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Assessing Opportunities and Threats: Doing an External Analysis

Assessing Opportunities and Threats: Doing an External Analysis. Strategic Management in Action: Chapter 3. What is an external analysis?. Pet care spending has more than doubled to 3.2 billion over the last 5 yrs. Referred to as nonessential expenditures

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Assessing Opportunities and Threats: Doing an External Analysis

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  1. Assessing Opportunities and Threats: Doing an External Analysis Strategic Management in Action: Chapter 3

  2. What is an external analysis? • Pet care spending has more than doubled to 3.2 billion over the last 5 yrs. • Referred to as nonessential expenditures • External analysis: process of scanning and evaluating an organizations external environment. • Strategic managers determine the opportunities and threat facing their organizations. • Opportunities: positive external trends or changes • Threats: negative external trends or changes

  3. Organizations as Open Systems • Open systems: interact with and respond to their environment. • Example- inputs have to come from somewhere and outputs must be distributed somewhere. • The somewhere is the external environment. • Organizations are interrelated and interdependent. • Chester Barnard, management theorist, first suggested this in 1938.

  4. Organization as an Open System

  5. Perspectives on Organizational Environments • Organizations interact with their environment in two ways: • The environment as a source of information • The environment as a source of resources

  6. Environment as Information Perspective • Environmental uncertainty: the amount of change and complexity in an organization’s environment • Dynamic: changing rapidly; more uncertain environment • Stable: minimal and slow; • Strategic decisions made by doing an external analysis.

  7. Resources Perspective • Environment viewed a source of scarce and valued sources. • Organizations depend on the environment for these resources. • Reducing dependency means controlling environment resources. • Means knowing about the environment and attempting to change or influence it. • Example: Toyota hybrid vehicles.

  8. Determine What's Happening in the External Environment • Environmental scanning and analysis. • Identify the opportunities and threats facing the organization.

  9. How to Conduct an External Analysis • Specific Environments- Customers, Competitors, Suppliers, other Industry-competitive Variables -Whereas- • General Environments- Economic, Demographic, Sociocultural, Political-legal, Technological Sectors

  10. An Organization’s External Environment

  11. Five-forces Model(Specific Environments)

  12. Conditions Contributing to Rivalries • Numerous or Equally Balanced competitors • Slow Industry Growth • High Fixed or Storage Costs • Lack of Differentiation or Switching Costs • Addition of capacity in large increments • Diverse competitors • High Strategic stakes • High Exit Barriers

  13. Barriers to Potential Entrants • Economies of Scale • Cost Disadvantages • Product differentiation • Capital Requirements • Switching costs • Access to Distribution Channels • Government Policies

  14. Bargaining Power • Power Struggle between Buyers vs. Suppliers • Factors That Contribute to either side • Differentiates between industries and markets • Examples • Wal-mart as a buyer • UPS holds a “supplier” advantage for their service • Buyers of their service have few choices, and are therefore forced to pay UPS’s price.

  15. Substitute Products • An alternative product that can satisfy the consumer’s need that our industry is satisfying • Examples • Soft Drink industry

  16. General Environment • Economics • Demographic • Sociocultural • Political-Legal • Technological

  17. Finding and Evaluating Information • Informal approach vs. Formal Approach • External Information System- formal approach that provides managers with needed external information on a regular basis • Having too much information

  18. Responsibilities at Different Managerial Levels • Small to medium-sized organization • Large organizations • Lower level supervisors • Middle management • Top Level Management

  19. Benefits of Doing an External Analysis • Proactive Manager- a manager who anticipates changes and plans for those changes, instead of reacting to them. • “Environment as source of resources” • Ability to acquire and control needed resources depends on having strategies that take advantage of environment’s abundant resources and the limited resources.

  20. Benefits Continued • Depending on the industry, today’s external environment is increasingly dynamic. • Does an external analysis make a difference? • Research studies have shown that in organizations in which strategic decision makers did external analyses, performance was higher. • Evaluated using a financial measure such as return on assets or growth in profitability.

  21. Challenges of Doing an External Analysis • The environment might be changing more rapidly than realistically can be kept up with. • Amount of time it can consume. • Forecasts and trend analyses are a significant part of the external analysis, they are not perfect.

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