Strategic Management Day 3

External Assessment

Strategic Management Model

External Audit

Chapter 3

Vision & Mission

Long-Term Objectives

Generate, Evaluate, Select Strategies

Implement Strategies: Mgmt Issues

Implement Strategies: Marketing, Fin/Acct, R&D, CIS

Measure & Evaluate Performance

Chapter 2

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Internal Audit Strategy Formulation Strategy Implementation Strategy Evaluation

Chapter 4

External Assessment
The opportunities and threats existing in any situation always exceed the resources needed to exploit the opportunities or avoid the threats. Thus, Strategy is essentially a problem of allocating resources. If strategy is to be successful, it must allocate superior resources against a decisive opportunity

(william Cohen)

If everyone is thinking alike, then somebody is not thinking (George Patton)

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External Assessment
It is not the Strongest of the species that survive, nor the most intelligent, but the one most responsive to Change

(Charles Dawin)

Introduction
External Strategic Management Audit is sometimes called Environmental Scanning or Industry Analysis External Audit focuses on identifying and evaluating Trends and Events beyond the Control of a Single Firm. Examples are:
Increased Foreign Investment Concurrence of WTO Consumer fear of Traveling Stock Market Volatility etc.

External Audit reveals key opportunities and threats confronting an organization so that managers can Formulate Strategies to take
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advantage of the opportunities and avoid the impact of threats

External Audit
Develop a Finite List of opportunities that could benefit a firm; and Threats that should be avoided.

The Term Finite suggests that External Audit is not aimed at Developing an Exhaustive List of every possible factors that could influence the Business; rather, it is aimed at Identifying Key Variables that Offer Actionable Responses

Key External Forces

External Forces can be divided into 5 broad categories.
1. 2. 3. 4. 5. Economic Forces Social, Cultural, Demographic, and Environmental Forces Political, Governmental, and Legal Forces Technological Forces Competitive Forces

Key External Forces

Economic Forces
Increasing numbers of 2-income households is an economic trend in the Asian Countries. As affluence increases, individuals place a premium on time. Improved Customer Service, immediate Availability, Trouble-Free Operation of Products, and Dependable Maintenance and Repair Services are becoming more important

Key External Forces

Economic Forces
Economic Factors have a direct impact on the potential attractiveness of various strategies. E.g.
When Interest Rate Rises, funds needed for capital expansion become more costly or unavailable When Interest Rate Rises, discretionary Income declines, and the demand of discretionary goods fall

Key Economic Variables

Availability of credit Level of disposable income Interest rates Inflation rates Federal government budget deficits Gross domestic product trend Consumption patterns

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Key Economic Variables

Unemployment trends Value of the dollar in world markets Stock market trends Foreign countries economic conditions Import/export factors Income differences by region/customer Price fluctuations Exportation of labor & capital Monetary policies Fiscal policies Tax rates
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Key External Forces

Social, Cultural, Demographic, and Environmental Forces
Increasing numbers of families in Asia are adopting to live alone rather than in combined families Increasing number of People worldwide purchases online but this trend has not yet been increased in purchasing the Clothes Online.

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Summary of important Social, Cultural, Demographic, and Environmental Forces

Number of marriages Number of divorces Number of births Number of deaths Immigration & emigration rates Life expectancy rates Per capita income Attitudes toward business Average disposable income Buying habits Attitudes toward saving Value placed on leisure time

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Key External Forces

Political, Governmental, and Legal Forces
Federal, Provincial and District Governments are major regulators, deregulators, subsidizers, employers. For Industries that depend heavily on Government Contracts or Subsidies, Political Forecasts can be the most important part of an External Audit. Changes in patent laws, antitrust legislation, tax rates, and lobbying activities can affect firms significantly.

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Key External Forces

Technological Forces
Revolutionary Technologies Changes and Discoveries having a dramatic impact on Organization. The Internet is changing the very nature of opportunities and threats in the life cycles of products, increasing the speed of distribution, creating new products and services, and erasing limitations of traditional geographic markets.

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Key External Forces

Competitive Forces
The most important part of an external audit is identifying the rival firms and determining their Strengths, Weaknesses, Capabilities, Opportunities, Threats, Objectives, and Strategies. Collecting and Evaluating Information on Competitors is essential for successful Strategy Formulation.

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Key External Forces

Competitive Forces
Identifying the Competitors is not always easy because many firms have divisions that compete in different industries Most multidivisional firms generally do not provide sales and profit information on a divisional basis for competitive

Many Business use the Internet to obtain reason. most of their information on Competitors
Privately held firms do not publish any financial or marketing information
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Key Questions About Competitors

1 2 3 4 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 current economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive trends affecting our industry? How vulnerable are the major competitors to our alternative company strategies? How vulnerable are our alternative strategies to successful counterattacks by our major competitors? How are our Products or Services positioned relative to major competitors? To what extent are new firms entering and old firms leaving the industry? What key factors have resulted in our present competitive position in this industry? How have the Sales and Profit rankings of major competitors in the industry changed over recent years ? Why have these rankings changed that way? What is the nature of Supplier and Distributor relationships in the industry? To what extent could Substitute products or services be a threat to competitors in this industry?

5 6 7 8 9 10 11 12

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Competitive Analysis: Porters Five-Force Model

Potential development of substitute products

According to Porter, the nature of Rivalry among competitiveness in any industry Bargaining power can be Bargaining power of suppliers of consumers viewed as competing firmsof 5 forces a composite

Potential entry of new competitors

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Porters Five-Force Model

Rivalry Among Competing Firms
Rivalry among competitors is usually the most powerful of the five competitive forces The strategies pursued by one firm can be successful only to extent that they provide competitive advantage over the strategies pursued by the rival firms Changing in Strategy by one firm may be met with retaliatory countermoves, such as:
      Lowering Prices Enhancing Quality Adding Features Providing Services Extending Warranties Increasing Advertising

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Porters Five-Force Model

Rivalry Among Competing Firms
The intensity of rivalry among competing firms tends to increase as the number of competitors increase, as competitors become more equal in size and capability, as

As Rivalry among Competing Firms demand for industrys products declines, and as price intensifies, Industry Profile decline, in cutting becomes common some cases to the point where an Rivalryindustry becomes unattractive brands also increases when consumers can switch
easily; when barriers to leaving the market are high; when fixed costs are high; when the product is perishable, when rival firms are diverse in strategies, origins, and culture.
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Porters Five-Force Model

Potential Entry of New Competitors
Whenever new firms can easily enter a particular industry, the intensity of competitiveness among firms increases. Despite numerous barriers to entry, new firms sometimes enter industries with higher-quality products, lower prices, and substantial marketing resources Barriers to entry includes :
     
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Lowering Prices Enhancing Quality Adding Features Providing Services Extending Warranties Increasing Advertising

Porters Five-Force Model

Potential Entry of New Competitors
Barriers to entry includes :
           
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The need to gain Economies of Scale Quickly The need to gain Technology and Specialized know-how Lack of Experience Strong Customer Loyalty Strong Brand Preference Large Capital Requirements Lack of Adequate Distribution Channels Government Regulatory Policies Tariffs Lack of Access to Raw Material Possession of Patents Potential Saturation of Market

Porters Five-Force Model

The Strategists job is to: - Identify Potential new firms entering the Market, - Monitor the new rival firms strategies - Counterattack as needed - Capitalize on existing Strengths and Opportunities
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Porters Five-Force Model

Potential Development of Substitute Products
Competitive pressures arising from substitute products increase; as the relative price of substitute products declines and as consumers switching cost decreases The Competitive Strength of Substitute Products is measured by the inroads into the market share those products obtain, as well as those firms plans for increased capacity and market penetration

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Porters Five-Force Model

Bargaining Power of Suppliers
The bargaining power of suppliers affects the intensity of competition in an industry, especially when there is a large number of suppliers, when there are only a few good substitute raw materials, or when the cost of switching raw

a Backward Integration Strategy to gain control or ownership of Suppliers. This Strategy is successful when Suppliers are unreliable, too costly, or not capable of meeting a firms needs on a consistent basis
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Firms may costly. materials is especially pursue

Porters Five-Force Model

Bargaining Power of Consumers
When customers are concentrated or large, or buy in volume, their bargaining power represents a major force affecting the intensity of competition in an industry. Rival firms may offer extended warranties or special services to gain customer loyalty whenever the bargaining power of consumers is substantial Bargaining Power of Consumers also is Higher when the products being purchased are standard or undifferentiated. When this is the case, the consumers often can negotiate selling price, warranty coverage, and accessory packages
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to a greater extent.

Sources of External Information

The information may be available to organizations from both published and unpublished sources. Unpublished Sources include:
Customer Surveys Market Research Speeches at Professionals and Shareholders Meetings Etc.

Published Sources include:

Periodicals Journals Reports Government Documents Abstracts Books, Directories, Newspapers, etc.

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Industry Analysis The External Factor Evaluation (EFE) Matrix

EFE Matrix allows Strategists to summarize & evaluate following information

Economic Social Cultural

Demographic Environmental Political

Governmental Technological Competitive

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Industry Analysis The External Factor Evaluation (EFE) Matrix

EFE Matrix is usually developed in five steps
Step 1: List Key External Factors as identified in the External-audit process.
Include total of from 10-20 factors (both opportunities and threats)

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Opportunities first then Threats

Dawn Newspaper
Sr.# 1. 2 3 4 5 Total Opportunities WTO implementations will reduce prices of imported machinery (press related parts) Reading Newspaper after lunch in office hours has become the trend of big cities Cost reduction in most innovative Publishing Software. Liberal approach for freedom of press by President of Pakistan Financially Strong Group
Type Wt Rating Score

E S T G C

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Dawn Newspaper
Sr.# 1. 2 3 4 5 Total: Threats High Cost of raw materials including paper, ink etc. Change of Culture towards reading news from websites More TV Channels may decrease the sale of Newspaper As per government regulation, Wage Board (where salaries of employees of publishing industry) is announced by GOP Competitors are involved in Concentrating diversification strategies
Type Wt Rating Score

E S T G C

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Industry Analysis The External Factor Evaluation (EFE) Matrix

Step 2: Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important).
These weightings indicate the relative importance of that factor to being successful in the firms industry
 Opportunities often receive higher weights than threats, but threats too can receive high weights if they are especially severe or threatening.

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Dawn Newspaper
Sr.# 1. 2 3 4 5 Opportunity/Threat WTO implementations will reduce prices of imported machinery (press related parts) Reading Newspaper after lunch in office hours has become the trend of big cities Cost reduction in most innovative Publishing Software. Liberal approach for freedom of press by President of Pakistan Financially Strong Group
Type Wt Rating Score

E S T G C

.05 .2 .15 .1 .2

Opportunities:

.7

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Dawn Newspaper
Sr.# 1. 2 3 4 5 Total: Threats High Cost of raw materials including paper, ink etc. Change of Culture towards reading news from websites More TV Channels may decrease the sale of Newspaper As per government regulation, Wage Board (where salaries of employees of publishing industry) is announced by GOP Competitors are involved in Concentrating diversification strategies
Type Wt Rating Score

E S T G C

.05 .05 .1 .05 .05 .3

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Industry Analysis The External Factor Evaluation (EFE) Matrix

Step 3: Assign a 1-to-4 rating to each key external factor to indicate how effectively the firms current strategies respond to the factor.
4=Superior Response 3=response is above average 2=response is average Ratings are company-based whereas 1=response isare Industry Based weights poor

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the

Ratings are based on effectiveness of the firms strategies

Dawn Newspaper
Sr.# 1. 2 3 4 5 Opportunity/Threat WTO implementations will reduce prices of imported machinery (press related parts) Reading Newspaper after lunch in office hours has become the trend of big cities Cost reduction in most innovative Publishing Software. Liberal approach for freedom of press by President of Pakistan Financially Strong Group
Type Wt Rating Score

E S T G C

.05 .2 .15 .1 .2

1 4 4 3 3

Opportunities:

.7

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Dawn Newspaper
Sr.# 1. 2 3 4 5 Total: Threats High Cost of raw materials including paper, ink etc. Change of Culture towards reading news from websites More TV Channels may decrease the sale of Newspaper As per government regulation, Wage Board (where salaries of employees of publishing industry) is announced by GOP Competitors are involved in Concentrating diversification strategies
Type Wt Rating Score

E S T G C

.05 .05 .1 .05 .05 .3

1 2 2 2 3

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Industry Analysis The External Factor Evaluation (EFE) Matrix

Step 4: Multiply each factors weight by its rating to determine a weighted average. Step 5: Sum the weighted Scores for each variable to determine the total weighted score for the organization

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Dawn Newspaper
Sr.# 1. 2 3 4 5 Opportunity/Threat WTO implementations will reduce prices of imported machinery (press related parts) Reading Newspaper after lunch in office hours has become the trend of big cities Cost reduction in most innovative Publishing Software. Liberal approach for freedom of press by President of Pakistan Financially Strong Group
Type Wt Rating Score

E S T G C

.05 .2 .15 .1 .2 .7

1 4 4 3 3

.05 .8 .6 .3 .6 2.35

Opportunities:

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Dawn Newspaper
Sr.# 1. 2 3 4 5 Threats High Cost of raw materials including paper, ink etc. Change of Culture towards reading news from websites More TV Channels may decrease the sale of Newspaper As per government regulation, Wage Board (where salaries of employees of publishing industry) is announced by GOP Competitors are involved in Concentrating diversification strategies
Type Wt Rating Score

E S T G C

.05 .05 .1 .05 .05 .3 .7

1 2 2 2 3

.05 .1 .2 .1 .15 .6 2.35

Total (Threats): Total (Opportunities)

Grand Total:

1.0

2.95

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Industry Analysis The External Factor Evaluation (EFE) Matrix

Analysis:
Regardless of the no. of key opportunities and Threats is included in an EFE Matrix, the highest possible total weighted score for an organization is 4.0 and the lowest possible total weighted score is 1.0 The Average Total Weighted Score is 2.5 The Total Weighted Score of 4.0 indicates that an organization is responding in outstanding way to existing opportunities and threats in the Industry In Other Words, Organizations strategies effectively take advantage of existing opportunities and minimize the potential adverse effects of external threats Total Score of 1.0 indicates that the firms strategies are not capitalizing on opportunities or avoiding external threats.

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IFE Factors
KEY EXTERNAL FACTORS OPPURTUNITIES
1. Pakistans economy continues to grow with over 6.5% GDP 2. Improved technology is reducing costs 3. Stock market is performing well 3. Government is promoting FDI 4. Consumer Financing trend is increasing 5. Over all change in culture towards plastic money 6. Government is promoting SME and agricultural lending 7. High profit margins in banking industry due to double digit interest rates

THREATS
1. Credit expansion may introduce debt creation 2. Lack of proper regulations towards E-transactions 3. Mergers and Acquisitions results in strong competitors, which results in high competition 4. Upcoming Elections 2008 5. SBP regulations TOTAL

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EFE Factors
Opportunities
1. 2. 3. 4. 5. 6. Increasing Demand of Oil. Higher Demand for Gas & LPG. Petroleum Policy of 2001 (More Incentives). High Economic Growth Rate of the Country. Offshore Explorations (Arabian Sea Coast). Iran Pakistan India Gas Pipeline.

Threats
1. 2. 3. 4. 5. Substantial Decrease in the Oil and Energy Prices. Conflicts of Interest with Related Parties Transactions. Increasing Competition especially from Multinationals. Political Instability in the Country. Terrorist Attacks on Some Fields and Unrest in Baluchistan.

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Competitive Profile Matrix (CPM)

CPM identifies a firms major competitors and its particular strengths and weaknesses in relation to a sample firms strategic position.

The weights and total weighted scores in both CPM and EFE have the same meaning

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The Critical Success Factors in CPM include both Internal and External Issues 4 = Major Strength 3 = Minor Strength 2 = Minor Weakness 1 = Major Weakness

Competitive Profile Matrix (CPM)

AVON LOREAL

P&G 3 3 4 3 3 2 2 3 0.60 0.30 0.40 0.30 0.45 0.20 0.40 0.15 2.80

Critical Success Factor Advertising Product Quality Price Competition Management Financial Position Customer Loyalty Global Expansion Market Share

Weight Rating Score Rating Score Rating Score

Total
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0.20 0.10 0.10 0.10 0.15 0.10 0.20 0.05 1.00

1 4 3 4 4 4 4 1

0.20 0.40 0.30 0.40 0.60 0.40 0.80 0.05 3.15

4 4 3 3 3 4 2 4

0.80 0.40 0.30 0.30 0.45 0.40 0.40 0.20 3.25

Industry Analysis The External Factor Evaluation (EFE) Matrix

Analysis:
Advertising and Global Expansion are the most important Critical Success Factors as indicated by a weight of 0.20 Avons and LOreals Product Quality is Superior, as evidenced by a rating of 4. LOreals Financial Position is Good as indicated by rating of 3 P&G is the weakest firm overall, as indicated by a Total Weighted Score of 2.80 The factors may expand to:
Breadth of Product Line Effectiveness of Sales Distribution Location of Facilities Production Capacity Experience Union Relations Technological Advantages E-Commerce Expertise

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Conclusion

Increasing Turbulence in markets and industries around the world means the external audit has become an explicit and vital part of the Strategic Management Process. Firms that do not mobilize and empower their managers and employees to Identify, Monitor, Forecast, and Evaluate Key External Forces may fail to anticipate emerging opportunities and threats and, consequently, may pursue ineffective strategies, miss opportunities, and invite organizational demise Major responsibility of Strategists is to ensure development of an effective external-audit system. This may include using IT to devise a competitive intelligent system that works. The EFE Matrix and Porters 5-Force Model can help Strategists evaluate the market and Industry, but these tools must be accompanied by good intuitive judgment.