Chapter 3 The External Assessment Strategic Management Concepts

Chapter 3 The External Assessment Strategic Management: Concepts & Cases 12 th Edition Fred David Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 1 Ch 3 -

The strategic plan- project n n Naming the company and the team. Preparing the plan step by step as the progress in the course. Make presentations. Final hard copy submission. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 2 Ch 3 -

External Strategic Management Audit – Environmental Scanning – Industry Analysis Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 3 Ch 3 -

External Strategic Management Audit Purpose of External Audit q Identify Opportunities n Threats n Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 Ch 3 -

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External Audit Gather competitive intelligence – n n n n Social Cultural Demographic Environmental Governmental Legal Technological Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 6 Ch 3 -

External Audit – Sources of Information • Internet • Libraries • Suppliers • Distributors • Salespersons • Customers • Competition Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 7 Ch 3 -

Performing External Audit Key Factors – n n Vary over time Vary by industry Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 8 Ch 3 -

Performing External Audit – Variables • Market share • Breadth of competing products • World economies • Foreign affiliates • Proprietary account advantages Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 9 Ch 3 -

Performing External Audit – Variables • Price competitiveness • Technological advancements • Interest rates • Pollution abatement Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 10 Ch 3 -

Performing External Audit Long-term Orientation External Factors Measurable Applicable to Competing Firms Hierarchical Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 11 Ch 3 -

Industrial Organization (I/O) View – Industry factors more important than internal factors n Performance determined by industry forces Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 12 Ch 3 -

Industrial Organization (I/O) View n Managing strategically from the I/O perspective entails firms striving to compete in attractive industries, avoiding weak or faltering/uncertain industries, and gaining a full understanding of key external factor relationships. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 13 Ch 3 -

Industrial Organization (I/O) View n it is not a question of whether external or internal factors are more important. Rather, effective integration and understanding of both external and internal factors is the key to securing and keeping a competitive advantage. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14 Ch 3 -

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” Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 15 Ch 3 -

Identify opportunities & threats n To conduct such analysis we will explain in details the different aspects of external environment forcesvariables such as economic, social, cultural and technology. . Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 16 Ch 3 -

Economic Forces n n Trends in the dollar’s value European Union Layoffs Economic standard of living Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 17 Ch 3 -

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OT on economic issues: Example n n GM US car producer could the integration and expansion of EU a threat to their market share in Europe because they EU gives priority to their companies. GM would find the decline in the value of US$ as Opportunity to export. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 19 Ch 3 -

Social, Cultural, Demographic, and Environmental Forces U. S. Facts • Aging population • Less Caucasian: white population will not continue to be majority. • Widening gap between rich & poor • 2025 = 18. 5% population > 65 years • 2075 = no ethnic or racial majority Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 20 Ch 3 -

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Social, Cultural, Demographic, and 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 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 22 Ch 3 -

Social, Cultural, Demographic, and Environmental Forces n Trends q q q Aging Americans – affects all organizations Population shift to the south and west Decimation and degradation of the natural environment Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 23 Ch 3 -

Social, Cultural, Demographic, and Environmental Forces 21 st Century Trends: trends • More educated consumers • Aging population • Minorities more influential Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 24 Ch 3 -

Key Social, Cultural, Demographic, and Environmental Variables Number of special interest groups Number of marriages & divorces Number of births & deaths Immigration & emigration rates Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 25 Ch 3 -

Social, Cultural, Demographic, and Environmental Forces: summary Monitor Key Variables Per Capita Income Attitudes Toward Business Avg. Disposable Income Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 26 Ch 3 -

Social, Cultural, Demographic, and Environmental Forces: summary Consumer Behavior Monitor Key Variables Ethical Concerns Attitudes Toward Saving Racial Equality Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 27 Ch 3 -

Social, Cultural, Demographic, and Environmental Forces: summary Avg. Educational Level Monitor Key Variables Governmental Regulation Attitudes Toward Customer Service Attitudes Toward Quality Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 28 Ch 3 -

Social, Cultural, Demographic, and Environmental Forces: summary Energy Conservation Monitor Key Variables Social Responsibility Leisure-Time Values Recycling Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 29 Ch 3 -

Social, Cultural, Demographic, and Environmental Forces: summary Waste Management Monitor Key Variables Air & Water Pollution Ozone Depletion Endangered Species Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 30 Ch 3 -

Social, Cultural, Demographic, and Environmental Forces: Ex. On OT n n GM threats: Ozone deletion which put GM under pressure from green peace to react to environmental pollution. GM opportunity: invest in new energy development to reduce cost and environmental pollution. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 31 Ch 3 -

Political, Governmental, and Legal Forces Government Regulation Key opportunities & threats Antitrust legislation n Tax rates n Lobbying efforts n Patent laws n Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 32 Ch 3 -

Political, Governmental, and Legal Forces Increasing Global Interdependence Political variables impact – q q Formulation of strategies Implementation of strategies Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 33 Ch 3 -

Political, Governmental, and Legal Forces Increasing Global Interdependence Strategists in a global economy – q q q Forecast political climates Legalistic skills Diverse world cultures Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 34 Ch 3 -

Political, Governmental, and Legal Forces Globalization of Industry n n Worldwide trend toward similar consumption patterns Global buyers and sellers E-commerce Technology for instant currency transfers Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 35 Ch 3 -

Key Political, Governmental, and Legal Variables: summary Regulation/deregulation Tax law changes Special tariffs Voter participation rates Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 36 Ch 3 -

Key Political, Governmental, and Legal Variables (cont’d) summary Number of patents Changes in patent laws Environmental protection laws Equal employment legislation Government subsidies Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 37 Ch 3 -

Key Political, Governmental, and Legal Variables (cont’d) summary Anti-trust enforcement Global relationships Import/export regulations Political conditions Location and severity of terrorist activity Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 38 Ch 3 -

Political, Governmental, and Legal Variables: example on OT n n US global relationship is O for GM Global expansion. Us foreign policy against terrorist is a threat GM foreign expansion. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 39 Ch 3 -

Technological Forces Major Impact – • Internet • Communications • Semiconductors Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 40 Ch 3 -

Technological Forces Significance of IT • Chief Information Officer (CIO) • Chief Technology Officer (CTO) Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 41 Ch 3 -

Technological Forces Technology-based issues Essential for nearly every strategic decision Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 42 Ch 3 -

Technological Forces: example on OT n n Internet is O to increase GM e-selling. Internet is T from others to compete at us market. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 43 Ch 3 -

Competitive Forces Collection & evaluation of data on competitors is essential for successful strategy formulation Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 44 Ch 3 -

Competitive Forces Competition on virtually all industries can be described as intense Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 45 Ch 3 -

Competitive Forces Identifying Rival Firms • Strengths • Weaknesses • Capabilities • Opportunities • Threats • Objectives • Strategies Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 46 Ch 3 -

Key Questions Concerning Competitors Their strengths Their weaknesses Their objectives and strategies Their responses to external variables Their vulnerability to our alternative strategies Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 47 Ch 3 -

Key Questions Concerning Competitors (cont’d) Our vulnerability to strategic counterattack Our product/service positioning Entry and exit of firms in the industry Key factors for our current position in industry Sales/profit rankings of competitors over time Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 48 Ch 3 -

Key Questions Concerning Competitors (cont’d) Nature of supplier & distributor relationships The threat of substitute products/services Should we keep our strategies secret from employees and stakeholders? Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 49 Ch 3 -

Competitive Forces 7 Characteristics of Most Competitive U. S. Firms: 1. Market share matters 2. Understand what business you are in 3. Broke or not, fix it 4. Innovate or evaporate Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 50 Ch 3 -

Competitive Forces 7 Characteristics of Most Competitive U. S. Firms: 5. Acquisition is essential to growth 6. People make a difference 7. No substitute for quality Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 51 Ch 3 -

The Five-Forces Model of Competition Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 52 Ch 3 -

Steps to Determine if an Acceptable Profit Can Be Earned 1. 2. 3. Identify key aspects or elements of each competitive force Evaluate how strong and important each element is for the firm Decide whether the collective strength of the elements is worth the firm entering or staying in the industry Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 53 Ch 3 -

The Five-Forces Model Rivalry Among Competing Firms n n Most powerful of the five forces Focus on competitive advantage of strategies Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 54 Ch 3 -

The Five-Forces Model Potential Entry of New Competitors n n Barriers to entry are important Quality, pricing, and marketing can overcome barriers Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 55 Ch 3 -

The Five-Forces Model Potential Development of Substitute Products n n Pressures increase when consumers’ switching costs decrease Firm’s plans for increased capacity & market penetration Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 56 Ch 3 -

The Five-Forces Model Bargaining Power of Suppliers n n Large number of suppliers & few substitutes affects intensity of competition Backward integration can gain control or ownership of suppliers Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 57 Ch 3 -

The Five-Forces Model Bargaining Power of Consumers n n Customers concentrated or buying in volume affects intensity of competition Consumer power is higher where products are standard or undifferentiated Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 58 Ch 3 -

Conditions Where Consumers Gain Bargaining Power n n n 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 sellers’ products, prices, and costs If they have discretion in whether and when they purchase the product Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 59 Ch 3 -

Forecasting Tools and Techniques n Forecasts are educated assumptions about future trends and events q q Quantitative techniques – most appropriate when historical data is available and there is a constant relationship Qualitative techniques Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 60 Ch 3 -

The Global Challenge Faced by U. S. Firms – • Gain & maintain exports to other nations • Defend domestic markets against imported goods Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 61 Ch 3 -

Global Perspective China’s Automobile Producers Heading to the United States in 2008 n China’s auto exports doubled in 2006 n China produces more cars than Germany and is the world’s third largest automobile producer n Changfeng Group first Chinese automaker in the Detroit Auto Show Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 62 Ch 3 -

The Global Challenge Multinational Corporations (MNCs) Simultaneously globally competitive & nationally responsive Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 63 Ch 3 -

The Global Challenge Globalization Worldwide integration of: §Strategy formulation §Strategy implementation §Strategy evaluation Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 64 Ch 3 -

The Global Challenge Globalization of Industries §Similar consumption patterns: encourage businesses to sell products overseas, e. g. , computers which are used in US the same as in Palestine. §Global buyers and sellers §E-commerce §Instant transmission of money & information Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 65 Ch 3 -

Teamwork n n 1. Identify the OT to the business you wrote vision & mission. Key variables: Economic: $ value, per capita income, available of credit at banks. 3. Social, Cultural, Demographic, and Environmental Forces: population age and size, level of education to consumer. Political, Governmental, and Legal Forces: Tax rates, 4. Technological Forces: internet, communication development. 2. political stability, law and order. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 66 Ch 3 -

There are five steps in developing The External Factor Evaluation (EFE) Matrix 1. 2. 3. 4. 5. List key external factors as identified in the external-audit process. Include a total of 10 -20 factors from both the opportunities and threats. Assign to each factor a weight from. 0 (not important) to 1. 0 (very important). These weights show the relative importance. The total of all the weights should equal 1. 0. Assign a 1 -4 rating to each factor to indicate how effectively the firm’s current response strategy: 1= the response is poor, 2 = the response is average, 3 = the response is above average, and 4 = the response is superior. Multiply each factor’s weight by its rating to get a weighted score. Sum the weighted scores for each variable to determine the total weighted score for the organization. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 67 Ch 3 -

Industry Analysis: The External Factor Evaluation (EFE) Matrix Summarize & Evaluate Economic Demographic Governmental Social Environmental Technological Cultural Political Competitive Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 68 Ch 3 -

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Industry Analysis EFE Total weighted score of 4. 0 n Organization response is outstanding to threats and weaknesses Total weighted score of 1. 0 n Firm’s strategies not capitalizing on opportunities or avoiding threats Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 71 Ch 3 -

Industry Analysis EFE Important – Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 72 Ch 3 -

Industry Analysis: The External Factor Evaluation (EFE) Matrix: teamwork. n Apply the EFE to the previous case. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 73 Ch 3 -

Industry Analysis: Competitive Profile Matrix (CPM) Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 74 Ch 3 -

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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 75 Ch 3 -

Review n n Explain how to conduct an external strategic-management audit. An effective approach for conducting an external strategic-management audit consists of four basic steps: (1) select key variables, (2) select key sources of information, (3) use forecasting tools and techniques, and (4) construct an EFE Matrix. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 76 Ch 3 -

Review n n n Identify a recent economic, social, political, or technological trend that significantly affects financial institutions. Economic—Interest rates remain low. Social—Many states are passing no smoking ordinances. Political—Eastern European countries are experiencing political instability. Technological—Use of the Internet is doubling every 100 days. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 77 Ch 3 -

Review n n Discuss the following statement: Major opportunities and threats usually result from an interaction among key environmental trends rather than from a single external event or factor. This statement is accurate. It reveals how complex the external audit part of strategy formulation can be. There an infinite number of interactions among key external factors. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 78 Ch 3 -

Review n n Use Porter’s five-forces model to evaluate competitiveness within the Gaza banking industry. Porter identifies five competitive forces that determine the intensity of competition in an industry and the total value of profits created in a particular industry. The five forces are 1) new entrants, 2) substitute products or services, 3) bargaining power of suppliers, 4) bargaining power of buyers, and 5) rivalry among existing firms. A key to selecting appropriate generic strategies is to analyze these competitive forces in terms of trends, opportunities, and threats facing the firm. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 79 Ch 3 -

Review n n What major forecasting techniques would you use to identify (1) economic opportunities and threats and (2) demographic opportunities and threats? Why are these techniques most appropriate? With the advent of sophisticated computers, simultaneous systems of regression equations have become the most widely used approach forecasting economic variables. Scenario development is the most popular of all techniques for social and demographic forecasting, although surveys and market research are also widely used. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 80 Ch 3 -

Review n n Give some advantages and disadvantages of cooperative versus competitive strategies. Cooperative strategies are generally less costly than competitive strategies. Cooperative strategies between domestic and foreign companies can facilitate entry into world markets. However, competitive strategies recognize that survival of the fittest is an underlying philosophy of business not only in the United States, but also in most of the world. Identifying competitors’ strengths and weaknesses is, thus, an integral and vital part of the external audit. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 81 Ch 3 -

Review n n Let’s say your boss develops an EFE Matrix that includes 62 factors. How would you suggest reducing the number of factors to 20? Answer: Let a group of knowledgeable individuals in the organization evaluate the relative importance of each factor by assigning a 1 = not important, 2 = somewhat important, and 3 = very important. Then add the ratings each factor receives. The 20 factors with the highest sum score should be included in the EFE Matrix. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 82 Ch 3 -

Review n n Do you agree with I/O theorists that external factors are more important than internal factors in a firm achieving competitive advantage? Explain both your and their position. While I/O theorists claim that industry factors are more important than internal factors, research findings suggest that only 20% of a firm’s profitability can be explained by industry factors and 36% explained by internal factors. Regardless, it is not a question of whether external or internal factors are more important. Rather, effective integration and understanding of both external and internal factors is the key to securing and keeping a competitive advantage. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 83 Ch 3 -

Review n n List the 9 external areas that give rise to opportunities and threats. Answer: The ten external areas are economic, social, cultural, demographic, environmental, political, government, legal, and technological. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 84 Ch 3 -