Chapter 3: Assessing Opportunities & Threats

1. Strategic Management in Action By Mary Coulter 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

2. 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

3. Case Study • External analysis of 4 major movie theater competitors in 2008 • Regal-AMC-Cinemark-Carmike • Questions 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?

4. 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.

5. 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.

6. Organizations as Open Systems • Organizations 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

7. 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

8. 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

9. 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?”

10. An Organization’s External Environment

11. 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.

12. Porter’s Five Forces

13. 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?

14. Factors Affecting the Level of Rivalry • Numerous/Equally Balanced competitors: • Continuous Competition • Equality of firm’s size and resources/higher competitive • action • Slow 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 costs • Back and forth price cutting=more competition • Inventory Levels • Low inventory levels=lower storage costs

15. Factors Affecting the Level of Rivalry • Lack of differentiation or switching costs: • Commodities • Competition 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’s • All 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

16. Factors Affecting the Level of Rivalry • Addition of capacity in large increments: • Industry overcapacity due to large capacity increments • Leads to rivalry and price cutting • Coulter’s Example: • Cruise Lines: • Average number of passengers = 5,000 • Royal 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

17. 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 value • Labor agreements that must be honored • Management’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.

18. Factors of Current Rivalry • We 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 Motors • Do not directly compete due to differences in • customers, resources, and strategies. • You need to understand who you are directly competing with.

19. Potential Entrants 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

20. Barriers to Entry • 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

21. 7 Major Barriers • Economies of Scale • Cost disadvantage from other than Scale • Product differentiation • Capital requirements • Switching costs • Access to distribution channels • Government Policies

22. FYI The Benefits of Competition Forces organizations to be more innovative in the… • Product • Work process Compels companies to be on their toes • Effective • Efficient

23. Bargaining Power of Buyers • 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

24. 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

25. 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

26. Bargaining Power of Suppliers continued… • Identifying whether an industry’s suppliers are powerful. • Are the suppliers few and selling to an industry that is fragmented i.e. small and not very powerful? • Are there any substitute products? • Is the industry an important customer? • Is the supplier’s product important to your industry? • Are the products differentiated or is the customer switching cost? • Do the supplier’s have the ability to provide the products that your industry is currently providing? -Example: Liz Claiborne

27. 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

28. General Environment • The external factors affecting the industry: • Economy • Demographics • Sociocultural • Political-Legal • Technology Sectors • Trends in these sectors: • Positive Impact (Opportunity) • Negative Impact (Threat) • External changes not always an opportunity or threat: • Example: Interest rates

29. 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.

30. Macroeconomic Variables

31. 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.

32. Sociocultural • “Measuring and interpreting people’s opinions, values, attitudes, likes and dislikes.” • What the sociocultural sector includes: • Traditions • Lifestyle values • Beliefs • Tastes • Patterns of behavior • Its important for strategic decision makers to recognize both the • current status and trends in the sociocultural sector.

33. 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

34. 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

35. Significant Federal Laws and Regulations for Businesses • 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

36. 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-Static • New technological innovations could be opportunities and threats to different industries, but the impact of these innovations will be different for different industries.

37. Finding and Evaluating Information on the External Environment • Informal and unscientific observations • Formal systematic search • External Information System • Identify potential trends

38. Responsibilities for External Analysis at Different Managerial Levels • Small Organizations • Everyone should monitor changes in • the external environment • Large Organizations • Mid-managers gather information • Top Level managers use information to • create strategy

39. 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?

40. Why do an External Analysis? Challenges: • Environment Changing • The Amount of Time • Short Comings of Forecasts

41. 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.

42. 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/