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Chapter 3: Assessing Opportunities & Threats
Team 2 Presenters: Gabriel Gamez Chris Flockerzy Nancy Nguyen Sarah Doyle Raquel Vasquez Lydia Herschap
Quintin Jordan Monica Del Bosque
Strategic Management in ActionBy Mary Coulter
Introduction
Describe what an external analysis is
Explain how to do an external analysis of an organization’s specific and general environments
Discuss the benefits and challenges of doing an external analysis
Case Study
External analysis of 4 major movie theater competitors in 2008
Regal-AMC-Cinemark-CarmikeQuestions for strategic decision makers
1). How do people want their movies delivered? (Fidelity experience)
2). What is the impression consumers have of the movie-going experience?
3). How to be proactive in avoiding the problems that the music industry faced?
Case Study cont. Overall, the major questions to be answered are:
What do customers want? How do they perceive what you are currently giving them? How can we avoid getting passed by in the industry?
When answered, strategic decision makers can find new ways to make the movie-going experience something special.
Also, it is important to monitor competitor trends, customer tastes and habits, and changes in technology.
External Analysis External Analysis-the process of scanning and
evaluating an organization’s external environment to determine potential opportunities and threats.Opportunities-positive external trends or changes
that may help an organization improve its performance.
Threats-negative external trends or changes that may hinder an organizations performance.
Organizations as Open SystemsOrganizations interact with and respond to
their environment
Inputs outputs distributed in the external environment (departments, units, divisions)
All are interdependent and interrelated
Any change in one affects the others
Perspective on Organizational Environments
Organizational researchers look for ways to describe and understand external environments and their potential impact on organizational performance
Information perspective-where the environment is a source of information for decision making (Stable or Dynamic) (Simple or Complex)
Resource perspective-where the environment is a source of critical resources that management tries to obtain and control (Hostile environments means greater uncertainty)
Environmental Uncertainty-the amount of change and complexity in an organization’s environment
Environmental Scanning & External Analysis
Management and strategic decision makers need to know and evaluate what’s happening in the external environment Environmental Scanning (Is the environment seen
as a source of resources, information, or both?)
An external analysis is needed to identify certain opportunities and threats
External Analysis of an Organization’s Specific and General Environments“What do managers look at in an external analysis?”
“Where can they find information on the external environment?”
“How do they evaluate the information they find?”
“How do managers at different organizational levels do an external analysis?”
An Organization’s External Environment
Specific Environment Includes: Industry and Competitive Variables Industry- “A group/groups of organizations producing
similar/identical products.” Michael Porter’s Five-Forces
Industries: Higher Attraction and Potential Profit Levels Coulter’s Example:
Airbus and Boeing-have higher profits than the airline industry
Strength and Interaction, of the five-forces, specifically influence profit potential.
Strategists use Porter’s five-forces to determine threats and opportunities.
Porter’s Five Forces
Current Rivalry Among Existing Firms
Organizations that are established within the industry are your competition.
Coulter’s Example: Soft drink industry includes:
Coca Cola, PepsiCo, Cott, Dr. Pepper Snapple Group, and Wal-Mart (Sam’s Choice house brand)
How intense is the industry you want to enter?
Factors Affecting the Level of RivalryNumerous/Equally Balanced competitors:
Continuous Competition Equality of firm’s size and resources/higher competitive
actionSlow Industry Growth:
“Market Pie”Less Demand=Stealing Market Share
Coulter’s Example:Newspaper Companies
High Fixed or Storage Costs: Company profits are low because of:
High fixed costsBack and forth price cutting=more competition
Inventory LevelsLow inventory levels=lower storage costs
Factors Affecting the Level of Rivalry
Lack of differentiation or switching costs:
CommoditiesCompetition based on low prices and quality service.High levels of competition
Coulter’s Example:P.F. Chang’s, Romano’s Macaroni Grill, Olive Garden, and
Chili’sAll have themes which have been “created and over-
replicated” Switching Costs
“Actual dollars or the amount of time you’d have to spend to invest to learn about a new product.”
No switching costs = High competition among companies
Factors Affecting the Level of RivalryAddition of capacity in large increments:
Industry overcapacity due to large capacity incrementsLeads to rivalry and price cutting
Coulter’s Example: Cruise Lines:
Average number of passengers = 5,000Royal Caribbean's Oasis of the Seas passenger
capacity = 5,400 If passenger levels drop there is pressure to keep the boat
at max capacity
Diverse competitors: Increased rivalry due to differentiated strategies
High strategic stakes: Companies will do anything to succeed
Factors Affecting the Level of Rivalry
High Exit Barriers: Porter’s definition:
“Economic, strategic, and emotional factors that keep companies competing in businesses even though they may be earning low or even negative returns on investment.”
Coulter’s Example of Exit Barriers:Highly specialized assets that cannot be used in other ways
or that have low liquidation valueLabor agreements that must be honoredManagement’s unwillingness to leave a business because of
pride, fear, or other psychological reasons. Creates a situation where the company can not “exit” their
industry.
Factors of Current RivalryWe need to ask:
“Who are our current competitors?”
Strategic Group: “A group of firms competing within an industry that has similar
strategies, resources, and customers.” Coulter’s Example:
Mercedes-Benz/General MotorsDo not directly compete due to differences in
customers, resources, and strategies. You need to understand who you are directly competing with.
Why should organizations be concerned ?
New organizations bring new capacity to the industry
New organizations gain market share
Could have substantial resources that can be used to launch attacks against current competitors
Potential Entrants
The threat of entrants depends on the barriers to entry and the reaction by current competitors to entrants
Barriers to entry: are obstacles to entering the industry 7 major entry barriers
Barriers to Entry
Economies of ScaleCost disadvantage from other than ScaleProduct differentiationCapital requirements Switching costsAccess to distribution channelsGovernment Policies
7 Major Barriers
Forces organizations to be more innovative in the… Product Work process
Compels companies to be on their toes Effective Efficient
FYIThe Benefits of Competition
How do buyers affect the industry?
High bargaining power Forces prices down Can bargain for higher quality or more
services Play competitors against each other
Bargaining Power of Buyers
What makes a buyer powerful? Whether the buyer purchases large volume
Can make or break a company
If products are standard or undifferentiated
Face little switching costs
Ability to manufacture products themselves
Bargaining Power of Buyers
Bargaining Power of Suppliers
Suppliers can raise or reduce the number of services provided or the quality of products that the industry purchases.
An Industry’s Suppliers (Provider of Resources):
Raw Material Sources Equipment Manufactures Labor Sources Financial Institutions
Bargaining Power of Suppliers continued…Identifying whether an industry’s
suppliers are powerful.1. Are the suppliers few and selling to an industry that is
fragmented i.e. small and not very powerful? 2. Are there any substitute products?3. Is the industry an important customer?4. Is the supplier’s product important to your industry? 5. Are the products differentiated or is the customer
switching cost? 6. Do the supplier’s have the ability to provide the
products that your industry is currently providing?-Example: Liz Claiborne
Substitute Product The threat of a substitute product.
Example: Customer wanting something to drink
Few or no substitutes = Low Threat Few good or several not so good substitutes
= High Threat, not favorable for your industry and hurts your profitability
General Environment The external factors affecting the
industry: Economy Demographics Sociocultural Political-LegalTechnology Sectors
Trends in these sectors: Positive Impact (Opportunity)Negative Impact (Threat)
External changes not always an opportunity or threat: Example: Interest rates
Economics Looking at what’s happening in the overall economy is
important to determine how the shareholders of the company, and ultimately the company’s performance will be impacted. Evaluate current and future macroeconomic variables to see if
they pose a threat or create an opportunity for your organization. Interest rates, GDP, consumer debt levels, inflation rates etc.
Industries are affected differently, but organizations within each industry face the same economic trends and changes.
Companies should specifically focus on volatile factors because these could significantly affect
strategic decisions.
Macroeconomic Variables
Demographics Use demographics, data and shifts in population
characteristics, to see what positive or negative trends affect the organization, in order to make strategic decisions.
Demographic information is useful for understanding current customers as well as targeting potential customers.
Regardless of operating domestically or globally, it is important to have as much demographic information as possible to accurately assess the external environment and to create an appropriate strategy.
Sociocultural “Measuring and interpreting people’s opinions, values, attitudes,
likes and dislikes.”
What the sociocultural sector includes:TraditionsLifestyle valuesBeliefsTastesPatterns of behavior
Its important for strategic decision makers to recognize both the current status and trends in the sociocultural sector.
Evaluating the Sociocultural Sector
Look at values and attitudes
Values influence people’s behavior in the way they shop, work, raise their families, and live their lives.
People’s attitudes can also influence behavior. Ex: Openness v. privacy on the internet (i.e. Facebook)
Also want to look at changes or trends in people’s activities, behavior, and purchases.
Ex: Healthier snack foods
Political-Legal Includes various laws, regulations, judicial decisions, and political forces currently in effect at the federal, state, and local levels of government.
Example: New bankruptcy laws
Other major concerns include: Taxation Minimum wage Product labeling safety laws Political changes
Aspects of the Global political environment: Be aware of changes of who or what political party is in power and
new laws and regulations Various trade alliances
NAFTA, ASEAN, and African Union
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
Table 3.3, p. 83, Strategic Management in Action, Marry Coulter
Significant Federal Laws and Regulations for Businesses
Technological Look for scientific or technological innovations that create
opportunities and threats.Two organizational areas most affected are:
Product research and development Organizational work processes
Innovations in Technology: Computerization
Ex: EDI Medicine
Coulter’s Ex: X-StaticNew technological innovations could be opportunities and threats to
different industries, but the impact of these innovations will be different for different industries.
Finding and Evaluating Information on the External Environment
Informal and unscientific observations Formal systematic searchExternal Information System
Identify potential trends
Responsibilities for External Analysis at Different Managerial LevelsSmall OrganizationsEveryone should monitor changes in
the external environment
Large OrganizationsMid-managers gather informationTop Level managers use information to
create strategy
Why do an External Analysis?
Benefits!!!Provides the information for strategic managers
Planning Decision Making Strategy Formulation
Realization that today’s external environment is increasing
Differences Maker?
Why do an External Analysis?
Challenges: Environment ChangingThe Amount of TimeShort Comings of Forecasts
Points to Take Away
Porter's five-forces model helps a company analyze their specific environment.
Do not underestimate the power of your buyers and suppliers.
Strategic groups help a company realize who they directly compete with.
Your approach to doing an external analysis can range from informal to formal.
Works Cited:Coulter, Mary K. Strategic Management in Action. Upper Saddle River, N.J: Prentice Hall, 2010. Print.
Kim, W. Chan, and Renée Mauborgne. Blue Ocean Strategy How to Create Uncontested Market Space and Make Competition Irrelevant. New York: Harvard Business School, 2005. Print.
Belch, George E., and Michael A. Belch. Advertising and Promotion An Integrated Marketing Communications Perspective. 8th ed. New York: McGraw-Hill Irwin, 2009. Print.
Economic Research Federal Reserve of St. Louis http://research.stlouisfed.org/fred2/