THE EXTERNAL ASSESSMENT Chapter 3

If everyone is thinking alike then somebody isn’t thinking

Chapters Objectives Describe how to conduct an external strategic-

management audit Discuss 10 major external forces that affect

Organization Identify key sources of external information,

including the internet Discuss forecasting tools used in SM Explain how to develop an EFE Matrix Explain how to develop a Competitive Profile

Matrix

Tools & concepts needed to conduct an external strategic management audit (environmental scanning or industry analysis)

Firm evaluate trends & events beyond the control

Ext Audit reveals key opportunities & threatsManagers formulate strategies to take adv of

opportunities & avoid threats

Affect products, services, markets & Organizations in the world (acquire & sell)

Changes in consumer demands

Factors affect suppliers & distributors

Foreign business & countries learn, adapt, innovate to compete successfully in the Marketplace

Key External Factors

Economies of Scale

Industry Properties

Barriers to market entry

Product differentiation

Level of competitiveness

I/O Perspective Firm Performance

I/O approach External factors more important than internal factors in firms Competitive advantage)I/O Theorists contend that the industry in which a firm chooses to compete has a stronger influence on the firms competitive performance than do the internal functional decisions managers make in Marketing, finance, and the like 20% firm’s profitability can be explained by the industry36% profitability attributed to the firms internal factors

Porter’s Five Forces Model is an Example of I/O perspective

CompetitorsSuppliers

DistributorsCreditors

CustomersEmployees

CommunitiesManagers

StockholdersLabor Unions

Special Interest GroupsProductsServices

Key External Forces

Opportunities&

Threats

Key External Forces & the Organization

•Company must gather competitive intelligence & information about External forces•Sources ( key magazines, trade journals & newspapers.. Internet, university- Suppliers, distributors, salespersons, customers & competitors

Performing External Audit

External Factors

Measurable

Long-term orientation

Applicable to competing firms

Hierarchical

Managers meet & identify most important opportunities & threats facing the firmKey external factors listed on flip charts/blackboard Managers prioritized list by ranking the factors identified (1-20) imp- least O/TCOMPETING PRODUCTS/ WORLD ECONOMIES, FOREIGN AFFLIATES, PRICE COMPETIVIENESS, TECHNOLOGICAL ADVANCEMENTS, POPULATION SHIFTS

The Industrial Organizational (I/O) View

• I/O approach to competitive advantage advocates that external (industry ) factors are more important than internal factors in a firm achieving CA

• Proponents of I/O view (Michael Porter) –Organizational performance will be primarily determined by industry forces– Porter’s Five-Forces Model

Assignment for discussion

Economic ForcesSocial, Cultural, Demographic &

Environmental ForcesPolitical, Governmental & Legal ForcesTechnological ForcesCompetitive ForcesCompetitive Intelligence Programs

Economic Forces

• Economic forces produce many opportunities and threats for mangers– Interests rate– Inflation – Unemployment – Economic growth

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Economic Forces

Representing the overall economic health of the country or region in which the Organization functions

(Consumer purchasing power, Unemployment rate, interest rates, labor market,)

are all part of Org economic environment

One significant recent trend in the economic environment is the frequency of mergers & acquisitions

Social, Cultural, Demographic & Environmental Forces

• US getting older & Less Caucasian

• People/households making more purchases on line

• Census data – Aging population – Trend towards older America is good news for

• Tours• Restaurants • Hotels• Airlines• pharma

Sociocultural Forces

• Sociocultural Forces are pressures emanating from the social structure of a country or society or from the national culture – Social structure – National Culture

Managers and Organizations also must respond to social changes

within a society Americans becoming more personal fitness and health

conscious

Demographic Forces

• Are the outcomes of changes in or changing attitudes toward the characteristics of a population such as age, gender, ethnic origin, race, sexual orientation and social class– Women seeking employment– Changes in the age distribution of a

population

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

Political and Legal ForcesChanges in laws and regulations

Laws constrain the operations of org & managers thus create both opportunities & threats

Deregulation & privatization(create challenges for Org & managersEnvironmental protectionPreservation of endangered species Emphasis on safety in the workplaceLegal constraints against discrimination

Successful managers carefully monitor changes in laws and regulations in order to take advantage of the Opp they create and counter threats they

pose

Technological Forces– Combination of skills and equipments that

managers use in the design, production and distribution of goods and services

– Technological forces are the outcomes of changes in the technology that managers use to design , produce or distribute goods and services

– Tech change can make established products obsolete overnight

• Telecommuting / Teleconferencing • CIO/CTO new positions to effectively capitalize on

e-commerce

Competitive Forces

Strengths

•Weaknesses

•Capabilities

•Opportunities

•Threats

•Objectives

•Strategies

Identifying Rival Firms

Identify major competitors not

always easy because many firms have divisions that compete in different

industries

Formally defined by Society of CI Professionals --- systematic & Ethical process for gathering & analyzing information about competitors9 out of 10 large companies have employees

dedicated solely to gather CIFunction on the Org charts (Director of

Competitive Analysis)Bribery , wiretapping and computer break ins

should never be used

Competitive Intelligence Programs

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

The Five Forces Model

• Helps managers isolate particular forces in the external environment that are potential threats

• Porter argued that when managers analyze O/T they should pay particular attention to these five forces

• They affect how much a profit organizations competing within the same industry can expect to make

Rivalry among competing firmsPowerful of the five competitive forcesThe more the companies compete against

one another for customers– (by lowering prices of the products/ increasing advertising) – the lower is the level of industry profits ( low prices mean less profits)

As rivalry among competing firms intensifies, industry profits decline– industry becomes unattractive

Coke & Pepsi ( price wars, comparative advertising, new product introduction)

Potential Entry of New Competitors Whenever new firms can easily enter a

particular industry, the intensity of competitiveness among firms increases

Barriers to entry, such as economies of the scale, strong customer loyalty, strong brand preferences….. Are low the easier it is for companies to enter an industry (industry profits to be low)

Example: GM offering employee discounts- to all customers purchasing new cars

Threat is high for local hamburger restaurant than Ford & Toyota

When the threats of new firms entering the market is strong, Firms generally fortify their positions and take actions to deter new entrants, such as lowering prices, extending warranties and adding features………

Potential Development of Substitute Products

Often, the output of one industry is a substitute for the output of another industry plastic may be a substitute for steel in some

applications eyeglasses / contact lenses laser eye surgerySugar Companies artificial sweetners

Competitive pressures arising from substitute products increase as the relative price of substitute products declines & as consumers’ switching costs decreases

Bargaining Power of Suppliers

If there are only a few suppliers of an important input, then suppliers can drive up the price of that input & expensive inputs result in lower profits for the producer

Firms may pursue a backward integration strategy to gain control or ownership of suppliers

Local electric co. is the only source of electricity in your community therefore it can charge what it wants for its product

• Backward integration strategy to gain control of ownership of suppliers. This strategy is especially effective when suppliers are unreliable, too costly or not capable of meeting a firm’s needs on a consistent basis.

Bargaining Power of Consumers

• If only a few large customers are available to buy an industry’s output, they can bargain to drive down the price of that output. As a result producer make lower profits

• Rival firms may offer extended warranties or special services to gain customer loyalty whenever the bargaining power of consumers is substantial

Sources Of External Information

Published & Unpublished sourcesCustomer survey-Market research-

Speeches at meetings- TV programs-Interviews

Journals-Government documents- books- newspaper

Internet

Forecasting Tools & Techniques

Truth is we all make implicit forecasts throughout our daily lives

Organization forecast (project) their own resources & profits annually

Making Assumptions

Best present estimates of the impactOf major external factors, over which the

managersHas little if any control,

but which may exert a significantImpact on performance

or ability to achieve desired results

Industry Analysis: The External Factor Evaluation (EFE) Matrix

CompetitivePoliticalCultural

Technological

EnvironmentalSocial

Governmental

DemographicEconomic

Summarize & Evaluate

Developed in Five Steps: (Open Book)

EFE – Poultry Firm

Key External Factors Weight RatingWtd

Score

Opportunities (cont’d)1. Demand for chicken increasing 8 % annually

0.07 4 0.28

2. Demand for prepared food incaresing 10% annually

0.08 4 0.32

3.Leading competitor could be acquired for $1billion

0.02 1 0.02

Threats 0.10 1 0.10

1. Leading competitor increased its ad expenses 30%

0.06 1 0.06

EFE – Gateway Computers (2003) (cont’d)

Key External Factors Weight RatingWtd

Score

Threats (cont’d)2. Illegal immigrant problem plagues the firm

0.09 3 0.27

3. 0.05 1 0.05

4. 0.05 3 0.15

5. 0.05 4 0.20

6. 0.05 3 0.15

EFE – Gateway Computers (2003) (cont’d)

Key External Factors Weight RatingWtd

Score

Threats (cont’d)

7. 0.05 2 0.10

8. 0.05 3 0.15

Total 1.00 2.56

Five steps in developing EFE Matrix(Step1)

List key external factors as identified in the External audit process

Include 10-20 factors including both opportunities & threats that affect the firm & its industry

List opportunities first & then the threats Be specific as possible using percentages,

ratios and comparative numbers whenever possible

EFE matrix (step 2) Continue…….Assign to each factor a weight that ranges from

0.0(not important) to 1.0(very important)The weight indicates the relative importance of that

factor to being successful in the firm’s industry.Opportunities often receive higher weights than

threats, but threats too can receive high weights if they are especially severe or threatening

Appropriate weights can be determined by comparing successful with unsuccessful competitors or discussing a factor (reaching a consensus)

The sum of all weights assigned to the factors must equal 1.0

EFE matrix step 3 continue….

assign rating between 1&4 to each key external factor indicate how effectively the firm’s current strategies respond to the factor , where 4= the response is superior, 3= response is above average, 2=average, 1=poor

Ratings are based on effectiveness of the firm’s strategies

Ratings are company based, whereas the weights in step 2 are industry based

Both threats & opp can receive a 1,2,3 or 4

EFE Matrix step 4 & 5

Multiply each factor’s weight by its rating to determine a weighted score

Sum the weighted score for each variable to determine total weighted score for the organization

Total weighted score of 4.0• Organization response is outstanding to threats

and weaknesses• Firms strategy effectively taking advantage of

existing opportunities and minimizing the effects of external threats

Industry Analysis EFE

Total weighted score of 1.0• Firm’s strategies not capitalizing on opportunities or

avoiding threats

Industry Analysis: Competitive Profile Matrix (CPM)

Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions

CPM 4 ----- Major Strength3 ----- Minor Strength2 ----- Minor Weakness1 ----- Major Weakness

Critical success factors in a CPM are broader (do not include factual or specific date)

CSF in CPM not grouped into O/T as they are in EFE

Ratings & Total weighted scores for rival firms can be compared to the sample firm

Comparative analysis provides important internal strategic information

Weights & total weights scores in both CPM & EFE having the same

meaning Ratings refer to

strengths & weakness

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

Apple has the best product quality and management experience ; Dell has the best market share and inventory system; Gateway

has the best price as indicated by the ratings

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