WEEK 3 The External Assessment

Comprehensive Strategic Management Model (External Assessment/Audit) Vision & Mission Long-Term Objectives Generate, Evaluate, Select Strategies Implement Strategies: Mgmt Issues Implement Strategies: Marketing, Fin/Acct, R&D, CIS Measure & Evaluate Performance Internal Audit

External Assessment The purpose external assessment is to develop a finite list of opportunities that could benefit a firm and threats that should be avoided Finite mean it is aimed at identifying key variables that offer actionable responses

Five Broad Category of External Forces Economic forces Social, culture, demographic and natural environment forces Political, government and legal forces Technology forces Competitive forces

Special Interest Groups An Organization’s Opportunities Key External Forces & the Organization Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Economic forces Social, culture, demographic and natural environment forces Political, government and legal forces Technology forces Competitive forces An Organization’s Opportunities & Threats

Important to achieve Long-term Applicable to competing firms The process of Performing External Audit Important to achieve Long-term and annual objectives External Factors Measurable Applicable to competing firms Hierarchical

The Industry Organization (I/O) View Advocate that external (industry) factors are more important than internal factors in a fir achieving competitive advantage Contend that external factors and the industry in which a firm choose to compete has a stronger influence on the firm’s performance than do the internal functional

Economic Forces – Key economic Variables Change to service economic Availability of credit Level of disposable income Propensity of people spend Interest rate Inflation rate Money market rates Gross Domestic product trend Employment rate/trend Value of dollar in world markets Stock market trends Foreign countries economics condition Import/export factors Income differences by consumers

Economic Forces – Countries GDP 2010 The ten largest economies in the world in 2010, measured in nominal GDP (millions of USD), according to the International Monetary Fund

Economic Forces – Inflation rate in Malaysia Year Inflation rate (consumer prices) (%) 2000 2.8 2001 1.7 2002 1.5 2003 1.9 2004 1.1 2005 1.3 2006 3 2007 3.8 2008 2 2009 5.4

Social, Cultural, Demographic & Environmental Forces Have a major impact on all products, services, markets and consumers Shaping the way people live, work, produce and consume

Social, Cultural, Demographic & Environmental Forces Aging population - occurs when the median age of a country or region rises Less Caucasian Widening gap between rich & poor no ethnic or racial majority

Number of marriages & divorces Key Social, Cultural, Demographic & Environmental Variables Childbearing rates Number of marriages & divorces Lifestyle Attitudes towards work/ saving/investing/business Air pollution/ water pollution/ recycle. Waste management

Social, Cultural, Demographic & Environmental Forces – example UK population grows

Political, Government & Legal Forces Government is the major regulators, deregulators, employers, customers or organization Firm that depend heavily on government contract can be the most important part of external audit Recent trend Government are taking control of more and more companies (in the UK, 2009, government took 95% stake in the Royal Bank) (US government taking over Fannie Mae and Freddie Mac) More companies accept government bail-out (BMB and MISC – in Malaysia)

Political, Government & Legal Forces – some key variables Government regulations or de-regulations Changes in Tax laws Special tariff Environment protection laws Legislation on equal employment Level of government subsidies Import-export regulation Government fiscal and monetary policy Political conditions in foreign countries Size of government budget Countries relationship Corruption index

Technology Forces Internet has changed the nature of opportunities by: altering cycles of products increase speed of distribution create new products and services erasing limitations of traditional geographic markets Altering economic scale Changing entry barriers Redefining the relationship between industries, supplies, creditors, customers and competitors

Technology Forces Technology advancement can effect: Product or services, markets, suppliers, competitors, customers, manufacturing processes, marketing practices and competitive position Create new markets, result in proliferation of new and improve med product, change the relative competitive cost position Create new competitive advantages that are more powerful than existing advantages

Competitive Forces Identifying Rival Firms Strengths Weaknesses Capabilities Opportunities Threats Objectives Strategies

Competitive Forces 7 Characteristics of most Competitive U.S. Firms: Market share matters Understand what business you are in Broke or not, fix it Innovate or evaporate

Competitive Forces 7 Characteristics of most Competitive U.S. Firms: Acquisition is essential to growth People make a difference No substitute for quality

The Five-Forces Model of Competition Porter's five forces is a framework for the industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws upon Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. This concept involves a relationship between competitors within an industry, potential competitors, suppliers, buyers and alternative solutions to the problem being addressed.

The Five-Forces Model of Competition Potential development of substitute products Rivalry among competing firms Bargaining power of suppliers Bargaining power of consumers Potential entry of new competitors

The Five-Forces Model of Competition

Reducing the Bargaining Power of Suppliers Partnering, Supply chain management, supply chain training, increase dependency, build knowledge of supplier costs and methods, take over a supplier Reducing the Treat of New Entrants - Increase minimum efficient scales of operations, create a marketing / brand image (loyalty as a barrier), protection of intellectual property, alliances with linked products / services, tie up with suppliers, tie up with distributors Reducing the Competitive Rivalry between Existing Players - Avoid price competition, differentiate your product, buy out competition, reduce industry over-capacity, focus on different segments, communicate with competitors Reducing the Bargaining Power of Customers- partnering, supply chain management, increase loyalty, increase incentives and value added, move purchase decision away from price, cut put powerful intermediaries (go directly to customer) Reducing the Threat of Substitutes- Legal actions, increase switching costs, alliances, customer surveys to learn about their preferences, enter substitute market and influence from within  

Source of External Information Published report/information Internet- websites (IMF, world Bank, EPU, Central Bank, stock exchange, etc) Standard and Poor – industry surveys http://sandp.ecnext.com/coms2/page_industry Example: Apparel & Footwear

Industry Analysis: Summarize & Evaluate The External Factor Evaluation (EFE) Matrix Summarize & Evaluate Competitive Political Cultural Technological Environmental Social Governmental Demographic Economic

Industry Analysis: The External Factor Evaluation (EFE) Matrix Steps: List key external factors. List the opportunities and then threat Assign each factors a weight that ranges from 0.0 (not important) to 1.0 (very important) Assign rating between 1 to 4 (1=the response is poor, 2=the response is average, 3= the response is above average, 4= the response is superior) Multiple each factor’s weight by its rating to determine weighted score Sum the weighted score for each variable to determines the total weighted score for the organization

Total weighted score of 4.0 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

Include both internal and external factors Industry Analysis: Competitive Profile Matrix (CPM) Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions Include both internal and external factors

The rating score: 4= major strength 3= minor strength 2=minor weakness Industry Analysis: Competitive Profile Matrix (CPM) The rating score: 4= major strength 3= minor strength 2=minor weakness 1=major weakness

Samsung Apple Nokia Market share 0.15 3 0.45 Inventory sys 0.08 0.24 CSF’s Wt Rating Wt’d Score Market share 0.15 3 0.45 Inventory sys 0.08 0.24 Fin. position 0.10 0.30 Prod. Quality 4 0.32 Cons. Loyalty 0.02 0.06 Sales Distr Global Exp. Org. Structure 0.05

Samsung Apple Nokia CSF’s (cont’d) Prod. Capacity 0.04 4 0.16 Wt Rating Wt’d Score Prod. Capacity 0.04 4 0.16 E-commerce 0.10 3 0.30 Customer Serv 2 0.20 Price competitive 0.02 1 Mgt. experience 0.01 Total 1.00 2.99

Issues for Review or Discussion List 8 key external forces that affect Proton Using Porter’s model, explain competitiveness for local fast food restaurant (example: Marry Brown, Radix Fried Chicken)