Ch 3 -1 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Chapter 3 The External Assessment Strategic Management: Concepts & Cases 12 th Edition Fred David

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. Ch 3 -2 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Ch 3 -3 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall External Strategic Management Audit – Environmental Scanning – Industry Analysis

Ch 3 -4 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Purpose of External Audit  Identify Opportunities Threats External Strategic Management Audit

Ch 3 -5 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Ch 3 -6 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Gather competitive intelligence – Social Cultural Demographic Environmental Governmental Legal Technological External Audit

Ch 3 -7 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall External Audit – Sources of Information Internet Libraries Suppliers Distributors Salespersons Customers Competition

Ch 3 -8 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Performing External Audit Key Factors – Vary over time Vary by industry

Ch 3 -9 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

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

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

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Industrial Organization (I/O) View – Industry factors more important than internal factors Performance determined by industry forces

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Industrial Organization (I/O) View Managing strategically from the I/O perspective entails firms striving to compete in attractive industries, avoiding weak or faltering/uncertain industries, and gaining a full understanding of key external factor relationships.

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Industrial Organization (I/O) View 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.

Ch 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”

Ch 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..

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Economic Forces Trends in the dollar’s value European Union Layoffs Economic standard of living

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Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall OT on economic issues: Example GM US car producer could the integration and expansion of EU a threat to their market share in Europe because they EU gives priority to their companies. GM would find the decline in the value of US$ as Opportunity to export.

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Social, Cultural, Demographic, and Environmental Forces U.S. Facts Aging population Less Caucasian: white population will not continue to be majority. Widening gap between rich & poor 2025 = 18.5% population > 65 years 2075 = no ethnic or racial majority

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Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Social, Cultural, Demographic, and Environmental Forces Facts World population approaching 7 billion World population = 8 billion by 2028 World population = 9 billion by 2054 U.S. population < 300 million

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Trends  Aging Americans – affects all organizations  Population shift to the south and west  Decimation and degradation of the natural environment Social, Cultural, Demographic, and Environmental Forces

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Social, Cultural, Demographic, and Environmental Forces More educated consumers Aging population Minorities more influential 21 st Century Trends: trends

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

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Monitor Key Variables Per Capita Income Attitudes Toward Business Avg. Disposable Income Social, Cultural, Demographic, and Environmental Forces: summary

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Consumer Behavior Monitor Key Variables Ethical Concerns Attitudes Toward Saving Racial Equality Social, Cultural, Demographic, and Environmental Forces: summary

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Avg. Educational Level Monitor Key Variables Governmental Regulation Attitudes Toward Customer Service Attitudes Toward Quality Social, Cultural, Demographic, and Environmental Forces: summary

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Energy Conservation Monitor Key Variables Social Responsibility Leisure-Time Values Recycling Social, Cultural, Demographic, and Environmental Forces: summary

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Waste Management Monitor Key Variables Air & Water Pollution Ozone Depletion Endangered Species Social, Cultural, Demographic, and Environmental Forces: summary

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Social, Cultural, Demographic, and Environmental Forces: Ex. On OT GM threats: Ozone deletion which put GM under pressure from green peace to react to environmental pollution. GM opportunity: invest in new energy development to reduce cost and environmental pollution.

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Political, Governmental, and Legal Forces Key opportunities & threats Antitrust legislation Tax rates Lobbying efforts Patent laws Government Regulation

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Political, Governmental, and Legal Forces Political variables impact –  Formulation of strategies  Implementation of strategies Increasing Global Interdependence

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Political, Governmental, and Legal Forces Strategists in a global economy –  Forecast political climates  Legalistic skills  Diverse world cultures Increasing Global Interdependence

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

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Key Political, Governmental, and Legal Variables: summary Special tariffs Tax law changes Voter participation rates Regulation/deregulation

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Key Political, Governmental, and Legal Variables (cont’d) summary Environmental protection laws Changes in patent laws Equal employment legislation Government subsidies Number of patents

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Key Political, Governmental, and Legal Variables (cont’d) summary Import/export regulations Global relationships Political conditions Location and severity of terrorist activity Anti-trust enforcement

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Political, Governmental, and Legal Variables: example on OT US global relationship is O for GM Global expansion. Us foreign policy against terrorist is a threat GM foreign expansion.

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Technological Forces Major Impact – Internet Communications Semiconductors

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Technological Forces Significance of IT Chief Information Officer (CIO) Chief Technology Officer (CTO)

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Technological Forces Essential for nearly every strategic decision Technology-based issues

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Technological Forces: example on OT Internet is O to increase GM e-selling. Internet is T from others to compete at us market.

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Competitive Forces Collection & evaluation of data on competitors is essential for successful strategy formulation

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Competitive Forces Competition on virtually all industries can be described as intense

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Competitive Forces Strengths Weaknesses Capabilities Opportunities Threats Objectives Strategies Identifying Rival Firms

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Key Questions Concerning Competitors Their objectives and strategies Their weaknesses Their responses to external variables Their vulnerability to our alternative strategies Their strengths

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

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

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

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

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

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

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall The Five-Forces Model Most powerful of the five forces Focus on competitive advantage of strategies Rivalry Among Competing Firms

Prentice Hall, 2009 Chapter 3 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

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall The Five-Forces Model Barriers to entry are important Quality, pricing, and marketing can overcome barriers Potential Entry of New Competitors

2009 Chapter 3 Industry Analysis Threat of New Entrants -- Barriers to entry: Economies of Scale Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Size Government Policy

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

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall The Five-Forces Model Pressures increase when consumers’ switching costs decrease Firm’s plans for increased capacity & market penetration Potential Development of Substitute Products

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

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

Ch 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\good judgement in whether and when they purchase the product

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 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: e.g., Statistical modeling, Time- series methods Qualitative techniques: Brainstorming Expert opinion, Scenario writing

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall The Global Challenge Faced by U.S. Firms – Gain & maintain exports to other nations Defend domestic markets against imported goods

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Global Perspective China’s Automobile Producers Heading to the United States in 2008 China’s auto exports doubled in 2006 China produces more cars than Germany and is the world’s third largest automobile producer Changfeng Group first Chinese automaker in the Detroit Auto Show

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall The Global Challenge Simultaneously globally competitive & nationally responsive Multinational Corporations (MNCs)

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall The Global Challenge Worldwide integration of:  Strategy formulation  Strategy implementation  Strategy evaluation Globalization

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall The Global Challenge  Similar consumption patterns: encourage businesses to sell products overseas, e.g., computers which are used in US the same as in Palestine.  Global buyers and sellers  E-commerce  Instant transmission of money & information Globalization of Industries

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Teamwork Identify the OT to the business you wrote vision & mission. Key variables: 1. Economic: $ value, per capita income, available of credit at banks. 2. Social, Cultural, Demographic, and Environmental Forces: population age and size, level of education to consumer. 3. Political, Governmental, and Legal Forces: Tax rates, political stability, law and order. 4. Technological Forces: internet, communication development.

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall There are five steps in developing The External Factor Evaluation (EFE) Matrix 1. List key external factors as identified in the external-audit process. Include a total of factors from both the opportunities and threats. 2. 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 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. 4. Multiply each factor’s weight by its rating to get a weighted score. 5. Sum the weighted scores for each variable to determine the total weighted score for the organization.

Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Industry Analysis: The External Factor Evaluation (EFE) Matrix CompetitivePoliticalCultural TechnologicalEnvironmentalSocial GovernmentalDemographicEconomic Summarize & Evaluate

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

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

Ch 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.

Ch 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

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

The CPM Matrix The CPM, illustrated in Table 3-9, identifies a firm’s major competitors and their particular strengths and weaknesses in relation to a sample firm’s strategic position. Table 3-10 provides a Competitive Profile Matrix example. There are some important differences between the EFE and CPM. First, the critical success factors in a CPM are broader. These factors are also not grouped into opportunities and threats as in the EFE. In a CPM, the ratings and weighted scores can be compared to rival firms. Ch Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Ch 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.

Ch 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.

Ch 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.

Ch 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.

Ch 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.

Ch 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.

Ch 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.

Ch 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.

Ch 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.