Chapter 3 The External Assessment Strategic Management: Concepts & Cases 12th Edition Fred David Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

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

Environmental scanning: The monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the corporation to avoid strategic surprise and ensure the long-term health of the firm. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

External Strategic Management Audit – Environmental Scanning – Industry Analysis Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

External Strategic Management Audit Purpose of External Audit Identify Opportunities Threats Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

External Environment External Environmental Variables: Societal\community environment: General forces that do not directly touch on the short-run activities but often influence its long-run decisions. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

External Environmental Variables: Task environment: Those elements or groups that directly affect the corporation and, in turn, are affected by it. The task environment is the industry within which that firm operates. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industry Analysis Industry A group of firms producing a similar product or service, such as soft drinks, health services or financial services. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

External Environment External Environmental Variables: Industry analysis: An in-depth examination of key factors within a corporation’s task environment Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

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

The process of performing an external audit The process of performing an external audit must involve as many managers and employees as possible to grantee commitment and understanding from organizational members. Individuals appreciate having the opportunity to contribute ideas and to gain a better understanding of the firms industry competitors and markets. To perform an external audit, a company first must gather competitive intelligence and information about economic, social, cultural, demographic, environmental, political, governmental, legal, and technological trends. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

The process of performing an external audit Individuals can be asked to mentor various sources of information such as key magazines, trade journals, and newspapers. These persons can submit periodic scanning reports to a committee of managers charged with performing the external audit. This approach provides a continues stream of timely strategic information and involves in the external audit process. The internet provide another source for gathering strategic information, as do corporate, university and public libraries. Suppliers, distributers, salespersons, customers and competitors represent other sources of vital information. Once information is gathered, it should be assimilated and evaluated. A meeting or series of meeting of managers is needed to collectively identify the most important opportunities and threats facing the firm. Copyright © 2009 Pearson Education, Inc. Publis Pne Hall

The process of performing an external audit These key external factors should be listed on flipcharts or chalkboard. A prioritized list of these factors could be obtained by requesting that all managers rank the factors identified, from one for the most important opportunity/threat to twenty for the least important opportunity/threat 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

External Environment Economic forces Regulate the exchange of materials, money, energy, and information Technological forces Generate problem-solving inventions Political-legal forces Allocate power, provide laws and regulations Socio-cultural forces Regulate values, mores\traditions, and customs Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

External Environment Competitive Forces: An important part of an external audit is identifying rival firms and determining their strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies. Collecting and evaluating information on competitors is essential for strategy formulation 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 Key Factors – Vary over time Vary by industry 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 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Performing External Audit – Variables Price competitiveness Technological advancements Interest rates Pollution abatement Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Performing External Audit Freund emphasized that the key external factors should be: Important to achieving long-term and annual objectives Measurable Applicable to all competing firms Hierarchical in the sense that some will pertain to the overall company and others will be more narrowly focused on functional or divisional areas. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industrial Organization (I/O) View The Industrial Organization (I/O) approach to competitive advantages that external (industry) factors in a firm achieving competitive advantage. Proponents of the I/O view such as Michael Porter, contended that organizational performance will be primarily determined by industry forces. Porter’s Five Forces Model, is an example of the I/O perspective, which focuses upon analyzing external forces and industry and industry variables as a basis for getting and keeping completive advantage. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industrial Organization (I/O) View Competitive advantages is determined largely by competitive positioning within an industry, according to I/O advocates. Managing strategically from the I/O perspective entails firms striving to compete in attractive industries, avoiding weak or faltering industries , and gaining a full understanding I/O of key external factors relationships within that attractive industry. I/O research was mainly conducted from1960s to the 1980s and provided an important contributions to our understanding of how to gain competitive advantage. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industrial Organization (I/O) View I/O theorists contend that the industry in which a firm chooses to compete has stronger influence on the firm’s performance than do the internal functional decisions managers make in marketing, finance, and the like. They contend, that firm performance is primarily based more on industry properties, such as economies of scale, barriers to market entry, product differentiation, and level of competitiveness than internal resources, capabilities, structure, and operations. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industrial Organization (I/O) View The I/O view has enhanced our understanding of strategic management . However, 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. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

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

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

Societal Environment Important Variables Economic GDP trends Interest rates Money supply Inflation rates Unemployment levels Wage/price controls Devaluation/revaluation Energy availability and cost Disposable and discretionary income Technological Total government spending for R&D Total industry spending for R&D Focus of technological efforts Patent protection New products New developments in technology transfer from lab to marketplace Productivity improvements through automation Political-Legal Antitrust regulations Environmental protection laws Tax laws Special incentives Foreign trade regulations Attitudes toward foreign companies Laws on hiring and promotion Stability of government Sociocultural Lifestyle changes Career expectations Consumer activism Rate of family formation Growth rate of population Age distribution of population Regional shifts in population Life expectancies Birth rates Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Definitions Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period. In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time In economics , inflation is a rise in the general level of price of goods and services in an economy over a period of time   Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Definitions Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged Price controls are governmental restrictions on the prices that can be charged for goods and services in a market Disposable income is total personal income minus personal current taxes Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

The Five-Forces Model of Competition Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industry Analysis Porter’s approach: Assess the six forces -- Threat of new entrants Rivalry among existing firms Threat of substitute products Bargaining power of buyers Bargaining power of suppliers Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industry Analysis Threat of New Entrants -- Barriers to entry: Previous experience with retaliation to new entry. Economies of Scale Product Differentiation Capital Requirements Switching Costs to another suppler Access to Distribution Channels Cost Disadvantages Independent of Size: established firms may have, proprietary product technology, favorable access to raw material, learning curve. Government Policy Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

The threat of new entry (competitors). New entries expand industry’s productive capacity. “Unless the market grows, a new entries intensifies the fight for market share”. The result is prices go down which, lowering industry profitability. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industry Analysis Rivalry Among Existing Firms -- Intense rivalry related to: Number of competitors Rate of Industry Growth Produce or Service Characteristics Amount of Fixed Costs Capacity Height of Exit Barriers Diversity of Rivals Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Threat of Substitute Products/Services Industry Analysis Threat of Substitute Products/Services Substitute Products: Those products that appear to be different but can satisfy the same need as another product. To the extent that switching costs are low, substitutes can have a strong effect on an industry. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industry Analysis Bargaining Power of Buyers -- Buyer is powerful when: Buyer purchases large proportion of seller’s products Buyer has the potential to integrate backward Alternative suppliers are plentiful Changing suppliers costs very little Purchased product represents a high percentage of a buyer’s costs Buyer earns low profits Purchased product is unimportant to the final quality or price of a buyer’s products Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industry Analysis Bargaining Power of Suppliers -- Supplier is powerful when: Supplier industry is dominated by a few companies but sells to many Its product is unique and/or has high switching costs Substitutes are not readily available Suppliers are able to integrate forward and compete directly with present customers Purchasing industry buys only a small portion of the supplier’s goods. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Teamwork Identify the OT to the business you wrote vision & mission. Key variables: Economic: $ value, per capita income, available of credit at banks. Social, Cultural, Demographic, and Environmental Forces: population age and size, level of education to consumer. Political, Governmental, and Legal Forces: Tax rates, political stability, law and order. Technological Forces: internet, communication development. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

There are five steps in developing The External Factor Evaluation (EFE) Matrix List key external factors as identified in the external-audit process. Include a total of 10-20 factors from both the opportunities and threats. 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. 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. Multiply each factor’s weight by its rating to get a weighted score. Sum the weighted scores for each variable to determine the total weighted score for the organization. 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

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

Industry Analysis CPM Important – 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. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

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

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

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

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

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

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

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

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

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