External Environmental Analysis
Analyzing the external environmental of an organization is significant for its strategy formation and general success of an organization. For organizations to successfully carry out this task, they need to make use of a number of tools, models, and frameworks. These will ensure that they appropriately identify factors in their environment, whether internal or external, and it will affect their operations and business. One of the most significant environments that an organization should consider is its business environment, which is made up of a number of multi-layers, each with a specific role to play in the organization’s success. In addition to this, carrying out a resource based analysis is also significant for an organization. This will allow an organization to place realistic requirements on its resources during the development of its strategy. External environment is critical to the success of any given organization in various industries, especially for companies, such as Best Buy and Honda, which are explicated in this paper.
Answer to Question 1A
External environment refers to events, conditions, and factors, taking place outside of an organization. The environment has a strong influence on an organization’s activities and other operations. It is usually difficult to predict and organization has no control over it. Thus, external environment determines organization’s opportunities and risks. Nonetheless, this environment must exist, since a business cannot operate in a vacuum.
It is necessary to analyze external environment when creating a strategy for companies like Circuit City and Wal-Mart, because factors in this environment can be dangerous for an organization, especially, given the fact that they are unpredictable. As a result, they are most likely to interfere with the process of developing an organization’s strategy or lead to the development of an ineffective strategy.
There are multiple layers, constituting an organization’s business environment. The first layer is the macro-environment. It is the highest layer of business environment and consists of global factors, influencing the lower layers economically. It is all forces that are a part of the larger society (Ungson & Wong 2014). Some examples of the macro-environment included demographics, technology, and government regulations. For Best Buy Company, its demographics include wealthy, suburban families, trendy urban dwellers, and closely knit middle class families. Some of the government regulations, impacting the company, include regulations with regards to tax credits and Federal Reserve winding down the bond market.
The second layer, constituting an organization’s business environment, is industry, also known as a sector. It refers to a group of organizations and companies, which produce the same products or services. In addition, companies and organizations that operate in a given industry usually have primary related business activities. For example, Best Buy Company belongs in the consumer electronics industry.
Competitors are another significant layer that makes up a business environment for an organization. There can be direct competitors, which are companies that produce the same or similar products. There also exist indirect competitors, which are companies competing for the same revenue. The layer of competitors is adjacent to the organization itself, together with markets. The competitors for Best Buy Company include Staples, GameStop Corp, and RadioShack Corp.
The final layer, constituting an organization’s business environments is market. In particular, the market segment focuses on customers. These customers usually share their needs that are similar but different than the needs in other parts of the market. Companies create customer profiles, based on specific indicators, such as demographics or consumer purchasing power (Newbert 2007). For Best Buy, its specific market is electronics and, thus, its market segmentation should focus on those customers with preferences for electronics.
Answer to Question 1B
There are a number of tools and techniques that managers can use to identify and evaluate external influences on strategy. Some of these tools are explained in the bottom line.
This tool is essential in evaluating the micro-environment layer of a business environment. In particular, it provides understanding to strategic issues, underpinning a business from external sources. In this case, it will analyze the political, economic, social, technological, environmental, and legal environment of Best Buy Company.
The company has greatly benefited from the liberalization of electronic markets. For example, the Chinese market has recently become liberalized. There has also been a reduction in entry barriers. This has been favorable for the company, as it has allowed it to operate freely in new markets. This has become an opportunity for the company.
The US economy, the company’s main market, has been experiencing adverse economic conditions. The economic slowdown in the US has dealt Best Buy a blow, as the company struggles to maintain its operations in this market and grasp its customer base. There has been a shift to market oriented economy. For this reason, there is a need for the company to adjust to these new economic challenges if it is to survive. Thus, the economic analysis has proven to be a constraint for the company’s success.
There has been an increase in middle class people. This has opened up a new market for Best Buy, as it has restructured its products to meet the needs of these new classes of people. There has also been a rise in income for newly educated people. Not only these people, but there has also been an increase in demand for electronic devices for many young educated people in metro cities. This has expanded Best Buy’s market options. The social analysis is, therefore, an opportunity for Best Buy Company.
There are few laws on intellectual property rights, with regards to electronic devices. This has made it difficult for Best Buy to protect its products from counterfeits. Further, there is a lot of technological advancements with new companies coming up with newer and fresher ideas, making it difficult for the company to continue competing. Thus, technological advancement has ended up being a threat for the company, unless it positions itself as a leader in technology.
There has been an inclination towards environmentally friendly products. Customer tastes have changed towards products that do not adversely affect the environment. As a company, Best Buy strives to produce products that are environmentally friendly. In addition, to maintain the stance of being environmentally friendly, the company participates in various environmental conservation practices.
There are many government regulations, with regards to operating in electronic consumer industry. In addition, there are a lot of procedural delays with regards to entry into the market. This has proven to be an opportunity for Best Buy, since having had already established itself in the market, the company does not have much to worry about, with regards to new market entrants.
Porter’s Five Forces Model
The second tool that can be used to identify and evaluate the external influences on strategy is Porter’s Five Forces framework. The framework will enable the determination of market position of Best Buy to enable formulation of strategies that will increase the company’s success.
Supplier Bargaining Power
Supplier bargaining power is moderate and steady. The company obtains its products from few key suppliers, but despite this, the suppliers have a restricted ability to make changes to prices. This is due to the commoditization of many items the electronic retailer sells.
Buyer Bargaining Power
The buyer bargaining power is very high. The use of customer centric model has weakened the company’s ability to deal with its customers. Consequently, power has been transferred onto the buyers, causing them to demand products on their terms and preferred prices.
Rivalry is very high and keeps increasing. The competition has been increasing due to the emerging online retailers. Currently, the main competitors of Best Buy Company are Amazon, Apple Inc, and Wal-Mart. They have given Best Buy a cut throat competition.
Threat of Substitution
The threat of substitute is low. This is because there are no real substitutes for electronic gadgets and other products. There can be no actual replacement of electronic products. The only replacement that there can be is transitioning towards up to date technology.
Threat of New Entrant
The level of threat of new entrants is relatively low for the consumer electronic industry. For instance, the industry imposes a lot of entry barriers for new companies in the market. The government has set in place a number of regulations that new entrants in the market must follow and comply with. The existing market players are strongly protected by regulations, which make it difficult for new entrants to effectively compete with them (Ireland, Hoskisson & Hitt 2011).
SWOT analysis can also, to an extent, be used by managers to identify and evaluate the external influences on strategy. But this is by focusing only on the opportunities and threats, since strengths and weaknesses encompass internal analysis.
One of the opportunities that Best Buy Company has is the ability to access international markets. This is due to the increase in liberalization around the world. Thus, the company can increase its market share. Another significant opportunity is emerging technology. For instance, the 3D television sets, smart television, and smartphones.
One of the main threats to Best Buy Company is increased competition. This is especially coming from online retailers. The major competitors of Best Buy Company are Amazon, Apple, and Wal-Mart Stores. Another threat is changes in technology. This makes some of the products that Best Buy is currently selling become obsolete at a faster rate. For instance, tablets and smartphones are quickly replacing PCs and laptops. Another significant threat is that many customers are leaning towards making purchases on credit. This is affecting the company’s sales greatly.
Answer to Question 2A
It is imperative to note that when an organization is developing its strategy for success, the strategy must place realistic requirements on the organization’s resources. This is the significance of resource based analysis for any firm, company, or organization (Newbert 2007). This resource based analysis will be based on Honda company. The analysis will provide an overview of the company’s possessed resources and competencies. This will make use of the resource based analysis framework; VRIO. The VRIO framework analyzes a company’s resources, in terms of whether they are valuable, rare, costly to imitate, and Organization of the company to exploit the resources.
The tangible resources of Honda are divided into financial and physical resources. To begin with financial resources, as of 2013, the market capital for Honda was $64.77 billion, debt/Equity at $0.97 billion, while free cash flow was $1.81 billion (Market Publishers 2015). The physical resources were valued, as follows in 2013. The market values were $45.06 billion, while the age capital equipment in percentage was at 53.7 (Market Publishers 2015). Using the VRIO framework, these resources can be analyzed in specificity as follows. Firstly, Honda possesses 47 manufacturing facilities. These facilities are valuable and Honda is well organized to make use of them. Secondly, the manufacture also owns 8 research and development centers. These research centers are valuable, rare, inimitable, and the company is organized to exploit them. Thirdly, Honda’s distribution network is wide and heterogeneous in nature. It is valuable and the firm is well organized to make use of it. Fourthly, Honda’s financial assets are valuable and the company possesses a great deal of organization to manage them. Lastly, Honda has flexibility in its fixed assets. This is a competitive advantage for the company, as it fits the VRIO criteria.
Honda’s intangible resources include patents, trade secrets, trademarks, technological innovation, brand value, CSR initiatives, and human resources (Honda 2015). The VRIO for these intangible resources is as follows. Firstly, the company’s trademarks, patents, and technological innovation meet the VRIO criteria. Thus, they are all potential sources of sustainable competitive advantage for the company. Secondly, Honda’s brand value also successfully qualifies for the VRIO framework. Therefore, it is also a source of competitive advantage for the company. Honda’s human resources are approximately 190, 338 and are spread across the world (Honda 2015). The company encourages employee participation, opinion, and creativity in their work. Being highly trained has caused Honda’s human resources to be considered as VRIO assets.
Honda company possesses a wide range of competencies (Honda 2015). In the first place, the company’s strategic implementation is a strong feature that has led to a new market entry. It has also led to profitability and company’s growth. This is the strategic importance of this competence. The second competence is with regards to the company’s manufacturing. In this case, the strategic importance of this, has impacted efficiency, quality, and flexibility, which are factors significant to customer satisfaction. The third competence of Honda is with regards to design of its auto vehicles. This can be perceived as important, however, it is imitable. Thus, its relative strength, with regards to design is less than memorable. Honda’s customer service competence has impacted the company’s brand reputation. It is not quite as strong, as it lacks the ability to exploit financial services that add value. The fifth competence for Honda is related to its marketing. The automotive manufacturer has a relatively strong media presence. Its promotion on various media platforms is important, however, it is imitable. The final competence for Honda is related to its expansion. The company’s multidivisional coordination is critical for its success, as it enables it to reinforce its global presence.
Answer to Question 2B
When a company finds out about its strengths and weaknesses, there is a need for it to take up steps to exploit these strengths and correct its weaknesses, in relation to its current and future strategy. Before embarking on showing how Honda can do this as a company, it is imperative to first identify its strengths and weaknesses.
Honda’s strengths are as follows, according to Jurevicius (2013). The company has a high and powerful research and development sector. Another significant strength is a highly diversified product portfolio. Thus, the company is able to provide a range of products to its customers. Honda also has a very strong brand image, which has served as a strengths for the company. It has enabled it to maintain brand equity and brand loyalty by its customers. A fourth strength of Honda is that it has a strong presence as a motorsports leader. For instance, it is leading with F1.
Honda’s weaknesses can be identified as follows, as explained by Jurevicius (2013). The first weakness by the company is its high cost structure. It is a well known fact that Honda has high prices for its vehicles in the automotive industry. The reason may be attributed to the company’s use of the latest technology, which has made it difficult to keep price at a minimum. The second weakness by Honda is it has a weak position in the European market. The company has had difficulty penetrating the European automotive market, being that it is an Asian company. The third weakness of Honda is that it has a limited customer base. This is because the automotive maker caters only to the upper and middle segment. The final weakness by Honda is a constant recall of its products. The company has had on several occasions to recall a number of its models for corrective action an act that has caused many to doubt the quality of its vehicles.
Honda can exploit its strengths as follows. First, it can exploit its research and development by making use of innovative ideas and latest technologies that come about as a result of this process. This will be significant in helping the company generate increased revenue streams over a period of time and, thus, become a market leader in automotive industry. Second, the company can exploit its highly diversified portfolio to prevent and reduce risk for its products in the market. When one product fails in the market, it will still have the other remaining products (Ungson & Wong 2014). Third, Honda can make use of its strong brand image by ensuring that it is maintained. It can exploit this strong brand image to introduce new products into the markets, as they will be easily accepted and they can raise the price of their products, as a strong brand image commands higher prices. Finally, Honda’s can make use of its strong presence in the manufacture of motor cycles to introduce newer models in the market, as it will be easy for them to be accepted by buyers.
The company can also correct its weaknesses in relation to its current and future strategy in the following manner. Firstly, when it comes to its high cost structure, Honda should strive to rethink it by finding a way of reducing it, but one which will create a sustainable cost advantage. Secondly, with regard to its weak position, in the European market, the automotive manufacturer should strive to understand the needs of European automotive customers and focus on developing products that will meet these needs. The company should strive to prioritize this target market. This can be done through thorough market analysis of the European market. Thirdly, the company’s limited customer base can be expanded by diversifying its customer portfolio. That is instead of continuing to focus on upper and middle customers, it should also incorporate the low income earners as potential customers. Finally, the company can reduce and prevent the recall of its products by implementing quality control standards. This may include inspecting the components brought in by suppliers. The company should have in place an effective quality control system to address any parts that are non-conforming.
The external environmental analysis of Best Buy Company shows how significant it is for an organization to recognize the factors that impact its strategy and overall success. In this case, the organization is able to identify those factors that will hinder its progress, such as weaknesses, threats, new entrants into the market, and rivals. It is also able to identify the factors in its environment that will promote its success, in this case, its strengths, opportunities, and technological advancement. An organization’s resources are significant in assisting it to realize its strategies and make them successful. Thus, resource based analysis, conducted on Honda, has illustrated its significance. It is imperative to note that once an organization has identified its strengths, it should establish steps to exploit them. When it identifies its weaknesses, it should embark on correcting them.