor the average consumer could not afford our product (this is an Economic factor).

A prime “real-life” example of changes in the environment in which our businesses exist happened in 2020 with the global COVID19 Pandemic. This pandemic was outside of our organizations’ control. But its impact has been incredible. Let’s use this example to help us understand some terms necessary for Week 2’s Project. In this example, we own a small Italian Restaurant in any city in America in the middle of the pandemic. This is actually a real example of a restaurant in an independently-owned restaurant in my neighborhood. But I'm sure we can all agree that this is a prime example of small businesses and restaurants across America. Our strategy has always been the following:

"Serve the the Lakeside neighborhood and surrounding communities with a limited Italian menu, serving 40 "tables" at a time with our casual in-dining experience. Be known as the best authentic Italian food within a 20-mile radius."

Changes in this environment have caused us to change our strategy.  We were forced to resort to “Take Out or Delivery” only during the country-wide shutdown. We learned in week 1 that strategies must by dynamic and flexible. Our small Italian Restaurant is a perfect example. Here are some of the terms important for Week 2, applied to our company:

· A pattern is a series of data that repeats in a recognizable manner. In the case of our Italian restaurant, the pattern is that in the weeks prior to the shutdown, Take-Out represented 20% of our sales. During the Pandemic shutdown, it represented 100% of sales. After the state slowly started to re-open, Take-Out sales represented 60% of our sales.

· A trend has to do with the general movement or change in a situation over time.  The trend that developed is that our take out and delivery sales have taken over our way of serving customers. We have basically become a Take-Out restaurant. This matches the trend across the restaurant industry.

· Relationships have to do with how concepts, information, organizations, and people are connected. The Pandemic was a health issue affecting our personal lives, but our organization was greatly impacted. The impact became greater and greater as information was spreading through media and our community about how the virus was spread through contact. The concept of social distancing had a huge impact on our way of doing business. As a result, we had to layoff our wait staff or move them over to the Take-Out side of the business. In this way the concept of social distancing and information about the virus had a profound impact on our organization and on our people.

· Uncertainty reduces an organization’s ability to confidently predict the future of its environment. Our Italian Restaurant is faced with profound uncertainty. Even as we are allowed to open, will customers ever feel comfortable eating in a restaurant again? The answer to this question will impact our future strategies.

Major Themes for Week Two:

Three common ways of analyzing the environment are taught in Week Two: Porter’s Five Forces, PESTEL, and SWOT.

The applications of these tools can be seen in the readings, videos, and podcast for this week. You will want to ensure that you know how to cite and reference videos and podcasts with APA.  This link may help:

APA for Electronic Resources (Videos, Podcasts, etc)

 One article that goes beyond the concepts in the eBook will be very useful particularly in Projects and Discussions after this week. The article by Rumelt (2011) outlines the perils of bad strategy, and will help you in identifying common errors by leaders that consider themselves strategic. This article gets to the heart of what a Strategy Is NOT. If you understand these concepts, and tie them in with the concept of intangible assets from Week 1, you will be well on your way to recognizing a good strategy from a weak one.

Porter's Five Forces - An Application to Current Times

Chapter 3 of this course's eBook covers Porter's Five Forces extensively (The Saylor Foundation, 2014, Chapter 3, 3.3 Evaluation the Industry). You will need to learn this theory inside and out for the Projects of this course (especially Project #2). The video interviewing Michael Porter (under Tools and Techniques) is an excellent source for how this theory should be applied (Porter, 2008). Porter uses the airline industry to demonstrate how the Five Forces predict low profits for players in this industry. What happened in 2020 with COVID19 is a reminder of how environmental forces can impact entire industries, and these impacts can be profoundly negative, according to the Five Forces analysis. Before looking at this current example, remember, the Five Forces analysis assumes competition is for the consumer's dollar. This means that an airline may be competing with the consumer's choice to travel in other ways, or maybe to not even travel at all.

Here is why the airlines were, in hindsight, not well-equipped to deal with COVID:

Rivalry - competition with each other has always been fierce. Intense rivalries lowers profit potential, even in the best of times.

Barriers to Entry - while the barriers to entry for new airlines may not have changed before or after COVID, it is safe to say there are not many people thinking of starting an airline these days!

Suppliers - airlines have only one or two suppliers of equipment. This has not changed. In the several months leading up to COVID19, many airlines had to cut their supply of the Boeing 737 Max planes, due to faulty equipment in the warning systems. This lowered their profit potential and weakened them before COVID hit.

Buyers - airline buyers are the fliers. Business travel and vacation travel has ceased. Fliers are fearful of the spread of coronavirus on the planes, and in many cases forced to stay at home anyway. International flights have been cancelled outright, as the borders were closed. Basically, the buyers had chosen not to fly. Because buyers had the most power before COVID19, this decision brought airline profits to a halt.

Substitutes - remember the substitute factor is not asking just about substitutes for flying. The question is, where are consumer dollars being spent? They were not spent on travel...period. As a result, the dollars spent on airline travel were substituted with spending dollars to stay at home (Zoom subscriptions, groceries, alcohol, Netflix, etc.).

The lesson to be learned in all of this: No one could have predicted COVID19. But the lesson to learn is that we should have an understanding of the health of the industries we exist within. Porter's Five Forces basically measures the health of an industry by profit potential. Strategic managers analyze the profit potential (i.e. health) of their industries and make strategic decisions based upon these analyses. Sometimes (especially with large conglomerates) the decision is to leave the industry altogether!

Project #1:

In this project you will be assigned a company to research. This same company will be your focus for all remaining Projects in this course. The Project Instructions outline how to conduct research on this company. Please note the following points to remember:

· The report for this Project should be written with the headings and headings numbers outlined in the Instructions.

· You are expected to use both the research materials on this company, and the course materials. Ensure you understand when to use which. For example, in the PESTEL Analysis, use COURSE MATERIALS when describing what each of the 6 letters in PESTEL represent. Then use COMPANY RESEARCH MATERIALS to identify these 6 elements for your company and the global industry in which it is based.

· Page and paragraph numbers are to be used for all citations in this course, except videos and podcasts. See Notes from Week One or the Half-Time Report for Week One.

How to Identify the Global Industry for your Company

One of the first steps in this project will be critical to your success for this project, and also for the remaining three projects about your focal company. You are being asked to "Identify the industry in which the company operates."

This information will come from Mergent Online. (See Project instructions for how to access Mergent Online.) This is a CRITICAL first step for the rest of this course! If you get this determination wrong, it will impact your grade as you will be required to analyze the industry. Most of the focal companies for this course are a conglomerate of multiple business segments, representing multiple industries. If multiple industries are identified for your company, click on the link "Business Segments" under Company Details. Focus on the business segment with the most revenue. Here is an example:

BYD Co. Ltd. is a company from China. If you enter this company in the search box you will see it is a company from China, with two industries listed:

Industry: Primary batteries, dry and wet (SIC 3692)

Industry: Primary Battery Manufacturing (NAICS 335912)

However, if you click on "Company Details" and then select "Business Segments" this is what you see:

As you can tell in the table above, the battery industry represents 7 Billion in sales for BYD Co. Ltd. However, Automobiles represent 55 Billion. You will need to research the largest business segment for your individual company in order to determine its industry. For ease of reference, here are the industries you should focus on for each of the four focal companies:

Focal Company	Industry (Mergent)	Industry to search in CSI
Merck	Pharmaceuticals	Major Pharmaceutical Preparations
Ford Motor Co	Automobiles/Automobile Manufacturing	Auto & Truck Manufacturers (Consumer Discretionary Sector)
Marriott	Hotels & Motels	Hotels & Tourism
United Airlines	Airlines	Airline

 How to Cite and Reference in APA for Mergent Online

For all four projects, you will be retrieving information from the Mergent Online database. In some cases, such as "Company News", the author name appears. In most cases, however, there is no apparent author or date. In this case, you treat this reference as APA would a "corporate author". Here is a link for how to treat corporate authors:  Citing Corporate Authors such as Mergent

When summarizing information from Mergent, such as the synopsis for your focal company, you would cite this way (this example is for for the tobacco company Altria):

(Mergent Inc, n.d., Altria Synopsis)

You would reference this way (note the date is necessary because information changes in these databases daily):

Mergent Inc. (n.d.) Altria Group Inc: Synopsis. Retrieved May 12, 2020 from  https://www-mergentonline-com.ezproxy.umuc.edu/companydetail.php?pagetype=synopsis&compnumber=17810

How to Cite and Reference an Annual Report or 10-K Report

In this case, the "corporate author" is the focal company itself.

Remember, APA references always have the same pieces of information:

Author. Date. Title. Access Information.

· Author. The author of the report is likely to be the company itself. However, look around for the name of an individual author or editor; if you do not see one, you should likely use the company name.

· Date. The date of publication is likely to be the year or year after the date of the annual report or report filing (a 2012 annual report might have been published in 2013, for instance).

· Title. The title of the report might simply be Annual Report or 10-K Form, but do look closely at the report to see if there's a more specific title.

· Access information. Access information will vary depending on the medium/type/location of the report. Your most likely scenario is that you found the report on the company's website. If so, you would use that URL. It is also possible you found it in the  Mergent Online  Database; if so, you will insert  www.mergentonline.com  as the URL.

Example Annual Report reference from company's website:

Harley-Davidson Motor Company. (2013). 2012 annual report. Retrieved from

http://ar.harley-davidson.com/home.php

Example 10-K reference from Mergent Online Database:

Harley-Davidson Motor Company. (2013). 2012 10-K form. Retrieved from  www.mergentonline.com

Example matching in-text citation:

In 2012, Harley contributed more than $4.5 million to charities in its communities (Harley-Davidson Motor Company, 2013).

Week Two Reading Outline: These Reading Outlines appear each week in Dr. Kathy's Notes. They are for your personal study use. You do not post the answers to these questions in learning activities. Completing this reading outline is optional and not for credit. While they are not for credit, completing these each week should help you organize your course materials and organize your notes according to topics as we cover them in class. This will be very useful to you in all weeks of this course, especially in the Weeks that a Project or Discussion are due.

Here's how to use this outline to your advantage: In creating the reading outline start with themes for the week as your main headings. As you read, answer the questions and note where you got the answers from in the class reading (including page or paragraph numbers). When you go to answer your project or discussion questions, refer to these notes and develop the themes as part of your answer.

Please note the below questions help with the project.

Week 2:  External Environmental Analysis

1. What economic factors have to be considered in identifying an industry analysis?

2. What competitive forces do companies face in an industry?

3. What factors are driving industry change and what impacts will they have?

4. What market positions do rivals occupy – who is strongly positioned and who is not?

5. What strategic moves are rivals likely to make next?

6. What are the key factors for future competitive success?

7.  Does the outlook for the industry present the company with an attractive opportunity?

8. What are the five forces of Porter's model?

9. What are the specific elements that should be assessed under each of Porter's five forces?

10. What is the difference between the company you are evaluating, the country industry and the global industry?

References:

Porter, M. (2008). The five competitive forces that shape strategy [Video]. Harvard Business Review. Available from  https://www.youtube.com/watch?v=mYF2_FBCvXw

Rumelt, R. (2011, June). The perils of bad strategy. McKinsey Quarterly. Retrieved from  https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-perils-of-bad-strategy

The Saylor Foundation. (2014). Mastering Strategic Management. Retrieved from  https://learn.umgc.edu/d2l/le/content/525837/viewContent/18557183/View