Copyright 2007 Prentice Hall Ch 3 -1 Chapter 3 The External Assessment Strategic Management: Concepts & Cases 11 th Edition Fred David.

Chapter 3 The External Assessment

Strategic Management: Concepts & Cases

11th Edition

Fred David

Chapter Outline

The Nature of the External Audit

The Industrial Organization (I/O) View

Social, Cultural, Demographic & Environmental Forces

Chapter Outline (cont’d)

Political, Governmental, and Legal Forces

Technological Forces

Competitive Forces

Porter’s Five-Forces Model

Sources of External Information

Forecasting Tools & Techniques

Global Challenge

The External Factor Evaluation (EFE) Matrix

Competitive Profile Matrix (CPM)

It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. –Charles Darwin

External Assessment

Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map. – Wayne Calloway, Former CEO, PepsiCo

External Strategic Management Audit

-- Environmental Scanning

-- Industry Analysis

Identify & Evaluate factors beyond the control of a single firm Increased foreign competition Population shifts Aging society Fear of traveling Stock market volatility

Purpose of External Audit Identify

Opportunities Threats

Key External Forces

•Economic forces

•Social, cultural, demographic & environmental forces

•Political, governmental & legal forces

•Technological forces

•Competitive forces

CompetitorsSuppliers

DistributorsCreditors

CustomersEmployees

CommunitiesManagers

StockholdersLabor Unions

Special Interest GroupsProductsServicesMarkets

Natural Environment

Key External Forces

Opportunities&

Threats

Key External Forces & the Organization

Gather competitive intelligence –

Social Cultural Demographic Environmental Governmental Legal Technological

External Audit

External Audit – Sources of Information•Internet

•Libraries

•Suppliers

•Distributors

•Salespersons

•Customers

•Competition

Performing External Audit

-- Key Factors Vary over time Vary by industry

Performing External Audit -- Variables

•Market share

•Breadth of competing products

•World economies

•Foreign affiliates

•Proprietary account advantages

Performing External Audit -- Variables

•Price competitiveness

•Technological advancements

•Interest rates

•Pollution abatement

Performing External Audit

External Factors

Measurable

Long-term orientation

Applicable to competing firms

Hierarchical

Industrial Organization (I/O) View

-- Industry factors more important than internal factors

Performance determined by industry forces

Economies of Scale

Industry Properties

Barriers to market entry

Product differentiation

Level of competitiveness

I/O Perspective Firm Performance

Research Findings

“Approximately 20% of a firm’s profitability can be explained by the industry, whereas 36% of the variance in profitability is attributed to the firm’s internal factors”

Economic Forces

Trends in the dollar’s value European Union Layoffs Economic standard of living

Economic Standard of Living

Russia’s Economy

Political bureaucracy Illegal actions by officials

and policemen State-run gas; monopoly

purchase of newspaper Foreign direct investment

Economic Forces

•Availability of credit

•Level of disposable income

•Interest rates

•Inflation rates

Major Impact –

•Products

•Services

•Markets

•Customers

U.S. Facts

•Aging population

•Less Caucasian

•Widening gap between rich & poor

•2025 = 18.5% population >65 years

•2075 = no ethnic or racial majority

•World population approaching 7 billion

•World population = 8 billion by 2028

•World population = 9 billion by 2054

•U.S. population < 300 million

Trends More American households with people living

alone By 2021 Hispanics will be largest minority group Aging Americans – affects all organizations Population shift to the south and west Less interested in fitness and exercise Decimation and degradation of the natural

environment

U.S. – Mexico Border

North America’s fastestgrowing region

1,500 maquiladoras No longer largest

exporter to U.S.

Global trends

•2003 – China largest exporter to U.S.

•2003 –– Asia receives highest foreign direct investment

•Cheaper labor and utilities than Mexico

•China joined WTO

Global trends

•China’s labor rates less than Mexico

•China provides more site location incentives than Mexico

•More educated consumers

•Aging population

•Minorities more influential

•Local rather than federal solutions

21st Century Trends

Social, Cultural, Demographic & Environmental Forces (cont’d)

•Fixation with youth decreasing

•Hispanics increase to 15% by 2021

•African American increase to 14% by 2021

21st Century Trends

Key Social, Cultural, Demographic & Environmental Variables

Number of marriages & divorces

Number of special interest groups

Number of births & deaths

Immigration & emigration rates

Childbearing rates

Actuarial rates

Monitor KeyVariables

Per capita income

Attitudes toward business

Avg. disposable income

Consumer behavior

Ethical concerns

Attitudes toward saving

Racial equality

Avg. educational level

Governmental regulation

Attitudes toward customer service

Attitudes toward quality

Energy conservation

Social responsibility

Leisure time values

Recycling

Waste management

Air & water pollution

Ozone depletion

Endangered species

Political, Government & Legal Forces

Key opportunities & threats Antitrust legislation Tax rates Lobbying efforts Patent laws

Government Regulation

Political variables impact – Formulation of strategies Implementation of strategies

Increasing Global Interdependence

Strategists in a global economy – Forecast political climates Legalistic skills Diverse world cultures

Increasing Global Interdependence

Worldwide trend toward similar consumption patterns

Global buyers and sellers E-commerce Technology for instant currency transfers

Globalization of Industry

Key Political, Governmental, & Legal Variables

Special tariffs

Tax law changes

PAC’s

Voter participation rates

Regulation/deregulation

Key Political, Governmental, & Legal Variables (cont’d)

Environmental protection laws

Changes in patent laws

Equal employment legislation

Government subsidies

Number of patents

Key Political, Governmental, & Legal Variables (cont’d)

Import/export regulations

Global relationships

Political conditions

Location and severity of terrorist activity

Anti-trust enforcement

Major Impact –

•Internet

•Communications

•Semiconductors

Significance of IT

•Chief Information Officer (CIO)

•Chief Technology Officer (CTO)

Essential for nearly every strategic decision

Technology-based issues

Competitive Forces

Collection & evaluation of data on competitors is essential for successful strategy formulation

Competitive Forces

Competition on virtually all industries can be described as intense.

Competitive Forces

Strengths

•Weaknesses

•Capabilities

•Opportunities

•Threats

•Objectives

•Strategies

Identifying Rival Firms

Key Questions Concerning Competitors

Their objectives and strategies

Their weaknesses

Their responses to external variables

Their vulnerability to our alternative strategies

Their strengths

Key Questions Concerning Competitors (cont’d)

Entry and exit of firms in the industry

Our product/service positioning

Key factors for our current position in industry

Sales/profit rankings of competitors over time

Our vulnerability to strategic counterattack

Key Questions Concerning Competitors (cont’d)

The threat of substitute products/services

Nature of supplier & distributor relationships

Should we keep our strategies secret from employees and stakeholders?

Competitive Forces

•Moody’s Manuals

•Standard Corporation Descriptions

•Value Line Investment Surveys

•Dun’s Business Rankings

•Standard & Poor’s Industry Surveys

•Industry Week

•Forbes, Fortune, Business Week

Sources of Corporate Information

Competitive Forces

1. Market share matters

2. Understand what business you are in

3. Broke or not, fix it

4. Innovate or evaporate

7 Characteristics of most Competitive U.S. Firms:

Competitive Forces

5. Acquisition is essential to growth

6. People make a difference

7. No substitute for quality

7 Characteristics of most Competitive U.S. Firms:

The Five-Forces Model of Competition

Potential development of substitute products

Rivalry among competing firms

Bargaining power of suppliers

Potential entry of new competitors

Bargaining power of consumers

Steps to Determine if an Acceptable Profit Can be Earned

1. Identify key aspects or elements of each competitive force

2. Evaluate how strong and important each element is for the firm

3. Decide whether the collective strength of the elements is worth the firm entering or staying in the industry

The Five-Forces Model

Most powerful of the five forces Focus on competitive advantage of

strategies

Rivalry Among Competing Firms

Barriers to entry are important Quality, pricing, and marketing can

overcome barriers

Potential Entry of New Competitors

Pressures increase when consumer’s switching costs decrease

Firm’s plans for increased capacity & market penetration

Potential Development of Substitute Products

Large number of suppliers & few substitutes affects intensity of competition

Backward integration can gain control or ownership of suppliers

Bargaining Power of Suppliers

Customers concentrated or buying in volume affects intensity of competition

Consumer power is higher where products are standard or undifferentiated

Bargaining Power of Consumers

Conditions where Consumers GainBargaining Power

If they can inexpensively switch If they are particularly important If sellers are struggling in the face of falling

consumer demand If they are informed about seller’s products,

prices and costs. If they have discretion in whether and when

they purchase the product.

Forecasting Tools and Techniques

Forecasts are educated assumptions about future trends and events Quantitative techniques – Most appropriate when

historical data is available and there is a constant relationship

Qualitative techniques

The Global Challenge

Faced by U.S. Firms --

•Gain & maintain exports to other nations

•Defend domestic markets against imported goods

Simultaneously globally competitive & nationally responsive

Multinational Corporations (MNC’s)

Worldwide integration of:

Strategy formulation

Strategy implementation

Strategy evaluation

Globalization

Similar consumption patterns

Global buyers and sellers

E-commerce

Instant transmission of money & information

Globalization of Industries

Industry Analysis: The External Factor Evaluation (EFE) Matrix

CompetitivePoliticalCultural

Technological

EnvironmentalSocial

Governmental

DemographicEconomic

Summarize & Evaluate

Total weighted score of 4.0 Organization response is outstanding to threats

and weaknesses

Industry Analysis EFE

Total weighted score of 1.0 Firm’s strategies not capitalizing on opportunities

or avoiding threats

Industry Analysis EFE

Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.

Important --

Industry Analysis: Competitive Profile Matrix (CPM)

Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions

Gateway Apple Dell

CSF’s Wt Rating Wt’d Score

Rating Wt’d Score

Market share 0.15 3 0.45 2 0.30 4 0.60

Inventory sys 0.08 2 0.16 2 0.16 4 0.32

Fin position 0.10 2 0.20 3 0.30 3 0.30

Prod. Quality 0.08 3 0.24 4 0.32 3 0.24

Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08

Sales Distr 0.10 3 0.30 2 0.20 3 0.30

Global Exp. 0.15 3 0.45 2 0.30 4 0.60

Org. Structure 0.05 3 0.15 3 0.15 3 0.15

Gateway Apple Dell

CSF’s (cont’d) Wt Rating Wt’d Score

Rating Wt’d Score

Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12

E-commerce 0.10 3 0.30 3 0.30 3 0.30

Customer Serv 0.10 3 0.30 2 0.20 4 0.40

Price competitive

0.02 4 0.08 1 0.02 3 0.06

Mgt. experience 0.01 2 0.02 4 0.04 2 0.02

Total 1.00 2.83 2.47 3.49

Industry Analysis CPM

Just because one firm receives a 3.2 rating and another receives a 2.8 rating, it does not follow that the first firm is 20 percent better than the second.

Important --

Key Terms & Concepts

For Review (Chapter 3)

AOL Competitive Analysis

Chief Information Officer (CIO)

Competitive Intelligence(CI)

Chief Technology Officer(CTO)

Competitive ProfileMatrix (CPM)

Competitive Advantage Decruiting

Director of CompetitiveAnalysis

External Factor EvaluationMatrix (EFE)

Downsizing External Forces

Environmental Scanning Industry Analysis

External AuditIndustrial Organizational

Information Technology(IT)

Lifecare Facilities

InternetPorter’s Five-Forces

Learning from the Partner

Rightsizing

Linear Regression World Wide Web

Tax Harmonization

Foreign Direct Investment

Copyright 2007 Prentice Hall Ch 3 -1 Chapter 3 The External Assessment Strategic Management: Concepts & Cases 11 th Edition Fred David.

prentice hall ch

purpose of external

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industry slide

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th edition fred david

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