Chapter 3 The External Assessment

Name: Chapter 3 The External Assessment
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Description: Chapter 3 The External Assessment

Chapter 3 The External Assessment
Strategic Management: Concepts and Cases. 9th edition Fred R. David PowerPoint Slides by Anthony F. Chelte Western New England College Fred R. David Prentice Hall

Chapter Outline The Nature of an External Audit Economic Forces
Social, Cultural, Demographic, and Environmental Forces Fred R. David Prentice Hall

Chapter Outline Political, Governmental, and Legal Forces
Technological Forces Competitive Forces Fred R. David Prentice Hall

Chapter Outline Competitive Analysis: Sources of External Information
Porter’s Five-Forces Model Sources of External Information Forecasting Tools and Techniques Fred R. David Prentice Hall

Chapter Outline The Global Challenge Industry Analysis:
The External Factor Evaluation Matrix The Competitive Profile Matrix Fred R. David Prentice Hall

The External Assessment
Prediction is very difficult, especially about the future. -- Neils Bohr Fred R. David Prentice Hall

External Strategic Management Audit
Also called: Environmental scanning Industry analysis Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

Nature of External Audit
Purpose: Development of Finite List: Opportunities Threats to be avoided Fred R. David Prentice Hall

Key External Forces Five (5) broad categories: Economic forces
Social, cultural, demographic, & environmental forces Political, governmental, and legal forces Technological factors Competitive forces Fred R. David Prentice Hall

Special Interest Groups
Relationships Between Key External Forces and an Organization Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Key External Forces Opportunities & Threats Fred R. David Prentice Hall

Performing an External Audit
Gather competitive intelligence on factors: Social Cultural Demographic Environmental Economic Political, legal, governmental technological Fred R. David Prentice Hall

Sources of information include: Internet Libraries (corporate, university, public) Suppliers Distributors Customers Competition Fred R. David Prentice Hall

Key factors: Vary over time Vary by industry Fred R. David Prentice Hall

Variables include: Market share Breadth of competing products World economies Foreign affiliates Proprietary account advantages Price competitiveness Technological advancements Interest rates Pollution abatement Fred R. David Prentice Hall

Key External Factors Key External Factors:
Oriented to long-term & annual objectives Measurable Applicable to all competing firms Hierarchical Overall company Divisional or functional areas Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

Monitor Key Economic Variables:
Price fluctuations Exportation of labor & capital Monetary policies Fiscal policies Tax rates ECC policies OPEC policies LDC policies Fred R. David Prentice Hall

Social, Cultural, Demographic & Environmental Forces
Major impact on: Products Services Markets customers Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

World population > 6 billion U.S. population < 300 million Great potential for domestic production expansion to other markets Domestic only is a risky strategy Fred R. David Prentice Hall

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. Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

Key variables – Childbearing rates Number of special-interest groups Number of marriages Number of divorces Number of births Number of deaths Immigration & emigration rates Fred R. David Prentice Hall

Monitor Key Variables Life expectancy rates Per capita income
Attitudes toward business Average disposable income Buying habits Ethical concerns Attitudes toward saving Fred R. David Prentice Hall

Monitor Key Variables Racial equality Average level of education
Government regulation Attitudes toward customer service Attitudes toward product quality Energy conservation Social responsibility Fred R. David Prentice Hall

Monitor Key Variables Value placed on leisure time Recycling
Waste management Air & water pollution Ozone depletion Endangered species Fred R. David Prentice Hall

Political, Govt., & Legal Forces
Government Regulation Key opportunities & key threats Antitrust legislation (Microsoft) Tax rates Lobbying efforts Patent laws Fred R. David Prentice Hall

Increasing Global Interdependence Impact of political variables Formulation of Strategies Implementation of Strategies Fred R. David Prentice Hall

Increasing Global Interdependence Strategists in a global economy Forecast political climates Legalistic skills Diverse world cultures Fred R. David Prentice Hall

Globalization of Industry Worldwide trend toward similar consumption patterns Global buyers & sellers E-commerce Instant transmission of money & information across continents Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

Technological Forces Revolutionary technological forces:
Profound impact on organizations Internet Semiconductors XML technologies UWB communications Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

Capitalizing on Information Technology (IT)
Technological Forces Capitalizing on Information Technology (IT) Chief Information Officer (CIO) Chief Technology Officer (CTO) Fred R. David Prentice Hall

Technological Forces Technology-based issues
Underlie nearly every strategic decision Fred R. David Prentice Hall

Competitive Forces Collection and evaluation of information on competitors is essential for successful strategy formulation Fred R. David Prentice Hall

Competitive Forces Competition in virtually all industries can be described as intense. Fred R. David Prentice Hall

Competitive Forces Identifying rival firms Strengths Weaknesses
Capabilities Opportunities Threats Objectives Strategies Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

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 Fred R. David 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, Business Week Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

Competitive Forces 7 Characteristics of most competitive U.S. firms:
Acquisition is essential to growth People make a difference No substitute for quality Fred R. David Prentice Hall

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. Fred R. David Prentice Hall

Competitive Analysis: Porter’s Five-Forces Model
Potential development of substitute products Rivalry among competing firms Bargaining power of suppliers Bargaining power of consumers Potential entry of new competitors Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

Industry Analysis (EFE)
External Factor Evaluation Matrix Summarize & evaluate: Competitive Political Cultural Technological Environmental Social Governmental Demographic Economic Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

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, Average = 2.5 Fred R. David Prentice Hall

UST—Key External Factors
.20 1 Clinton Administration 2 .10 Bad media exposure from FDA .05 Smokeless market SE region U.S. .15 3 Production limits on tobacco Legislation against the tobacco industry Threats .30 More social pressure to quit smoking 2.10 1.00 TOTAL .60 4 Pinkerton leader in discount market Astronomical Internet growth Increased demand Global markets untapped Weighted score Rating Weight UST—Key External Factors Opportunities Fred R. David Prentice Hall

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 Fred R. David Prentice Hall

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. Fred R. David Prentice Hall

Important Understanding of the factors used in the EFE Matrix is more important than the actual weights and ratings assigned. Fred R. David Prentice Hall

Industry Analysis (CPM)
Competitive Profile Matrix Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic position Fred R. David Prentice Hall

(CPM) Procter Avon L’Oreal & Gamble 2.80 3.25 3.15 1.00 Total 0.15 3 0.20 4 0.05 1 Market Share 0.40 2 0.80 Global Expansion 0.10 Customer Loyalty 0.45 0.60 Financial Position 0.30 Management Price Competition Product Quality Advertising Score Rating Weight Critical Success Factor Fred R. David Prentice Hall

Key Terms America Online Chief Information Officer (CIO)
Chief Technology Officer (CTO) Competitive advantages Competitive analysis Competitive intelligence (CI) Competitive Profile Matrix (CPM) Fred R. David Prentice Hall

Key Terms Critical success factors Cyberspace Decruiting
Director of competitive analysis Downsizing Econometric models Environmental scanning External audit External Factor Evaluation (EFE) Matrix Fred R. David Prentice Hall

Key Terms External forces Industry analysis
Information Technology (IT) Industrial policies Internet learning from the partner Linear regression Fred R. David Prentice Hall

Key Terms Porter’s Five-Forces Model Netscape On-Line databases
Rightsizing Trend extrapolation World Wide Web (www) Fred R. David Prentice Hall

Chapter 3 The External Assessment

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