assesing opportunities

Chapter 3 Assessing Opportunities and

Threats: Doing An External Analysis

Moses Acquaah, Ph. D.377 Bryan BuildingPhone: (336) 334-5305Email: [email protected]

Lecture Objectives

(1) Explain the importance of studying the firm’s external environment(2) Differentiate between external environmental opportunities and

threats(3) Explain the different perspectives on firms environments(4) Define and describe firms general and specific (industry)

environments(5) Explain the dominant economic characteristics in an industry(6) Identify each of Porter’s five competitive forces and explain how

they determine an industry’s profit potential(7) Explain how to cope with Porter’s five competitive forces(8) Define and explain the drivers of change in an industry(9) Define and explain the key success factors (KSF’s) in an industry(10) Explain the responsibilities of different managerial levels for

external analysis(11) Explain the benefits and challenges of doing an external analysis

Organizations as Open System

An organization is an open system that interacts with and responds to its external environment– Organizations function as systems– Organizations are affected by the environment and

can also impact the environment– Need to examine external environment of

organizations

Closed systems?

What is an External Analysis?

The process of scanning and evaluating an organization’s various external sectors impacting on performance

Environmental scanning– Monitoring & interpreting sweep of social, political,

economic, environmental, & technological events to spot budding trends that could eventually impact the industry

– Allow decision makers to know what’s happening in the external environment

– Recognize and anticipate external environmental changes


Evaluating external sectors:– Evaluating various data trends & information and

what they mean to the organization– Assessing the impact on organization by

determining the opportunities and threats facing the organization


Evaluating external sectors involves looking for:

(1) Opportunities: Positive external environmental trends that improve the organization’s performance

(2) Threats: Negative external environmental trends that hinder the organization’s performance

Perspectives on Organizational Environments

(1) Environment as Source of Information– The environment is viewed as a source of

information for decision-making

(a) Environmental uncertainty The amount of change & complexity of an organization’s

environment

(1) Environmental stability: Amount of change in an organization’s environment

– Dynamic: rapid change– Stable: minimal or slow change


Environmental Uncertainty (cont’d)(2) Environmental complexity: Number of

components in environment that decision makers must monitor

Complex: Many environmental components Simple: Few environmental components

(3) Implications of dynamic and complex environment: The more complex and dynamic the environment, the more

uncertain it is and the more information that decision makers need about the environment to be able to make appropriate decisions


(2) Environment as Source of Resource– Environment viewed as a source of scarce and

necessary resource, sought for by competing organizations

– The scarcer a resource, the harder it is to maintain control over resources

The more uncertainty decision makers face

– Environmental “hostility”: An environment is “hostile” when

Resources become harder to obtain & control Organizations are subjected to greater uncertainty

How Do You Do An External Analysis

External environmental sectors– External vs. Internal Environment

External environment affects all competitors Internal environment affects only the decision maker’s

firm

– Specific or Task Environment External sectors that directly impact decisions and actions

by opening up opportunities or threats

– General Environment External sectors that indirectly affect decisions and actions

and may present opportunities or threats

How Do You Do An External Analysis

General Environment

Specific Environment

Organization

Socio-culturalDemographic

EconomicPoliticalLegal

Tech

General Environment

Five main general environmental sectors– Economic

All macroeconomic data, current statistics, trends & changes

Interest rates; exchange rates; inflation rates; budget deficit-surplus; trade deficits-surplus; consumer income, spending, & debt levels; employment-unemployment rates, workforce productivity, etc.

General Environment

– Demographic Current statistical data and trends in population characteristics Gender; Age; Income levels; Ethnic makeup; Education; Family

composition; Geographic location; Birthrates; Employment status

– Technological Improvements, advancements, and innovations that create

opportunities & threats Communications; computing; transportation; robotics;

manufacturing; telecom; consumer electronics, etc.

General Environment

– Socio-Cultural Nature of the country’s culture and how it’s changing Society’s traditions, values, attitudes, beliefs, tastes,

patterns of behavior, and how they are changing

– Political-Legal The various laws, regulations, judicial decisions, and

political forces that are currently in effect at the federal, state, and local levels of government

Regulations enacted by professional associations, e.g. FASB

Potential legal, regulatory, & political changes, or pending judicial decisions that might take place & could impact firms


Include industry and competitive variables What is an industry?

– A group or groups of organizations producing (offering) similar or identical products (services)

Competitive variables– Compete for customers to purchase their products

& services– Compete for the necessary resources (or inputs)

that are converted (or processed) into products (or outputs)


Analyzing specific environment involves– Industry’s dominant economic

characteristics– The nature and intensity of competition

Porter’s Five Forces Model

– Drivers of Industry change– Industry Key Success Factors

Industry’s dominant economic characteristics

Market size & growth rate Small markets don’t tend to attract big/new competitors as

large markets; Faster growth breads new entry

Scope of competitive rivalry Local, regional, national, or global?

Number of competitors & their relative sizes Prevalence of backward or forward integration

Raises capital requirements; create differences in costs

Entry/exit barriers & resource requirements High barriers protect positions & profits of existing firms Big resource requirements make investment decisions critical

Industry’s dominant economic characteristics

Nature & pace of technology Raises risk because investments in tech. facilities may become

obsolete before they wear out

Product & customer characteristics Scale economies & experience curve effects

Increases volume & market share needed to be cost competitive

Capacity utilization Surpluses push prices & profit margins down; shortages pull them

up

Industry Profitability High profit industries attract new entrants; depressed conditions

encourage exit.

The nature and intensity of competition

What to identify– Main SOURCES of competitive forces

Rivals, suppliers, customers/buyers, types of products or services offered, government, entry barriers, etc

– STRENGTH of competitive forces Strong, moderate, weak, etc.

Key analytical tool– Porter’s FIVE FORCES MODEL of competition


Assess strength of each competitive force (Strong? Moderate? Weak?)

– Rivalry among existing competitors– Substitute products– Threat of potential entrants– Bargaining power of suppliers– Bargaining power of buyers

Explain how each force acts to create competitive pressure

Decide whether overall competition is brutal, fierce, strong, moderate, or weak


Rivalry amongCompetitors

BargainingPower ofSuppliers

BargainingPower ofBuyers

Threat ofPotentialEntrants

Threat ofSubstitutes


(1) Rivalry among existing competitors– Existing firms in an industry are organization's current & direct

competitors– Usually the most powerful of the five forces– Check for weapons of competition used by rivals in jockeying

for position Price Quality and/or product innovation Customer service Performance features offered Advertising/promotions Dealer networks and/or distribution channels Warranties/guarantees


What causes rivalry to be stronger?– Lots of firms, more equal in size & capability– Slow growth in market– Industry conditions tempt rivals to use price cuts and other

offensive weapons to boost volume & market shares– Customers have low switching costs– One or more firms initiate moves to bolster their position position

at the expense of rivals– A successful strategic move carries a big payoff– Costs more to get out of business than to stay in – Firms have diverse strategies, corporate priorities, resources

and countries of origin


Strategic group is a set of firms competing within an industry the have similar strategies and resources

Firms in same strategic group have two or more competitive characteristics in common:

– Sell in same price/quality range– Cover same geographic areas– Be vertically integrated to the same degree– Have comparable product line breath– Emphasize same types of distribution channels– Offer buyers similar services– Use identical technological approaches


(2) Threat of Potential Entrants– Seriousness of threat depends on

Barriers to entryReactions of existing firms to new entrants

– Barriers exist in an industry whenNewcomers confront obstaclesEconomic factors put potential entrants at a

disadvantage relative to established firms in an industry


Common Barriers to Entry– Economies of scale– Inability to gain access to specialized technology & know-how– Existence of learning/experience curve effects– Strong brand preferences and customer loyalty– High capital and/or specialized resource requirements– Costs disadvantages independent of size– Access to distribution channels– Regulatory policies, tariffs, trade restrictions


Threat of potential entry is stronger when:– Entry barriers are low– Sizeable pool of potential entrants exists– Established firms are unwilling or unable to

contest a newcomer's entry efforts– Newcomers can expect to earn attractive

profits


(3) Bargaining Power of Buyers Buyers are a strong competitive force when:

– They are large and purchase a sizeable %age of industry’s product

– They buy in bulk– They can integrate backwards– Industry’s product is standardized– Switching costs to substitutes or other brands are low– They can purchase from several suppliers– The product purchased does not save the buyer money


Buyers are a stronger competitive force the more they have leverage to bargain over:– Price– Quality– Service– Other terms and conditions of sales (e.g.,

warranties/guarantees)


(4) Bargaining Power of Suppliers Suppliers are a strong competitive force when:

– Items makes up large portion of product costs, is crucial to production process, and/or significantly affects product quality

– It is costly for buyers to switch suppliers– They have good reputations & growing demand– They can supply a component cheaper than industry members

can make it themselves– They do not have to contend with substitutes– Buying firms are not important customers


Suppliers are a stronger competitive force the more they can exercise power over:– Prices charged– Quality and/or performance of items

supplied– Amounts and delivery times


Substitute Products Substitutes matter when customers are

attracted to the products of firms in other industries - satisfy the same need

Limit potential returns (profitability) of an industry– Place ceiling on prices firms can charge


When are substitutes a stronger force?– Sale of substitute are growing rapidly– Producers of substitutes are planning to add new capacity– Profits of substitute producers are increasing

The competitive threat of substitutes is stronger when they are:– Readily available– Attractively priced– Believed to have comparable or better performance

features– Customer switching costs are low

Strategic Implications of Porter’s Five Forces Model

An industry environment is unattractive when– Rivalry is strong– Entry barriers are low– Competition from substitutes are strong– Suppliers and buyers have considerable

bargaining power

Strategic Implications of Porter’s Five Forces Model

Industry industry is attractive when:– Rivalry is moderate or low– Entry barriers are high– Good substitutes do not exist– Suppliers and buyers are in a weak

bargaining position

How to Cope with the Five Competitive Forces

Craft a strategy that will:– Insulate firm from competitive forces– Influence competitive pressures in ways

that will favor company– Build sustainable competitive advantage

Drivers of Change in an Industry

Industries change because forces are driving industry participants to alter their actions

What are driving forces – The major underlying causes of changing industry and

competitive conditions

Analyzing Driving Forces– Identify forces likely to exert greatest influence over next 1-3

years – usually not more than 3-4 factors– Assess their impact – difference they make– Environmental scanning a pre-requisite

Common Types of Driving Forces

Changes in long-term industry growth rate Changes in buyers of the product & how they use it Product innovation Technological change/process innovation Marketing innovation Entry or exit of major firms Diffusion of technical knowledge Changes in costs and efficiency

Common Types of Driving Forces

Increasing globalization of industry Market shift from standardized to differentiated

products New regulatory policies and/or government

legislation Changing societal concerns, attitudes, and risk

lifestyles Changes in the degree of uncertainty and

business risk

Key Success Factors (KSFs) in an Industry

What are industry KSFs?– The competitive elements that every industry

member must be competent at doing or concentrate on achieving in order to be competitive and financially successful in the marketplace

Specific strategy elements Product attributes Resources,Competencies & Competitive capabilities

Identifying Industry KSFs

KSF’s in an industry spell difference between– Profits and loss– Competitive success or failure

Answers to three questions pinpoint KSF’s(1) On what basis do customers choose between competing

brands or sellers?

(2) What must a seller do to be competitively successful – what resources and competitive capabilities does it need?

(3) What does it take for sellers to achieve a sustainable competitive advantage?

– KSFs consist of 3-5 major determinants of financial & competitive success in an industry

Common Types of KSFs

Technology-related– Scientific research expertise; product innovation

capability; expertise in a given technology; etc.

Manufacturing-related– Low-cost production efficiency; low cost plant

location; Quality of manufacture, low-cost product design & engineering, etc

Distribution-related– Strong network of wholesaler distributors/dealers;

ability to gain ample space on retail shelves; accurate filling of customer orders; short delivery times, etc.

Common Types of KSFs

Marketing-related– Customer service; merchandising skills; clever

advertising; attractive styling or packaging, Guarantees & warrantees

Skills-related– Superior workforce talent; quality control know-how;

design expertise; technological expertise, etc. Organizational capability

– Superior information systems; ability to employ internet to conduct business; managerial expertise

Responsibilities for External Analysis

Lower level or supervisory managers– Encourage workers to observe and interact with external parties

(customers & supplier reps)– Collect & consolidate information from workers

Middle managers– Coordinate external information– Share information with other organizational units– Act as information gatherer & disseminator– Monitor general information– Make neede strategic changes

Upper Management– Evaluate opportunities & threats

Benefits of Doing an External Analysis

Proactive Managers anticipate changes 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

Challenges of Doing an External Analysis

Rapid environmental changes are difficult to keep up with

Amount of time that the analysis can consume Identifying accurate forecasts and trends Availability of data and information

assesing opportunities

Documents

external analysis11

external analysisorganizations

external environmentrecognize

firms external environment2

external analysismoses

environmental componentssimple

complex environment

industryallow decision