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Considering External Factors

Strategic thinkers are aware of various external forces that shape their industry. Translating this into effective management, strategic thinkers balance these factors and make decisions that take them into account.

Porter’s Five Forces

One tool used to assess external factors is Porter’s Five Forces model. Applying this model can help your organization or department respond positively to the forces of competition. One such force is the bargaining power of customers.

Customers typically use their buying power to demand expensive product specifications at low prices. They may also play competitors against each other to get what they want. Another force is the bargaining power of suppliers, especially if your industry is dominated by only a few suppliers, or if the product or material supplied is rare.

Then there’s the threat of new entrants. These are organizations that enter a market for the first time. They can increase competition, forcing prices and profits down.

Next is the threat of substitutes — this is highest when customers and end users can easily switch to buying alternative products instead of buying yours. Finally, there are competitors, which force organizations to work with lower profit margins or risk losing sales completely.