Analyzing External Environment PDF

Analyzing the External Environment of the Firm Copyright Anatoli Styf/Shutterstock  Strategic Management Process Strategic management process involves: ▪ Analysis ▪Strategic goals (vision, mission,...

Analyzing the External Environment of the Firm Copyright Anatoli Styf/Shutterstock  Strategic Management Process Strategic management process involves: ▪ Analysis ▪Strategic goals (vision, mission, strategic objectives) ▪Internal and external environment ▪ Decisions - Formulation ▪What industries should we compete in? ▪How should we compete in those industries? ▪ Actions – Implementation of strategy ▪Allocate necessary resources. ▪Design the organization to bring intended strategies to reality. ©McGraw-Hill Education.  Learning Objectives 2-1 The impact of the general environment on a firm’s strategies and performance. 2-2 Why environmental scanning, environmental monitoring, and collecting competitive intelligence are critical inputs to forecasting of the business environment. 2-3 Why forecasts and scenario planning are useful techniques for firms competing in industries characterized by unpredictability and change. 2-4 How forces in the competitive environment can affect profitability, and how a firm can improve its competitive position by increasing its power vis-à-vis these forces. 2-5 The concept of strategic groups and their strategy and performance implications. ©McGraw-Hill Education.  The Importance of External Environment Consider... The best CEOs are always aware of what’s going on outside their company. Their perceptual acuity allows them to sense what’s coming. Detecting early warning signals, keeping pace with changes in the external environment can sustain a competitive advantage. ©McGraw-Hill Education.  Enhancing Awareness of the External Environment Exhibit 2.1 Inputs to Forecasting ©McGraw-Hill Education.  Environmental Scanning & Monitoring Environmental scanning involves surveillance of a firm’s external environment. Predicts environmental changes to come Detects changes already under way Allows firm to be proactive Environmental monitoring tracks evolution of environmental trends. Sequences of measurable facts/events Streams of activities or trends from outside the organization ©McGraw-Hill Education.  Competitive Intelligence Competitive intelligence Helps firms define & understand their industry Identifies rivals’ strengths & weaknesses Collect data on competitors Interpret intelligence data Helps firms avoid surprises Anticipate competitors’ moves Decrease response time Potential for unethical behavior while gathering intelligence ©McGraw-Hill Education.  Environmental Forecasting Environmental forecasting predicts change. Plausible projections about Direction Scope Speed Intensity of environmental change ©McGraw-Hill Education.  Environmental Forecasting Scenario analysis/planning involves detailed assessments of the ways trends may affect an issue & development of alternative futures based on these assessments. Produce different plausible scenarios of the future Prepare the company for those scenarios ©McGraw-Hill Education.  SWOT Analysis SWOT analysis is a basic technique for analyzing firm and industry conditions. Strengths & Weaknesses refer to firms’ internal conditions Where the firm excels or where it may be lacking Opportunities & Threats refer to firm’s external conditions Developments that exist in the general environment Activities among firms competing for the same customers (industry environment) Must consider both internal & external factors simultaneously Build of strengths, remedy weaknesses, take advantage of opportunities, protect from threats ©McGraw-Hill Education.  SWOT Analysis ©McGraw-Hill Education. Credit: business-to-you.com  The General Environment The general environment is composed of factors that can have a dramatic effect on firm strategy. Six segments: Demographic Sociocultural Political/Legal Technological Economic Global They are both hard to predict and difficult to control. ©McGraw-Hill Education.  The Demographic Segment Demographics are easily understandable & quantifiable. Aging population Rising affluence Changes in ethnic composition Geographic distribution of population Greater disparities in income levels ©McGraw-Hill Education.  The Sociocultural Segment Sociocultural forces influence the values, beliefs, and lifestyles of a society. More women in the workforce Increase in temporary workers Greater concern for healthy diets & physical fitness (increasing levels of obesity) Greater concern for the environment Postponement of marriage & family formation, having children ©McGraw-Hill Education.  The Political/Legal Segment Political/Legal processes & legislation influence environmental regulations with which industries must comply. Tort reform Americans with Disabilities Act (ADA) Deregulation of utilities & other industries Increases in minimum wages Taxation Legislation on corporate governance reforms Affordable Health Care Act, Medicare reimbursements ©McGraw-Hill Education.  The Technological Segment Technological developments lead to new products & services. They can create new industries & alter existing ones. Genetic engineering Three-dimensional (3D) printing Computer-aided design/computer-aided manufacturing systems (CAD/CAM) Research in synthetic & exotic materials Pollution/global warming Miniaturization of computing technologies Wireless communications Nanotechnology Big data/data analysis ©McGraw-Hill Education.  The Economic Segment Economic forces affect all industries. Interest rates Unemployment Consumer Price Index Trends in GDP & net disposable income Changes in stock market valuations ©McGraw-Hill Education.  The Global Segment Global forces offer both opportunities & risks. Increasing global trade Currency exchange rates Emergence of the Indian & Chinese economies Trade agreements among regional blocs (NAFTA, EU, ASEAN) Creation of the WTO (leading to decreasing tariffs/free trade in services) Increased risks associated with terrorism ©McGraw-Hill Education.  General Environment: Relationships among Elements Elements of the general environment interact with each other. Demographic trends have implications for economics. Greater access to information technology affects both economics and global relationships. Political/legal trends can have very different effects on different industries. Digital technology has altered the way business is conducted in nearly every business domain. Data analytics ©McGraw-Hill Education.