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Analysis of both internal factors and external
conditions is central to creating effective strategy.
LEARNING OBJECTIVES[ edit ]• Examine the discrepancies between internal proficiency and external factors to capture strategic value
- Recognize the relevance of both the internal and externalenvironments in strategic management
KEY POINTS[ edit ]• Strategic management is the managerial responsibility to achieve competitive advantage opportunities and avoiding external threats. through optimizing internal resources while capturing external
- While dieasiest to view these potentialfferent businesses have di attributesfferent internal conditions, it is as generalized categories. A
- valueA value^ chain is a common tool used to accomplish this. chain identifies the supporting activities (employee skills, technology, infrastructure, etc.) and the primary activities (acquiring inputs, operations, distribution, sales, etc.) that can potentially create
- proThe externalfit. environment is even more diverse and complex than the internal environment, and there are manymeasure, and analyze it (i.e., Porter's Five Force, SWOT effective models to discuss, Analysis,
- PESTELWith both the internal value chain and external environment in mind,^ framework, etc.). upper management can reasonably derive a set of strategic principleswhich internally leverage strengths and externally capture opportunities to create profits.
TERM[ edit ] The process of breaking down a substance into its constituent parts, or•^ analysis the result of this process. Give us feedback on this content:
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Strategic management is the managerial responsibility to achieve competitive advantage through optimizing internal resources while capturing external opportunities and avoiding external threats. This requires carefully crafting a structure, series of objectives, mission, vision, and operational plan. Recognizing the way in which internally developed organizational attributes will interact with the external competitive environment is central to successfully implementing a givenstrategy—and thus creating profitability.
Internal Conditions
The internal conditions are many and varied depending on the organization (just as the external factors in any given industry will be). However, management has some strategic control over how these various internal conditions interact. The achievementof synergy in this process derives competitive advantage. While different businesses have different internal conditions, it is easiest to view these potential attributes as generalized categories.
A value chain is a common tool used to identify each moving part. It is a useful mind map for management to fill in during the derivation of internal strengths and weakness. A value chain includes
Michael Porter's value chain This model, created by Michael Porter, demonstrates how support and primary activities add up to potential margins(and potential competitive advantage).
External Opportunities and Threats
The external environment is even more diverse and complex than the internal environment. There are many effective models to discuss, measure, and analyze the external environment (such as Porter's Five Force, SWOT Analysis, PESTEL framework, etc.). For the sake of this discussion, we will focus on the following general strategic concerns as they pertain to opportunities and threats:
- Markets (customers): Demographic and socio-cultural considerations, such as who the customers are and what they believe, are critical to capturing market share. Understanding the needs and preferences of the markets is essential to providing something that will have a demand.
- Competition: Knowing who else is competing and how they are strategically poised is also key to success. Consider the size, market share, branding strategy, quality, and strategy of all competitors to ensure a given organization can feasibly enter the market.
- Technology: Technological trajectories are also highly relevant to success. Does the manufacturing process of the product have new technologies which are more efficient? Has a disruptive technology filled the need that was currently being filled?
- Supplier markets: Suppliers have great power as they control the necessary inputs to an organization's operational process. For example, smartphones require rare earth materials; if these materials are increasingly scarce, the price points will rise.
Competitive Forces This image provides an example of external factors that would be important to consider when analyzing a firm'sstrategy.
With both the internal value chain and external environment in mind, upper management can reasonably derive a set of strategic principles that internally leverage strengths while externally capturing opportunities to create profits—and hopefully advantages over the competition.
Five Components of an Organization's External Environment by George N. Root III, Demand Media
The external environment of an organization are those factors outside the company that affect the company's abilityto function. Some external elements can be manipulated by company marketing, while others require the organization to make adjustments. Monitor the basic components of your company's external environment, and keepa close watch at all times.
CustomersYour customers are among the external elements you can attempt to influence, via marketing and strategic release of corporate information. But ultimately, your relationship with your clients is based on finding ways to influence themto purchase your products. Market research is used to determine the effectiveness of your marketing messages, and to decide what changes can be made to future marketing programs to improve sales. GovernmentGovernment regulations in product development, packaging and shipping play a significant role in the cost of doing business and your ability to expand into new markets. If the government places new regulations on how you mustpackage your product for shipment, that can increase your unit costs and affect your profit margins. International laws create processes that your company must follow to get your product into foreign markets. EconomyAs with the majority of the elements of your organization's external environment, your company must be efficient at monitoring the economy and learning how to react to it, rather than trying to manipulate it. Economic factors affecthow you market products, how much money you can spend on business growth, and the kind of target markets you will pursue. CompetitionYour competition has a significant effect on how you do business and how you address your target market. You can choose to find markets that the competition is not active in, or you can decide to take on the competition directly inthe same target market. The success and failure of your various competitors also determines a portion of your marketing planning, as well. For example, if a long-time competitor in a particular market suddenly decides to dropout due to financial losses, then you will need to adjust your planning to take advantage of the situation.
Public OpinionAny kind of company scandal can be damaging to your organization's image. The public perception of your organization can hurt sales it's negative, or it can boost sales with positive company news. Your firm can influencepublic opinion by using public relations professionals to release strategic information, but it is also important to monitor public opinion to try and defuse potential issues before they begin to spread.
Internal component of business enviorment consists of Resourses, Capabilities, Core Competenciesand Strategic competitiveness withing any organisation. Market environment consist of all factors that in one way or another affect or affected by theorganization desicion.
there are external and internal factors.
Organizational environment consists of both external and internal factors. Environment must be scanned so as todetermine development and forecasts of factors that will influence organizational success. Environmental scanning refers to possession and utilization of information about occasions, patterns, trends, and relationshipswithin an organization’s internal and external environment. It helps the managers to decide the future path of the organization. Scanning must identify the threats and opportunities existing in the environment. While strategyformulation, an organization must take advantage of the opportunities and minimize the threats. A threat for one organization may be an opportunity for another. Internal analysis of the environment internal organizational environment. This includes employee interaction with other employees, employee interaction is the first step of environment scanning. Organizations should observe the with management, manager interaction with other managers, and management interaction with shareholders, accessto natural resources, brand awareness, organizational structure, main staff, operational potential, etc. Also, discussions, interviews, and surveys can be used to assess the internal environment. Analysis of internal environmenthelps in identifying strengths and weaknesses of an organization. As business becomes more competitive, and there are rapid changes in the external environment, information fromexternal environment adds crucial elements to the effectiveness of long-term plans. As environment is dynamic, it becomes essential to identify competitors’ moves and actions. Organizations have also to update the corecompetencies and internal environment as per external environment. Environmental factors are infinite, hence, organization should be agile and vigile to accept and adjust to the environmental changes. For instance - Monitoringmight indicate that an original forecast of the prices of the raw materials that are involved in the product are no more credible, which could imply the requirement for more focused scanning, forecasting and analysis to create a moretrustworthy prediction about the input costs. In a similar manner, there can be changes in factors such as competitor’s activities, technology, market tastes and preferences. While in external analysis , three correlated environment should be studied and analyzed —
- immediate / industry environment
- national environment
- broader socio-economic environment / macro-environment Examining theincluding the competitive position of a particular organization and it’s main rivals. Also, an assessment of the nature, industry environment needs an appraisal of the competitive structure of the organization’s industry, stage, dynamics and history of the industry is essential. It also implies evaluating the effect of globalization oncompetition within the industry. Analyzing the national environment needs an appraisal of whether the national framework helps in achieving competitive advantage in the globalized environment. Analysis of environment includes exploring macro-economic, social, government, legal, technological and international factors macro- that may influence the environment. The analysis of organization’s external environment reveals opportunities andthreats for an organization. Strategic managers must not only recognize the present state of the environment and their industry but also be ableto predict its future positions.
