Chapter 03

Chapter 3 The External Assessment Strategic Management: Concepts and Cases. 9th edition Fred R. David PowerPoint Slides by Anthony F. Chelte Western New England College Fred R. David Prentice Hall

Ch.3-1

External Strategic Management Audit

Also called: – Environmental scanning – Industry analysis

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Ch.3-2

External Strategic Management Audit External Audit: – Identification and evaluation of trends and events beyond control of single firm • • • • •

Increased foreign competition Populations shifts Aging society Information technology Computer revolution Fred R. David Prentice Hall

Ch.3-3

Nature of External Audit Purpose: – Development of Finite List: • Opportunities • Threats to be avoided

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Ch.3-4

Key External Forces Five (5) broad categories: 1. Economic forces 2. Social, cultural, demographic, & environmental forces 3. Political, governmental, and legal forces 4. Technological factors 5. Competitive forces Fred R. David Prentice Hall

Ch.3-5

Relationships Between Key External Forces and an Organization

Key External Forces

Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services

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Opportunities & Threats

Ch.3-6

Performing an External Audit Gather competitive intelligence on factors: – Social – Cultural – Demographic – Environmental – Economic – Political, legal, governmental – technological Fred R. David Prentice Hall

Ch.3-7

Performing an External Audit Sources of information include: – Internet – Libraries (corporate, university, public) – Suppliers – Distributors – Customers – Competition Fred R. David Prentice Hall

Ch.3-8

Performing an External Audit Key factors: – Vary over time – Vary by industry

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Ch.3-9

Performing an External Audit Variables include: – – – – – – – – –

Market share Breadth of competing products World economies Foreign affiliates Proprietary account advantages Price competitiveness Technological advancements Interest rates Pollution abatement

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Ch.3-10

Key External Factors Key External Factors: 1. 2. 3. 4.

Oriented to long-term & annual objectives Measurable Applicable to all competing firms Hierarchical • •

Overall company Divisional or functional areas

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Ch.3-11

Economic Forces Monitor Key Economic Variables:        

Availability of credit Level of disposable income Interest rates Inflation rates Money market rates Federal government budget deficits Gross domestic product trend Consumption patterns Fred R. David Prentice Hall

Ch.3-12

Monitor Key Economic Variables: • • • • • • • • •

Unemployment trends Worker productivity levels Value of the dollar in world markets Stock market trends Foreign countries’ economic conditions Import/export factors Demand shifts for goods/services Income differences by region/customer

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Ch.3-13

Monitor Key Economic Variables: • • •

• • •

• •

Price fluctuations Exportation of labor & capital Monetary policies Fiscal policies Tax rates ECC policies OPEC policies LDC policies

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Ch.3-14

Social, Cultural, Demographic & Environmental Forces Major impact on: – Products – Services – Markets – customers

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Ch.3-15

Monitor Key Variables • • •

• • • •

Life expectancy rates Per capita income Attitudes toward business Average disposable income Buying habits Ethical concerns Attitudes toward saving Fred R. David Prentice Hall

Ch.3-16

Monitor Key Variables • • •

• • • •

Racial equality Average level of education Government regulation Attitudes toward customer service Attitudes toward product quality Energy conservation Social responsibility Fred R. David Prentice Hall

Ch.3-17

Monitor Key Variables • • • • •

•

Value placed on leisure time Recycling Waste management Air & water pollution Ozone depletion Endangered species

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Ch.3-18

Political, Govt., & Legal Forces Government Regulation • Key opportunities & key threats • • • •

Antitrust legislation (Microsoft) Tax rates Lobbying efforts Patent laws Fred R. David Prentice Hall

Ch.3-19

Political, Govt., & Legal Forces Increasing Global Interdependence •

Impact of political variables – Formulation of Strategies – Implementation of Strategies

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Ch.3-20

Political, Govt., & Legal Forces Increasing Global Interdependence •

Strategists in a global economy •

Forecast political climates • Legalistic skills • Diverse world cultures

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Ch.3-21

Political, Govt., & Legal Forces Globalization of Industry • Worldwide trend toward similar consumption patterns • Global buyers & sellers • E-commerce • Instant transmission of money & information across continents Fred R. David Prentice Hall

Ch.3-22

Political, Govt., & Legal Forces Key Political, govt., & legal variables: • • • • • • •

Government regulation/deregulation Tax law changes Special tariffs Political Action Committees (PACs) Voter participation rates Number of patents Changes in patent laws

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Ch.3-23

Technological Forces Revolutionary technological forces: •

Profound impact on organizations •

Internet • Semiconductors • XML technologies • UWB communications Fred R. David Prentice Hall

Ch.3-24

Technological Forces Internet changes the nature of opportunities and threats -• • • • • •

Alters life cycle of products Increases speed of distribution Creates new products and services Eases limitations of geographic markets Alters economies of scale Changes entry barriers Fred R. David Prentice Hall

Ch.3-25

Competitive Forces

Collection and evaluation of information on competitors is essential for successful strategy formulation

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Ch.3-26

Competitive Forces

Competition in virtually all industries can be described as intense.

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Ch.3-27

Competitive Forces Identifying rival firms • •

• • •

• •

Strengths Weaknesses Capabilities Opportunities Threats Objectives Strategies Fred R. David Prentice Hall

Ch.3-28

Competitive Analysis: Porter’s FiveForces Model Potential development of substitute products

Bargaining power of suppliers

Rivalry among competing firms

Bargaining power of consumers

Potential entry of new competitors

Fred R. David Prentice Hall

Ch.3-29

Industry Analysis (EFE) External Factor Evaluation Matrix Summarize & evaluate: Economic

Demographic

Governmental

Social

Environmental

Technological

Cultural

Political

Competitive

Fred R. David Prentice Hall

Ch.3-30

Industry Analysis (EFE) Five-Step process: •

List key external factors (10-20) Opportunities

•

& threats

Assign weight to each (0 to 1.0) Sum

of all weights = 1.0  (not important to very important) Fred R. David Prentice Hall

Ch.3-31

Industry Analysis (EFE) •

Five-step process:

•

Assign 1-4 rating to each factor • Firm’s current strategies response to the factor • Response poor - superior

•

Multiply each factor’s weight by its rating • Produces a weighted score

Fred R. David Prentice Hall

Ch.3-32

Industry Analysis (EFE) Five-step process: •

Sum the weighted scores for each Determines

the total weighted score for the organization.

•

Highest possible weighted score for the organization is 4.0; the lowest, 1.0. Average = 2.5 Fred R. David Prentice Hall

Ch.3-33

 Factor

Weight Rating Weighted score

Opportunities High-end in-home entertainment sales are growing nationally

0.15

4

0.60

Forecast for continued growth of expensive housing in Dade & Broward counties Wealthy foreigners buy expensive entertainment equipment for their homes in South Florida Current customers refer new prospects with little prompting

0.16

4

0.64

0.07

3

0.21

0.12

3

0.36

Direct mailing lists are available by household income

0.06

3

0.18

0.13

1

0.13

New technologies such as satellite broadcast compete with current technologies Declining incomes in South Florida versus the U.S.

0.10

1

0.10

0.08

2

0.16

South Florida highly dependent on trade with Latin America

0.07

1

0.07

Economy depends on air transport, a volatile industry

0.06

2

0.12

Threats Large chains could expand upward into their niche

Total

1.00 Fred R. David Prentice Hall

2.57 Ch.3-34

Industry Analysis (EFE)

Important •

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

Fred R. David Prentice Hall

Ch.3-35

Industry Analysis (CPM) Competitive Profile Matrix •

•

Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic position Major weakness – major strength Fred R. David Prentice Hall

Ch.3-36

(CPM) Critical Success Factor

Avon

L’Oreal

Procter & Gamble

Weight Rating Score Rating Score Rating Score

Advertising

0.20

Product Quality

0.10

Price Competition

0.10

Management

0.10

Financial Position

0.15

Customer Loyalty

0.10

Global Expansion

0.20

Market Share

0.05

Total

1.00

1 4 3 4 4 4 4 1

0.20

0.40 0.30 0.40 0.60 0.40 0.80 0.05

3.15 Fred R. David Prentice Hall

4 4 3 3 3 4 2 4

0.80

3

0.60

0.40

3

0.30

0.30

4

0.40

0.30

3

0.30

0.45

3

0.45

0.40

2

0.20

0.40

2

0.40

0.20

3

0.15

3.25

2.80 Ch.3-37