Chapter3 External Assessment 1
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Transcript of Chapter3 External Assessment 1
Ch 3 -1Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Chapter 3 The External Assessment
Strategic Management: Concepts & Cases
12th Edition
Fred David
The strategic plan- project
Naming the company and the team. Preparing the plan step by step as the
progress in the course. Make presentations. Final hard copy submission.
Ch 3 -2Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Ch 3 -3Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
External Strategic Management Audit
– Environmental Scanning
– Industry Analysis
Ch 3 -4Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Purpose of External Audit Identify
Opportunities Threats
External Strategic Management Audit
Ch 3 -5Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Ch 3 -6Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Gather competitive intelligence –
Social Cultural Demographic Environmental Governmental Legal Technological
External Audit
Ch 3 -7Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
External Audit – Sources of Information•Internet
•Libraries
•Suppliers
•Distributors
•Salespersons
•Customers
•Competition
Ch 3 -8Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Performing External Audit
Key Factors – Vary over time Vary by industry
Ch 3 -9Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Performing External Audit – Variables
•Market share
•Breadth of competing products
•World economies
•Foreign affiliates
•Proprietary account advantages
Ch 3 -10Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Performing External Audit – Variables
•Price competitiveness
•Technological advancements
•Interest rates
•Pollution abatement
Ch 3 -11Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Performing External Audit
External Factors
Measurable
Long-term Orientation
Applicable to Competing Firms
Hierarchical
Ch 3 -12Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Industrial Organization (I/O) View
– Industry factors more important than internal factors
Performance determined by industry forces
Ch 3 -13Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Industrial Organization (I/O) View 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.
Ch 3 -14Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Industrial Organization (I/O) View 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.
Ch 3 -15Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
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”
Ch 3 -16Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Identify opportunities & threats To conduct such analysis we will explain in
details the different aspects of external environment forces\variables such as economic, social, cultural and technology..
Ch 3 -17Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Economic Forces
Trends in the dollar’s value European Union Layoffs Economic standard of living
Ch 3 -18Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Ch 3 -19Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
OT on economic issues: Example 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.
Ch 3 -20Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
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
Ch 3 -21Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Ch 3 -22Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
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
Ch 3 -23Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Trends Aging Americans – affects all organizations Population shift to the south and west Decimation and degradation of the natural
environment
Social, Cultural, Demographic, and Environmental Forces
Ch 3 -24Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Social, Cultural, Demographic, and Environmental Forces
•More educated consumers
•Aging population
•Minorities more influential
21st Century Trends: trends
Ch 3 -25Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Key Social, Cultural, Demographic, and Environmental Variables
Number of marriages & divorces
Number of special interest groups
Number of births & deaths
Immigration & emigration rates
Ch 3 -26Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Monitor KeyVariables
Per Capita Income
Attitudes Toward Business
Avg. Disposable Income
Social, Cultural, Demographic, and Environmental Forces: summary
Ch 3 -27Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Consumer Behavior
Monitor KeyVariables
Ethical Concerns
Attitudes Toward Saving
Racial Equality
Social, Cultural, Demographic, and Environmental Forces: summary
Ch 3 -28Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Avg. Educational Level
Monitor KeyVariables
Governmental Regulation
Attitudes Toward Customer Service
Attitudes Toward Quality
Social, Cultural, Demographic, and Environmental Forces: summary
Ch 3 -29Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Energy Conservation
Monitor KeyVariables
Social Responsibility
Leisure-Time Values
Recycling
Social, Cultural, Demographic, and Environmental Forces: summary
Ch 3 -30Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Waste Management
Monitor KeyVariables
Air & Water Pollution
Ozone Depletion
Endangered Species
Social, Cultural, Demographic, and Environmental Forces: summary
Ch 3 -31Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Social, Cultural, Demographic, and Environmental Forces: Ex. On OT 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.
Ch 3 -32Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Political, Governmental, and Legal Forces
Key opportunities & threats Antitrust legislation Tax rates Lobbying efforts Patent laws
Government Regulation
Ch 3 -33Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Political, Governmental, and Legal Forces
Political variables impact – Formulation of strategies Implementation of strategies
Increasing Global Interdependence
Ch 3 -34Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Political, Governmental, and Legal Forces
Strategists in a global economy – Forecast political climates Legalistic skills Diverse world cultures
Increasing Global Interdependence
Ch 3 -35Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Political, Governmental, and Legal Forces
Worldwide trend toward similarconsumption patterns
Global buyers and sellers E-commerce Technology for instant currency transfers
Globalization of Industry
Ch 3 -36Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Key Political, Governmental, and Legal Variables: summary
Special tariffs
Tax law changes
Voter participation rates
Regulation/deregulation
Ch 3 -37Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Key Political, Governmental, and Legal Variables (cont’d) summary
Environmental protection laws
Changes in patent laws
Equal employment legislation
Government subsidies
Number of patents
Ch 3 -38Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Key Political, Governmental, and Legal Variables (cont’d) summary
Import/export regulations
Global relationships
Political conditions
Location and severity of terrorist activity
Anti-trust enforcement
Ch 3 -39Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Political, Governmental, and Legal Variables: example on OT US global relationship is O for GM Global
expansion. Us foreign policy against terrorist is a threat
GM foreign expansion.
Ch 3 -40Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Technological Forces
Major Impact –
•Internet
•Communications
•Semiconductors
Ch 3 -41Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Technological Forces
Significance of IT
•Chief Information Officer (CIO)
•Chief Technology Officer (CTO)
Ch 3 -42Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Technological Forces
Essential for nearly every strategic decision
Technology-based issues
Ch 3 -43Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Technological Forces: example on OT Internet is O to increase GM e-selling. Internet is T from others to compete at us
market.
Ch 3 -44Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Competitive Forces
Collection & evaluation of data on competitors is essential for successful strategy formulation
Ch 3 -45Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Competitive Forces
Competition on virtually all industries can be described as intense
Ch 3 -46Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Competitive Forces
•Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies
Identifying Rival Firms
Ch 3 -47Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Key Questions Concerning Competitors
Their objectives and strategies
Their weaknesses
Their responses to external variables
Their vulnerability to our alternative strategies
Their strengths
Ch 3 -48Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
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
Ch 3 -49Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Key Questions Concerning Competitors (cont’d)
The threat of substitute products/services
Nature of supplier & distributor relationships
Should we keep our strategies secret fromemployees and stakeholders?
Ch 3 -50Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
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:
Ch 3 -51Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
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:
Ch 3 -52Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
The Five-Forces Model of Competition
Ch 3 -53Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
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
Ch 3 -54Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
The Five-Forces Model
Most powerful of the five forces Focus on competitive advantage of
strategies
Rivalry Among Competing Firms
Ch 3 -55Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
The Five-Forces Model
Barriers to entry are important Quality, pricing, and marketing can
overcome barriers
Potential Entry of New Competitors
Ch 3 -56Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
The Five-Forces Model
Pressures increase when consumers’ switching costs decrease
Firm’s plans for increased capacity & market penetration
Potential Development of Substitute Products
Ch 3 -57Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
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
Ch 3 -58Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
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
Ch 3 -59Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Conditions Where Consumers GainBargaining 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 sellers’ products,
prices, and costs If they have discretion in whether and when
they purchase the product
Ch 3 -60Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
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
Ch 3 -61Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
The Global Challenge
Faced by U.S. Firms –
•Gain & maintain exports to other nations
•Defend domestic markets against imported goods
Ch 3 -62Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Global PerspectiveChina’s Automobile Producers Heading to the United States in 2008 China’s auto exports doubled in 2006 China produces more cars than Germany and is the
world’s third largest automobile producer Changfeng Group first Chinese automaker in the Detroit
Auto Show
Ch 3 -63Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
The Global Challenge
Simultaneously globally competitive & nationally responsive
Multinational Corporations (MNCs)
Ch 3 -64Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
The Global Challenge
Worldwide integration of:
Strategy formulation
Strategy implementation
Strategy evaluation
Globalization
Ch 3 -65Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
The Global Challenge
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
Globalization of Industries
Ch 3 -66Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Teamwork
Identify the OT to the business you wrote vision & mission.
Key variables:1. Economic: $ value, per capita income, available of credit at
banks.
2. Social, Cultural, Demographic, and Environmental Forces: population age and size, level of education to consumer.
3. Political, Governmental, and Legal Forces: Tax rates, political stability, law and order.
4. Technological Forces: internet, communication development.
Ch 3 -67Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
There are five steps in developing The External Factor Evaluation (EFE) Matrix1. List key external factors as identified in the external-audit
process. Include a total of 10-20 factors from both the opportunities and threats.
2. 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.
3. 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.
4. Multiply each factor’s weight by its rating to get a weighted score.
5. Sum the weighted scores for each variable to determine the total weighted score for the organization.
Ch 3 -68Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Industry Analysis: The External Factor Evaluation (EFE) Matrix
CompetitivePoliticalCultural
Technological
EnvironmentalSocial
Governmental
DemographicEconomic
Summarize & Evaluate
Ch 3 -69Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Ch 3 -70Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Ch 3 -71Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
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
Ch 3 -72Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Industry Analysis EFE
Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.
Important –
Ch 3 -73Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Industry Analysis: The External Factor Evaluation (EFE) Matrix: teamwork. Apply the EFE to the previous case.
Ch 3 -74Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Industry Analysis: Competitive Profile Matrix (CPM)
Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions
Ch 3 -75Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
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 –
Ch 3 -76Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Review
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.
Ch 3 -77Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Review
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.
Ch 3 -78Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Review
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 are an infinite number of interactions among key external factors.
Ch 3 -79Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Review
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.
Ch 3 -80Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Review
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 for 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.
Ch 3 -81Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Review
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.
Ch 3 -82Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Review
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.
Ch 3 -83Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Review
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.
Ch 3 -84Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Review
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.