Strategic management module 2

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The External Assessment

Overview of Strategic Management

� What is SM?

� Different Stages of SM

� Integrating Intuition and Analysis

� Adapting to Change

� Key Terms in SM

� Competitive Advantage

� Strategists

� Vision and Mission statements

� External Threats and Opportunities

� Internal Strengths and Weaknesses

� Long Term Objectives

� Strategies

� Annual Objectives

� Policies

� SM Model

� Benefits of SM

� Business Ethics and SM

� Importance of Vision and Mission statements

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ExternalAudit

InternalAudit

Long-TermObjectives

Generate,Evaluate,

SelectStrategies

ImplementStrategies:

Mgmt Issues

ImplementStrategies:Marketing,Fin/Acct,R&D, CIS

Measure &Evaluate

PerformanceVision

&Mission

Comprehensive strategic management model

Agenda

� Nature of an external audit

� Key external Forces

� Process of performing an external audit

� The industrial organization view

� Economic Forces

� Russia’s economy

� Social, Cultural, Demographic and environmental Forces

� Political, Governmental and Legal Forces

� Technological Forces

� Competitive Forces

� Competitive Intelligence

� Cooperation among competitors

� Market Commonality and Resource Similarity

� Competitive Analysis: Porter’s Five Forces Model

� Sources of External Information

� Forecasting Tools and Techniques

� Industry Analysis – External Factor Evaluation (EFE Matrix)

� The Competitive Profile Matrix (CPM)

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Module Outline

The Nature of the External Audit

The Industrial Organization (I/O) View

Social, Cultural, Demographic &

Environmental Forces

Module Outline (cont’d)

Political, Governmental, and Legal Forces

Technological Forces

Competitive Forces

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Porter’s Five-Forces Model

Sources of External Information

Forecasting Tools & Techniques


Global Challenge

The External Factor Evaluation (EFE) Matrix

Competitive Profile Matrix (CPM)

5

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

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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


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Purpose of External audit

� To develop a finite list of opportunities that could benefit a firm

� Threats that could be avoided

� External audit is aimed at identifying key variables that offer actionable responses

� Firms should be able to respond offensively or defensively to the factors by formulating strategies that take advantage of external opportunities or minimize threats

Key External Forces

•Economic forces

•Social, cultural, demographic & environmental forces

•Political, governmental & legal forces

•Technological forces

•Competitive forces

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CompetitorsSuppliers

DistributorsCreditors

CustomersEmployees

CommunitiesManagers

StockholdersLabor Unions

Special Interest GroupsProductsServicesMarkets

Natural Environment

KeyExternalForces

Opportunities&

Threats

Key External Forces & the Organization

Gather competitive intelligence –

� Social

� Cultural

� Demographic

� Environmental

� Governmental

� Legal

� Technological

External Audit

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External Audit – Sources of Information

•Internet

•Libraries

•Suppliers

•Distributors

•Salespersons

•Customers

•Competition

Performing External Audit

-- Key Factors� Vary over time

� Vary by industry

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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

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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

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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”

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Economic Forces

Economic Forces

� Trends in the dollar’s value

� European Union

� Layoffs

� Economic standard of living

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Economic Standard of Living

Russia’s Economy

� Political bureaucracy

� Illegal actions by officialsand policemen

� State-run gas; monopolypurchase of newspaper

� Foreign direct investment

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Economic Forces

•Availability of credit

•Level of disposable income

•Interest rates

•Inflation rates

Social, Cultural, Demographic & Environmental Forces

Major Impact –

•Products

•Services

•Markets

•Customers

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U.S. Facts

•Aging population

•Less Caucasian

•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

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� 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

Social, Cultural, Demographic &

Environmental Forces

U.S. – Mexico Border

� North America’s fastestgrowing region

� 1,500 maquiladoras

� No longer largestexporter to U.S.

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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


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•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

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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 Key

Variables

Per capita income

Attitudes toward business

Avg. disposable income


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Consumer behavior

Monitor Key

Variables

Ethical concerns

Attitudes toward saving

Racial equality


Avg. educational level

Monitor Key

Variables

Governmental regulation

Attitudes toward customer service

Attitudes toward quality


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Energy conservation

Monitor Key

Variables

Social responsibility

Leisure time values

Recycling


Waste management

Monitor Key

Variables

Air & water pollution

Ozone depletion

Endangered species


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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

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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

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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

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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

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Significance of IT

•Chief Information Officer (CIO)

•Chief Technology Officer (CTO)


Essential for nearly every strategic decision

Technology-based issues

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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.

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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

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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?

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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:

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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

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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

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� 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

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� 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

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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

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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)

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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

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Industry Analysis: The External Factor Evaluation (EFE) Matrix

CompetitivePoliticalCultural

TechnologicalEnvironmentalSocial

GovernmentalDemographicEconomic

Summarize & Evaluate

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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

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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

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Gateway Apple Dell

CSF’s Wt Rating Wt’d

Score

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

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

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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 --

To Summarize

� Nature of an external audit

� Key external Forces

� Process of performing an external audit

� The industrial organization view

� Economic Forces

� Russia’s economy

� Social, Cultural, Demographic and environmental Forces

� Political, Governmental and Legal Forces

� Technological Forces

� Competitive Forces

� Competitive Intelligence

� Cooperation among competitors

� Market Commonality and Resource Similarity

� Competitive Analysis: Porter’s Five Forces Model

� Sources of External Information

� Forecasting Tools and Techniques

� Industry Analysis – External Factor Evaluation (EFE Matrix)

� The Competitive Profile Matrix (CPM)

Strategic management module 2

Education