1. Chapter 3 The External Assessment
Strategic Management: Concepts & Cases
Chapter 3 The External Assessment
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2. External Strategic Management Audit
Also known as
– Environmental Scanning
– Industry Analysis
Main purpose :
develop a finite list of opportunities that could benefit the firm and threats that should be avoided.
*can provide key variables that offer actionable responses; offensively or defensively
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4. External trends and events significantly affect products, services, markets, and organizations in the world.
External forces directly affect both suppliers and distributors
Key Factors –
Vary over time
Vary by industry
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5. Performing External Audit
The process must involve as many managers and employees as possible
-Gather competitive intelligence and information (both opportunities and threats can be external factors)
-The information gathered must be assimilated and evaluated.
-Factors listed on the chart and prioritized
-Results from information must be communicated and distributed in the organization
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6. External Audit Gather competitive intelligence – Social Cultural
Demographic
Environmental
Governmental
Legal
Technological
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7. Performing External Audit –Variables
Market share
Breadth of competing products
World economies
Foreign affiliates
Proprietary account advantages
.Price competitiveness
.Technological advancements
.Interest rates
.Pollution abatement
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8. External Audit – Sources of Information
Internet
Libraries
Suppliers
Distributors
Salespersons
Customers
Competition
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9. Performing External Audit
Long-term Orientation
External Factors should be
Measurable
Applicable to Competing Firms
Hierarchical
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10. Industrial Organization (I/O) View
This approach views that industry factors are more important than internal factors in the sense that:
Performance determined by industry forces
Effective integration and understanding of both internal and external factors is the key to securing and keeping a competitive advantages.
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11. I/O Perspective Firm Performance
Industry Properties
Economies of Scale
Barriers to Market Entry
Product Differentiation
Level of Competitiveness
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12. Economic Forces
Economic factors have a direct impact on the potential attractiveness of various strategies. Some examples of economic indicators that are influential:
Customers’ buying trends
Layoffs
Economic standard of living
Interest rates
Discretionary income
The value of dollar/currency
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14. Social, Cultural, Demographic, and Environmental Forces
Major Impact –
Products
Services
Markets
Customers
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15. Social, Cultural, Demographic, and Environmental Forces
21st Century Trends
More educated consumers
Aging population
Minorities more influential
Local rather than federal solutions
Fixation with youth decreasing
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16. Eg: the emergence of online purchase
New trends are creating a different type of consumer and consequently creates a need for different product, different service which in turn demand for different strategies
Eg: the emergence of online purchase
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17. Number of special interest groups
Some of the Key Social, Cultural, Demographic, and Environmental Variables
Childbearing rates
Number of special interest groups
Number of marriages & divorces
Number of births & deaths
Immigration & emigration rates
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18. Political, Governmental, and Legal Forces
Government Regulation and legal factors (local, state, federal) can represent key opportunities and threats
Some key opportunities & threats
Antitrust legislation
Tax rates
Lobbying efforts
Patent laws
Import-export regulations
Political condition of foreign countries
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19. Political, Governmental, and Legal Forces
Political variables have impact on –
Formulation of strategies
Implementation of strategies
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20. Political, Governmental, and Legal Forces
Globalization of Industry
Worldwide trend toward similar consumption patterns
Global buyers and sellers
E-commerce
Technology for instant currency transfers
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21. Technological Forces
Technological changes demand redesigning the site and revamping the way we work
Major Impact –
Internet
Communications
Semiconductors
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22. Competitive Forces
Competitors are firms that offer similar products and services in the same market
Collection & evaluation of data on competitors is essential for successful strategy formulation
Competition on virtually all industries can be described as intense (industries battle each other on price and customer service)
Industries should identify rivals’ SWOT, objectives, strategies
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23. 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, BusinessWeek
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24. Porter’s Five-Forces Model of Competition : widely used approach
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25. 1. Rivalry Among Competing Firms
The Five-Forces Model
1. Rivalry Among Competing Firms
Most powerful of the five forces
Focus on competitive advantage of strategies
Competition is more intense when the number of competitors increases
As rivalry increases, profits decreases
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26. 2. Potential Entry of New Competitors
The Five-Forces Model
2. Potential Entry of New Competitors
Barriers to entry are important – when the threats of new entry firms are strong, more efforts should be given to deter new entrants
Quality, pricing, and marketing can overcome barriers
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27. 3. Potential Development of Substitute Products
The Five-Forces Model
3. Potential Development of Substitute Products
Pressures increase when consumers’ switching costs decrease (sugar vs artificial sweetener, eyeglasses/lenses vs laser eye surgery)
Firm’s plans for increased capacity & market penetration
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28. 4. Bargaining Power of Suppliers
The Five-Forces Model
4. Bargaining Power of Suppliers
Large number of suppliers & few substitutes affects intensity of competition
Backward integration can gain control or ownership of suppliers
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29. 5. Bargaining Power of Consumers
The Five-Forces Model
5. Bargaining Power of Consumers
Customers concentrated or buying in volume affects intensity of competition
Consumer power is higher where products are standard or undifferentiated
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30. 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 in whether and when they purchase the product
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31. The Global Challenge Gain & maintain exports to other nations
Defend domestic markets against imported goods
Multinational Corporations (MNCs)
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32. Worldwide integration of: Strategy formulation Strategy implementation
The Global Challenge
A global strategy seeks to meet the needs of customers worldwide, with the highest value and the lowest cost
Worldwide integration of:
Strategy formulation
Strategy implementation
Strategy evaluation
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33. Globalization of Industries
The Global Challenge
Globalization of Industries
Similar consumption patterns
Global buyers and sellers
E-commerce
Instant transmission of money & information
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34. Industry Analysis: The External Factor Evaluation (EFE) Matrix
Summarize & Evaluate
Competitive
Political
Cultural
Technological
Environmental
Social
Governmental
Demographic
Economic
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35. Five steps in performing EFE
List the key factors
Assign weight for each ( weight indicates the relative importance and the total must equal to 1)
Assign rating from 1-4 (to indicate how effective the firm responds to the factor; 1-the response is poor; 4-the response is superior)
Multiply the weight and rating to get weighted score
Sum the weighted score (the maximum score is 4)
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38. 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
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39. Industry Analysis EFE
Important –
Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.
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40. Industry Analysis: Competitive Profile Matrix (CPM)
Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions
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