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Organizational External Environment Evaluation
The purpose of this paper is to explore the process of evaluating the external environment of an organization by using seven questions to determine the fit of its strategy. This process is followed by strategically considering key sources of power or weakness and why these sources are keys. Finally, decision models are selected that will aid in the strategic process of evaluating the external environment, how these decision models aid or hinder the process and the reasons why.
Process: Evaluating the External Environment
As an organization contemplates its strategic direction, it must address its external environment and its capabilities within that environment, or as the SWOT analysis refers to it as opportunities and threats. Determining if strategy is a good fit externally requires answers to seven questions (Gamble, Peteraf, & Thompson, 2019). The first question an organization must address concerns the macro-environment such as politics, the economy, technological advances, and regulatory conditions that must offer the seller an opportunity for growth and profits (Gamble et al., 2019).
The next question concerns the nature and strength of five competitive forces in the industry context that can determine success (Gamble et al., 2019). The five competitive forces are the bargaining power of buyer leverage to receive price concessions or its price sensitivity; the availability, comparability, price, and cost of switching to substitute products; supplier bargaining power that depends on availability, substitutes, supply, differentiation, major customers, and vertical integration ability; new entrants and incumbent reaction, and barriers to entry; and competitive force for competitive advantage as competitors increase, demand slows, brand switching becomes seamless, excess capacity develops, less differentiation occurs, diversity grows, and high exit barriers exist (Gamble et al., 2019). When these competitive forces are high is when organizations should focus on innovation because of its influence on performance; however, if these competitive forces are low, organizations are better served by focusing on market oriented behaviors of promotion or customer service, which contradicts the general academic idea of innovation being universally productive (Hernández‐Espallardo & Delgado‐Ballester, 2009).
A third consideration of external environment analysis is the driving forces of industry change (Gamble et al., 2019). To accomplish this analysis, the driving forces of change such as long-term growth rate, globalization, changes in buyer or use, innovation in technology, manufacturing, or marketing, major firm entry or exit, technological diffusion, cost changes, differentiation or standardization preference changes, regulatory or government influences, and sociocultural must be identified (Gamble et al., 2019). These powerful change agents must be assessed for their individual or collective impact on demand, competition, and profit, which is necessary to position organizational strategy for impact (Gamble et al., 2019).
The next consideration for the external environment is how rivals are positioned (Gamble et al., 2019). Gamble et al. (2019) proposes that this is accomplished using strategic group mapping of industry members with competitive and market position similarities. The value of strategic group maps is that it identifies similarly positioned close and distant rivals, which also gives the firm a vision of cross-group competitive rivalry (Gamble et al., 2019).
Gamble et al. (2019) answers the fifth question of anticipating rival strategic moves with a Framework for Competitor Analysis with four indicators. The first indicator is the current strategy of rivals, followed by an appraisal of their financial and strategic objectives, followed by consideration for their capabilities, and followed by management assumptions assessed from press releases, corporate websites, and public filings (Gamble et al., 2019). Tsai, Su, & Chen (2011) expand on rival assumptions and center their research on what they call competitor acumen, which says that firms should not only focus on rival actions, but that firms must have clear insight into the perception of a rival even if it is biased before it can sensibly predict offensive or defensive rival moves.
Organizations should now consider key success factors (KSF) such as technology, manufacturing, distribution, marketing, and skills and capabilities, which can be determined by assessing why buyers choose between competing brands, what resources and capabilities are necessary for success, and what the disadvantages or shortcomings are (Gamble et al., 2019). Ultimately organizations must consider the potential for attractive profits by analyzing the important factors of growth potential, if competition is growing or contracting, if profitability is likely in the context of driving forces, and firm KSF competence (Gamble et al., 2019).
Strategic Thinking: Key Source of Power/Weakness
Preconceived ideas of strength and weakness are futile because the discovery of power over the wielding of power in which one discovers what others have not, what has been ignored, or a pivotable objective, creates an advantage of decisive asymmetry (Rumelt, 2011). The discovery of power yields healthy growth that cannot be engineered because of growing demand for special, expanded, or extended capabilities and superior products and skills as a reward for successful innovation, cleverness, efficiency, and creativity (Rumelt, 2011).
Another key source of power is competitive advantage because no one has an advantage at everything; therefore, where organizations have the advantage is where pressure should be applied, exploiting the weakness of rivals and not leading with the organization’s own weakness (Rumelt, 2011). Producing at a lower cost or providing more perceived value or both is the basis of competitive advantage (Rumelt, 2011). Strategic progress must be made on four fronts to increase wealth as competitive advantage increases (Rumelt, 2011). Deepening advantage increases the gap in value to buyers, reduced costs, or both but can be stalled by believing improvement is a natural process and by attempting to catch a free ride on the improvement of others (Rumelt, 2011). The second front extends advantage by engaging special skills and resources underlying advantage instead of only focusing on the other products, buyers, and competitors (Rumelt, 2011). The third front creates higher demand by growing the number of buyers or demand of existing buyers (Rumelt, 2011). Lastly, the isolating mechanisms must be strengthened by inhibiting duplication of the organizational product or more importantly, its resources (Rumelt, 2011).
Decision Model
Making decisions concerning the external environment of an organization may involve three decision making models. One model that can be used is the Johari Window. Because external analysis involves vulnerabilities, which are not easy to identify depending on perceived strength, the organization could use two quadrants of what the organization knows about itself but chooses not to reveal and what others see clearly that the organization does not know about itself to identify organizational susceptibility to threats (Krogerus & Tschappeler, 2017). Similarly, the organization could use the UFFE ELF/EK model, especially the considerations of how others see the organization and how others would like to see the organization to assess both opportunities and threats in its external environment (Krogerus & Tschappeler, 2017). Of course, an external analysis would be incomplete without the mention of SWOT analysis, potentially using feedback from the previous two models to determine how to maximize opportunities and protect against threats (Krogerus & Tschappeler, 2017).
Summary
Seven questions are offered that address the external evaluation of an organization beginning with the macro-environment, followed by five competitive forces, driving industry forces, rival positioning, competitor analysis of strategic moves, and key success factors; however, the last question addresses the ultimate consideration of the potential for attractive profits and growth (Gamble et al., 2019). Key sources of power are identified in discovering what others have not or at least have ignored and in competitive advantage by deepening and extending advantages, creating higher demand, and isolating mechanisms (Rumelt, 2011). Finally, three decision models are offered that incite the organization to explore what it knows about itself, what others know about it, how others see it, and how others should see it using the Johari Window and UFFE ELF/EK models, respectively, to contribute to opportunity and threat matrices of the SWOT analysis (Krogerus & Tschappeler, 2017).
References
Gamble, J., Peteraf, M., & Thompson, A. (2019), Essentials of Strategic Management, (6th edition). New York, NY: McGraw – Hill Higher Education
Hernández‐Espallardo, M., & Delgado‐Ballester, E. (2009). Product innovation in small manufacturers, market orientation and the industry’s five competitive forces: Empirical evidence from Spain. European Journal of Innovation Management, 12(4), 470-491. doi:10.1108/14601060910996927
Krogerus, M., & Tschäppeler, R. (2018), The decision book: 50 models for strategic thinking, (Revised edition.). New York, NY: W. Norton & Company, Inc.
Rumelt, R. (2011), Good strategy/bad strategy: The difference and why it matters., New York, NY: Crown Business
TSAI, W., SU, K., & CHEN, M. (2011). Seeing through the eyes of a rival: Competitor acumen based on rival-centric perceptions. The Academy of Management Journal, 54(4), 761-778. doi:10.5465/AMJ.2011.64870138
Dr. Philebaum
May 21, 2019
Annotated Bibliography of Evaluating the External Environment
Hernández‐Espallardo, M., & Delgado‐Ballester, E. (2009). Product innovation in small manufacturers, market orientation and the industry’s five competitive forces: Empirical evidence from Spain. European Journal of Innovation Management, 12(4), 470-491. doi:10.1108/14601060910996927
The purpose of the paper was to study the effectiveness of innovation in improving a firm’s performance in different competitive situations and to analyze whether the competitive forces act as a motivator or inhibitor. The findings show that small firms must invest in innovation preferably when competitive forces are more intense and that marketing orientation plays a positive role in promoting innovation and performance no matter the level of competitive forces. The practical implications are that product innovation should be used in accordance with the competitive situation. When pressure is low, investment in innovation should cautiously proceed, however, when competitive forces are more intense, innovation is more productive.
The quality of the publication is indicated by its publishing within the last 10 years and it passed the filter for scholarly and peer review in the JF Library. The article contained an abstract, citations throughout, and an extensive reference list. Emerald Insight, the publisher, is a global publisher linking research and practice to the benefit of society. Emerald Insight is COUNTER 4 and TRANSFER compliant and a partner on the Committee on Publication Ethics.
The quality of the authors is indicated by their positions as faculty of the economic discipline in Espinardo, Spain. They met the publishing guidelines set by Emerald Insight. The authors followed typical research writing technique and made a significant contribution to the literature on innovation in a competitive environment.
The article fits into the discussion because it provides guidance for the importance of innovation in the context of competitive forces.
Tsai, W., Su, K., & Chen, M. (2011). Seeing through the eyes of a rival: Competitor acumen based on rival-centric perceptions. The Academy of Management Journal, 54(4), 761-778. doi:10.5465/AMJ.2011.64870138
Key points of the article begin with the assertion that competitor analysis has placed significant emphasis on the importance of identifying and understanding rivals. To truly understand an opponent, the firm needs to be able to comprehend the rival’s view of the competition. A valid assessment of a rival requires comprehension of the rival’s own perception of who its main competitors are and the relative importance of each. A firm must have clear insight into a rival’s perception even if it is biased before it can sensibly predict the offensive or defensive moves of a rival. A firm with a larger market share with a high level of competitor acumen with regard to a target rival is likely to increase the share gap between itself and the rival.
Quality of the publication is indicated by its published date within the last 10 years and it passed the JF Library filter for scholarly and peer reviewed journals. The publication contains an abstract, citations throughout, and an extensive reference list. The JSTOR publication is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive.
The authors follow a typical research writing format. The authors make a contribution to the research on competitor analysis and competitive dynamics and reinforce a theoretical link between the two.
The research fits into the discussion because it advances the construct of a competitor acumen, which is the extent to which a focal firm’s assessment of its rival’s prioritization of competitors to reflect the rival’s own view, contributing to the assessment of a firm’s external environment.
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