Visit UMT online at © 2005 UMT Version MGT195 Visit UMT online at BUSINESS POLICY AND STRATEGY University of Management and Technology 1901 N. Fort Myer Drive Arlington, VA USA Phone: (703) Fax: (703) Website:

Visit UMT online at © 2005 UMT Version MGT195 Visit UMT online at Chapter 3: The External Assessment David, Fred R. Strategic Management: Concepts (9th ed.) © 2003 Prentice Hall.

3-3 Visit UMT online at © 2005 UMT Version MGT195 Chapter Outline The Nature of an External Audit Economic Forces Social, Cultural, Demographic, and Environmental Forces

3-4 Visit UMT online at © 2005 UMT Version MGT195 Chapter Outline Political, Governmental, and Legal Forces Technological Forces Competitive Forces

3-5 Visit UMT online at © 2005 UMT Version MGT195 Chapter Outline Competitive Analysis: Porter’s Five-Forces Model Sources of External Information Forecasting Tools and Techniques

3-6 Visit UMT online at © 2005 UMT Version MGT195 Chapter Outline The Global Challenge Industry Analysis: The External Factor Evaluation Matrix The Competitive Profile Matrix

3-7 Visit UMT online at © 2005 UMT Version MGT195 The External Assessment Prediction is very difficult, especially about the future. -- Neils Bohr

3-8 Visit UMT online at © 2005 UMT Version MGT195 External Strategic Management Audit Also called: Environmental scanning Industry analysis

3-9 Visit UMT online at © 2005 UMT Version MGT195 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

3-10 Visit UMT online at © 2005 UMT Version MGT195 Nature of External Audit Purpose: Development of Finite List: Opportunities Threats to be avoided

3-11 Visit UMT online at © 2005 UMT Version MGT195 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

3-12 Visit UMT online at © 2005 UMT Version MGT195 Key External Forces Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Opportunities & Threats Relationships Between Key External Forces and an Organization

3-13 Visit UMT online at © 2005 UMT Version MGT195 Performing an External Audit Gather competitive intelligence on factors: Social Cultural Demographic Environmental Economic Political, legal, governmental technological

3-14 Visit UMT online at © 2005 UMT Version MGT195 Performing an External Audit Sources of information include: Internet Libraries (corporate, university, public) Suppliers Distributors Customers Competition

3-15 Visit UMT online at © 2005 UMT Version MGT195 Performing an External Audit Key factors: Vary over time Vary by industry

3-16 Visit UMT online at © 2005 UMT Version MGT195 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

3-17 Visit UMT online at © 2005 UMT Version MGT195 Key External Factors Key External Factors: 1.Oriented to long-term & annual objectives 2.Measurable 3.Applicable to all competing firms 4.Hierarchical Overall company Divisional or functional areas

3-18 Visit UMT online at © 2005 UMT Version MGT195 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

3-19 Visit UMT online at © 2005 UMT Version MGT195 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

3-20 Visit UMT online at © 2005 UMT Version MGT195 Monitor Key Economic Variables: Price fluctuations Exportation of labor & capital Monetary policies Fiscal policies Tax rates ECC policies OPEC policies LDC policies

3-21 Visit UMT online at © 2005 UMT Version MGT195 Social, Cultural, Demographic & Environmental Forces Major impact on: Products Services Markets customers

3-22 Visit UMT online at © 2005 UMT Version MGT195 Social, Cultural, Demographic & Environmental Forces Consider: United States— Population growing older Less Caucasian Gap between rich and poor widening 65 and older will rise to 18.5% of population by 2025 By 2075, no racial or ethnic majority

3-23 Visit UMT online at © 2005 UMT Version MGT195 Social, Cultural, Demographic & Environmental Forces World population > 6 billion U.S. population < 300 million Great potential for domestic production expansion to other markets Domestic only is a risky strategy

3-24 Visit UMT online at © 2005 UMT Version MGT195 Social, Cultural, Demographic & Environmental Forces NAFTA U.S. exports to Mexico increased 170% 2000, U.S. trade deficits: Mexico -- $25 billion China -- $84 billion Japan -- $81 billion 2001 Recession (U.S. and World) > 60,000 laid off along Mexico Border with U.S.

3-25 Visit UMT online at © 2005 UMT Version MGT195 Social, Cultural, Demographic & Environmental Forces Trends for the 2000’s – More educated consumers Population aging Minorities more influential Local rather than federal solutions Fixation with youth decreasing Hispanics increase to 15% by 2021 African Americans increase to 14% by 2021

3-26 Visit UMT online at © 2005 UMT Version MGT195 Social, Cultural, Demographic & Environmental Forces Key variables – Childbearing rates Number of special-interest groups Number of marriages Number of divorces Number of births Number of deaths Immigration & emigration rates

3-27 Visit UMT online at © 2005 UMT Version MGT195 Monitor Key Variables Life expectancy rates Per capita income Attitudes toward business Average disposable income Buying habits Ethical concerns Attitudes toward saving

3-28 Visit UMT online at © 2005 UMT Version MGT195 Monitor Key Variables Racial equality Average level of education Government regulation Attitudes toward customer service Attitudes toward product quality Energy conservation Social responsibility

3-29 Visit UMT online at © 2005 UMT Version MGT195 Monitor Key Variables Value placed on leisure time Recycling Waste management Air & water pollution Ozone depletion Endangered species

3-30 Visit UMT online at © 2005 UMT Version MGT195 Political, Govt., & Legal Forces Government Regulation Key opportunities & key threats Antitrust legislation (Microsoft) Tax rates Lobbying efforts Patent laws

3-31 Visit UMT online at © 2005 UMT Version MGT195 Political, Govt., & Legal Forces Increasing Global Interdependence Impact of political variables Formulation of Strategies Implementation of Strategies

3-32 Visit UMT online at © 2005 UMT Version MGT195 Political, Govt., & Legal Forces Increasing Global Interdependence Strategists in a global economy Forecast political climates Legalistic skills Diverse world cultures

3-33 Visit UMT online at © 2005 UMT Version MGT195 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

3-34 Visit UMT online at © 2005 UMT Version MGT195 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

3-35 Visit UMT online at © 2005 UMT Version MGT195 Key Political, Government & Legal Variables Environmental protection laws Equal employment legislation Level of government subsidies Antitrust legislation/enforcement Sino-American relationships Russian-American relationships European-American relationships

3-36 Visit UMT online at © 2005 UMT Version MGT195 Key Political, Government & Legal Variables African-American relationships Import-export regulations Monetary policy Political conditions in other countries Government budgets World oil, currency, & labor markets Location and severity of terrorist activities

3-37 Visit UMT online at © 2005 UMT Version MGT195 Technological Forces Revolutionary technological forces: Profound impact on organizations Internet Semiconductors XML technologies UWB communications

3-38 Visit UMT online at © 2005 UMT Version MGT195 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

3-39 Visit UMT online at © 2005 UMT Version MGT195 Technological Forces Capitalizing on Information Technology (IT) Chief Information Officer (CIO) Chief Technology Officer (CTO)

3-40 Visit UMT online at © 2005 UMT Version MGT195 Technological Forces Technology-based issues Underlie nearly every strategic decision

3-41 Visit UMT online at © 2005 UMT Version MGT195 Competitive Forces Collection and evaluation of information on competitors is essential for successful strategy formulation

3-42 Visit UMT online at © 2005 UMT Version MGT195 Competitive Forces Competition in virtually all industries can be described as intense.

3-43 Visit UMT online at © 2005 UMT Version MGT195 Competitive Forces Identifying rival firms Strengths Weaknesses Capabilities Opportunities Threats Objectives Strategies

3-44 Visit UMT online at © 2005 UMT Version MGT195 Competitive Forces Key Questions About Competitors: Their strengths Their weaknesses Their objectives and strategies Their responses to all external variables (e.g. social, political, demographic, etc.) Their vulnerability to our alternative strategies

3-45 Visit UMT online at © 2005 UMT Version MGT195 Competitive Forces Key Questions About Competitors: Our vulnerability to successful strategic counterattack Our product and service positioning relative to competitors Entry and exit of firms in the industry Key factors for our current position in industry

3-46 Visit UMT online at © 2005 UMT Version MGT195 Competitive Forces Key Questions About Competitors: Sales and profit rankings of competitors over time Nature of supplier and distributor relationships The threat of substitute products or services

3-47 Visit UMT online at © 2005 UMT Version MGT195 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, Business Week

3-48 Visit UMT online at © 2005 UMT Version MGT195 Competitive Forces 7 Characteristics of most competitive U.S. firms: 1.Market share matters 2.Understand what business you are in 3.Broke or not, fix it 4.Innovate or evaporate

3-49 Visit UMT online at © 2005 UMT Version MGT195 Competitive Forces 7 Characteristics of most competitive U.S. firms: 5.Acquisition is essential to growth 6.People make a difference 7.No substitute for quality

3-50 Visit UMT online at © 2005 UMT Version MGT195 Competitive Forces Competitive Intelligence Programs: Systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’ own goals.

3-51 Visit UMT online at © 2005 UMT Version MGT195 Competitive Analysis: Porter’s Five-Forces Model Potential development of substitute products Rivalry among competing firms Bargaining power of suppliers Potential entry of new competitors Bargaining power of consumers

3-52 Visit UMT online at © 2005 UMT Version MGT195 Global Challenge International Challenge faced by U.S. firms: How to gain and maintain exports to other nations How to defend domestic markets against imported goods

3-53 Visit UMT online at © 2005 UMT Version MGT195 Industry Analysis (EFE) External Factor Evaluation Matrix Summarize & evaluate: CompetitivePoliticalCultural TechnologicalEnvironmentalSocial GovernmentalDemographic Economic

3-54 Visit UMT online at © 2005 UMT Version MGT195 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

3-55 Visit UMT online at © 2005 UMT Version MGT195 Industry Analysis (EFE) Five-step process: Assign 1-4 rating to each factor Firm’s current strategies response to the factor Multiply each factor’s weight by its rating Produces a weighted score

3-56 Visit UMT online at © 2005 UMT Version MGT195 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

3-57 Visit UMT online at © 2005 UMT Version MGT Clinton Administration Bad media exposure from FDA Smokeless market SE region U.S Production limits on tobacco Legislation against the tobacco industry Threats More social pressure to quit smoking TOTAL Pinkerton leader in discount market.051 Astronomical Internet growth Increased demand.151 Global markets untapped Weighted score RatingWeight UST—Key External Factors Opportunities

3-58 Visit UMT online at © 2005 UMT Version MGT195 Industry Analysis (EFE) Total weighted score of 4.0 = Organization response is outstanding to threats & weaknesses Total weighted score of 1.0 = Firm’s strategies not capitalizing on opportunities or avoiding threats

3-59 Visit UMT online at © 2005 UMT Version MGT195 Industry Analysis (EFE) UST (in the previous example), has a total weighted score of 2.10 indicating that the firm is below average in its effort to pursue strategies that capitalize on external opportunities and avoid threats.

3-60 Visit UMT online at © 2005 UMT Version MGT195 Industry Analysis (EFE) Important Understanding of the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.

3-61 Visit UMT online at © 2005 UMT Version MGT195 Industry Analysis (CPM) Competitive Profile Matrix Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic position

3-62 Visit UMT online at © 2005 UMT Version MGT195 (CPM) Procter Avon L’Oreal & Gamble Total Market Share Global Expansion Customer Loyalty Financial Position Management Price Competition Product Quality Advertising ScoreRatingScoreRatingScoreRatingWeight Critical Success Factor

3-63 Visit UMT online at © 2005 UMT Version MGT195 Key Terms America Online Chief Information Officer (CIO) Chief Technology Officer (CTO) Competitive advantages Competitive analysis Competitive intelligence (CI) Competitive Profile Matrix (CPM)

3-64 Visit UMT online at © 2005 UMT Version MGT195 Key Terms Critical success factors Cyberspace Decruiting Director of competitive analysis Downsizing Econometric models Environmental scanning External audit External Factor Evaluation (EFE) Matrix

3-65 Visit UMT online at © 2005 UMT Version MGT195 Key Terms External forces Industry analysis Information Technology (IT) Industrial policies Internet learning from the partner Linear regression

3-66 Visit UMT online at © 2005 UMT Version MGT195 Key Terms Porter’s Five-Forces Model Netscape On-Line databases Rightsizing Trend extrapolation World Wide Web (www)