Module Assignment: Background: THE EXTERNAL ENVIRONMENT, INTERNAL PROFILE, AND SWOT
Part 1: External Environment Analysis
SWOT is an acronym for: Strengths, Weaknesses, Opportunities, and Threats. The first two variables (strengths and weaknesses) relate to the internal organization, while the last two variables (opportunities and threats) relate to the organization's external environment.
The purpose of an external analysis is to scan the outside environment for factors that might open up new opportunities for the business-or that may present threats to the survival of the organization. Then company managers and executives can formulate plans to take advantage of the opportunities and respond to external threats. Optimally, the organization wishes to altogether eliminate (and if this is not possible, to ameliorate to the greatest extent possible) those threats that exist in the external environment.
There are endless numbers and kinds of external factors that can have an effect on a company's sustainability. Customers, competitors, and suppliers are all pretty obvious entities that can affect profitability. If we think a little more deeply, however, we can see that current as well as potential customers should be considered in an assessment of opportunities and threats (e.g., in terms of changing consumer tastes and preferences). Any such threats or opportunities will affect strategic choices that will (or that can) be made concerning products and services.
What about technology? Advances in technology can affect all three of our "obvious" external concerns (customers, competitors, and suppliers) with changes in product features, how products are made and sold, what services are offered and how they are delivered, supply chains, inventory controls, and so on. The failure to monitor the technological environment can spell obsolescence for a business in no time.
Ease of substitution is something we always think of when considering competitors. How easy would it be to switch from flying on one airline to flying on another, for example? But thinking more creatively about substitution, we can see that teleconferencing and video conferencing can eliminate the need for much business travel-thus acting as a substitute to airline tickets. Failure to think broadly enough will cause a planner to completely miss a major threat just over the horizon. For example, consider the immeasurable impact that Internet sites such as eBay and Amazon have had on the sales of "brick-and-mortar" operations. Or consider how online video availability has adversely affected companies that sell or rent DVDs, such as Blockbuster.
The sheer number of possible external influences creating opportunities and threats is mind-boggling. This is why most strategic planners use analytic models to structure their thinking and help avoid perceptual biases that might interfere with a clear and objective identification of opportunities and threats.
In this course, we will be using two different models that approach the external environment from two different perspectives:
1. Industry environment - Porter's Five Forces Model
2. Macro environment - PEST analysis
Industry Environment
Porter's Model of Five Forces is one of the most versatile frameworks for analyzing the industry (or operating) external environment. Employed by a variety of academics and business practitioners for more than three decades, the Five Forces Model has proved its usefulness in a variety of arenas. The Porter model helps the user get a handle on the competitive and market characteristics of a specific industry. The factors covered by the Five Forces Model are:
1. Threat of new entrants
2. Bargaining power of suppliers
3. Bargaining power of customers
4. Availability of substitutes
5. Degree of rivalry among competitors
Macro Environment
While the Porter analysis looks at the conditions in a specific industry, the PEST analysis looks at factors that affect the greater business environment. The sub-environments addressed by this model include:
1. Political (including regulatory)
2. Economic
3. Socio-cultural
4. Technical
Required Reading
For a general introduction to the Five Forces Model, the following video interview with Michael Porter is helpful for putting the external analysis into perspective:
The five competitive forces that shape strategy. (2008). Harvard Business Publishing. (Youtbe video)
The following site is an excellent introduction to the industry (operating) and remote (macro) environments. This site is a very good overview of Porter's Five Forces and PEST.
Connelley, D. (2005). Strategy for the External Environment. Power Point Presentation.
PEST analysis. (2009).
Porter's Five Forces: A model for industry analysis. (2007).
SWOT analysis: Lesson. (2009). Marketing Teacher.
Optional Material
Carrying out a PEST analysis. (2005). The Free Library.
PEST analysis. (2007). Quick MBA.
Porter's Five Forces. (2009). Mind Tools.
Porter's Five Forces (2007). The Manager.
Zahorsky, D. (2009). A business owner's secret weapon: SWOT analysis.
Part 2: Internal Analysis
One of the criticisms of Porter's Five Forces Model (and external analyses in general) is that while Five Forces can certainly help in the identification of problems and difficulties that firms are likely to encounter in a given industry, the model does not provide insight into what a particular company can do to manipulate those forces in its favor, thus gaining a competitive advantage.
In Part 2 of this module, we will focus on an analysis of the internal environment, or the internal company. At the conclusion of this process, we will have what is sometimes referred to as a "company profile" or an "internal profile." Two useful frameworks that will help us to focus on the essential factors for analysis of the internal environment are Porter's Value Chain and the Resource Based View framework (RBV).
After conducting an analysis of an organization's internal environment, you will be in a position to complete the last two elements of the SWOT analysis: identification of the strengths and weaknesses of a company.
Internal Analysis Components
Before we introduce the analytical models we will be using in this module, some background information will be helpful. A company has (A) primary activities and (B) support activities.
A company's primary activities are:
• Research and Development (R&D)
• Production (manufacturing)
• Marketing and Sales
• Customer Service
A company's support activities include:
• Materials Management
• Human Resources
• Information Systems
• Infrastructure
A. Primary Activities
• Research and Development (R&D) includes development and design of products and production processes. Many manufacturing companies have separate R&D departments. For highly innovative companies (such as 3M), this may be one of the most important departments in the organization. Some service companies may include R&D activities as a part of marketing or customer service functions. For instance, banks introduce new products to attract customers.
• Production is in charge of creating goods or services. Some companies manufacture products. Banks make loans. Retail companies sell products. These are instances of production.
• Marketing and Sales plays several roles. It advertises and positions the brand, identifies marketing needs, and sets pricing.
• Customer Service provides after-sale service.
B. Support Activities
• Materials Management manages the logistics of moving materials from procurement of inputs to production and then moving outputs through distribution to customers. Inventory management is part of the Materials Management support activity.
• Human Resources is focused on employing the necessary skills mix to carry out the organization's mission, and to motivate, train, and compensate the workforce.
• Information Systems refers to computer support in processing functions and supporting company operations, as well as Internet.
• Infrastructure refers to organizational structure, controls, and culture. The infrastructure must be capable of supporting the primary activities of the organization and must also be compatible with its strategy.
Presentation on the Internal Environment
Review the following presentation by Dr. Connelley. For Part Two of the narrated slide presentation on strategic situation analysis, click on the title below. This slide presentation focuses on the importance of optimizing the internal functions of an organization to create added value to the firm's products or services: Strategy for the Internal Environment
Porter's Value Chain
Porter's Value Chain is a widely used framework for organizing and interpreting an internal analysis. It is pictured below and is also discussed in the previous PowerPoint presentation. You can see that the Value Chain considers both primary and support activities, although it may use slightly different labels and definitions. By managing the various components of the value chain, companies can achieve a cost advantage over competitors, or distinguish themselves from competitors by offering a distinctively better product or service. Read more about Value Chain analysis at:
The value chain. (2007).
While the Value Chain can be a valuable tool for breaking down and streamlining costs and creating maximum value, it is a complicated process that typically involves considerable quantitative analysis.
The Resource-Based View
The Resource-Based View (RBV) arose in direct response to the criticism mentioned previously, that is, the external analysis is much less useful to a company seeking to attain a competitive advantage than are its internal capabilities and resources.
Instead of focusing on the accumulation of resources necessary to implement the strategy dictated by conditions and constraints in the external environment (I/O model), the resource-based view suggests that a firm's unique resources and capabilities provide the basis for a strategy. The business strategy chosen should allow the firm to best exploit its core competencies relative to opportunities in the external environment (p. 1380).***
*** Source: Hitt, M., Ireland, R., and Hoskisson, R. (2007). A resource-based view of the firm. In International Encyclopedia of Organization Studies (Clegg, S., & Bailey, J.R., Eds.). Thousand Oaks, CA: Sage Publications.
Central to this analytical view is the notion that a firm's core competencies and resources are more critical to the development of a strategy than the external environment. In reality, the truth probably lies somewhere in between, with a balance between external demands and internal capacities leading to the most successful competitive position. This is the essence of a SWOT analysis, and RBV can certainly inform an analysis of strengths and weaknesses.
For an excellent review of the basics of the Resource-Based View, read the following chapter:
Henry, A. (2007). The internal environment: A resource based view of strategy. In Understanding Strategic Management. Oxford University Press.
Required
Connelley, D. Strategy for the internal environment. PowerPoint presentation.
Henry, A. (2007). The internal environment: A resource based view of strategy. In Understanding Strategic Management. Oxford University Press.
The following presentation is a good overview of internal analysis:
Bramha, D. (2011). Internal Analysis in Strategic Management.
Optional Reading
The Value Chain. (2007).
Part 3: SLP
There are no reading assignments for the SLP. However, if you need a refresher on various theories (e.g., product life cycle, pricing, price elasticity, market saturation, or product development) there is
Module 2 - Home: THE EXTERNAL ENVIRONMENT, INTERNAL PROFILE, AND SWOT
Modular Learning Outcomes
Upon successful completion of this module, the student will be able to satisfy the following outcomes:
• Case
o After completing an assessment of the organization's external environment and internal profile, synthesize the company's internal strengths and weaknesses and environmental opportunities and threats into a formal SWOT analysis, with overall impressions and recommendations.
• SLP
o Re-run a business simulation, using business theory to make decisions related to pricing, product, and R&D allocations.
• Discussion
o Identify key strengths, weaknesses, opportunities, and threats, completing a SWOT, and drawing conclusions related to an organization's future opportunities.
Module Overview
According to Michael Porter, a preeminent scholar of strategy, a thorough analysis of the competitive environment allows strategic planners to identify opportunities and threats facing an organization. Then planners are able to consider various options for taking advantage of opportunities and guarding against threats. (Porter, 3-5) *
There are numerous tools available to help managers evaluate the external environment and uncover threats and opportunities. In this module, we will consider two different tools- Porter's Five Forces Model and the PEST analysis. Using tools such as these helps ensure that managers will consider all aspects of the environment and avoid perceptual blinders that may bias their thinking.
In Module 2, we will discuss how the external environment is assessed within the strategic management process.
SLP:
In Module 1, you turned in your report a few days early, and Sally Smothers was impressed. However, some strange time warp has taken you back in time to 2012, allowing you the opportunity to perform better than Joe Thomas.
* Source: Porter, M. (1980). Competitive strategy. New York: Free Press.
a multitude of sources on the Internet.
Module 2 - SLP
THE EXTERNAL ENVIRONMENT, INTERNAL PROFILE, AND SWOT
Simulation
Wonder Company Simulation
Simulation
The Module 2 SLP requires that you continue with the scenario and simulation you began in the Module 1 SLP.
SCENARIO CONTINUATION
SLP2 - It is January 15, 2017. You have finished analyzing the performance of the Wonder Company, and you have submitted the report requested by your CEO, Sally Smothers. You are ready to move forward to 2017, but then.....
....as you turn on the TV, you notice something very strange. You recognize that the date is January 1, 2013, and that you get to make the decisions for the Wonder Company for the 4-year period beginning with 2013. Your challenge is to do better than Joe Thomas.
At the beginning of each year (2013-2016), you will determine your pricing, your R&D allocations, and whether or not to discontinue any products. You are required to make your decisions for each year, and to report your results to see what happened. You must keep track of your decisions, making specific notes supporting each of your decisions.
Run the Wonder Co. simulation through the end of 2016. When you are finished, the date will be December 31, 2016. What is your total Score? Did you do better than Joe Thomas?
You organize your notes about your decisions, your analysis, and your reasoning into a well-written report.
Session Long Project
Run the Wonder Company simulation with your strategy, making decisions year by year for prices and R&D allocations. Write a 6- to 7-page paper, not including cover and reference pages, in which you discuss the decisions and the results for each year. Discuss why you did better (or worse) than Joe Thomas.
KEYS TO THE ASSIGNMENT
The key aspects of this assignment that should be covered and taken into account in preparing your paper include:
• As you run the simulation, keep track of your decisions and the results - both financial and marketing. Copy and paste the results into Excel or into a Word document. You will also want to record the information that you get from the Advisor. Make a note of your Final Total Score.
• Include your Final Total Score, some tables, and/or graphs showing key results. Using sound logic, be sure to clearly explain the differences from Joe.
• Remember that the key here is quality of analysis.
• Time Line Summary:
SLP1
• 2016: You are hired on December 31, 2016.
• Turned in first report to the CEO on January 15, 2017.
SLP2
• You again find yourself in a Time Warp that takes you back to January 1, 2013.
• You revise the decisions made by Joe for 2013 - 2016. You make new decisions each year.
• December 31, 2016 - You have gone through all four years, and you write your second report to summarize how you did.
Format your assignment according to the following formatting requirements:
1. The answer should be 6-7 pages, typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also include a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also Include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.