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The External Assessment Western New England College
Strategic Management Concepts & Cases 8th edition Fred R. David Chapter 3: The External Assessment PowerPoint Slides By: Anthony F. Chelte Western New England College © 2001 Prentice Hall
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Comprehensive Strategic Management Model
External Audit Chapter 3 Vision & Mission Statements Chapter 2 Long-Term Objectives Chapter 5 Generate, Evaluate, Select Strategies Chapter 6 Implement Strategies: Mgmt Issues Chapter 7 Implement Strategies: Marketing, Fin/Acct, R&D, CIS Chapter 8 Measure & Evaluate Performance Chapter 9 Internal Audit Chapter 4 © 2001 Prentice Hall
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External Assessment “If you're not faster than your competitor, you’re in a tenuous position, and if you’re only half as fast, you’re terminal.” —George Salk— © 2001 Prentice Hall
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External Assessment (Cont’d)
“The idea is to concentrate our strength against our competitor’s relative weakness.” —Bruce Henderson— © 2001 Prentice Hall
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External Assessment (Cont’d)
External Strategic-Management Audit Industry analysis Environmental scanning © 2001 Prentice Hall
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External Assessment (Cont’d)
External audit: Focuses on identifying & evaluating events beyond the immediate control of the firm © 2001 Prentice Hall
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External Assessment (Cont’d)
External audit focuses on: Increased foreign competition Population shifts Demographics (e.g., aging population) Information technology © 2001 Prentice Hall
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External Assessment (Cont’d)
External audit reveals: Key opportunities Key threats Managers then formulate strategies: Take advantage of opportunities Avoid/reduce impact of threats © 2001 Prentice Hall
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External Assessment (Cont’d)
External Audit Aimed at identifying key variables that offer actionable responses © 2001 Prentice Hall
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External Assessment (Cont’d)
Key External Forces Five (5) broad categories: Economic forces Social, cultural, demographic, & environmental forces © 2001 Prentice Hall
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External Assessment (Cont’d)
Key External Forces (Cont’d) Five (5) broad categories: Political, governmental, & legal forces Technological forces Competitive forces © 2001 Prentice Hall
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External Assessment (Cont’d)
Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Key External Forces Opportunities & Threats © 2001 Prentice Hall
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External Assessment (Cont’d)
Process of External Audit: Involve as many managers & employees as possible Gather competitive intelligence Information about social, demographic, cultural, environmental, etc. Monitor sources of information (key magazines, articles, etc.) Utilization of Internet Suppliers, distributors, customers as sources of information © 2001 Prentice Hall
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External Assessment (Cont’d)
Key External Factors: Vary over time & Vary by industry © 2001 Prentice Hall
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External Assessment (Cont’d)
Key External Factors: Important to achieving long-term objectives Measurable Applicable to all competing firms Hierarchical © 2001 Prentice Hall
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External Assessment (Cont’d)
Examples of Key External Factors: Market share Breadth of competing products World economies Proprietary & key account advantages Price competitiveness Technological advancements Interest rates © 2001 Prentice Hall
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Monitor Key Economic Variables:
Economic Forces Monitor Key Economic Variables: Availability of credit Level of disposable income Interest rates Inflation rates Money market rates Federal government budget deficits Gross domestic product trend Consumption patterns © 2001 Prentice Hall
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Economic Forces (Cont’d)
Monitor Key Economic Variables: (Cont’d) Unemployment trends Worker productivity levels Value of the dollar in world markets Stock market trends Foreign countries’ economic conditions Import/export factors Demand shifts for goods/services Income differences by region/customer © 2001 Prentice Hall
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Economic Forces (Cont’d)
Monitor Key Economic Variables: (Cont’d) Price fluctuations Exportation of labor & capital Monetary policies Fiscal policies Tax rates ECC policies OPEC policies LDC policies © 2001 Prentice Hall
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Social & Environmental Forces
Social, cultural, demographic, and environmental changes: Major impact on: Products Services Markets Customers © 2001 Prentice Hall
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Social & Environmental Forces (Cont’d)
World population > 6 billion U.S. population < 300 million Great potential for domestic production expansion to other markets Domestic only is a risky strategy © 2001 Prentice Hall
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Social & Environmental Forces (Cont’d)
53.33 46 m 30 m Oceania 28.52 392 m 305 m North America 16.08 729 m 628 m Europe 60.52 809 m 504 m Latin America 140.32 1.8 b 749 m Africa 47.22 5.3 b 3.6 b Asia % Increase 2050 1998 Country © 2001 Prentice Hall
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Social & Environmental Forces (Cont’d)
E-commerce Perspective Question: “Is the Internet Revolution Bypassing Poor, Minorities?” Answer: Yes! © 2001 Prentice Hall
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Social & Environmental Forces (Cont’d)
Internet revolution is widening the gap between rich & poor 42% U.S. households have personal computers 80% of them are in households w/family income > $75,000 © 2001 Prentice Hall
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Social & Environmental Forces (Cont’d)
Internet usage lowest (3%) among Americans earning $10K or less 26.7% of White Americans use Internet at home compared to 9.2% Blacks & 8.8% of Hispanics 90% shares of common stock of American companies held by the wealthiest 10% of Americans © 2001 Prentice Hall
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Social & Environmental Forces (Cont’d)
Key social, cultural, demographic, & environmental variables: Childbearing rates Number of special-interest groups Number of marriages Number of divorces Number of births Number of deaths Immigration & emigration rates © 2001 Prentice Hall
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Social & Environmental Forces (Cont’d)
Key social, cultural, demographic, & environmental variables: (Cont’d) Life expectancy rates Per capita income Attitudes toward business Average disposable income Buying habits Ethical concerns Attitudes toward saving © 2001 Prentice Hall
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Social & Environmental Forces (Cont’d)
Key social, cultural, demographic, & environmental variables: (Cont’d) Racial equality Average level of education Government regulation Attitudes toward customer service Attitudes toward product quality Energy conservation Social responsibility © 2001 Prentice Hall
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Social & Environmental Forces (Cont’d)
Key social, cultural, demographic, & environmental variables: (Cont’d) Value placed on leisure time Recycling Waste management Air & water pollution Ozone depletion Endangered species © 2001 Prentice Hall
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Political, Govt., & Legal Forces
Government Regulation Key opportunities & key threats Antitrust legislation (Microsoft) Tax rates Lobbying efforts Patent laws © 2001 Prentice Hall
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Political, Govt., & Legal Forces (Cont’d)
Increasing Global Interdependence Impact of political variables Formulation of strategies Implementation of strategies © 2001 Prentice Hall
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Political, Govt., & Legal Forces (Cont’d)
Increasing Global Interdependence Strategists in a global economy Forecast political climates Legalistic skills Diverse world cultures © 2001 Prentice Hall
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Political, Govt., & Legal Forces (Cont’d)
Globalization of Industry Worldwide trend toward similar consumption patterns Global buyers & sellers E-commerce Instant transmission of money & information across continents © 2001 Prentice Hall
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Political, Govt., & Legal Forces (Cont’d)
Key Political, govt., & legal variables: Government regulation/deregulation Tax law changes Special tariffs Political Action Committees (PACs) Voter participation rates Number of patents Changes in patent laws © 2001 Prentice Hall
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Political, Govt., & Legal Forces (Cont’d)
Key Political, govt., & legal variables: (Cont’d) Environmental protection laws Equal employment legislation Level of government subsidies Antitrust legislation/enforcement Sino-American relationships Russian-American relationships European-American relationships © 2001 Prentice Hall
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Political, Govt., & Legal Forces (Cont’d)
Key Political, govt., & legal variables:(Cont’d) African-American relationships Import-export regulations Monetary policy Political conditions in other countries Government budgets World oil, currency, & labor markets Location and severity of terrorist activities © 2001 Prentice Hall
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Technological Forces Technological Change Dramatic effect on business
Fiber optics Biometrics EFT Computer engineering Superconductivity advancements © 2001 Prentice Hall
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Technological Forces (Cont’d)
Internet impact on opportunities & threats: Altering life cycles of products Increasing speed of distribution Creating new products & services Erasing limitations of traditional geographic markets © 2001 Prentice Hall
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Technological Forces (Cont’d)
Internet impact on opportunities & threats: (Cont’d) Altering economies of scale Changing entry barriers Redefining relationships Industries & suppliers, creditors, customers, and competitors © 2001 Prentice Hall
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Technological Forces (Cont’d)
Capitalizing on Information Technology (IT) Chief Information Officer (CIO) Chief Technology Officer (CTO) © 2001 Prentice Hall
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External Audit & Competing Firms
Competitive Forces External Audit & Competing Firms Identifying rival firms Strengths Weaknesses Capabilities Opportunities Threats Objectives Strategies © 2001 Prentice Hall
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Competitive Forces (Cont’d)
Competitor Information Sources: 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 © 2001 Prentice Hall
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Competitive Forces (Cont’d)
Most competitive firms in America Seven Characteristics Market share matters Understand what business you are in Broke or not, fix it Innovate or evaporate © 2001 Prentice Hall
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Competitive Forces (Cont’d)
Most competitive firms in America (Cont’d) Seven Characteristics Acquisition is essential to growth People make a difference No substitute for quality © 2001 Prentice Hall
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Competitive Analysis: Porter’s Five-Forces Model
Potential development of substitute products Rivalry among competing firms Bargaining power of suppliers Bargaining power of consumers Potential entry of new competitors © 2001 Prentice Hall
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Global Challenge Differences U.S. and MNCs
Affect strategic management: Language Culture Politics Economy Government interference Labor relations Trade barriers © 2001 Prentice Hall
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Industry Analysis (EFE)
External Factor Evaluation Matrix Summarize & evaluate: Competitive Political Cultural Technological Environmental Social Governmental Demographic Economic © 2001 Prentice Hall
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Industry Analysis (EFE) (Cont’d)
Five-Step process: List key external factors (10-20) Opportunities & threats Assign weight to each (0 to 1.0) Sum of all weights = 1.0 © 2001 Prentice Hall
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Industry Analysis (EFE) (Cont’d)
Five-step process: Assign 1-4 rating to each factor Firm’s current strategies response to the factor Multiply each factor’s weight by its rating Produces a weighted score © 2001 Prentice Hall
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Industry Analysis (EFE) (Cont’d)
Five-step process: Sum the weighted scores for each Determines the total weighted score for the organization. Highest possible weighted score for the organization is 4.0; the lowest, Average = 2.5 © 2001 Prentice Hall
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UST—Key External Factors
.20 1 Clinton Administration 2 .10 Bad media exposure from FDA .05 Smokeless market SE region U.S. .15 3 Production limits on tobacco Legislation against the tobacco industry Threats .30 More social pressure to quit smoking 2.10 1.00 TOTAL .60 4 Pinkerton leader in discount market Astronomical Internet growth Increased demand Global markets untapped Weighted score Rating Weight UST—Key External Factors Opportunities © 2001 Prentice Hall
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Industry Analysis (EFE) (Cont’d)
Total weighted score of 4.0 = Organization response is outstanding to threats & weaknesses Total weighted score of 1.0 = Firm’s strategies not capitalizing on opportunities or avoiding threats © 2001 Prentice Hall
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Industry Analysis (EFE) (Cont’d)
UST (in the previous example), has a total weighted score of 2.10 indicating that the firm is below average in its effort to pursue strategies that capitalize on external opportunities and avoid threats. © 2001 Prentice Hall
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Industry Analysis (EFE) (Cont’d)
Important Understanding of the factors used in the EFE Matrix is more important than the actual weights and ratings assigned. © 2001 Prentice Hall
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Industry Analysis (CPM)
Competitive Profile Matrix Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic position © 2001 Prentice Hall
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(CPM) Procter Avon L’Oreal & Gamble 2.80 3.25 3.15 1.00 Total 0.15 3 0.20 4 0.05 1 Market Share 0.40 2 0.80 Global Expansion 0.10 Customer Loyalty 0.45 0.60 Financial Position 0.30 Management Price Competition Product Quality Advertising Score Rating Weight Critical Success Factor © 2001 Prentice Hall
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Key Terms & Concepts America Online Chief Information Officer (CIO)
Chief Technology Officer (CTO) Competitive advantages Competitive analysis Competitive intelligence (CI) Competitive Profile Matrix (CPM) Critical success factors Cyberspace Decruiting Director of competitive analysis Downsizing Econometric models Environmental scanning External audit External Factor Evaluation (EFE) Matrix © 2001 Prentice Hall
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Key Terms & Concepts (Cont’d)
External forces Industry analysis Information Technology (IT) Industrial policies Internet learning from the partner Linear regression Lifecare facilities Porter’s Five-Forces Model Netscape On-Line databases Rightsizing Trend extrapolation World Wide Web (www) © 2001 Prentice Hall
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