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

External Strategic Management Audit Also known as – Environmental Scanning – Industry Analysis Main purpose : develop a finite list of opportunities that could benefit the firm and threats that should be avoided. *can provide key variables that offer actionable responses; offensively or defensively Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

External trends and events significantly affect products, services, markets, and organizations in the world. External forces directly affect both suppliers and distributors Key Factors – Vary over time Vary by industry Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Performing External Audit The process must involve as many managers and employees as possible -Gather competitive intelligence and information (both opportunities and threats can be external factors) -The information gathered must be assimilated and evaluated. -Factors listed on the chart and prioritized -Results from information must be communicated and distributed in the organization Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

External Audit Gather competitive intelligence – Social Cultural Demographic Environmental Governmental Legal Technological Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Performing External Audit –Variables Market share Breadth of competing products World economies Foreign affiliates Proprietary account advantages .Price competitiveness .Technological advancements .Interest rates .Pollution abatement Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

External Audit – Sources of Information Internet Libraries Suppliers Distributors Salespersons Customers Competition Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Performing External Audit Long-term Orientation External Factors should be Measurable Applicable to Competing Firms Hierarchical Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industrial Organization (I/O) View This approach views that industry factors are more important than internal factors in the sense that: Performance determined by industry forces Effective integration and understanding of both internal and external factors is the key to securing and keeping a competitive advantages. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

I/O Perspective Firm Performance Industry Properties Economies of Scale Barriers to Market Entry Product Differentiation Level of Competitiveness Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Economic Forces Economic factors have a direct impact on the potential attractiveness of various strategies. Some examples of economic indicators that are influential: Customers’ buying trends Layoffs Economic standard of living Interest rates Discretionary income The value of dollar/currency Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Social, Cultural, Demographic, and Environmental Forces Major Impact – Products Services Markets Customers Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Social, Cultural, Demographic, and Environmental Forces 21st Century Trends More educated consumers Aging population Minorities more influential Local rather than federal solutions Fixation with youth decreasing Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Eg: the emergence of online purchase New trends are creating a different type of consumer and consequently creates a need for different product, different service which in turn demand for different strategies Eg: the emergence of online purchase Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Number of special interest groups Some of the Key Social, Cultural, Demographic, and Environmental Variables Childbearing rates Number of special interest groups Number of marriages & divorces Number of births & deaths Immigration & emigration rates Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Political, Governmental, and Legal Forces Government Regulation and legal factors (local, state, federal) can represent key opportunities and threats Some key opportunities & threats Antitrust legislation Tax rates Lobbying efforts Patent laws Import-export regulations Political condition of foreign countries Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Political, Governmental, and Legal Forces Political variables have impact on – Formulation of strategies Implementation of strategies Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Political, Governmental, and Legal Forces Globalization of Industry Worldwide trend toward similar consumption patterns Global buyers and sellers E-commerce Technology for instant currency transfers Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Technological Forces Technological changes demand redesigning the site and revamping the way we work Major Impact – Internet Communications Semiconductors Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Competitive Forces Competitors are firms that offer similar products and services in the same market Collection & evaluation of data on competitors is essential for successful strategy formulation Competition on virtually all industries can be described as intense (industries battle each other on price and customer service) Industries should identify rivals’ SWOT, objectives, strategies Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Competitive Forces Sources of Corporate Information Moody’s Manuals Standard Corporation Descriptions Value Line Investment Surveys Dun’s Business Rankings Standard & Poor’s Industry Surveys Industry Week Forbes, Fortune, BusinessWeek Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Porter’s Five-Forces Model of Competition : widely used approach Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

1. Rivalry Among Competing Firms The Five-Forces Model 1. Rivalry Among Competing Firms Most powerful of the five forces Focus on competitive advantage of strategies Competition is more intense when the number of competitors increases As rivalry increases, profits decreases Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

2. Potential Entry of New Competitors The Five-Forces Model 2. Potential Entry of New Competitors Barriers to entry are important – when the threats of new entry firms are strong, more efforts should be given to deter new entrants Quality, pricing, and marketing can overcome barriers Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

3. Potential Development of Substitute Products The Five-Forces Model 3. Potential Development of Substitute Products Pressures increase when consumers’ switching costs decrease (sugar vs artificial sweetener, eyeglasses/lenses vs laser eye surgery) Firm’s plans for increased capacity & market penetration Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

4. Bargaining Power of Suppliers The Five-Forces Model 4. Bargaining Power of Suppliers Large number of suppliers & few substitutes affects intensity of competition Backward integration can gain control or ownership of suppliers Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

5. Bargaining Power of Consumers The Five-Forces Model 5. Bargaining Power of Consumers Customers concentrated or buying in volume affects intensity of competition Consumer power is higher where products are standard or undifferentiated Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Conditions Where Consumers Gain Bargaining 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 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

The Global Challenge Gain & maintain exports to other nations Defend domestic markets against imported goods Multinational Corporations (MNCs) Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Worldwide integration of: Strategy formulation Strategy implementation The Global Challenge A global strategy seeks to meet the needs of customers worldwide, with the highest value and the lowest cost Worldwide integration of: Strategy formulation Strategy implementation Strategy evaluation Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Globalization of Industries The Global Challenge Globalization of Industries Similar consumption patterns Global buyers and sellers E-commerce Instant transmission of money & information Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industry Analysis: The External Factor Evaluation (EFE) Matrix Summarize & Evaluate Competitive Political Cultural Technological Environmental Social Governmental Demographic Economic Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Five steps in performing EFE List the key factors Assign weight for each ( weight indicates the relative importance and the total must equal to 1) Assign rating from 1-4 (to indicate how effective the firm responds to the factor; 1-the response is poor; 4-the response is superior) Multiply the weight and rating to get weighted score Sum the weighted score (the maximum score is 4) Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industry Analysis EFE Total weighted score of 4.0 Organization response is outstanding to threats and weaknesses Total weighted score of 1.0 Firm’s strategies not capitalizing on opportunities or avoiding threats Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industry Analysis EFE Important – Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industry Analysis: Competitive Profile Matrix (CPM) Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall