Chapter3 External Assessment 1

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

Chapter 3 The External Assessment

Strategic Management: Concepts & Cases

12th Edition

Fred David

The strategic plan- project

Naming the company and the team. Preparing the plan step by step as the

progress in the course. Make presentations. Final hard copy submission.



External Strategic Management Audit

– Environmental Scanning

– Industry Analysis


Purpose of External Audit Identify

Opportunities Threats

External Strategic Management Audit



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


Industrial Organization (I/O) View Managing strategically from the I/O

perspective entails firms striving to compete in attractive industries, avoiding weak or faltering/uncertain industries, and gaining a full understanding of key external factor relationships.


Industrial Organization (I/O) View it is not a question of whether external or

internal factors are more important. Rather, effective integration and understanding of both external and internal factors is the key to securing and keeping a competitive advantage.


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”


Identify opportunities & threats To conduct such analysis we will explain in

details the different aspects of external environment forces\variables such as economic, social, cultural and technology..


Economic Forces

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



OT on economic issues: Example GM US car producer could the integration

and expansion of EU a threat to their market share in Europe because they EU gives priority to their companies.

GM would find the decline in the value of US$ as Opportunity to export.


Social, Cultural, Demographic, and Environmental Forces

U.S. Facts

•Aging population

•Less Caucasian: white population will not continue to be majority.

•Widening gap between rich & poor

•2025 = 18.5% population > 65 years

•2075 = no ethnic or racial majority




Facts

•World population approaching 7 billion

•World population = 8 billion by 2028

•World population = 9 billion by 2054

•U.S. population < 300 million


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

environment




•More educated consumers

•Aging population

•Minorities more influential

21st Century Trends: trends


Key Social, Cultural, Demographic, and Environmental Variables

Number of marriages & divorces

Number of special interest groups

Number of births & deaths

Immigration & emigration rates


Monitor KeyVariables

Per Capita Income

Attitudes Toward Business

Avg. Disposable Income

Social, Cultural, Demographic, and Environmental Forces: summary


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



Social, Cultural, Demographic, and Environmental Forces: Ex. On OT GM threats: Ozone deletion which put GM

under pressure from green peace to react to environmental pollution.

GM opportunity: invest in new energy development to reduce cost and environmental pollution.


Political, Governmental, and 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 similarconsumption patterns

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

Globalization of Industry


Key Political, Governmental, and Legal Variables: summary

Special tariffs

Tax law changes

Voter participation rates

Regulation/deregulation


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

Environmental protection laws

Changes in patent laws

Equal employment legislation

Government subsidies

Number of patents


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

Import/export regulations

Global relationships

Political conditions

Location and severity of terrorist activity

Anti-trust enforcement


Political, Governmental, and Legal Variables: example on OT US global relationship is O for GM Global

expansion. Us foreign policy against terrorist is a threat

GM foreign expansion.


Technological Forces

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


Technological Forces: example on OT Internet is O to increase GM e-selling. Internet is T from others to compete at us

market.


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

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: encourage businesses to sell products overseas, e.g., computers which are used in US the same as in Palestine.

Global buyers and sellers

E-commerce

Instant transmission of money & information

Globalization of Industries


Teamwork

Identify the OT to the business you wrote vision & mission.

Key variables:1. Economic: $ value, per capita income, available of credit at

banks.

2. Social, Cultural, Demographic, and Environmental Forces: population age and size, level of education to consumer.

3. Political, Governmental, and Legal Forces: Tax rates, political stability, law and order.

4. Technological Forces: internet, communication development.


There are five steps in developing The External Factor Evaluation (EFE) Matrix1. List key external factors as identified in the external-audit

process. Include a total of 10-20 factors from both the opportunities and threats.

2. Assign to each factor a weight from .0 (not important) to 1.0 (very important). These weights show the relative importance. The total of all the weights should equal 1.0.

3. Assign a 1-4 rating to each factor to indicate how effectively the firm’s current response strategy: 1= the response is poor, 2 = the response is average, 3 = the response is above average, and 4 = the response is superior.

4. Multiply each factor’s weight by its rating to get a weighted score.

5. Sum the weighted scores for each variable to determine the total weighted score for the organization.


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: The External Factor Evaluation (EFE) Matrix: teamwork. Apply the EFE to the previous case.


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 –


Review

Explain how to conduct an external strategic-management audit.

An effective approach for conducting an external strategic-management audit consists of four basic steps: (1) select key variables, (2) select key sources of information, (3) use forecasting tools and techniques, and (4) construct an EFE Matrix.


Review

Identify a recent economic, social, political, or technological trend that significantly affects financial institutions.

Economic—Interest rates remain low. Social—Many states are passing no smoking

ordinances. Political—Eastern European countries are

experiencing political instability. Technological—Use of the Internet is doubling

every 100 days.


Review

Discuss the following statement: Major opportunities and threats usually result from an interaction among key environmental trends rather than from a single external event or factor.

This statement is accurate. It reveals how complex the external audit part of strategy formulation can be. There are an infinite number of interactions among key external factors.


Review

Use Porter’s five-forces model to evaluate competitiveness within the Gaza banking industry.

Porter identifies five competitive forces that determine the intensity of competition in an industry and the total value of profits created in a particular industry. The five forces are 1) new entrants, 2) substitute products or services, 3) bargaining power of suppliers, 4) bargaining power of buyers, and 5) rivalry among existing firms. A key to selecting appropriate generic strategies is to analyze these competitive forces in terms of trends, opportunities, and threats facing the firm.


Review

What major forecasting techniques would you use to identify (1) economic opportunities and threats and (2) demographic opportunities and threats? Why are these techniques most appropriate?

With the advent of sophisticated computers, simultaneous systems of regression equations have become the most widely used approach for forecasting economic variables. Scenario development is the most popular of all techniques for social and demographic forecasting, although surveys and market research are also widely used.


Review

Give some advantages and disadvantages of cooperative versus competitive strategies.

Cooperative strategies are generally less costly than competitive strategies. Cooperative strategies between domestic and foreign companies can facilitate entry into world markets. However, competitive strategies recognize that survival of the fittest is an underlying philosophy of business not only in the United States, but also in most of the world. Identifying competitors’ strengths and weaknesses is, thus, an integral and vital part of the external audit.


Review

Let’s say your boss develops an EFE Matrix that includes 62 factors. How would you suggest reducing the number of factors to 20?

Answer: Let a group of knowledgeable individuals in the organization evaluate the relative importance of each factor by assigning a 1 = not important, 2 = somewhat important, and 3 = very important. Then add the ratings each factor receives. The 20 factors with the highest sum score should be included in the EFE Matrix.


Review

Do you agree with I/O theorists that external factors are more important than internal factors in a firm achieving competitive advantage? Explain both your and their position.

While I/O theorists claim that industry factors are more important than internal factors, research findings suggest that only 20% of a firm’s profitability can be explained by industry factors and 36% explained by internal factors. Regardless, it is not a question of whether external or internal factors are more important. Rather, effective integration and understanding of both external and internal factors is the key to securing and keeping a competitive advantage.


Review

List the 9 external areas that give rise to opportunities and threats.

Answer: The ten external areas are economic, social, cultural, demographic, environmental, political, government, legal, and technological.

Chapter3 External Assessment 1

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