1. Ch 3 -1
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2. Strategic Management: Concepts and Cases
Arab World Edition
Fred R. David
Abbas J. Ali
Abdulrahman Y. Al-Aali
Chapter 3:
The External Assessment
Ch 3 -2
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3. Chapter Outline The Nature of the External Assessment
The Industrial Organization (I/O) View
Economic Forces and Social and Demographic Forces
Political, Governmental, and Legal Forces
Technological Forces
Industry Forces
Competitive Analysis: Porter’s Five-Forces Model
Ch 3 -3
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4. Chapter Outline (cont’d)
Operating Environment Forces
Sources of External Information
Forecasting Tools & Techniques
Global Challenge
Industry Analysis: The External Factor Evaluation (EFE) Matrix
Competitive Profile Matrix (CPM)
Ch 3 -4
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5. Every convenience brings its own inconvenience.
External Assessment
Every convenience brings its own inconvenience.
– Arab Saying
“To seize opportunities and overcome threats and difficulties, we have to actively confront changing conditions.”
– Abdul Wahab Ben Naser Al Munthery, CEO, Al-Batina Group, Oman
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6. Figure 3-1
Source: Adapted from Fred R. David, “How Companies Define Their Mission” Long Range Planning 22,
no. 3 (June 1988): 40
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7. The Natural of an External Assessment
The purpose of performing an external Assessment is to Identify and examine a finite list of opportunities that could benefit a firm and threats that should be avoided .
These factors are out of the firm’s control , but exercise significant influence on the direction and the operation of the firm
Firms should be able to actively respond to these factors by formulating better strategies by which firms can take advantages of external opportunities and minimize the impact of potential threats
Ch 3 -7
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8. The Natural of an External Assessment
The external assessment consists of:_
General environment assessment (5 key broad forces)
Immediate environment assessment
Industry environment
Operating environment
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9. Social and demographic forces Political & governmental forces
The key external force encompasses five broad categories (general environment)
Economic forces
Social and demographic forces
Political & governmental forces
Environmental forces
Technological forces
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10. The Industry Environment
The immediate environment consists of the operating environment and the industry environment
According to Porter; the industry environment is shaped by many forces:
Entry barriers
Buyer power
suppliers power
Rivalry
Substituted product
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11. The Operating Environment
The operating environment is representing the forces that have immediate impact on the success or failure of a firm.
Firms have frequently and proactively interact with the operating environment.
The operating environment includes
Customers
Suppliers
Creditors (funders)
Labors
Competitors
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12. Why the external assessment is important?
External factors affect the consumer \ customer demand
External factors affect the type of products developed
External factors affect the nature of positioning and market segmentation strategies
External factors affect the type of service offered
External factors affect the choice of business to acquire or sell
External factors directly affect both suppliers &distribution
Identifying and evaluating the external opportunities and threats enables organization to develop a clear mission , to design better strategies by which it can achieve its long term objectives and to develop the suitable policies for the annual objectives .
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13. The Process of Performing External Assessment
First : A company must gather competitive intelligence and information:
Economic
Social
Cultural
Demographic
Environmental
Political
Governmental
Legal
Technological
Industry trends
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14. Sources of these information include:
Magazine – trade journal –newspapers
Internet
Libraries
Suppliers
Distributors
Salespersons
Customers
Competitors
Ch 3 -14
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15. Second
A meeting of managers is needed to identify the most important opportunities and threats facing the firm .
These key external factors should be listed on flipcharts or a whiteboard .
A prioritized list of these factors could be obtained by asking all managers to rank factors that identified (1= most important opportunity or threats to 20= the least important opportunity or threats )
Note: these external factors are vary over time and vary by industry
Third
The final list must be widely distributed in the organization
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16. According the researches results the following factors are often critical success factors in organizations
Market share
Breadth of competing products
World economies
Foreign subsidiaries
Price competitiveness
Ch 3 -16
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17. Success factors (cont’d)
Technological advancements
Population shifts
Interest rates
Pollution abatement
Ch 3 -17
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18. According to York P. Freund the key external :-
Must be the base for setting and achieving the long-term and the annual objectives
Must be measurable
Applicable to all competing firms
Hierarchy In its effect on organization; some will pertain all the organization while others may be narrowly focused on
one function or division
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19. Industrial Organization (I/O) Approach
The industrial organization (I\O) approach to CA advocated that external (industry) factors are more important than internal factors in a firm achieving competitive advantages as determined by industry forces.
(I\O) theory contents that the industry in which a firm chooses to compete has a stronger influence on the firm’s performance than do the internal functional decisions.
Research has found that 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 -19
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20. Remote Environment (Arab World) (1)Economic Forces
Uncertainties and fluctuations in oil prices
Increased the trend towards individual savings plans
Many industries in the Arab countries (e.g. Gulf) are highly dependent on the trends (fluctuations) in the dollar’s value
High worldwide demand for oil
Resource-poor and labor-abundant countries in the region ( Djibouti-Jordan ) greatly benefit from the thriving economics
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21. Copyright © 2011 Pearson Education

22. (2)Social and Demographic Forces:
Arab world in general has a high rate of birth
According to the Human Development Report 2009:- The Arab world is one of the most youthful region in the world
The youth segment group is one of the largest and fastest-growing in the Arab world.
About 60 % of the population in the Arab world is under 25 years of age with a median age of 22 years compared to a global average of 28 .
Life expectancy has advanced substantially because of the improving in health condition and lifestyle
On the other hand, by 2050 = 25% population > 60 years or older
Ch 3 -22
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23. Source: Based on World Population Ageing 1950-2050 (United Nations, New York, 2002).
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24. (2)Social and Demographic Forces
According to pervious table the older segments are ranging from a low of 3.1% in Qatar to 8.5% in Lebanon
These older segments are positively affecting the need for special service & goods as such health-care , financial service ,travel ,crime prevention ,more entertainment, state park facilities ,transportation…..etc.
On the other hand ,the population of the world population will reach 7 billion in 2012,and 9 billion by 2050, the Arab world population has just over300 million as a result, applying only domestic strategy has became very risky .
Ch 3 -24
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25. (2)Social and Demographic Forces
Social and Demographic trends are shaping the way by which the Arabs live, work, produce, and consume , some new trends are creating a different type of consumer and a need for new goods, services and strategies as example .
More Arab households with people living in urban areas and away from the birthplaces of their parents or grandparents which increasing the number of Arabs who are entering colleges and universities , that’s why many of them are traveling abroad.
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26. (3) Political, Governmental, and Legal Forces
Political , governmental and legal factors represent key opportunities & threats for all organizations :
Antitrust legislation
Tax rates
Lobbying efforts
Patent laws
Ch 3 -26
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27. (3)Political, Governmental, and Legal Forces Arab Countries
Arab countries as Egypt- UAE- and Saudi Arabia have various agencies such as the industrial development authority in Egypt and the Authority of the Saudi General Investment that have played significant roles in persuading their own governments to accelerate market reform and provide assistances to compete in the global marketplace
These increasing global interdependence among economic , markets , governments and organizations makes it is imperative that firms consider the significant impact of political variables on the formulation and implementation of competitive strategies .
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28. (3) Political, Governmental, and Legal Forces
In other words, local ,state ,and federal laws , regulatory agencies and special-interest groups have a major impact on the strategies of all organizations . That’s why many organizations have altered strategies in the past because of the impact of political , governmental and legal variables
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29. Ch 3 -29
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30. (4) Environmental Forces
The impacted areas:
Water resources
Sea-level rise
Human health
Food production
Tourism
Biodiversity
Land-use and urban planning
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31. (4) Environmental Forces
In Arab world, many institutions have been called for preserve the environment and take corrective action to stop the continuing expansion of the desert and increasing pollution
The overexploitation of land , water shortages, desertification ,pollution and climate change are the most serious threats to Arab human security
According to the Arab Human Development Report 2009 :-
The region faces growing challenges to the security of its population from environmental stresses
The Lack of water and increasing the pollution threaten agriculture and food production
The desert has formed more than two-thirds of the total land area of the region
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32. (4) Environment Forces
4-Climate change also will affect the region through :-
water shortages
reduced agricultural production
large population transfers to foreign countries
lower levels of economic activity
threats to national security
Many companies in the Arab world have been developed programs and polices to enhance their contributions to a safe and healthy environment (Dallah – Qatar Telecom- Kuwaiti National Petroleum- Emirates Group)
Many countries in the Arab world have enacted laws to save and preserve the environment. In 1999 the UAE government (which has a ministry specialized in environment protection) established the federal environment law to protect the land , ground , soil, water, sea, …..etc
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33. Copyright © 2011 Pearson Education

34. Copyright © 2011 Pearson Education

35. (5)Technological Forces
Technological forces represent the major opportunities and threats for organizations :_
It affect organization’s products, services , markets , supplies distributors , competitors ….etc
It can create new markets
It can reduce or eliminate cost barriers between business , create shorter production runs, create shorter production runs , changing values and expectations of employees , managers , and customers , create more advanced competitive advantages
For business today the technological opportunities & threats are the most important part of the external strategic – management audit
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36. (5)Technological Forces
Two new jobs are developed in organizations :-
Chief Information Officer (CIO) is more a manager , managing the overall external – audit process
Chief Technology Officer (CTO) is more a technician focusing on the technical issues such as data acquisition – data processing – decision support system and software & hardware acquisition
Ch 3 -36
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37. (5)Technological Forces
Note;
Not all sectors of the economy are affected equally by technological developments . As ex.
The communications, electronics, and pharmaceutical industries are much more volatile than the textile, forestry, and material industry
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38. The Immediate Environment INDUSTRY FORCES OPERATING FORCES
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39. Industry Forces
Collecting and evaluating information on competitors is essential for successful strategy formulation.
Ch 3 -39
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40. Identifying Rival Firms
Industry Forces
Identifying Rival Firms
Need to look at:
Strengths
Weaknesses
Capabilities
Opportunities
Threats
Objectives
Strategies
Ch 3 -40
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41. Key Questions Concerning Competitors
What are the major competitors strengths?
What are the major competitors weaknesses?
What are the major competitors objectives and strategies?
How will the major competitors most likely respond to the current external variables?
how vulnerable are the major competitors to our alternative strategies?
Ch 3 -41
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42. Key Questions Concerning Competitors (cont’d)
How are our goods or services positioned relative to major competitors?
To what extent are new firms entering and old firms leaving this industry?
What are the sales/profit rankings of competitors over time?
What is the nature of supplier & distributor relationships?
What is the threat of substitute products/services?
Ch 3 -42
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43. competitive intelligence programs
Competitive intelligence is the process of monitoring the competitive environment and analyzing the findings in the context of internal issues .
Good competitive intelligence is one of the keys to success .
The more information and knowledge a firm can obtain about its competitors , the more likely it is that it can formulate and implement effective strategies .
For any company the major competitors’ weaknesses can represent external opportunities, however the major competitors’ strengths may represent key threats
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44. competitive intelligence programs
Companies need an effective competitive intelligence program.
For three important reasons :-
To provide a general understanding of an industry and its competitors
To identify areas in which competitors are weak and to assess the impact of the strategic actions on the competitors
To identify potential moves that might be taken by competitors and that may have a negative effect on the company position
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45. Porter’s Five-Forces Model of Competition
It is a framework for industry analysis and business strategy development .It derives five forces that determine the competitive intensity and therefore attractiveness of the industry . Attractiveness in this context refers to…… the overall industry profitability.
An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. However an attractive industry would be one approaching "pure competition", in which a high profits for a firms is
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46. Porter’s Five-Forces Model of Competition
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47. Steps to Determine if an Acceptable Profit Can Be Earned
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
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48. The Five-Forces Model 1- Rivalry Among Competing Firms
Most powerful of the five forces
Focus on competitive advantage of strategies
Ch 3 -48
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49. The Five-Forces Model 2-Potential Entry of New Competitors
Barriers to entry are important; whenever new firms can easily enter a particular industry ; the intensity of competitiveness among firms increase
Quality, pricing, and marketing can overcome barriers
Ch 3 -49
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50. The Five-Forces Model 3-Potential Development of Substitute Products
Pressures increase when consumers’ switching costs decrease
Firm’s plans for increased capacity & market penetration
Ch 3 -50
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51. The Five-Forces Model 4-Bargaining Power of Suppliers
Suppliers number & volume affect intensity of competition
suppliers power is higher when products are custom or differentiated
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52. Conditions Where Suppliers Gain Bargaining Power
Few number of suppliers
High quality of the raw material
Few substitutes raw material
High cost of switching raw material
Good brand name of the suppliers
After-sales service
Backward integration strategy can gain control and can be effective especially when suppliers are unreliable, too costly and not capable of meeting a firm needs
Ch 3 -52
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53. The Five-Forces Model 5- Bargaining Power of Consumers
Customers concentrated or buying in volume affects intensity of competition
Consumer power is higher where products are standard or undifferentiated
Ch 3 -53
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54. Conditions Where Consumers Gain Bargaining Power
If they can inexpensively/easily 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
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55. Operating Environment Forces
Customers
Creditors
Suppliers
Labor market
Competitors
- In the Arab world, these forces are not generally identified and classified
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56. Sources of External Information
Unpublished sources
Customer survey
Market research
Meeting with stakeholders
Interviews
Published sources
Periodicals
Internet
Reports
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57. Forecasting Tools Quantitative Methods Qualitative Methods
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58. The External Factor Evaluation (EFE) Matrix
Summarize & Evaluate
Competitive
Political and legal
Cultural
Technological
Environmental
Social
Governmental
Demographic
Economic
Ch 3 -58
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59. (EFE) Matrix Five steps must be undertaken :-
The main purpose of this matrix is to allow the strategists to summarize and evaluate the external variables in terms of threats & opportunity
Five steps must be undertaken :-
List key external factors as identified in the external – analysis process (10 -up to 20 factors)
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 ….note the sum of all weights must equal to one (1.0)
Assign a rating between 1 and 4 to each key external factor to indicate how the firms’ current strategies effectively responded to the factor since 4 = superior ;3= above average ; 2 = the average ; 1= poor respond
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60. 4- multiply each factor’s weight by its rating to determine the weighted score for each facto
5- sum the weighted score for each variable to determine the total weighted score for the organization
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62. Notes:- Total weighted score of 4.0
It is the highest possible total weighted score for an organization is 4.0 (an organization is responding in an outstanding way to existing opportunities& avoiding threats in its industry )
2.Total weighted score of 1.0
It is the lowest possible total weighted score for an organization is 1.0 (an organization’s strategies are not capitalizing on opportunities or avoiding threats in its industry )
3. Total weighted score of 2.5
It is the average (The midpoint)
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63. The local Ten – Theatre Cinema
The most important factors to being successful in this business (industry)is 0.12 weight
This firm is doing very well in regard to handling two factors TDB university (4) and healthy eating (4)
The total weighted scores above the average (2.5) though we could say that this cinema is doing slightly well in exploiting opportunity and avoiding threats in the external environment
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64. Industry Analysis EFE Important
Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.
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65. 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 -65
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66. Ch 3 -66
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67. Assignment (2) as Individual Task
Identify five key economic variables that could represent major opportunities or threats to the STC company .
List three opportunities and three threats that could represent key factors facing the King Saud University.
According to the external analysis process , define the main levels by which this analysis can be undertaken and explain each level in details ? Which force do you feel is most important for banking sector ? Why?
Deadline:- Next Wednesday
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