External Analysis
the process of scanning and evaluating an org's external environment, how strategic managers evaluate the threats and opportunities facing their org
Opportunities
positive external trends or changes that may help improve the org's performance
Threats
negative trends or changes that may hinder the org's performance
Open Systems
orgs are open systems, which means they interact with and respond to their environment
2 Perspectives on Organizational Environments
1) environment as a source of information 2) environment as a source of resources
Environment as Information Perspective
the environment provides organizations with a source of decision making, environmental uncertainty is a key element
Environmental Uncertainty
the amount of change and complexity in an org's environment, the amount of change can be dynamic or stable
Dynamic environment
changing rapidly, ex. cell phone industry
Stable environment
one that change is slow or minimal, ex. oil industry
Environment as Source of Resources Perspective
the environment is viewed as a source of scarce and necessary resources, the more hostile the environment the scarce the resources and the greater the uncertainty
Environmental Scanning and External Analysis
to know and evaluate what is happening in the external environment
External Environment Sectors
comprises the specific environment and the general environment
Specific Environment
(customers, competitors, suppliers, and other industry-competitive variables) requires looking at the industry and competitors, 5 Forces Model
Porters 5 Forces Model
threat of new entrants, competitors, threat of substitutes, supplier power, buyer power
Porter's 8 conditions that contribute to rivalry among competitors
numerous or balanced competitors, slow industry growth, high fixed costs, lack of differentiation or switching costs, addition of capacity in large increments, diverse competitors, high strategic stakes, high exit barriers
Threat of New Entrants
depends on the barriers to entry and the reaction by current competitors to the threats posed by the new entrants
Examples of Barriers to Entry
economies of scale, cost disadvantages, product differentiation, capital requirements, switching costs, access to distribution channels, government policy
Economies of scale
are cost savings that you get as volume increases
Switching costs
one time costs associated with switching from one product to another, costs may be financial or not
Buyer Power
bargaining power of the buyer, they can force prices down, bargain for higher quality or more services, or able to play competitors against one another r
When do buyers have power?
when purchasing large volumes of goods, products purchased are undifferentiated, products require little switching costs
Supplier Power
bargaining power of suppliers, they can raise prices, reduce the number of services provided or the quality of products offered for purchase
When do suppliers have power?
when there are few or no substitute products, the product is imp to the buyers, the supplier's product is differentiated, the industry is not an important consumer
Threat of Substitutes
whether products can be provided by other industries to satisfy the consumer
General Environment
can have a positive or negative impact on the industry (opportunities and threats), PEST analysis
PEST
Political, economic, socio-demographic, technological, (can add G-global or environment)
Benefits of Doing an External Analysis
1)enable managers to be proactive not reactive, 2) provides info used in planning, decision making, and formulating strategy, 3) helps orgs get needed resources, 4) helps orgs cope with uncertain environment, 5) makes a difference in orgs performance
Challenges of Doing an External Analysis
1) rapidly changing environment can be hard to keep up with, 2) its time consuming, 3) forecasts and trends analyses aren't perfect