Directions: Please summarize in 6 paragraphs what you have learned by reading everything below. Tell us how you can apply this knowledge to a marketing agency.
MT1 – Some aspects of the External Context of Strategy to be considered are: What are some of the fundamental characteristics of the External Context and the key questions to be asked when analyzing the firm’s external context. How to use PESTEL analysis to identify the macro characteristics of the external context. What are some of the determinants and consequences of globalization?
External Context of strategy is very important in companies. The macro environment plays an important role when managers are planning and strategizing. According to Carpenter and Sanders (2008) “Managers perform stakeholder analysis to gain a better understanding of the range and variety of groups and individuals who not only have a vested interest in the formulation and implementation of a firm’s strategy but who also have some influence on the firm’s performance”. Today companies are in a global arena, the companies must take into consideration what other countries are doing to stay competitive in the marketplace. For example, Apple has made use of the low labor cost in China. Apple’s Iphones are manufactured in China, this enables the company to make better profit.
According to Wagner (n.d) “An external analysis helps you stay on top of trends and events in your industry that may affect your company, but are out of your control. Some people conduct one as part of a full SWOT analysis that also looks at a company’s internal strengths and weaknesses. Armed with an external analysis, your company can make and implement decisions that help your company move forward and become more competitive.
The market section of your analysis reviews the opportunities and threats of the industry in which you compete. Look at the overall size of the industry to get a feel for how many companies offer similar products and services, then research the projected industry growth.
Economic trends can affect your business for better or worse, so staying on top of anything that could affect your profitability is key to conducting an ongoing external analysis. For instance, look at economic indicators, such as recession levels or interest rates that affect buying power.
Keeping an eye on your competitors is a necessity if you want to gain more market share, or even to stay competitive. Evaluate the performance of your competition by reviewing the services and products they offer and their pricing structure.
A careful review of the demographics of your target market is a valuable component of an external analysis since it helps you figure out if you’re on track with your marketing messages. Review the characteristics your market shares, such as age, interests, dislikes, location, income level and needs than the messages you create to attract senior citizens who want their hair set and dried every week”.
The key questions to be asked when doing external analysis is how the competitors are performing, what are the market conditions and the market forecast. According to Carpenter and Sanders (2008) “What macro environmental conditions will have an effect on our ability to implement our strategy successfully? What is the firm’s industry? What are the characteristics of the industry? How stable are the characteristics?”
PESTEL Analysis is a efficient tool to analyze the political, economic, sociocultural, technological, environmental and legal aspects of a company. Pestel analysis explains the external influences that can impact a company. According to Carpenter and Sanders (2008) “It helps managers gain a better understanding of the opportunities and threats they face and consequently aids them in building a better vision of the future business landscape and how the firm might compete profitably.”
Globalization has helped some companies and hurt others, for example, the companies that cut costs use a globalized strategy to do so. The multinational companies use cheap labor, cheap raw materials to increase their profit. The companies have outsourced and offshored processes and functions. Globalization has also helped with more intellectual capabilities and the ability to get to market quickly. I believe globalization was bound to happen due to the internet and its capability to join the entire world through a screen.
In my company, external factors play a major role because we import speakers from China, the Chinese economy is closely watched by our owner. For example, during the Chinese economic crisis when the Yuan lost its value. The owners asked the suppliers if they could reduce the raw material cost, but the businesses there were just waiting and watching for the next economic move to make any changes. I also suggested the owner to hedge the currency.
Wagner, N (n.d), An external analysis of the company, Retrieved fromhttp://smallbusiness.chron.com/external-analysis-company-71031.html
Carpenter, M. A., & Sanders, W. G. (2008). Strategic Management: A Dynamic Perspective. Upper Saddle River, NJ, USA: Pearson Education, Inc.
In analyzing an industry, it is necessary to determine the subject industry’s boundaries. “…Industries are typically composed of many segments with different structural characteristics” (Carpenter & Sanders, 2008, p. 103). For the sake of consistency, I will continue with my examples relative to real estate development. In hopes of analyzing the industry I must determine and specify the industry, or determine the industry boundaries. A funnel approach would be useful in determining this, going from a broad focus to a narrow determination. Am I interested in the American residential industry, or the commercial industry? Let’s assume I am interested in the commercial industry. I should not stop there, as this would be much too broad and there are many segments within the commerical industry with different characteristics (Carpenter & Sanders, 2008). An appropriate level of focus would be something along the lines of focusing on high-end hotels in Monterey. Now equipped with industry boundaries, I can evaluate the industry structure by employing Porter’s (1980) five forces model.
Porter’s (1980) five forces model allows one to gain an understanding of an industry. The forces within the analysis model include the degree of rivalry, supplier power, threat of new entrants, buyer power, and threat of substitutes. Let’s assume I want to use the model in hopes of better understanding the hotel industry in Monterey.
Degree of rivalry: It is within this section where competition is evaluated. Who are my competitors? What are the switching costs? How do firms compete? These are just some questions that must be answered. In the high-end hotel development industry in Monterey, rivalry is very high. There are many players within the industry, many of which are top-tier global firms providing world-class facilities, amenities, etc.
Threat of new entrants: This part of the analysis is aimed at gaining an understanding of the “degree to which new competitors can enter an industry and intensify rivalry” (Carpenter & Sanders, 2008, p. 106). The analysis also includes evaluating the barriers to entry, or “the condition under which it is more difficult to join or compete in an industry” (Carpenter & Sanders, 2008, p. 106). In Monterey’s high-end hotel industry, the threat of new entrants is relatively low. High capital requirements coupled with the importance of brand identity seem to deter entrants. Just as it is important to evaluate the barriers to entry, it is also important to evaluate the exit barriers. “Firms face high exit barriers when it is very costly to leave an industry or market…” (Carpenter & Sanders, 2008, p. 107). In this example, exit barriers are relatively high. Hotels are convertible to other uses such as apartments, condominiums, office space, etc., but not cheaply or easily.
Threat of substitutes: Important considerations within this force include switching costs, buyer inclination to substitute, variety of substitutes, necessity of product or service, among others. In the high-end hotel industry in Monterey, the threat of substitutes is low. There is only one Monterey, and the character and beauty of the city are not replicable, thus, difficult to substitute. In terms of high-end accommodations, however, short-term vacation rentals are becoming increasingly popular and are considered an increasing threat to the high-end hotel industry.
Bargaining power of buyers: “A buyers group hs greater power in the exchange relationship with its suppliers when the buyers are prestigious and when their purchases represent a significant portion of the sellers’ sales” (Carpenter & Sanders, 2008, p. 109). In the high-end hotel industry in Monterey, bargaining power of buyers is considered to be medium, as there are many high-end hotels (suppliers) that accommodate many travelers (buyers). Considering the high level of competition, consumers have many choices and thus have more power. In light of this, customer are also price conscious as they have the ability to easily compare.
Bargaining power of suppliers: In the competitive industry of high-end hotels in Monterey, the bargaining power of suppliers is low. Prices are competitive, and options are plentiful. Furthermore, switching costs are low. Evaluating the bargaining power of suppliers and buyers is important as “the relative power of each party affects both the pricing and profitability of each industry” (Carpenter & Sanders, 2008, p. 108).
Carpenter., & Sanders. (2008). Strategic Management: A Dynamic Perspective. Upper Saddle River, NJ, USA: Pearson Education, Inc.