1. THE EXTERNAL ASSESSMENT Chapter 3

2. If everyone is thinking alike then somebody isn’t thinking

3. Chapters Objectives  Describe how to conduct an external strategic-management audit  Discuss 10 major external forces that affect Organization  Identify key sources of external information, including the internet  Discuss forecasting tools used in SM  Explain how to develop an EFE Matrix  Explain how to develop a Competitive Profile Matrix

4.  Tools & concepts needed to conduct an external strategic management audit (environmental scanning or industry analysis)  Firm evaluate trends & events beyond the control  Ext Audit reveals key opportunities & threats  Managers formulate strategies to take adv of opportunities & avoid threats

5.  Affect products, services, markets & Organizations in the world (acquire & sell)  Changes in consumer demands  Factors affect suppliers & distributors  Foreign business & countries learn, adapt, innovate to compete successfully in the Marketplace Key External Factors

6. Economies of Scale Industry Properties Barriers to market entry Product differentiation Level of competitiveness I/O Perspective Firm Performance  I/O approach External factors more important than internal factors in firms Competitive advantage)  I/O Theorists contend that the industry in which a firm chooses to compete has a stronger influence on the firms competitive performance than do the internal functional decisions managers make in Marketing, finance, and the like  20% firm’s profitability can be explained by the industry  36% profitability attributed to the firms internal factors Porter’s Five Forces Model is an Example of I/O perspective

7. Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Key External Forces Opportunities & Threats Key External Forces & the Organization Company must gather competitive intelligence & information about External forces Sources ( key magazines, trade journals & newspapers.. Internet, university- Suppliers, distributors, salespersons, customers & competitors

8. Performing External Audit External Factors Measurable Long-term orientation Applicable to competing firms Hierarchical  Managers meet & identify most important opportunities & threats facing the firm  Key external factors listed on flip charts/blackboard  Managers prioritized list by ranking the factors identified (1-20) imp- least O/T  COMPETING PRODUCTS/ WORLD ECONOMIES, FOREIGN AFFLIATES, PRICE COMPETIVIENESS, TECHNOLOGICAL ADVANCEMENTS, POPULATION SHIFTS

9. The Industrial Organizational (I/O) View I/O approach to competitive advantage advocates that external (industry ) factors are more important than internal factors in a firm achieving CA Proponents of I/O view (Michael Porter) – Organizational performance will be primarily determined by industry forces –Porter’s Five-Forces Model

10. Assignment for discussion  Economic Forces  Social, Cultural, Demographic & Environmental Forces  Political, Governmental & Legal Forces  Technological Forces  Competitive Forces  Competitive Intelligence Programs

11. Economic Forces Economic forces produce many opportunities and threats for mangers –Interests rate –Inflation –Unemployment –Economic growth Volunteer

12. Economic Forces  Representing the overall economic health of the country or region in which the Organization functions ( Consumer purchasing power, Unemployment rate, interest rates, labor market, ) are all part of Org economic environment  One significant recent trend in the economic environment is the frequency of mergers & acquisitions

13. Social, Cultural, Demographic & Environmental Forces US getting older & Less Caucasian People/households making more purchases on line Census data –Aging population –Trend towards older America is good news for Tours Restaurants Hotels Airlines pharma

14. Sociocultural Forces Sociocultural Forces are pressures emanating from the social structure of a country or society or from the national culture –Social structure –National Culture Managers and Organizations also must respond to social changes within a society Americans becoming more personal fitness and health conscious

15. Demographic Forces Are the outcomes of changes in or changing attitudes toward the characteristics of a population such as age, gender, ethnic origin, race, sexual orientation and social class –Women seeking employment –Changes in the age distribution of a population

16. 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

17. Political and Legal Forces  Changes in laws and regulations  Laws constrain the operations of org & managers thus create both opportunities & threats  Deregulation & privatization(create challenges for Org & managers  Environmental protection  Preservation of endangered species  Emphasis on safety in the workplace  Legal constraints against discrimination Successful managers carefully monitor changes in laws and regulations in order to take advantage of the Opp they create and counter threats they pose

18. Technological Forces –Combination of skills and equipments that managers use in the design, production and distribution of goods and services –Technological forces are the outcomes of changes in the technology that managers use to design, produce or distribute goods and services –Tech change can make established products obsolete overnight Telecommuting / Teleconferencing CIO/CTO new positions to effectively capitalize on e-commerce

19. Competitive Forces Strengths Weaknesses Capabilities Opportunities Threats Objectives Strategies Identifying Rival Firms Identify major competitors not always easy because many firms have divisions that compete in different industries

20.  Formally defined by Society of CI Professionals --- systematic & Ethical process for gathering & analyzing information about competitors  9 out of 10 large companies have employees dedicated solely to gather CI  Function on the Org charts (Director of Competitive Analysis)  Bribery, wiretapping and computer break ins should never be used Competitive Intelligence Programs

21. 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

22. The Five Forces Model Helps managers isolate particular forces in the external environment that are potential threats Porter argued that when managers analyze O/T they should pay particular attention to these five forces They affect how much a profit organizations competing within the same industry can expect to make

23. Rivalry among competing firms  Powerful of the five competitive forces  The more the companies compete against one another for customers– (by lowering prices of the products/ increasing advertising) – the lower is the level of industry profits ( low prices mean less profits)  As rivalry among competing firms intensifies, industry profits decline– industry becomes unattractive Coke & Pepsi ( price wars, comparative advertising, new product introduction)

24. Potential Entry of New Competitors  Whenever new firms can easily enter a particular industry, the intensity of competitiveness among firms increases  Barriers to entry, such as economies of the scale, strong customer loyalty, strong brand preferences….. Are low the easier it is for companies to enter an industry (industry profits to be low)  Example: GM offering employee discounts- to all customers purchasing new cars Threat is high for local hamburger restaurant than Ford & Toyota

25.  When the threats of new firms entering the market is strong, Firms generally fortify their positions and take actions to deter new entrants, such as lowering prices, extending warranties and adding features………

26. Potential Development of Substitute Products  Often, the output of one industry is a substitute for the output of another industry  plastic may be a substitute for steel in some applications  eyeglasses / contact lenses laser eye surgery  Sugar Companies artificial sweetners  Competitive pressures arising from substitute products increase as the relative price of substitute products declines & as consumers’ switching costs decreases

27. Bargaining Power of Suppliers  If there are only a few suppliers of an important input, then suppliers can drive up the price of that input & expensive inputs result in lower profits for the producer  Firms may pursue a backward integration strategy to gain control or ownership of suppliers Local electric co. is the only source of electricity in your community therefore it can charge what it wants for its product

28. Backward integration strategy to gain control of ownership of suppliers. This strategy is especially effective when suppliers are unreliable, too costly or not capable of meeting a firm’s needs on a consistent basis.

29. Bargaining Power of Consumers If only a few large customers are available to buy an industry’s output, they can bargain to drive down the price of that output. As a result producer make lower profits Rival firms may offer extended warranties or special services to gain customer loyalty whenever the bargaining power of consumers is substantial

30. Sources Of External Information  Published & Unpublished sources  Customer survey-Market research- Speeches at meetings- TV programs- Interviews  Journals-Government documents- books- newspaper  Internet

31. Forecasting Tools & Techniques  Truth is we all make implicit forecasts throughout our daily lives  Organization forecast (project) their own resources & profits annually  Making Assumptions Best present estimates of the impact Of major external factors, over which the managers Has little if any control, but which may exert a significant Impact on performance or ability to achieve desired results

32. Industry Analysis: The External Factor Evaluation (EFE) Matrix CompetitivePoliticalCultural TechnologicalEnvironmentalSocial GovernmentalDemographicEconomic Summarize & Evaluate Developed in Five Steps: (Open Book)

33. EFE – Poultry Firm Key External Factors WeightRating Wtd Score Opportunities (cont’d) 1. Demand for chicken increasing 8 % annually 0.0740.28 2. Demand for prepared food incaresing 10% annually 0.0840.32 3.Leading competitor could be acquired for $1billion 0.021 Threats 0.101 1. Leading competitor increased its ad expenses 30% 0.061

34. EFE – Gateway Computers (2003) (cont’d) Key External Factors WeightRating Wtd Score Threats (cont’d) 2. Illegal immigrant problem plagues the firm 0.0930.27 3.0.051 4.0.0530.15 5.0.0540.20 6.0.0530.15

35. EFE – Gateway Computers (2003) (cont’d) Key External Factors WeightRating Wtd Score Threats (cont’d) 7.0.0520.10 8.0.0530.15 Total1.002.56

36. Five steps in developing EFE Matrix(Step1)  List key external factors as identified in the External audit process  Include 10-20 factors including both opportunities & threats that affect the firm & its industry  List opportunities first & then the threats  Be specific as possible using percentages, ratios and comparative numbers whenever possible

37. EFE matrix (step 2) Continue…….  Assign to each factor a weight that ranges from 0.0(not important) to 1.0(very important)  The weight indicates the relative importance of that factor to being successful in the firm’s industry.  Opportunities often receive higher weights than threats, but threats too can receive high weights if they are especially severe or threatening  Appropriate weights can be determined by comparing successful with unsuccessful competitors or discussing a factor (reaching a consensus)  The sum of all weights assigned to the factors must equal 1.0

38. EFE matrix step 3 continue….  assign rating between 1&4 to each key external factor indicate how effectively the firm’s current strategies respond to the factor, where 4= the response is superior, 3= response is above average, 2=average, 1=poor  Ratings are based on effectiveness of the firm’s strategies  Ratings are company based, whereas the weights in step 2 are industry based  Both threats & opp can receive a 1,2,3 or 4

39. EFE Matrix step 4 & 5  Multiply each factor’s weight by its rating to determine a weighted score  Sum the weighted score for each variable to determine total weighted score for the organization

40. Total weighted score of 4.0 Organization response is outstanding to threats and weaknesses Firms strategy effectively taking advantage of existing opportunities and minimizing the effects of external threats Industry Analysis EFE Total weighted score of 1.0 Firm’s strategies not capitalizing on opportunities or avoiding threats

41. Industry Analysis: Competitive Profile Matrix (CPM) Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions

42. CPM  4 ----- Major Strength  3 ----- Minor Strength  2 ----- Minor Weakness  1 ----- Major Weakness  Critical success factors in a CPM are broader (do not include factual or specific date)  CSF in CPM not grouped into O/T as they are in EFE  Ratings & Total weighted scores for rival firms can be compared to the sample firm  Comparative analysis provides important internal strategic information Weights & total weights scores in both CPM & EFE having the same meaning Ratings refer to strengths & weakness

43. GatewayAppleDell CSF’s WtRatingWt’d Score RatingWt’d Score RatingWt’d Score Market share0.1530.4520.3040.60 Inventory sys0.0820.162 40.32 Fin position0.1020.2030.303 Prod. Quality0.0830.2440.3230.24 Cons. Loyalty0.0230.063 40.08 Sales Distr0.1030.3020.2030.30 Global Exp.0.1530.4520.3040.60 Org. Structure0.0530.153 3 Apple has the best product quality and management experience ; Dell has the best market share and inventory system; Gateway has the best price as indicated by the ratings

44. GatewayAppleDell CSF’s (cont’d) WtRatingWt’d Score Ratin g Wt’d Score RatingWt’d Score Prod. Capacity0.0430.123 3 E-commerce0.1030.303 3 Customer Serv0.1030.3020.2040.40 Price competitive 0.0240.0810.0230.06 Mgt. experience 0.0120.0240.0420.02 Total1.002.832.473.49