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Copyright 2007 Prentice HallCh 3 -1
Chapter 3 The External Assessment
Strategic Management: Concepts & Cases
11th Edition
Fred David
Copyright 2007 Prentice HallCh 3 -2
Chapter Outline
The Nature of the External Audit
The Industrial Organization (I/O) View
Social, Cultural, Demographic & Environmental Forces
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Chapter Outline (cont’d)
Political, Governmental, and Legal Forces
Technological Forces
Competitive Forces
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Chapter Outline (cont’d)
Porter’s Five-Forces Model
Sources of External Information
Forecasting Tools & Techniques
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Chapter Outline (cont’d)
Global Challenge
The External Factor Evaluation (EFE) Matrix
Competitive Profile Matrix (CPM)
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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
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External Strategic Management Audit
-- Environmental Scanning
-- Industry Analysis
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Identify & Evaluate factors beyond the control of a single firm Increased foreign competition Population shifts Aging society Fear of traveling Stock market volatility
External Strategic Management Audit
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Purpose of External Audit Identify
Opportunities Threats
External Strategic Management Audit
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Key External Forces
•Economic forces
•Social, cultural, demographic & environmental forces
•Political, governmental & legal forces
•Technological forces
•Competitive forces
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CompetitorsSuppliers
DistributorsCreditors
CustomersEmployees
CommunitiesManagers
StockholdersLabor Unions
Special Interest GroupsProductsServicesMarkets
Natural Environment
Key External Forces
Opportunities&
Threats
Key External Forces & the Organization
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Gather competitive intelligence –
Social Cultural Demographic Environmental Governmental Legal Technological
External Audit
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External Audit – Sources of Information•Internet
•Libraries
•Suppliers
•Distributors
•Salespersons
•Customers
•Competition
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Performing External Audit
-- Key Factors Vary over time Vary by industry
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Performing External Audit -- Variables
•Market share
•Breadth of competing products
•World economies
•Foreign affiliates
•Proprietary account advantages
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Performing External Audit -- Variables
•Price competitiveness
•Technological advancements
•Interest rates
•Pollution abatement
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Performing External Audit
External Factors
Measurable
Long-term orientation
Applicable to competing firms
Hierarchical
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Industrial Organization (I/O) View
-- Industry factors more important than internal factors
Performance determined by industry forces
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Economies of Scale
Industry Properties
Barriers to market entry
Product differentiation
Level of competitiveness
I/O Perspective Firm Performance
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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”
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Economic Forces
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Economic Forces
Trends in the dollar’s value European Union Layoffs Economic standard of living
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Economic Standard of Living
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Russia’s Economy
Political bureaucracy Illegal actions by officials
and policemen State-run gas; monopoly
purchase of newspaper Foreign direct investment
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Economic Forces
•Availability of credit
•Level of disposable income
•Interest rates
•Inflation rates
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Social, Cultural, Demographic & Environmental Forces
Major Impact –
•Products
•Services
•Markets
•Customers
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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
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Social, Cultural, Demographic & 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
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Trends More American households with people living
alone By 2021 Hispanics will be largest minority group Aging Americans – affects all organizations Population shift to the south and west Less interested in fitness and exercise Decimation and degradation of the natural
environment
Social, Cultural, Demographic & Environmental Forces
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U.S. – Mexico Border
North America’s fastestgrowing region
1,500 maquiladoras No longer largest
exporter to U.S.
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Social, Cultural, Demographic & Environmental Forces
Global trends
•2003 – China largest exporter to U.S.
•2003 –– Asia receives highest foreign direct investment
•Cheaper labor and utilities than Mexico
•China joined WTO
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Global trends
•China’s labor rates less than Mexico
•China provides more site location incentives than Mexico
Social, Cultural, Demographic & Environmental Forces
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Social, Cultural, Demographic & Environmental Forces
•More educated consumers
•Aging population
•Minorities more influential
•Local rather than federal solutions
21st Century Trends
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Social, Cultural, Demographic & Environmental Forces (cont’d)
•Fixation with youth decreasing
•Hispanics increase to 15% by 2021
•African American increase to 14% by 2021
21st Century Trends
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Key Social, Cultural, Demographic & Environmental Variables
Number of marriages & divorces
Number of special interest groups
Number of births & deaths
Immigration & emigration rates
Childbearing rates
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Actuarial rates
Monitor KeyVariables
Per capita income
Attitudes toward business
Avg. disposable income
Social, Cultural, Demographic & Environmental Forces
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Consumer behavior
Monitor KeyVariables
Ethical concerns
Attitudes toward saving
Racial equality
Social, Cultural, Demographic & Environmental Forces
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Avg. educational level
Monitor KeyVariables
Governmental regulation
Attitudes toward customer service
Attitudes toward quality
Social, Cultural, Demographic & Environmental Forces
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Energy conservation
Monitor KeyVariables
Social responsibility
Leisure time values
Recycling
Social, Cultural, Demographic & Environmental Forces
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Waste management
Monitor KeyVariables
Air & water pollution
Ozone depletion
Endangered species
Social, Cultural, Demographic & Environmental Forces
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Political, Government & Legal Forces
Key opportunities & threats Antitrust legislation Tax rates Lobbying efforts Patent laws
Government Regulation
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Political, Government & Legal Forces
Political variables impact – Formulation of strategies Implementation of strategies
Increasing Global Interdependence
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Political, Government & Legal Forces
Strategists in a global economy – Forecast political climates Legalistic skills Diverse world cultures
Increasing Global Interdependence
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Political, Government & Legal Forces
Worldwide trend toward similar consumption patterns
Global buyers and sellers E-commerce Technology for instant currency transfers
Globalization of Industry
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Key Political, Governmental, & Legal Variables
Special tariffs
Tax law changes
PAC’s
Voter participation rates
Regulation/deregulation
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Key Political, Governmental, & Legal Variables (cont’d)
Environmental protection laws
Changes in patent laws
Equal employment legislation
Government subsidies
Number of patents
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Key Political, Governmental, & Legal Variables (cont’d)
Import/export regulations
Global relationships
Political conditions
Location and severity of terrorist activity
Anti-trust enforcement
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Technological Forces
Major Impact –
•Internet
•Communications
•Semiconductors
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Technological Forces
Significance of IT
•Chief Information Officer (CIO)
•Chief Technology Officer (CTO)
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Technological Forces
Essential for nearly every strategic decision
Technology-based issues
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Competitive Forces
Collection & evaluation of data on competitors is essential for successful strategy formulation
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Competitive Forces
Competition on virtually all industries can be described as intense.
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Competitive Forces
Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies
Identifying Rival Firms
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Key Questions Concerning Competitors
Their objectives and strategies
Their weaknesses
Their responses to external variables
Their vulnerability to our alternative strategies
Their strengths
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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
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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?
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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
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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:
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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:
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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
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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
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The Five-Forces Model
Most powerful of the five forces Focus on competitive advantage of
strategies
Rivalry Among Competing Firms
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The Five-Forces Model
Barriers to entry are important Quality, pricing, and marketing can
overcome barriers
Potential Entry of New Competitors
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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
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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
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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
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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 seller’s products,
prices and costs. If they have discretion in whether and when
they purchase the product.
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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
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The Global Challenge
Faced by U.S. Firms --
•Gain & maintain exports to other nations
•Defend domestic markets against imported goods
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The Global Challenge
Simultaneously globally competitive & nationally responsive
Multinational Corporations (MNC’s)
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The Global Challenge
Worldwide integration of:
Strategy formulation
Strategy implementation
Strategy evaluation
Globalization
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The Global Challenge
Similar consumption patterns
Global buyers and sellers
E-commerce
Instant transmission of money & information
Globalization of Industries
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Industry Analysis: The External Factor Evaluation (EFE) Matrix
CompetitivePoliticalCultural
Technological
EnvironmentalSocial
Governmental
DemographicEconomic
Summarize & Evaluate
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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
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Industry Analysis EFE
Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.
Important --
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Industry Analysis: Competitive Profile Matrix (CPM)
Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions
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Gateway Apple Dell
CSF’s Wt Rating Wt’d Score
Rating Wt’d Score
Rating Wt’d Score
Market share 0.15 3 0.45 2 0.30 4 0.60
Inventory sys 0.08 2 0.16 2 0.16 4 0.32
Fin position 0.10 2 0.20 3 0.30 3 0.30
Prod. Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distr 0.10 3 0.30 2 0.20 3 0.30
Global Exp. 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15
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Gateway Apple Dell
CSF’s (cont’d) Wt Rating Wt’d Score
Rating Wt’d Score
Rating Wt’d Score
Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12
E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Serv 0.10 3 0.30 2 0.20 4 0.40
Price competitive
0.02 4 0.08 1 0.02 3 0.06
Mgt. experience 0.01 2 0.02 4 0.04 2 0.02
Total 1.00 2.83 2.47 3.49
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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 --
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Key Terms & Concepts
For Review (Chapter 3)
AOL Competitive Analysis
Chief Information Officer (CIO)
Competitive Intelligence(CI)
Chief Technology Officer(CTO)
Competitive ProfileMatrix (CPM)
Competitive Advantage Decruiting
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Key Terms & Concepts
For Review (Chapter 3)
Director of CompetitiveAnalysis
External Factor EvaluationMatrix (EFE)
Downsizing External Forces
Environmental Scanning Industry Analysis
External AuditIndustrial Organizational
(I/O)
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Key Terms & Concepts
For Review (Chapter 3)
Information Technology(IT)
Lifecare Facilities
InternetPorter’s Five-Forces
Model
Learning from the Partner
Rightsizing
Linear Regression World Wide Web
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Key Terms & Concepts
For Review (Chapter 3)
Tax Harmonization
Foreign Direct Investment