The External Assessment

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  • 1. Chapter 3 The External Assessment
    • Strategic Management: Concepts & Cases
    • 10 th Edition
    • Fred David PowerPoint Slides by
    • Anthony F. Chelte
    • Western New England College
  • 2. Chapter Outline The Nature of the External Audit The Industrial Organization (I/O) View Social, Cultural, Demographic & Environmental Forces
  • 3. Chapter Outline ( cont’d ) Political, Governmental, and Legal Forces Technological Forces Competitive Forces
  • 4. Chapter Outline ( cont’d ) Porter’s Five-Forces Model Sources of External Information Forecasting Tools & Techniques
  • 5. Chapter Outline ( cont’d ) Global Challenge The External Factor Evaluation (EFE) Matrix Competitive Profile Matrix (CPM)
  • 6.
    • 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
  • 7.
    • -- Environmental Scanning
    • -- Industry Analysis
    External Strategic Management Audit
  • 8.
    • Identify & Evaluate factors beyond the control of a single firm
      • Increased foreign competition
      • Population shifts
      • Information technology
    External Strategic Management Audit
  • 9.
    • Purpose of External Audit
      • Identify
        • Opportunities
        • Threats
    External Strategic Management Audit
  • 10. Key External Forces
    • Economic forces
    • Social, cultural, demographic & environmental forces
    • Political, governmental & legal forces
    • Technological forces
    • Competitive forces
  • 11. 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
  • 12.
    • Gather competitive intelligence –
        • Social
        • Cultural
        • Demographic
        • Environmental
        • Economic
        • Political, legal governmental
        • Technological
    External Audit
  • 13. External Audit – Sources of Information
    • Internet
    • Libraries
    • Suppliers
    • Distributors
    • Customers
    • Competition
  • 14.
    • -- Key Factors
        • Vary over time
        • Vary by industry
    Performing External Audit
  • 15. Performing External Audit -- Variables
    • Market share
    • Breadth of competing products
    • World economies
    • Foreign affiliates
    • Proprietary account advantages
  • 16. Performing External Audit -- Variables
    • Price competitiveness
    • Technological advancements
    • Interest rates
    • Pollution abatement
  • 17. Performing External Audit External Factors Measurable Long-term orientation Applicable to competing firms Hierarchical
  • 18. Industrial Organization (I/O) View
    • -- Industry factors more important than internal factors
        • Performance determined by industry forces
  • 19. Economies of Scale Industry Properties Barriers to market entry Product differentiation Level of competitiveness I/O Perspective Firm Performance
  • 20. Economic Forces
    • Availability of credit
    • Level of disposable income
    • Interest rtes
    • Inflation rates
  • 21. Economic Forces
    • Money market rates
    • Fed Gov’t deficits
    • GDP trend
    • Consumption patterns
  • 22. Key Economic Variables Value of the dollar in world markets Worker productivity levels Stock market trends Foreign economic conditions Unemployment trends
  • 23. Key Economic Variables Income differences by region/customer Demand shifts for goods/services Price fluctuations Exportation of labor and capital Import/Export factors
  • 24. Key Economic Variables Tax rates Fiscal policies OPEC policies ECC policies Monetary policies
  • 25. Social, Cultural, Demographic & Environmental Forces
    • Major Impact –
      • Products
      • Services
      • Markets
      • Customers
  • 26. 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
  • 27. Social, Cultural, Demographic & Environmental Forces
    • Facts
      • World population > 6 billion
      • U.S. population < 300 million
  • 28. Social, Cultural, Demographic & Environmental Forces Population characteristics require global strategies
  • 29. Social, Cultural, Demographic & Environmental Forces
    • Global trends
      • 2003 – China largest exporter to U.S.
      • 2003 Asia receives highest foreign direct investment
  • 30.
    • Global trends
      • China’s labor rates less than Mexico
      • China provides more site location incentives than Mexico
    Social, Cultural, Demographic & Environmental Forces
  • 31.
    • Export Trends
      • Mexico-exports to U.S. 1.2% growth (2002)
      • China-exports to U.S. 19% growth (2002)
    Social, Cultural, Demographic & Environmental Forces
  • 32.
    • Export Trends
      • Mexico-corporate income tax rate 34%
      • China-corporate income tax rate 17%
    Social, Cultural, Demographic & Environmental Forces
  • 33. Social, Cultural, Demographic & Environmental Forces
    • More educated consumers
    • Aging population
    • Minorities more influential
    • Local rather than federal solutions
    21 st Century Trends
  • 34. 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
  • 35. Key Social, Cultural, Demographic & Environmental Variables Number of marriages & divorces Number of special interest groups Number of births & deaths Immigration & emigration rates Childbearing rates
  • 36. Actuarial rates Monitor Key Variables Per capita income Attitudes toward business Avg. disposable income Social, Cultural, Demographic & Environmental Forces
  • 37. Consumer behavior Monitor Key Variables Ethical concerns Attitudes toward saving Racial equality Social, Cultural, Demographic & Environmental Forces
  • 38. Avg. educational level Monitor Key Variables Governmental regulation Attitudes toward customer service Attitudes toward quality Social, Cultural, Demographic & Environmental Forces
  • 39. Energy conservation Monitor Key Variables Social responsibility Leisure time values Recycling Social, Cultural, Demographic & Environmental Forces
  • 40. Waste management Monitor Key Variables Air & water pollution Ozone depletion Endangered species Social, Cultural, Demographic & Environmental Forces
  • 41. Political, Government & Legal Forces
    • Key opportunities & threats
        • Antitrust legislation
        • Tax rates
        • Lobbying efforts
        • Patent laws
    Government Regulation
  • 42. Political, Government & Legal Forces
    • Political variables impact –
      • Formulation of strategies
      • Implementation of strategies
    Increasing Global Interdependence
  • 43. Political, Government & Legal Forces
    • Strategists in a global economy --
      • Forecast political climates
      • Legalistic skills
      • Diverse world cultures
    Increasing Global Interdependence
  • 44. Political, Government & Legal Forces
    • Worldwide trend toward similar consumption patterns
    • Global buyers and sellers
    • E-commerce
    • Technology for instant currency transfers
    Globalization of Industry
  • 45. Key Political, Governmental, & Legal Variables Special tariffs Tax law changes PAC’s Voter participation rates Regulation/deregulation
  • 46. Key Political, Governmental, & Legal Variables (cont’d) Environmental protection laws Changes in patent laws Equal employment legislation Government subsidies Number of patents
  • 47. Key Political, Governmental, & Legal Variables (cont’d) Import/export regulations Global relationships Political conditions Location and severity of terrorist activity Anti-trust enforcement
  • 48. Technological Forces
    • Major Impact –
      • Internet
      • Communications
      • Semiconductors
  • 49. Technological Forces
    • Significance of IT
      • Chief Information Officer (CIO)
      • Chief Technology Officer (CTO)
  • 50. Technological Forces Essential for nearly every strategic decision Technology-based issues
  • 51. Competitive Forces Collection & evaluation of data on competitors is essential for successful strategy formulation
  • 52. Competitive Forces Competition on virtually all industries can be described as intense.
  • 53. Competitive Forces
    • Strengths
    • Weaknesses
    • Capabilities
    • Opportunities
    • Threats
    • Objectives
    • Strategies
    Identifying Rival Firms
  • 54. Key Questions Concerning Competitors Their objectives and strategies Their weaknesses Their responses to external variables Their vulnerability to our alternative strategies Their strengths
  • 55. 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
  • 56. 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?
  • 57. 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
  • 58. Competitive Forces
    • Market share matters
    • Understand what business you are in
    • Broke or not, fix it
    • Innovate or evaporate
    7 Characteristics of most Competitive U.S. Firms:
  • 59. Competitive Forces
    • Acquisition is essential to growth
    • People make a difference
    • No substitute for quality
    7 Characteristics of most Competitive U.S. Firms:
  • 60. 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
  • 61. The Five-Forces Model
    • Most powerful of the five forces
    • Focus on competitive advantage of strategies
    Rivalry Among Competing Firms
  • 62. The Five-Forces Model
    • Barriers to entry are important
    • Quality, pricing, and marketing can overcome barriers
    Potential Entry of New Competitors
  • 63. 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
  • 64. 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
  • 65. The Five-Forces Model
    • Customers concentrated or buy in volume affects intensity of competition
    • Consumer power is higher where products are standard or undifferentiated
    Bargaining Power of Consumers
  • 66. The Global Challenge
    • Faced by U.S. Firms --
      • Gain & maintain exports to other nations
      • Defend domestic markets against imported goods
  • 67. The Global Challenge Simultaneously globally competitive & nationally responsive Multinational Corporations (MNC’s)
  • 68. The Global Challenge
    • Worldwide integration of:
      • Strategy formulation
      • Strategy implementation
      • Strategy evaluation
    Globalization
  • 69. The Global Challenge
    • Similar consumption patterns
    • Global buyers and sellers
    • E-commerce
    • Instant transmission of money & information
    Globalization of Industries
  • 70. Industry Analysis: The External Factor Evaluation (EFE) Matrix Summarize & Evaluate Competitive Political Cultural Technological Environmental Social Governmental Demographic Economic
  • 71. 0.15 3 0.05 5. The average income for PC worker has declined from $40K/yr to $30k/yr 0.10 1 0.10 4. China entered WTO; lowered taxes for importing PC’s 0.10 2 0.05 3. Internet use growing rapidly 0.30 3 0.10 2. Cost of PC component parts expected to decrease 10% - 2004 0.30 3 0.10 1. Global PC market expected to grow 20% in 2004 Opportunities Wtd Score Rating Weight Key External Factors EFE – Gateway Computers (2003)
  • 72. 0.05 1 0.10 1. Intense rivalry in industry 0.10 1 0.10 Threats 0.05 1 0.05 8. 30% of Chinese population can afford a PC; only 10% of homes have a PC 0.15 3 0.05 7. U.S. (& world) economies recovering 0.10 2 0.05 6. Modernization of business firms and government agencies Opportunities (cont’d) Wtd Score Rating Weight Key External Factors EFE – Gateway Computers (2003) (cont’d)
  • 73. 0.15 3 0.05 6. Birth rate in U.S. declining annually 0.20 4 0.05 5. Demand exceeds supply of experienced PC workers 0.15 3 0.05 4. Palm & PDA becoming substitutes 0.05 1 0.05 3. Different countries have different reg’s and infrastructure for PC’s 0.20 2 0.10 2. Severe price cutting in PC industry Threats (cont’d) Wtd Score Rating Weight Key External Factors EFE – Gateway Computers (2003) (cont’d)
  • 74. 2.40 1.00 Total 0.15 3 0.05 8. PC firms diversifying into consumer electronics 0.10 2 0.05 7. U.s. consumers and businesses delaying purchase of PC’s Threats (cont’d) Wtd Score Rating Weight Key External Factors EFE – Gateway Computers (2003) (cont’d)
  • 75.
    • 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
  • 76. Industry Analysis EFE Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned. Important --
  • 77. Industry Analysis: Competitive Profile Matrix (CPM) Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions
  • 78. 0.15 3 0.15 3 0.15 3 0.05 Org. Structure 0.60 4 0.30 2 0.45 3 0.15 Global Exp. 0.30 3 0.20 2 0.30 3 0.10 Sales Distr 0.08 4 0.06 3 0.06 3 0.02 Cons. Loyalty 0.24 3 0.32 4 0.24 3 0.08 Prod. Quality 0.30 3 0.30 3 0.20 2 0.10 Fin position 0.32 4 0.16 2 0.16 2 0.08 Inventory sys 0.60 4 0.30 2 0.45 3 0.15 Market share Wt’d Score Rating Wt’d Score Rating Wt’d Score Rating Wt CSF’s Dell Apple Gateway
  • 79. 3.49 2.47 2.83 1.00 Total 0.02 2 0.04 4 0.02 2 0.01 Mgt. experience 0.06 3 0.02 1 0.08 4 0.02 Price competitive 0.40 4 0.20 2 0.30 3 0.10 Customer Serv 0.30 3 0.30 3 0.30 3 0.10 E-commerce 0.12 3 0.12 3 0.12 3 0.04 Prod. Capacity Wt’d Score Rating Wt’d Score Rating Wt’d Score Rating Wt CSF’s (cont’d) Dell Apple Gateway
  • 80. 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 --
  • 81.
    • Key Terms & Concepts
    For Review (Chapter 3) AOL Competitive Analysis Chief Information Officer (CIO) Competitive Intelligence (CI) Chief Technology Officer (CTO) Competitive Profile Matrix (CPM) Competitive Advantage Decruiting
  • 82.
    • Key Terms & Concepts
    For Review (Chapter 3) Director of Competitive Analysis External Factor Evaluation Matrix (EFE) Downsizing External Forces Environmental Scanning Industry Analysis External Audit Industrial Organizational (I/O)
  • 83.
    • Key Terms & Concepts
    For Review (Chapter 3) Information Technology (IT) Lifecare Facilities Internet Porter’s Five-Forces Model Learning from the Partner Rightsizing Linear Regression World Wide Web
  • 84.
    • Key Terms & Concepts
    For Review (Chapter 3) Tax Harmonization Foreign Direct Investment