External Analysis Overview

Summary

This video from the Marriott School of Business at Brigham Young University provides a high-level overview of external analysis in strategic management. It explores the importance of understanding the external environment, including competition, threats, and opportunities. Key tools for external analysis, such as competitor dynamics, industry analysis, and the PEST model, are introduced. The video highlights how these tools can help businesses assess the competitive landscape, evaluate potential threats from external factors like political, economic, social, and technological changes, and ultimately generate strategic insights for better decision-making.

Takeaways

• 😀 External analysis helps companies understand the external environment and identify both opportunities and threats.
• 😀 The competitive environment must be clearly defined to conduct an external analysis, including boundaries such as industry segment and geography.
• 😀 Competitive dynamics within a company’s circle of competitors are important to analyze for strategic insights, such as pricing and cooperation strategies.
• 😀 Industry analysis helps assess external entities outside the competitive circle that might influence company profits, such as buyers, suppliers, substitutes, and complements.
• 😀 Potential entrants, or new companies entering the market, can impact existing companies' profitability if entry barriers are low.
• 😀 Buyer power can affect companies’ profits as buyers push for better prices and products.
• 😀 Suppliers can also impact profits by pushing for higher prices or lower-quality goods, shifting profits from companies to their own pockets.
• 😀 Substitute products or services pose a threat to profitability by providing alternatives that satisfy customer needs in different ways.
• 😀 Complementary products can increase the value of a company’s products, benefiting companies within the competitive environment.
• 😀 The PEST model (Political, Economic, Social, Technological) helps anticipate how external trends could change the competitive environment and profitability over time.
• 😀 Political, economic, social, and technological changes can either improve or diminish a company's external environment, affecting the competition and profitability.

Q & A

What is the primary purpose of the video?

The primary purpose of the video is to provide a high-level overview of external analysis, including understanding its purpose, gaining exposure to key tools for analysis, and showing how these tools can work together to generate strategic insights.

What is the significance of external analysis for a company?

External analysis is crucial because it helps a company understand the environment it operates in, identifies potential threats and opportunities, and provides insights that inform strategic decision-making.

How does the fish analogy help explain the importance of external analysis?

The fish analogy illustrates how understanding the external environment (the pond) is essential for a company to succeed. By analyzing factors like competition, resources, and potential changes, a company can make better decisions, just as a fish must understand the pond to thrive.

Why is it important to define the competitive environment before performing external analysis?

Defining the competitive environment is necessary to ensure the analysis is focused and meaningful. By establishing boundaries, such as the market segment or geographic region, the analysis remains consistent and relevant.

What role do competitor companies play in the external analysis?

Competitor companies within the defined competitive environment are analyzed to understand the nature of their competition—whether they compete aggressively or cooperate—and how this affects the market dynamics and profitability.

What is the significance of understanding potential entrants in an industry?

Understanding potential entrants is important because the ease with which new companies can enter a market affects the profitability of existing companies. The more easily new entrants can enter, the more competitive and less profitable the market may become.

How do buyers impact the external environment of a company?

Buyers can influence the external environment by bargaining for lower prices and better products. When buyers have high bargaining power, they can shift profits away from companies inside the competitive environment.

What role do suppliers play in shaping the competitive environment?

Suppliers can affect the competitive environment by trying to shift profits toward themselves, typically by demanding higher prices or offering lower-quality products. This influences the profitability of companies within the competitive environment.

How can substitute products or services affect a company's competitive environment?

Substitute products or services can reduce demand for a company's offerings, forcing companies to compete more aggressively. The easier it is for buyers to find substitutes, the more difficult it becomes for companies to maintain their market share and profits.

What is the role of complementary products or services in an external analysis?

Complementary products or services can increase demand for a company's products. For example, apps for Android smartphones increase the attractiveness of Android phones, helping companies in the Android market to capture more profits.

How does PEST analysis help in forecasting future trends in external analysis?

PEST analysis helps by examining political, economic, social, and technological trends that may affect the external environment. By understanding these factors, companies can anticipate changes and adjust their strategies to maintain or improve profitability.

Why is it important to consider both current and future trends in external analysis?

It is important to consider both current and future trends because external environments change over time. By understanding how these trends will evolve, companies can adapt and prepare for shifts that could affect their competitiveness and profitability.