Understanding External Analysis in Organizations: Strategies and Impacts

1. COMP5331: Web Pub and Web Ad 8. External Analysis Dickson K.W. Chiu PhD, SMIEEE

2. What is External Analysis? External Analysis Scan and evaluate various external environmental sectors impacting performance Opportunities Positive external environmental trends that improve the organization’s performance Threats Negative external environmental trends that hinder the organization's performance Dickson Chiu 2006

3. Organizations as Open Systems Open System Interacts with and responds to its external environment • Organizations function as systems • Affect and impact environment Dickson Chiu 2006

4. Organizations as Open Systems (2) Environment Organization Processes Outputs Inputs Organization Functions: Production-Operations Marketing Financial-Accounting Human Resource Mgt. Research and Development Information Systems Managerial Activities: Planning Organization Leading Controlling Goods Services Performance Measures: Financial Productivity Achieve Goal Resources: Physical Capital Human Information Environment Environment Organization Environment Dickson Chiu 2006

5. External Environmental Sectors 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 Dickson Chiu 2006

6. Organization’s External Environment General Environment Technological Economic Specific Environment Industry-Competitors Current Rivalry Organization Substitute Products Potential Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Political-Legal Demographic Sociocultural Dickson Chiu 2006

7. Specific Environment • Industry • Group(s) of organizations producing similar or identical products • Competitive Variables • Compete for customers • Compete for resources • Assess an organization’s specific environment • Porter’s five forces model Dickson Chiu 2006

8. Five Forces Model Potential Entrants Threats of New Entrants Industry Competitors Bargaining Power of Suppliers Bargaining Power of Buyers Suppliers Buyers Rivalry Among Existing Firms One assumption of Porter’s five forces model is that some industries are inherently more attractive than others; that is, the profit potential for companies in that industry is higher. As this figure indicates, the interaction and strength of five forces influences profit potential. Threat of Substitute Products or Services Substitutes Dickson Chiu 2006

9. General Environment Trends in each of the five sectors of the general environment could have a potential positive effect on the organization (opportunity) or a potential negative impact (threat). Economic Demographic Sociocultural Decision Making Strategic Plan Political-Legal Technical Sources of External Influence Dickson Chiu 2006

10. General Environment - Economic 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 Dickson Chiu 2006

11. General Environment - Demographics Demographics Current statistical data and trends in population characteristics • • • • • • • • • Gender Age Income levels Ethnic makeup Education Family composition Geographic location Birth rates Employment status Dickson Chiu 2006

12. General Environment - Sociocultural Sociocultural • • Country's culture Society's • Traditions • Values • Attitudes • Beliefs • Tastes • Patterns of behavior Dickson Chiu 2006

13. General Environment – Political-Legal Political-Legal • Federal, state, and local • Laws • Regulations • Judicial decisions • Political forces Dickson Chiu 2006

14. General Environment - Technical Technical Improvements, advancements, and innovations that create opportunities and threats • • • • • • • • • Communications Computing Transportation Manufacturing Robotics Biotechnology Medicine and medical Telecommunications Consumer electronics Dickson Chiu 2006

15. Responsibilities for External Analysis at Different Managerial Levels • Lower Level Managers/Supervisors • Observe and interact • Collect and consolidate • Middle Managers • Coordinate • Share with organizational units • Gatherer and disseminator • Monitor general environmental sectors • Make needed strategic changes • Upper Management • Evaluate opportunities and threats Dickson Chiu 2006

16. Benefits of Doing An External Analysis • Proactive managers anticipate change and plan accordingly • Provide information for • Planning • Decision making • Strategy formulation • Acquire and control needed resources • Cope effectively with increasingly dynamic environment • Make a difference with higher performance Dickson Chiu 2006

17. 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 Dickson Chiu 2006