Chapter 3 The External Assessment Strategic Management Concepts

Chapter 3 The External Assessment Strategic Management: Concepts & Cases 13 th Edition Fred David Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1

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External Strategic Management Audit – Environmental Scanning – Industry Analysis Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 3

External Strategic Management Audit Identify & evaluate factors beyond the control of a single firm q q q Increased foreign competition Population shifts Aging society Fear of traveling Stock market volatility Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 4

External Strategic Management Audit Purpose of an External Audit q Develop a finite list of n opportunities that could benefit a firm n threats that should be avoided Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 5

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External Audit n Gather competitive intelligence n Assimilate information n Evaluate Resulting in a list of the most important key external factors Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7

Performing External Audit Long-term Orientation External Factors Measurable Applicable to Competing Firms Hierarchical Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 8

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Social, Cultural, Demographic, and Natural Environmental Forces n US Facts q q q 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, Inc. Publishing as Prentice Hall 10

Social, Cultural, Demographic, and Natural Environmental Forces n Trends More American households with people living alone q Aging Americans – affects all organizations q Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 11

Political, Governmental, and Legal Forces Government Regulation Key opportunities & threats Antitrust legislation n Tax rates n Lobbying activities n Patent laws n Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12

Political, Governmental, and Legal Forces n Protectionist policies n Governments taking equity stakes in companies Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13

Technological Forces Major Impact – • Internet Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14

Competitive Forces Collection & evaluation of data on competitors is essential for successful strategy formulation Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 15

Competitive Forces Identify Rival Firms’ • Strengths • Weaknesses • Capabilities • Opportunities • Threats • Objectives • Strategies Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 16

Key Questions Concerning Competitors n n n 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, Inc. Publishing as Prentice Hall 17

Key Questions Concerning Competitors n n n 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, Inc. Publishing as Prentice Hall 18

Competitive Intelligence n 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, Inc. Publishing as Prentice Hall 19

Sources of Competitive Intelligence n n n n Internet Employees Managers Suppliers Distributors Customers Creditors n n n Consultants Trade journals Want ads Newspaper articles Government filings Competitors Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 20

Objectives of Competitive Intelligence n n n 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, Inc. Publishing as Prentice Hall 21

The Five-Forces Model of Competition Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 22

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 © 2011 Pearson Education, Inc. Publishing as Prentice Hall 23

The Five-Forces Model n Rivalry among competing firms Most powerful of the five forces q Focus on competitive advantage of strategies over other firms q Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 24

Conditions that Cause High Rivalry Among Competing Firms n n n 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, Inc. Publishing as Prentice Hall 25

Conditions that Cause High Rivalry Among Competing Firms n n n 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, Inc. Publishing as Prentice Hall 26

Conditions that Cause High Rivalry Among Competing Firms n n n 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, Inc. Publishing as Prentice Hall 27

The Five-Forces Model n Potential development of substitute products q Pressure increases when: n Prices of substitutes decrease n Consumers’ switching costs decrease Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 28

The Five-Forces Model n n Bargaining Power of Suppliers is increased when there are: q Large numbers of suppliers q Few substitutes q Costs of switching raw materials is high Backward integration is gaining control or ownership of suppliers Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 29

The Five-Forces Model n Bargaining power of consumers q Customers being concentrated or buying in volume affects intensity of competition q Consumer power is higher where products are standard or undifferentiated Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 30

Conditions Where Consumers Gain Bargaining Power n n n 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, Inc. Publishing as Prentice Hall 31

Sources of External Information: Unpublished Sources n n n Customer surveys Market research Speeches at professional or shareholder meetings Television programs Interviews and conversations with stakeholders Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 32

Sources of External Information: Published Sources n n n n n Periodicals Journals Reports Government documents Abstracts Books Directories Newspapers Manuals Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 33

Sources of External Information: Web Sites n n n 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, Inc. Publishing as Prentice Hall 34

Industry Analysis: The External Factor Evaluation (EFE) Matrix Economic n Social n Cultural n Demographic n Environmental n Political n Governmental n Technological n Competitive n Legal n Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 35

EFE Matrix Steps 1. 2. 3. 4. 5. List key external factors Weight from 0 to 1 Rate effectiveness of current strategies Multiply weight * rating Sum weighted scores Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 36

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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 © 2011 Pearson Education, Inc. Publishing as Prentice Hall 39

Industry Analysis: Competitive Profile Matrix (CPM) n Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions n Critical success factors include internal and external issues Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 40

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