1. Lecture 3 External opportunities and threats

2. Vision & Mission Strategy Formulation External Opportunities & Threats Internal Strengths & Weaknesses Long-Term Objectives Alternative Strategies Strategy Selection

3. It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. – Charles Darwin External Assessment Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map. – Wayne Calloway, Former CEO, PepsiCo

4. External Strategic Management Audit Identify & Evaluate factors beyond the control of a single firm –Increased foreign competition –Population shifts –Aging society –Fear of traveling –Stock market volatility –Identify Opportunities Threats

5. Key External Forces Economic forces Social, cultural, demographic & environmental forces Political, governmental & legal forces Technological forces Competitive forces

6. Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Markets Natural Environment Key External Forces Opportunities & Threats Key External Forces & the Organization

7. Performing External Audit -- Variables Commonly use areas requiring analysis in determining opportunities and threats: Market share Breadth of competing products World economies Foreign affiliates Proprietary account advantages Price competitiveness Technological advancements Interest rates Pollution abatement

8. Performing External Audit – factors Related to long term and annual, objectives Measurable Applicable to competitors Pertain to the overall organisation (wide scope) and to narrow areas or functions within the company.

9. Economic Forces Trends in the dollar’s value European Union Layoffs Economic standard of living

10. Economic Forces

11. Economic Standard of Living

12. Social, Cultural, Demographic & Environmental Forces Major Impact – Products Services Markets Customers

13. Social, Cultural, Demographic & Environmental Forces U.S. Facts Aging population Less Caucasian Widening gap between rich & poor 2025 = 18.5% population >65 years 2075 = no ethnic or racial majority

14. Social, Cultural, Demographic & 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

15. Local Trends –More American households with people living alone –By 2021 Hispanics will be largest minority group –Aging Americans – affects all organizations –Population shift to the south and west –Less interested in fitness and exercise –Decimation and degradation of the natural environment Social, Cultural, Demographic & Environmental Forces

16. Global trends China largest exporter to U.S. Asia receives highest foreign direct investment China and Asia provide cheaper labor and utilities than Mexico China joined WTO

17. Social, Cultural, Demographic & Environmental Forces More educated consumers Aging population Minorities more influential Local rather than federal solutions Fixation with youth decreasing Hispanics increase to 15% by 2021 African American increase to 14% by 2021 21 st Century Trends

18. Social, Cultural, Demographic & Environmental Forces Sample of variables that should be monitored : –Number of Births and deaths, –immigration and emigration rates –Average disposable income –Ethical Concerns –Average educational level –Government regulation –Social responsibility –Air and Water pollution –Ozone Depletion

19. Competitive Forces 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 Sources of Corporate Information

20. 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:

21. 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:

22. The Five-Forces Model of Competition Potential development of substitute products Rivalry among competing firms Bargaining power of suppliers Potential entry of new competitors Bargaining power of consumers

23. 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

24. The Five-Forces Model Most powerful of the five forces Focus on competitive advantage of strategies Rivalry Among Competing Firms

25. The Five-Forces Model Barriers to entry are important Quality, pricing, and marketing can overcome barriers Potential Entry of New Competitors

26. The Five-Forces Model Pressures increase when consumer’s switching costs decrease Firm’s plans for increased capacity & market penetration Potential Development of Substitute Products

27. 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

28. 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

29. 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 seller’s products, prices and costs. If they have discretion in whether and when they purchase the product.

30. 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 –Qualitative techniques

31. External Audit: Dell Opportunities Demand for personal computers continues to grow. Many customers switching from desktops to notebooks. Microsoft desires to partner with Dell. Consumer electronics is a profitable business. Higher consumer spending in the US. Incorporated managed and professional services. Global enterprise systems. Training and certification program. Financial services offered. Growth in the color printer market.

32. External evaluation: Dell Threats Consolidation in the PC industry (i.e., Lenove Group Ltd. of China purchase PC division of IBM in May 2005). Higher oil prices could crimp consumers’ spending. Commercial demand fails to accelerate. Competitors are strong. Slow growth in the PC market. Component price fluctuation Price for computing power has decreased. Computer market has broadened. Currency fluctuations in the international markets.

33. Industry Analysis: The External Factor Evaluation (EFE) Matrix CompetitivePoliticalCultural TechnologicalEnvironmentalSocial GovernmentalDemographicEconomic Summarize & Evaluate

36. 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

37. Question Derive an EEM based on the aforementioned opportunities and threats for Dell. (to be completed in class) Discuss the importance of an the external environment for an organisation and how to evaluate its impact on strategic formulation. Discuss how a company could evaluate whether it should remain in its current industry or enter a new industry, illustrate your answer with suitable examples.