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Chapter 4(2): External Analysis (External Forces (Key External Forces…
Chapter 4(2): External Analysis
Definition
Involve evaluation of broad task environment
to determine trend, threats, opportunity
provide foundation for strategic direction
aka
environmental scanning
industry analysis
Focus on identifying, evaluating trends beyond control of the firm
Reveal key OT confronting the organization, managers can formulate strategy to take advantage of the opportunity, reduce impact of threat
Importance of
External Analysis
Identify strategic OT and how it affects the mission
Help org to assess the competitive structure of its industry
competitive position and rivals
assess impact of globalization on competition within industry, country, region, continent
To determine how macroeconomics, social, legal and other factors have an impact towards organization
External trends affect the products
External forces changes in the consumer demand in product and services
External Forces (Key External Forces
economic force
have a direct impact
budget or fund needed for strategy become more costly/ unavailable
inflation rates, govt budget deficit, unemployment trend
social, culture, demographic, environmental forces
impact on product, service, customer, market
challenged from the changes
aging population, gap between rich and poor, number of death, life expectancy rates
political, governmental, legal forces
technological forces
can create new, more powerful CA than existing ones
not all sectors are equally affected by technological development
communication, electronic more volatile that textile, metal industries
competitive forces
collection and evaluation of information on competitors
hard to identify major competitors as some has divisions in other industries
some do not provide sales and profit on divisional basis, publish any marketing, financial information
determine SWOT in competitors
Tools
PESTEL, PEST
represent all major external forces (politic, economic, social, technological, and legal)
Competitor
they react to your moves and external changes
change their strategies, introduce a new ones,
org to follow competitor actions as new OT may open at any time
Market Changes
most visible OT
market converge started to satisfy other market segments need with the same product
new geographic market allow org to export volumes, starts operation in new countries
niche market becomes profitable from technological changes
create new OT must be seized to gain and sustain CA
4. Michael Porter's "Five Forces Model
Threats of New Entrants
the difficulty to enter into an industry
low barrier and high profit, the rivalry will intensifies
essential to create high barriers to deter new entrants
Example: amount of capital
legal barriers
product differentiation
access to supplies and distributors
Bargaining power of supplies
strong bargaining power allow supplier to sell at higher price/ low quality raw materials to the buyers
affect firm profit to pay more for supply
Example:
number of supplier
supplier's size
material scarcity
cost of switching to alternative materials
Industry Rivalry
Bargaining power of buyer
higher power means able to demand lower price/ higher quality from producers
lower price means lower profit, higher quality means higher production cost
Example:
number of buyers
size of buyer
price elasticity
size of order
Threat of substitute product
buyers easily find substitute with attractive price/ higher quality/ or switch with little cost
switch to coffee from tea
Example:
number of substitute
performance of substitute
cost of changing
Analysis tool that use five industry forces to determine the intensity of competition
determine the industry structure and level of competition
stronger the competitive, less profitable it is
Industrial Organizational View
approach that industry or external factors are more important than internal factors
Elements includes:
performance determined by industry forces
focus on analyzing external forces as a basis to gain and keep CA
CA is determined by competitive positioning in the industry
Each factor is essential to take into consideration in formulating strategies