Ch 3 -1 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Chapter 3 The External Assessment Strategic Management: Concepts & Cases 12.

Ch 3 -1Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Chapter 3 The External Assessment

Strategic Management: Concepts & Cases

12th Edition

Fred David


Chapter Outline

The Nature of the External Audit

The Industrial Organization (I/O) View

Social, Cultural, Demographic, and 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




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




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


States with the Highest Percentage of Minorities

1. Nevada

2. Arizona

3. Georgia

4. Florida

5. Idaho

6. North Carolina

7. Colorado




Facts

•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 Aging Americans – affects all organizations Population shift to the south and west Decimation and degradation of the natural

environment



Global trends

•China’s labor rates less than Mexico

•China provides more site location incentives than Mexico



Natural Environment PerspectiveBusiness Leaders Pushing for Legislation on Climate Change 10 CEOs pressuring for caps on

greenhouse-gas omissions Desiring a single national

emissions cap Top 5 buyers of green power:

1. PepsiCo

2. Wells Fargo

3. Whole Foods

4. U.S. Air Force

5. Johnson & Johnson



•More educated consumers

•Aging population

•Minorities more influential

•Local rather than federal solutions

21st Century Trends


Social, Cultural, Demographic, and 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, and 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




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 similarconsumption patterns

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

Globalization of Industry


Key Political, Governmental, and Legal Variables

Special tariffs

Tax law changes

PAC’s

Voter participation rates

Regulation/deregulation


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

Environmental protection laws

Changes in patent laws

Equal employment legislation

Government subsidies

Number of patents


Key Political, Governmental, and 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 fromemployees 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, BusinessWeek

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


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 consumers’ 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 sellers’ 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


Global PerspectiveChina’s Automobile Producers Heading to the United States in 2008 China’s auto exports doubled in 2006 China produces more cars than Germany and is the

world’s third largest automobile producer Changfeng Group first Chinese automaker in the Detroit

Auto Show



Simultaneously globally competitive & nationally responsive

Multinational Corporations (MNCs)



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


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 Organization

(I/O)




Information Technology(IT)

Lifecare Facilities

InternetPorter’s Five-Forces

Model

Learning from the Partner

Rightsizing

Linear Regression World Wide Web




Tax Harmonization

Foreign Direct Investment


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mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

Ch 3 -1 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Chapter 3 The External Assessment Strategic Management: Concepts & Cases 12.

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