Why is it important for a firm to study and understand its external organization

Why is it important for an organisation to understand its external and internal environments in the 21st century? Part 1 : Understanding the External Environment in Organisations

Why is it important for an organisation to understand its external and internal environments in the 21st century? Part 1 : Understanding the External Environment in Organisations

Executive Summary In the 21st century, strategic management processes have to adapt to forces never experienced before in the past (Hitt et al. 2014). Strategic management is an evolving and context dependent practice and thus must continually seek to analyse and understand the external and internal environments in which organisations operate (Joyce & Woods 2001). With the general growth of globalisation, the intensity of the information age and attacks from low cost competitors, the strategies organisations pursue for success have become more complicated, sophisticated, and even radical (Eames 2014; Barkin et al. 1995). With the changed dynamics in the new competitive landscape, firms face multiple discontinuities that often occur simultaneously and are not easily predicted (Hitt et al. 1998). The terrain in this new landscape often changes unexpectedly and organisations such as Qantas, are faced with unrelenting complexity. Qantas, must therefore develop new strategies and new ways of organizing to deal with this exceedingly complicated landscape (Ireland & Hitt 1999).

1. Identify the latest trends

To get a good idea of the latest market trends, several approaches can be used. First, information can be searched in online databases, including government, industry, Canadian and U.S., databases.Let's take the example of a door and window company. To identify market trends, you have to start by assessing changes in the construction industry. Once you have determined its growth and identified the major trends, more research is needed to understand the market developments relating more specifically to the window and door industry.

In particular, we look at the following:

• new technologies used
• major innovations
• new market entries
• key success factors

Researching the latest trends also requires contacting people directly to ask them questions. We call our clients and companies we buy from, for example, to find new information and sound out their needs, to detect or confirm trends.

2. Assess market shares

While you obviously need to know a company’s market share to complete a strategic planning exercise, finding this information is not that simple.Sometimes we find precise data, but if the data doesn’t exist, we have to use our creativity to make extrapolations that are as accurate as possible.

Let's take the example of architectural products. They’re grouped with other products to form a broader category, so you’ll never find very specific data. So you have to look at the company's sales, then talk to various experts and extrapolate to assess the market shares held.

3. Analyze the competitive environment

To be well positioned, a company also needs to know who its major competitors are. It generally does. But have some slipped under its radar?To conduct an in-depth analysis of the competitive environment, you must first conduct thorough Web and social media searches. You also need to search various databases, such as professional associations.

Don’t hesitate to ask questions directly to strategic people in the company’s different departments to bring in new perspectives and interview external experts and clients to understand in what ways they are satisfied and dissatisfied. Once the competitors have been clearly identified, you have to clearly define these competitive advantages, which may include quality, price, distribution network, customer service, technologies used, etc.

4. Identify threats

A business faces various risks, such as political, economic, or legal changes.They can also be social, environmental or cultural.

The company has no control over these changes, but you have to examine them to factor them into your strategic planning because they can have a major impact on your business.

5. Draw up a realistic picture of your situation

The analysis of the company’s external environment is therefore a major research effort to gather a great deal of information from databases, customers and experts.

Based on this analysis, the company can realistically assess the situation and decide, for example, to invest more in a market segment where there is growth but less competition.

To make these kinds of decisions, it is extremely important to be able to base them on facts. Many business people follow their instincts, but at some point you reach your limit and you have to do more sophisticated strategic planning to enable the company to go further.

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