1. Copyright 2005 Prentice Hall1 Bus 411 Day 6

2. Copyright 2005 Prentice Hall Ch 3 -2 Agenda Discussion on External Assessment  Opportunities and threats Assignment #2 Due Feb 9 Issues with Professional Conduct  Class starts at 9:30 AM SHARP!  Class ends when the instructor finishes, not when the clock says 10:50 AM, more often than than not the class will be finished by the required time but there may be occasions that it does not.

3. Copyright 2005 Prentice Hall Ch 3 -3 Chapter 3 The External Assessment Strategic Management: Concepts & Cases 11 th Edition Fred David

4. Copyright 2005 Prentice Hall Ch 3 -4 Chapter Outline The Nature of the External Audit The Industrial Organization (I/O) View Social, Cultural, Demographic & Environmental Forces

5. Copyright 2005 Prentice Hall Ch 3 -5 Chapter Outline ( cont’d ) Political, Governmental, and Legal Forces Technological Forces Competitive Forces

6. Copyright 2005 Prentice Hall Ch 3 -6 Chapter Outline ( cont’d ) Porter’s Five-Forces Model Sources of External Information Forecasting Tools & Techniques

7. Copyright 2005 Prentice Hall Ch 3 -7 Chapter Outline ( cont’d ) Global Challenge The External Factor Evaluation (EFE) Matrix Competitive Profile Matrix (CPM)

8. Copyright 2005 Prentice Hall Ch 3 -8 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

9. Copyright 2005 Prentice Hall Ch 3 -9 External Strategic Management Audit -- Environmental Scanning -- Industry Analysis

10. Copyright 2005 Prentice Hall Ch 3 -10 Identify & Evaluate factors beyond the control of a single firm  Increased foreign competition  Population shifts  Aging society  Fear of traveling  Stock market volatility External Strategic Management Audit

11. Copyright 2005 Prentice Hall Ch 3 -11 Purpose of External Audit  Identify Opportunities Threats External Strategic Management Audit

12. Copyright 2005 Prentice Hall Ch 3 -12 Key External Forces 1. Economic forces 2. Social, cultural, demographic & environmental forces 3. Political, governmental & legal forces 4. Technological forces 5. Competitive forces

13. Copyright 2005 Prentice Hall Ch 3 -13 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

14. Copyright 2005 Prentice Hall Ch 3 -14 Gather competitive intelligence – Social Cultural Demographic Environmental Governmental Legal Technological External Audit

15. Copyright 2005 Prentice Hall Ch 3 -15 External Audit – Sources of Information Internet Libraries Suppliers Distributors Salespersons Customers Competition CI Vendors http://www.burrellesluce.com/Press_Clipp ing_Service/default.php http://www.burrellesluce.com/Press_Clipp ing_Service/default.php

16. Copyright 2005 Prentice Hall Ch 3 -16 Internet Resources www.redherring.com www.fastcompany.com www.business2.com online.wsj.com www.hoovers.com www.ecommercetimes.com www.businessplanarchive.org/ www.informationweek.com/ www.thestandard.com cbs.marketwatch.com www.morningstar.com finance.yahoo.com

17. Copyright 2005 Prentice Hall Ch 3 -17 Performing External Audit -- Key Factors Vary over time Vary by industry

18. Copyright 2005 Prentice Hall Ch 3 -18 Performing External Audit -- Variables Market share Breadth of competing products World economies Foreign affiliates Proprietary account advantages

19. Copyright 2005 Prentice Hall Ch 3 -19 Performing External Audit -- Variables Price competitiveness Technological advancements Interest rates Pollution abatement

20. Copyright 2005 Prentice Hall Ch 3 -20 Performing External Audit External Factors Measurable Long-term orientation Applicable to competing firms Hierarchical

21. Copyright 2005 Prentice Hall Ch 3 -21 Industrial Organization (I/O) View -- Industry factors more important than internal factors Performance determined by industry forces

22. Copyright 2005 Prentice Hall Ch 3 -22 Economies of Scale Industry Properties Barriers to market entry Product differentiation Level of competitiveness I/O Perspective Firm Performance

23. Copyright 2005 Prentice Hall Ch 3 -23 Research Findings “Approximately 20% of a firm’s profitability can be explained by the industry, whereas 36% of the variance in profitability is attributed to the firm’s internal factors”

24. Copyright 2005 Prentice Hall Ch 3 -24 Economic Forces

25. Copyright 2005 Prentice Hall Ch 3 -25 Economic Forces Trends in the dollar’s value European Union Layoffs Economic standard of living

26. Copyright 2005 Prentice Hall Ch 3 -26 Economic Standard of Living

27. Copyright 2005 Prentice Hall Ch 3 -27 Russia’s Economy Political bureaucracy Illegal actions by officials and policemen State-run gas; monopoly purchase of newspaper Foreign direct investment

28. Copyright 2005 Prentice Hall Ch 3 -28 Economic Forces Availability of credit Level of disposable income Interest rates Inflation rates

29. Copyright 2005 Prentice Hall Ch 3 -29 Finding Economic Data http://www.economagic.com/ http://www.econdata.net/ http://www.census.gov/econ/www/ http://www.bls.gov/home.htm http://bea.gov/

30. Copyright 2005 Prentice Hall Ch 3 -30 Social, Cultural, Demographic & Environmental Forces Major Impact – Products Services Markets Customers

31. Copyright 2005 Prentice Hall Ch 3 -31 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

32. Copyright 2005 Prentice Hall Ch 3 -32 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

33. Copyright 2005 Prentice Hall Ch 3 -33 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

34. Copyright 2005 Prentice Hall Ch 3 -34 U.S. – Mexico Border North America’s fastest growing region 1,500 maquiladoras No longer largest exporter to U.S.

35. Copyright 2005 Prentice Hall Ch 3 -35 Social, Cultural, Demographic & Environmental Forces Global trends 2003 – China largest exporter to U.S. 2003 –– Asia receives highest foreign direct investment Cheaper labor and utilities than Mexico China joined WTO

36. Copyright 2005 Prentice Hall Ch 3 -36 Global trends China’s labor rates less than Mexico China provides more site location incentives than Mexico Social, Cultural, Demographic & Environmental Forces

37. Copyright 2005 Prentice Hall Ch 3 -37 Social, Cultural, Demographic & Environmental Forces More educated consumers Aging population Minorities more influential Local rather than federal solutions 21 st Century Trends

38. Copyright 2005 Prentice Hall Ch 3 -38 Social, Cultural, Demographic & Environmental Forces (cont’d) Fixation with youth decreasing Hispanics increase to 15% by 2021 African American increase to 14% by 2021 21 st Century Trends

39. Copyright 2005 Prentice Hall Ch 3 -39 Key Social, Cultural, Demographic & Environmental Variables Number of marriages & divorces Number of special interest groups Number of births & deaths Immigration & emigration rates Childbearing rates

40. Copyright 2005 Prentice Hall Ch 3 -40 Actuarial rates Monitor Key Variables Per capita income Attitudes toward business Avg. disposable income Social, Cultural, Demographic & Environmental Forces

41. Copyright 2005 Prentice Hall Ch 3 -41 Consumer behavior Monitor Key Variables Ethical concerns Attitudes toward saving Racial equality Social, Cultural, Demographic & Environmental Forces

42. Copyright 2005 Prentice Hall Ch 3 -42 Avg. educational level Monitor Key Variables Governmental regulation Attitudes toward customer service Attitudes toward quality Social, Cultural, Demographic & Environmental Forces

43. Copyright 2005 Prentice Hall Ch 3 -43 Energy conservation Monitor Key Variables Social responsibility Leisure time values Recycling Social, Cultural, Demographic & Environmental Forces

44. Copyright 2005 Prentice Hall Ch 3 -44 Waste management Monitor Key Variables Air & water pollution Ozone depletion Endangered species Social, Cultural, Demographic & Environmental Forces

45. Copyright 2005 Prentice Hall Ch 3 -45 Political, Government & Legal Forces Key opportunities & threats Antitrust legislation Tax rates Lobbying efforts Patent laws Government Regulation

46. Copyright 2005 Prentice Hall Ch 3 -46 Political, Government & Legal Forces Political variables impact –  Formulation of strategies  Implementation of strategies Increasing Global Interdependence

47. Copyright 2005 Prentice Hall Ch 3 -47 Political, Government & Legal Forces Strategists in a global economy –  Forecast political climates  Legalistic skills  Diverse world cultures Increasing Global Interdependence

48. Copyright 2005 Prentice Hall Ch 3 -48 Political, Government & Legal Forces Worldwide trend toward similar consumption patterns Global buyers and sellers E-commerce Technology for instant currency transfers Globalization of Industry

49. Copyright 2005 Prentice Hall Ch 3 -49 Key Political, Governmental, & Legal Variables Special tariffs Tax law changes PAC’s Voter participation rates Regulation/deregulation

50. Copyright 2005 Prentice Hall Ch 3 -50 Key Political, Governmental, & Legal Variables (cont’d) Environmental protection laws Changes in patent laws Equal employment legislation Government subsidies Number of patents

51. Copyright 2005 Prentice Hall Ch 3 -51 Key Political, Governmental, & Legal Variables (cont’d) Import/export regulations Global relationships Political conditions Location and severity of terrorist activity Anti-trust enforcement

52. Copyright 2005 Prentice Hall Ch 3 -52 Technological Forces Major Impact – Internet Communications Semiconductors

53. Copyright 2005 Prentice Hall Ch 3 -53 Technological Forces Significance of IT Chief Information Officer (CIO) Chief Technology Officer (CTO)

54. Copyright 2005 Prentice Hall Ch 3 -54 Technological Forces Essential for nearly every strategic decision Technology-based issues

55. Copyright 2005 Prentice Hall Ch 3 -55 Competitive Forces Collection & evaluation of data on competitors is essential for successful strategy formulation

56. Copyright 2005 Prentice Hall Ch 3 -56 Competitive Forces Competition on virtually all industries can be described as intense.

57. Copyright 2005 Prentice Hall Ch 3 -57 Competitive Forces Strengths Weaknesses Opportunities Threats Capabilities Objectives Strategies Identifying Rival Firms

58. Copyright 2005 Prentice Hall Ch 3 -58 Key Questions Concerning Competitors Their objectives and strategies Their weaknesses Their responses to external variables Their vulnerability to our alternative strategies Their strengths

59. Copyright 2005 Prentice Hall Ch 3 -59 Key Questions Concerning Competitors (cont’d) Entry and exit of firms in the industry Our product/service positioning Key factors for our current position in industry Sales/profit rankings of competitors over time Our vulnerability to strategic counterattack

60. Copyright 2005 Prentice Hall Ch 3 -60 Key Questions Concerning Competitors (cont’d) The threat of substitute products/services Nature of supplier & distributor relationships Should we keep our strategies secret from employees and stakeholders?

61. Copyright 2005 Prentice Hall Ch 3 -61 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

62. Copyright 2005 Prentice Hall Ch 3 -62 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:

63. Copyright 2005 Prentice Hall Ch 3 -63 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:

64. Copyright 2005 Prentice Hall Ch 3 -64 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

65. Copyright 2005 Prentice Hall Ch 3 -65 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

66. Copyright 2005 Prentice Hall Ch 3 -66 The Five-Forces Model Most powerful of the five forces Focus on competitive advantage of strategies Rivalry Among Competing Firms

67. Copyright 2005 Prentice Hall Ch 3 -67 The Five-Forces Model Barriers to entry are important Quality, pricing, and marketing can overcome barriers Potential Entry of New Competitors

68. Copyright 2005 Prentice Hall Ch 3 -68 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

69. Copyright 2005 Prentice Hall Ch 3 -69 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

70. Copyright 2005 Prentice Hall Ch 3 -70 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

71. Copyright 2005 Prentice Hall Ch 3 -71 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.

72. Copyright 2005 Prentice Hall Ch 3 -72 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

73. Copyright 2005 Prentice Hall Ch 3 -73 The Global Challenge Faced by U.S. Firms -- Gain & maintain exports to other nations Defend domestic markets against imported goods

74. Copyright 2005 Prentice Hall Ch 3 -74 The Global Challenge Simultaneously globally competitive & nationally responsive Multinational Corporations (MNC’s)

75. Copyright 2005 Prentice Hall Ch 3 -75 The Global Challenge Worldwide integration of:  Strategy formulation  Strategy implementation  Strategy evaluation Globalization

76. Copyright 2005 Prentice Hall Ch 3 -76 The Global Challenge  Similar consumption patterns  Global buyers and sellers  E-commerce  Instant transmission of money & information Globalization of Industries

77. Copyright 2005 Prentice Hall Ch 3 -77 Industry Analysis: The External Factor Evaluation (EFE) Matrix CompetitivePoliticalCultural TechnologicalEnvironmentalSocial GovernmentalDemographicEconomic Summarize & Evaluate

78. Copyright 2005 Prentice Hall Ch 3 -78 Industry Analysis: The External Factor Evaluation (EFE) Matrix CompetitivePoliticalCultural TechnologicalEnvironmentalSocial GovernmentalDemographicEconomic Summarize & Evaluate

79. Copyright 2005 Prentice Hall Ch 3 -79 5 Steps (Page 110-111) 1.List key external factors 10-20 Opportunities then threats Assign weights from 0.0 to 1.0 based on importance Sum of all weights across all factors = 1 Assign a rating from 1 to 4 for all factors where 4 = the firm’s response is superior 3 = the firm’s response is above avg 2 = the firm’s response is average 1 = the firm’s response is poor 1.Multiply the rating by the weight 2.Sum the weighted scores

80. Copyright 2005 Prentice Hall Ch 3 -80 EFE – Gateway Computers (2003) Key External Factors WeightRating Wtd Score Opportunities 1. Global PC market expected to grow 20% in 2004 0.1030.30 2. Cost of PC component parts expected to decrease 10% - 2004 0.1030.30 3. Internet use growing rapidly0.0520.10 4. China entered WTO; lowered taxes for importing PC’s 0.101 5. The average income for PC worker has declined from $40K/yr to $30k/yr 0.0530.15

81. Copyright 2005 Prentice Hall Ch 3 -81 EFE – Gateway Computers (2003) (cont’d) Key External Factors WeightRating Wtd Score Opportunities (cont’d) 6. Modernization of business firms and government agencies 0.0520.10 7. U.S. (& world) economies recovering0.0530.15 8. 30% of Chinese population can afford a PC; only 10% of homes have a PC 0.051 Threats 0.101 1. Intense rivalry in industry0.1010.05

82. Copyright 2005 Prentice Hall Ch 3 -82 EFE – Gateway Computers (2003) (cont’d) Key External Factors WeightRating Wtd Score Threats (cont’d) 2. Severe price cutting in PC industry0.1020.20 3. Different countries have different reg’s and infrastructure for PC’s 0.051 4. Palm & PDA becoming substitutes0.0530.15 5. Demand exceeds supply of experienced PC workers 0.0540.20 6. Birth rate in U.S. declining annually0.0530.15

83. Copyright 2005 Prentice Hall Ch 3 -83 EFE – Gateway Computers (2003) (cont’d) Key External Factors WeightRating Wtd Score Threats (cont’d) 7. U.s. consumers and businesses delaying purchase of PC’s 0.0520.10 8. PC firms diversifying into consumer electronics 0.0530.15 Total1.002.40

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85. Copyright 2005 Prentice Hall Ch 3 -85

86. Copyright 2005 Prentice Hall Ch 3 -86 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 templates\EFE_matrix.xlt

87. Copyright 2005 Prentice Hall Ch 3 -87 Industry Analysis EFE Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned. Important --

88. Copyright 2005 Prentice Hall Ch 3 -88 Industry Analysis: Competitive Profile Matrix (CPM) Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions

89. Copyright 2005 Prentice Hall Ch 3 -89 Steps to a CPM Identify Critical Success Factors (CSF)  Broad issues  Internal and external (5 of each is a good mix) Assign a weight to each CSF  Must add up to 1 Assign a rating for your firm and each of your competitors  4 = major strength  3 = minor strength  2 = minor weakness  1 – major weakness Multiply weight by rating Sum the weighted ratings and compare

90. Copyright 2005 Prentice Hall Ch 3 -90 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

91. Copyright 2005 Prentice Hall Ch 3 -91 GatewayAppleDell CSF’s (cont’d) WtRatingWt’d Score RatingWt’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. experience0.0120.0240.0420.02 Total1.002.832.473.49

92. Copyright 2005 Prentice Hall Ch 3 -92 Industry Analysis CPM Just because one firm receives a 3.2 rating and another receives a 2.8 rating, it does not follow that the first firm is 20 percent better than the second. Important --

93. Copyright 2005 Prentice Hall Ch 3 -93 Assignment two Prepare a EFE and CPM for Google  Bus 411 assignment two.doc Bus 411 assignment two.doc Due Feb 9 Excel templates for both the EFE and CPM are available in WebCT