External Analysis and what does it show managers.

a. What is external analysis and what does it show managers?

b. How does the concept of an organization as an open system relate to external analysis?

c. What does each of the perspectives on organizational environments say?

d. What role does environmental uncertainty play in external analysis?

e. Why do managers need to do more than just scan the environment?

1) What is external analysis and what does it show managers?

External Analysis can be defined as an analysis process that identifies the threats and opportunities for the company. In other words, managers are to conduct an external analysis. The identified opportunities and threats are to be factored in when developing strategies; that is, managers will seek to take advantage of opportunities and reduce the risk of threats, in attempts to reach the business' goals outlined in the mission. The manager's starting point will be to analyse the industry that the business operates in. There are various factors within the industry that may pose as opportunities or threats to your business. Porter's Five Forces Model identifies five industry factors that may present opportunities and threats for your business. They are:

The risk of entry by potential competitors

The new competitors in the industry may lead to your business losing some of it's market share, which will result in a loss of profit. Therefore, new entrants pose a threat to your business. On the other hand, if there is a minimal risk of new entrants into the market, this may present your business with new opportunities.

The intensity of rivalry among established companies within an industry

The Competing with other businesses to gain a market share may involve tactics that require your business to either increase costs or lower prices, which will affect profitability. This poses a threat to your business. However, minimal competition may also provide your business with an opportunity to increase prices or reduce costs.

The bargaining power of buyers

Here, The buyers have the power to bargain prices or demand higher quality products and services, this will pose a threat to your business and it will result in a decrease in profits. However, if buyers have little power, this may present some opportunities for your business.

The bargaining power of suppliers

The bargaining power of buyers, if suppliers have the power to demand higher input prices, this poses a threat to your business' profits. Conversely, if suppliers have little power, your business may have the opportunity to demand lower prices and thus increase profits.

The closeness of substitutes to a product

if there are various products available in the market that can substitute your product, by satisfying the customers' needs and wants, then this is a threat to your business, as your sales may potentially decrease, and so will profits.

2)How does the concept of an organization as an open system relate to external analysis?

The organization is a productive system. It interacts with its environment, drawing certain inputs from the environment and converting these to outputs that are offered to the environment. The attainment of its preferred state is dependent on the efficiency with which the firm carries out this production process.

In order to analyze a system it is necessary to establish the relationships between the system and its environment. The organization's environment is itself a higher order system composed of its own subsystems. The four major subsystems in the environment are

·Economic system;

·Technological system;

·Social-cultural system;

·Politico-legal system.

To analyze the organization as a system it is necessary to

·Establish the relationships between the firm and these external systems, and

·Establish the relationships between the firm and its environment it is necessary for us to study at least the major factors which influence these four environmental subsystems.

The influence of these major factors must be taken into account when studying the firm and its interaction with the environment.

3) What does each of the perspectives on organizational environments say?

There are normally two prospective on the organizational environment. They are as follows:-

What role does environmental uncertainty play in external analysis?

 The more uncertain an environment is means you will have to complete a larger external analysis of the environment. It is important for organizations to be able to cope and respond effectively to environmental uncertainty. External scanning is to know and evaluate what is happening in the external environment. Whether the environment is a source of information, source of scarce resources, or both.

 Why do managers need to do more than just scan the environment?

 Managers need to do more than just scan the environment so they can be prepared to handle/respond any uncertainty in the environment. The business environment is constantly changing internally and externally and its important for managers to be prepared and have a deep understanding of the world in which they operate to be successful.

4)What role does environmental uncertainty play in external analysis?

Environmental uncertainty is all about opportunities and threats for the company. Some company might have opportunity at the time of scarcity and threats. Sometimes some opportunities might leads to threats for the company. Therefore, we can summarize that environmental uncertainty can have both negative as well as positive role in external analysis.

5)Why do managers need to do more than just scan the environment?

Manager has to do lot of research work before grabbing opportunity and dealing with the threats. Simple scanning does not work for the company because it does not show the overall analysis of the company. If company focuses on those data they might face problem in future.

Reference

Coulter, M. (2013). Strategic Management in Action Sixth Edition. Upper Saddle River, New Jersey (USA): Pearson Education Inc

Pearce II, J., & Robinson, R. (2011). Strategic Management: Formulation, Implentation and Control. McGraw-Hill Irwin.