Strategic Management CH 03

Chapter 3 The External Assessment
Strategic Management: Concepts & Cases 11th Edition Fred David
Copyright 2007 Prentice Hall
Ch 3 -1
Chapter Outline
The Nature of the External Audit
The Industrial Organization (I/O) View Social, Cultural, Demographic & Environmental Forces
Ch 3 -2
Chapter Outline (contd)

Political, Governmental, and Legal Forces
Technological Forces
Competitive Forces
Ch 3 -3

Porters Five-Forces Model
Sources of External Information
Forecasting Tools & Techniques
Ch 3 -4

Global Challenge
The External Factor Evaluation (EFE) Matrix
Competitive Profile Matrix (CPM)
Ch 3 -5
External Assessment
It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. Charles Darwin
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
Ch 3 -6
External Strategic Management Audit

-- Environmental Scanning -- Industry Analysis
Identify & Evaluate factors beyond the control of a single firm Increased foreign competition Population shifts Aging society Purpose of External Audit Fear of traveling Identify Stock market volatility
Opportunities Threats
Ch 3 -7
Key External Forces
1. Economic forces 2. Social, cultural, demographic & environmental forces 3. Political, governmental & legal forces 4. Technological forces 5. Competitive forces
Ch 3 -8
Key External Forces & the Organization

Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Markets Natural Environment
Key External Forces
Opportunities & Threats
Ch 3 -9
External Audit Sources of Information

Internet Libraries Suppliers Distributors Salespersons Customers Competition CI Vendors
http://www.burrellesluce.com/Press_Clipp ing_Service/default.php Copyright 2007 Prentice Hall
Ch 3 -10
Gather competitive intelligence

Social Cultural Demographic Environmental Governmental Legal Technological
Internet Resources

www.redherring.com www.fastcompany.com www.business2.com online.wsj.com www.hoovers.com www.ecommercetimes.com www.businessplanarchive.org/ www.informationweek.com/ www.thestandard.com cbs.marketwatch.com www.morningstar.com finance.yahoo.com
Ch 3 -11
Performing External Audit --- Key Factors

Variables 1. Market share 2. Breadth of competing products 3. World economies 4. Foreign affiliates 5. Proprietary account advantages 6. Price competitiveness 7. Technological advancements 8. Interest rates 9. Pollution abatement
Ch 3 -12
Vary over time Vary by industry
Performing External Audit
Long-term orientation
External Factors
Measurable Applicable to competing firms Hierarchical
Ch 3 -13
Industrial Organization (I/O) View

-- Industry factors more important than internal factors

Performance determined by industry forces
I/O Perspective Firm Performance

Economies of Scale
Industry Properties
Barriers to market entry Product differentiation Level of competitiveness
Ch 3 -14
Research Findings
Approximately 20% of a firms profitability can be explained by the industry, whereas 36% of the variance in profitability is attributed to the firms internal factors
Ch 3 -15
Economic Forces
Trends in the dollars value European Union Layoffs Economic standard of living
Availability of credit Level of disposable income Interest rates Inflation rates
Ch 3 -16

Russias Economy
Political bureaucracy Illegal actions by officials and policemen State-run gas; monopoly purchase of newspaper Foreign direct investment

Ch 3 -17
Social, Cultural, Demographic Major Impact & Environmental Forces

U.S. Facts
Products Services Markets Customers
Aging population Less Caucasian Widening gap between rich & poor 2075 = no ethnic or racial majority
2025 = 18.5% population >65 years
Ch 3 -18
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
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 Ch 3 -19
U.S. Mexico Border

North Americas fastest growing region 1,500 maquiladoras No longer largest exporter to U.S.
Ch 3 -20
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
Global trends
Chinas labor rates less than Mexico China provides more site location incentives than Mexico 21st Century Trends More educated consumers Aging population Minorities more influential Local rather than federal solutions
Ch 3 -21
Fixation with youth decreasing Hispanics increase to 15% by 2021 African American increase to 14% by 2021
Key Social, Cultural, Demographic & Environmental Variables
Childbearing rates Number of special interest groups Number of marriages & divorces Number of births & deaths Immigration & emigration rates
Ch 3 -22
Social, Cultural, Demographic & Environmental Forces Avg. educational level
Monitor Key Variables Actuarial rates
Governmental regulation
Per capita income
Attitudes toward customer service
Attitudes toward business
Attitudes toward quality Energy conservation
Avg. disposable income Consumer behavior
Social responsibility
Ethical concerns
Leisure time values
Attitudes toward saving
Recycling Waste management Air & water pollution
Racial equality Ozone depletion Endangered species Ch 3 -23
Political, Government & Legal Forces Government Regulation

Key opportunities & threats Antitrust legislation Tax rates Lobbying efforts Patent laws Increasing Global Interdependence Political variables impact Formulation of strategies Implementation of strategies

Globalization of Industry Worldwide trend toward similar consumption patterns Global buyers and sellers E-commerce Technology for instant currency transfers
Strategists in a global economy Forecast political climates Legalistic skills Diverse world cultures Copyright 2007 Prentice Hall Ch 3 -24
Key Political, Governmental, & Legal Variables
Regulation/deregulation Tax law changes Special tariffs PACs Voter participation rates
Ch 3 -25
Key Political, Governmental, & Legal Variables (contd)
Number of patents Changes in patent laws Environmental protection laws Equal employment legislation Government subsidies Location and severity of terrorist activity Anti-trust enforcement Global relationships Import/export regulations Political conditions
Ch 3 -26
Technological Forces Major Impact
Internet Communications Semiconductors

Significance of IT
Chief Information Officer (CIO) Chief Technology Officer (CTO)

Technology-based issues Essential for nearly every strategic decision
Ch 3 -27
Competitive Forces
Collection & evaluation of data on competitors is essential for successful strategy formulation Competition on virtually all industries can be described as intense.
Identifying Rival Firms Strengths Weaknesses Opportunities Threats Capabilities Objectives Strategies Copyright 2007 Prentice Hall
Ch 3 -28
Key Questions Concerning Competitors
Their strengths Their weaknesses Their objectives and strategies Their responses to external variables Their vulnerability to our alternative strategies
Ch 3 -29
Key Questions Concerning Competitors (contd)
Our vulnerability to strategic counterattack Our product/service positioning Entry and exit of firms in the industry Key factors for our current position in industry Sales/profit rankings of competitors over time
Ch 3 -30
Key Questions Concerning Competitors (contd)
Nature of supplier & distributor relationships
The threat of substitute products/services Should we keep our strategies secret from employees and stakeholders?
Ch 3 -31
Competitive Forces
Sources of Corporate Information
Moodys Manuals Standard Corporation Descriptions Value Line Investment Surveys Duns Business Rankings Standard & Poors Industry Surveys Industry Week Forbes, Fortune, Business Week
Ch 3 -32
Competitive Forces
7 Characteristics of most Competitive U.S. Firms:
1. Market share matters 2. Understand what business you are in 3. Broke or not, fix it 4. Innovate or evaporate 5. Acquisition is essential to growth 6. People make a difference 7. No substitute for quality
Ch 3 -33
The Five-Forces Model of Competition

Potential development of substitute products
Bargaining power of suppliers
Rivalry among competing firms
Bargaining power of consumers
Potential entry of new competitors

Ch 3 -34
Steps to Determine if an Acceptable Profit Can be Earned

1.
2.
3.
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
Ch 3 -35
The Five-Forces Model
Rivalry Among Competing Firms

Most powerful of the five forces Focus on competitive advantage of strategies
Ch 3 -36
Potential Entry of New Competitors

Barriers to entry are important Quality, pricing, and marketing can overcome barriers
Ch 3 -37
Potential Development of Substitute Products

Pressures increase when consumers switching costs decrease Firms plans for increased capacity & market penetration
Ch 3 -38
Bargaining Power of Suppliers

Large number of suppliers & few substitutes affects intensity of competition Backward integration can gain control or ownership of suppliers
Ch 3 -39
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 -40
Conditions where Consumers Gain Bargaining 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 -41
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 -42
The Global Challenge

Globalization of Industries Similar consumption patterns Global buyers and sellers E-commerce Instant transmission of money & information
Faced by U.S. Firms --
Gain & maintain exports to other nations
Defend domestic markets against imported goods

Multinational Corporations (MNCs) Simultaneously globally competitive & nationally responsive Globalization
Worldwide integration of:
Strategy formulation Strategy implementation Strategy evaluation
Ch 3 -43
Industry Analysis: The External Factor Evaluation (EFE) Matrix Summarize & Evaluate
Economic Social Cultural
Demographic Environmental Political
Governmental Technological Competitive

Ch 3 -44
5 Steps (Page 110-111)

1. List key external factors 10-20 Opportunities then threats Assign weights from 0.0 to 1.0 based on importance Sum of all weights across all factors = 1 Assign a rating from 1 to 4 for all factors where 4 = the firms response is superior 3 = the firms response is above avg 2 = the firms response is average 1 = the firms response is poor Multiply the rating by the weight Sum the weighted scores
Ch 3 -45

1. 2.
EFE Gateway Computers (2003) Key External Factors

Weight Rating Wtd Score
Opportunities
1. Global PC market expected to grow 20% in 2004 2. Cost of PC component parts expected to decrease 10% - 2004 3. Internet use growing rapidly 4. China entered WTO; lowered taxes for importing PCs 5. The average income for PC worker has declined from $40K/yr to $30k/yr
0.10 0.10 0.05 0.10 0.05
3 3 2 1 3
0.30 0.30 0.10 0.10 0.15

Ch 3 -46
EFE Gateway Computers (2003) (contd) Key External Factors

Opportunities (contd)
6. Modernization of business firms and government agencies 7. U.S. (& world) economies recovering 8. 30% of Chinese population can afford a PC; only 10% of homes have a PC 0.05 0.05 0.05 0.10 0.10 2 3 1 1 1 0.10 0.15 0.05 0.10 0.05
Ch 3 -47
Threats
1. Intense rivalry in industry

Threats (contd)
2. Severe price cutting in PC industry 3. Different countries have different regs and infrastructure for PCs 4. Palm & PDA becoming substitutes 5. Demand exceeds supply of experienced PC workers 6. Birth rate in U.S. declining annually
0.10 0.05 0.05 0.05 0.05
2 1 3 4 3
0.20 0.05 0.15 0.20 0.15

Ch 3 -48

Threats (contd)
7. U.s. consumers and businesses delaying purchase of PCs 8. PC firms diversifying into consumer electronics Total 0.05 0.05 2 3 0.10 0.15
1.00
2.40
Ch 3 -49
Ch 3 -50
Industry Analysis EFE

Total weighted score of 4.0

Organization response is outstanding to threats and weaknesses
Total weighted score of 1.0

Firms strategies not capitalizing on opportunities or avoiding threats
templates\EFE_matrix.xlt Copyright 2007 Prentice Hall

Ch 3 -51
Industry Analysis EFE
Important --
Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.
Ch 3 -52
Industry Analysis: Competitive Profile Matrix (CPM)
Identifies firms major competitors and their strengths & weaknesses in relation to a sample firms strategic positions
Ch 3 -53
Steps to a CPM

Identify Critical Success Factors (CSF) Broad issues Internal and external (5 of each is a good mix) Assign a weight to each CSF Must add up to 1 Assign a rating for your firm and each of your competitors 4 = major strength 3 = minor strength 2 = minor weakness 1 major weakness Multiply weight by rating Sum the weighted ratings and compare
Ch 3 -54
Gateway
Apple
Rating Wtd Score
Dell
Rating Wtd Score
CSFs
Market share Inventory sys Fin position Prod. Quality Cons. Loyalty Sales Distr Global Exp. Org. Structure
Wt
Rating
Wtd Score
0.15 0.08 0.10 0.08 0.02 0.10 0.15 0.05
3 2 2 3 3 3 3 3
0.45 0.16 0.20 0.24 0.06 0.30 0.45 0.15
2 2 3 4 3 2 2 3
0.30 0.16 0.30 0.32 0.06 0.20 0.30 0.15
4 4 3 3 4 3 4 3
0.60 0.32 0.30 0.24 0.08 0.30 0.60 0.15
Ch 3 -55
Gateway CSFs (contd)

Prod. Capacity E-commerce Customer Serv Price competitive Mgt. experience Total
Wt Rating Wtd Score
Apple
Rating Wtd Score
Dell
Rating Wtd Score
0.04 0.10 0.10 0.02 0.01 1.00
3 3 3 4 2
0.12 0.30 0.30 0.08 0.02 2.83
3 3 2 1 4
0.12 0.30 0.20 0.02 0.04 2.47
3 3 4 3 2
0.12 0.30 0.40 0.06 0.02 3.49
Ch 3 -56
Industry Analysis CPM
Important --
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.
Ch 3 -57
Assignment two

Prepare a EFE and CPM for Google

Bus 411 assignment two.doc

Due Feb 9 Excel templates for both the EFE and CPM are available in WebCT
Ch 3 -58

Strategic Management CH 03

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Chapter 3 The External Assessment

Strategic Management: Concepts & Cases 11th Edition Fred David

Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall

Chapter Outline (contd)

Copyright 2007 Prentice Hall

Chapter Outline (contd)

Sources of External Information

Forecasting Tools & Techniques

Copyright 2007 Prentice Hall

Chapter Outline (contd)

The External Factor Evaluation (EFE) Matrix

Competitive Profile Matrix (CPM)

Copyright 2007 Prentice Hall

External Strategic Management Audit

Copyright 2007 Prentice Hall

Key External Forces

Key External Forces & the Organization

Key External Forces

Opportunities & Threats

Copyright 2007 Prentice Hall

External Audit Sources of Information

Gather competitive intelligence

Copyright 2007 Prentice Hall

Performing External Audit --- Key Factors

Vary over time Vary by industry

Performing External Audit

Measurable Applicable to competing firms Hierarchical

Copyright 2007 Prentice Hall

Industrial Organization (I/O) View

Performance determined by industry forces

I/O Perspective Firm Performance

Barriers to market entry Product differentiation Level of competitiveness

Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall

Social, Cultural, Demographic Major Impact & Environmental Forces

Products Services Markets Customers

2025 = 18.5% population >65 years

Social, Cultural, Demographic & Environmental Forces

Copyright 2007 Prentice Hall

U.S. Mexico Border

Copyright 2007 Prentice Hall

Social, Cultural, Demographic & Environmental Forces

Key Social, Cultural, Demographic & Environmental Variables

Social, Cultural, Demographic & Environmental Forces Avg. educational level

Monitor Key Variables Actuarial rates

Per capita income

Attitudes toward customer service

Attitudes toward business

Attitudes toward quality Energy conservation

Avg. disposable income Consumer behavior

Leisure time values

Attitudes toward saving

Recycling Waste management Air & water pollution

Racial equality Ozone depletion Endangered species Ch 3 -23

Political, Government & Legal Forces Government Regulation

Key Political, Governmental, & Legal Variables

Key Political, Governmental, & Legal Variables (contd)

Copyright 2007 Prentice Hall

Technological Forces Major Impact

Internet Communications Semiconductors

Chief Information Officer (CIO) Chief Technology Officer (CTO)

Strategy formulation Strategy implementation Strategy evaluation