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Strategic Management Lecture 3

Strategic Management Lecture 3

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  • 1. Chapter 3The External Assessment Strategic Management: Concepts & Cases 13th Edition Global Edition Fred David Copyright © 2011 Pearson Education Ch 3 -1
  • 2. Copyright © 2011 Pearson Education Ch 3 -2
  • 3. External Assessment “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” – Charles Darwin “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 Copyright © 2011 Pearson Education Ch 3 -3
  • 4. External StrategicManagement Audit – Environmental Scanning – Industry Analysis Copyright © 2011 Pearson Education Ch 3 -4
  • 5. External StrategicManagement Audit Identify & evaluate factors beyond the control of a single firm  Increased foreign competition  Population shifts  Ageing society  Fear of travelling  Stock market volatility Copyright © 2011 Pearson Education Ch 3 -5
  • 6. External StrategicManagement AuditPurpose of an External Audit Develop a finite list of  opportunities that could benefit a firm  threats that should be avoided Copyright © 2011 Pearson Education Ch 3 -6
  • 7. Copyright © 2011 Pearson Education Ch 3 -7
  • 8. External Audit  Gather competitive intelligence  Assimilate information  Evaluate Resulting in a list of the most important key external factors Copyright © 2011 Pearson Education Ch 3 -8
  • 9. Performing External Audit Long-term Orientation Measurable External Factors Applicable to Competing Firms Hierarchical Copyright © 2011 Pearson Education Ch 3 -9
  • 10. Industrial Organization(I/O) View Industry factors are more important than internal factors  Performance determined by industry forces Copyright © 2011 Pearson Education Ch 3 -10
  • 11. I/O Perspective Firm Performance Industry Properties Economies of Scale Barriers to Market Entry Product Differentiation The Economy Level of Competitiveness Copyright © 2011 Pearson Education Ch 3 -11
  • 12. Economic Forces GDP Trends in the dollar’s value Unemployment rates Copyright © 2011 Pearson Education Ch 3 -12
  • 13. Copyright © 2011 Pearson Education Ch 3 -13
  • 14. Social, Cultural, Demographic, andNatural Environmental Forces Major Impact – •Products •Services •Markets •Customers Copyright © 2011 Pearson Education Ch 3 -14
  • 15. Social, Cultural, Demographic, andNatural Environmental Forces US Facts  Aging population  Less White  Widening gap between rich & poor  2025 = 18.5% population > 65 years  2075 = no ethnic or racial majority Copyright © 2011 Pearson Education Ch 3 -15
  • 16. Social, Cultural, Demographic, andNatural Environmental Forces Facts  World population 7 billion  World population = 8 billion by 2028  World population = 9 billion by 2054  U.S. population > 310 million Copyright © 2011 Pearson Education Ch 3 -16
  • 17. Social, Cultural, Demographic, andNatural Environmental Forces Trends  More American households with people living alone  Aging Americans – affects all organizations Copyright © 2011 Pearson Education Ch 3 -17
  • 18. Political, Governmental, andLegal ForcesGovernment Regulation Key opportunities & threats  Antitrust legislation  Tax rates  Lobbying activities  Patent laws Copyright © 2011 Pearson Education Ch 3 -18
  • 19. Political, Governmental, andLegal Forces Protectionist policies Governments taking equity stakes in companies Copyright © 2011 Pearson Education Ch 3 -19
  • 20. Technological ForcesMajor Impact – •Internet Copyright © 2011 Pearson Education Ch 3 -20
  • 21. Technological ForcesSignificance of IT •Chief Information Officer (CIO) •Chief Technology Officer (CTO) Copyright © 2011 Pearson Education Ch 3 -21
  • 22. Technological ForcesEssential for nearly everystrategic decision Copyright © 2011 Pearson Education Ch 3 -22
  • 23. Competitive ForcesCollection & evaluation of data oncompetitors is essential for successfulstrategy formulation Copyright © 2011 Pearson Education Ch 3 -23
  • 24. Competitive ForcesIdentify Rival Firms’ •Strengths •Weaknesses •Capabilities •Opportunities •Threats •Objectives •Strategies Copyright © 2011 Pearson Education Ch 3 -24
  • 25. Competitive ForcesCompetition in virtually allindustries can be described asintense Copyright © 2011 Pearson Education Ch 3 -25
  • 26. Key Questions ConcerningCompetitors Their strengths Their weaknesses Their objectives and strategies Their responses to external variables Their vulnerability to our alternative strategies Our vulnerability to strategic counterattack Copyright © 2011 Pearson Education Ch 3 -26
  • 27. Key Questions ConcerningCompetitors Our product/service positioning Entry and exit of firms in the industry Key factors for our current position in industry Sales/profit ranking of competitors over time Nature of supplier and distributor relationships The threat of substitute products/services Copyright © 2011 Pearson Education Ch 3 -27
  • 28. Competitive Forces 7 characteristics of most competitive firms  Market share matters  Understanding what business you are in  Broke or not, fix it  Innovate or evaporate  Acquisition is essential to growth  People make a difference  No substitute for quality Copyright © 2011 Pearson Education Ch 3 -28
  • 29. Competitive Intelligence A systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’s own goals Copyright © 2011 Pearson Education Ch 3 -29
  • 30. Sources of Competitive Intelligence Internet  Consultants Employees  Trade journals Managers  Want ads Suppliers  Newspaper articles Distributors  Government filings Customers  Competitors Creditors Copyright © 2011 Pearson Education Ch 3 -30
  • 31. Objectives of Competitive Intelligence Provide a general understanding of industry and competitors Identify areas where competitors are vulnerable and assess impact of actions on competitors Identify potential moves that a competitor might make Copyright © 2011 Pearson Education Ch 3 -31
  • 32. Market Commonality The number and significance of markets that a firm competes in with rivals Copyright © 2011 Pearson Education Ch 3 -32
  • 33. Resource Similarity Extentto which the type and amount of a firm’s internal resources are comparable to a rival Copyright © 2011 Pearson Education Ch 3 -33
  • 34. The Five-Forces Model of Competition Copyright © 2011 Pearson Education Ch 3 -34
  • 35. Steps to Determine if an AcceptableProfit Can Be Earned1. Identify key aspects or elements of each competitive force2. Evaluate how strong and important each element is for the firm3. Decide whether the collective strength of the elements is worth the firm entering or staying in the industry Copyright © 2011 Pearson Education Ch 3 -35
  • 36. The Five-Forces Model Rivalry among competing firms  Most powerful of the five forces  Focus on competitive advantage of strategies over other firms Copyright © 2011 Pearson Education Ch 3 -36
  • 37. Conditions that Cause High RivalryAmong Competing Firms High number of competing firms Similar size of firms competing Similar capability of firms competing Falling demand for the industry’s products Falling product/service prices in the industry Copyright © 2011 Pearson Education Ch 3 -37
  • 38. Conditions that Cause High RivalryAmong Competing Firms Consumers can switch brands easily Barriers to leaving the market are high Barriers to entering the market are low Fixed costs are high among firms competing The product is perishable Copyright © 2011 Pearson Education Ch 3 -38
  • 39. Conditions that Cause High RivalryAmong Competing Firms Rivals have excess capacity Consumer demand is falling Rivals have excess inventory Rivals sell similar products/services Mergers are common in the industry Copyright © 2011 Pearson Education Ch 3 -39
  • 40. The Five-Forces Model Potential Entry of New Competitors  Barriers to entry are important  Quality, pricing, and marketing can overcome barriers Copyright © 2011 Pearson Education Ch 3 -40
  • 41. The Five-Forces Model Potential development of substitute products  Pressure increases when:  Prices of substitutes decrease  Consumers’ switching costs decrease Copyright © 2011 Pearson Education Ch 3 -41
  • 42. The Five-Forces Model Bargaining Power of Suppliers is increased when there are:  Large numbers of suppliers  Few substitutes  Costs of switching raw materials is high Backward integration is gaining control or ownership of suppliers Copyright © 2011 Pearson Education Ch 3 -42
  • 43. The Five-Forces Model Bargaining power of consumers  Customers being concentrated or buying in volume affects intensity of competition  Consumer power is higher where products are standard or undifferentiated Copyright © 2011 Pearson Education Ch 3 -43
  • 44. Conditions Where Consumers GainBargaining Power If buyers can inexpensively switch If buyers are particularly important If sellers are struggling in the face of falling consumer demand If buyers are informed about sellers’ products, prices, and costs If buyers have discretion in whether and when they purchase the product Copyright © 2011 Pearson Education Ch 3 -44
  • 45. Sources of External Information:Unpublished Sources Customer surveys Market research Speeches at professional or shareholder meetings Television programs Interviews and conversations with stakeholders Copyright © 2011 Pearson Education Ch 3 -45
  • 46. Sources of External Information:Published Sources Periodicals Journals Reports Government documents Abstracts Books Directories Newspapers Manuals Copyright © 2011 Pearson Education Ch 3 -46
  • 47. Sources of External Information:Web Sites http://marketwatch.multexinvestor.com http://moneycentral.msn.com http://finance.yahoo.com www.clearstation.com https://us.etrade.com/e/t/invest/markets www.hoovers.com Copyright © 2011 Pearson Education Ch 3 -47
  • 48. 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 Copyright © 2011 Pearson Education Ch 3 -48
  • 49. Assumptions Estimates of future events based upon the best available information in the present Copyright © 2011 Pearson Education Ch 3 -49
  • 50. Industry Analysis: The ExternalFactor Evaluation (EFE) Matrix Economic  Political Social  Governmental Cultural  Technological Demographic  Competitive Environmental  Legal Copyright © 2011 Pearson Education Ch 3 -50
  • 51. EFE Matrix Steps1. List key external factors2. Weight from 0 to 13. Rate effectiveness of current strategies4. Multiply weight * rating5. Sum weighted scores Copyright © 2011 Pearson Education Ch 3 -51
  • 52. Copyright © 2011 Pearson Education Ch 3 -52
  • 53. Copyright © 2011 Pearson Education Ch 3 -53
  • 54. 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 Copyright © 2011 Pearson Education Ch 3 -54
  • 55. Industry Analysis: Competitive ProfileMatrix (CPM) Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions Critical success factors include internal and external issues Copyright © 2011 Pearson Education Ch 3 -55
  • 56. Copyright © 2011 Pearson Education Ch 3 -56
  • 57. Industry Analysis CPM Important – 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. Copyright © 2011 Pearson Education Ch 3 -57
  • 58. GROUP EXERCISE Analyse Varsity College’s External Strategic Situation Identify 10 opportunities and rank them in order of importance, 1 being most important, 10 being least important Identify 10 threats and rank them in order of importance, 1 being most important, 10 being least important Develop an EFE matrix for Varsity College Prepare a 2 minute presentation to summarise your findings Copyright © 2011 Pearson Education Ch 3 -58
  • 59. FOR NEXT WEEK• Readings 5 & 6 Strategic Management Supplement for Southern Africa• Assurance of Learning exercise 3A – Group exercise• Read Business Report, www.busrep.co.za• Read CNBC, www.cnbc.com Copyright © 2011 Pearson Education Ch 3 -59