Chapter3 External Assessment1

Chapter 3 The External Assessment
Strategic Management: Concepts & Cases 12th Edition Fred David
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall
Ch 3 -1
The strategic plan- project
Naming the company and the team. Preparing the plan step by step as the progress in the course. Make presentations. Final hard copy submission.
Ch 3 -2
External Strategic Management Audit
Environmental Scanning Industry Analysis
Ch 3 -3
External Strategic Management Audit
Purpose of External Audit
Identify
Opportunities Threats
Ch 3 -4
Ch 3 -5
External Audit
Gather competitive intelligence

Social Cultural Demographic Environmental Governmental Legal Technological
Ch 3 -6
External Audit Sources of Information

Internet
Libraries
Suppliers
Distributors
Salespersons Customers Competition
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -7
Performing External Audit
Key Factors

Vary over time Vary by industry
Ch 3 -8
Performing External Audit Variables

Market share Breadth of competing products
World economies
Foreign affiliates
Proprietary account advantages

Performing External Audit Variables

Price competitiveness Technological advancements
Interest rates
Pollution abatement
Ch 3 -10
Performing External Audit
Long-term Orientation
External Factors
Measurable Applicable to Competing Firms Hierarchical
Ch 3 -11
Industrial Organization (I/O) View
Industry factors more important than internal factors
Performance determined by industry forces
Ch 3 -12
Managing strategically from the I/O perspective entails firms striving to compete in attractive industries, avoiding weak or faltering/uncertain industries, and gaining a full understanding of key external factor relationships.
Ch 3 -13
it is not a question of whether external or internal factors are more important. Rather, effective integration and understanding of both external and internal factors is the key to securing and keeping a competitive advantage.
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
Identify opportunities & threats
To conduct such analysis we will explain in details the different aspects of external environment forces\variables such as economic, social, cultural and technology..
Ch 3 -16
Economic Forces
Trends in the dollars value European Union Layoffs Economic standard of living
Ch 3 -17
Ch 3 -18
OT on economic issues: Example
GM US car producer could the integration and expansion of EU a threat to their market share in Europe because they EU gives priority to their companies. GM would find the decline in the value of US$ as Opportunity to export.
Ch 3 -19
Social, Cultural, Demographic, and Environmental Forces

U.S. Facts
Aging population Less Caucasian: white population will not continue to be majority. Widening gap between rich & poor 2025 = 18.5% population > 65 years 2075 = no ethnic or racial majority
Ch 3 -21

Facts
World population approaching 7 billion
World population = 8 billion by 2028

World population = 9 billion by 2054
U.S. population < 300 million

Trends
Aging Americans affects all organizations Population shift to the south and west Decimation and degradation of the natural environment
Ch 3 -23

21st Century Trends: trends
More educated consumers Aging population Minorities more influential
Ch 3 -24
Key Social, Cultural, Demographic, and Environmental Variables
Number of special interest groups

Number of marriages & divorces Number of births & deaths
Immigration & emigration rates

Social, Cultural, Demographic, and Environmental Forces: summary
Monitor Key Variables
Per Capita Income Attitudes Toward Business Avg. Disposable Income
Ch 3 -26
Social, Cultural, Demographic, and Environmental Forces:

summary
Consumer Behavior
Ethical Concerns Attitudes Toward Saving Racial Equality
Ch 3 -27

summary
Avg. Educational Level
Governmental Regulation Attitudes Toward Customer Service Attitudes Toward Quality
Ch 3 -28

summary
Energy Conservation
Social Responsibility Leisure-Time Values Recycling
Ch 3 -29

summary
Waste Management
Air & Water Pollution Ozone Depletion Endangered Species
Ch 3 -30
Social, Cultural, Demographic, and Environmental Forces: Ex. On OT
GM threats: Ozone deletion which put GM under pressure from green peace to react to environmental pollution. GM opportunity: invest in new energy development to reduce cost and environmental pollution.
Ch 3 -31
Political, Governmental, and Legal Forces Government Regulation

Key opportunities & threats
Antitrust legislation Tax rates Lobbying efforts Patent laws
Ch 3 -32
Political, Governmental, and Legal Forces Increasing Global Interdependence

Political variables impact

Formulation of strategies Implementation of strategies
Ch 3 -33
Political, Governmental, and Legal Forces Increasing Global Interdependence

Strategists in a global economy

Forecast political climates Legalistic skills Diverse world cultures
Ch 3 -34
Political, Governmental, and Legal Forces Globalization of Industry
Worldwide trend toward similar consumption patterns Global buyers and sellers E-commerce Technology for instant currency transfers
Ch 3 -35
Key Political, Governmental, and Legal Variables: summary
Regulation/deregulation
Tax law changes

Special tariffs Voter participation rates
Ch 3 -36
Key Political, Governmental, and Legal Variables (contd) summary
Number of patents
Changes in patent laws

Environmental protection laws Equal employment legislation
Government subsidies
Key Political, Governmental, and Legal Variables (contd) summary
Anti-trust enforcement
Global relationships
Import/export regulations Political conditions
Location and severity of terrorist activity

Political, Governmental, and Legal Variables: example on OT
US global relationship is O for GM Global expansion. Us foreign policy against terrorist is a threat GM foreign expansion.
Ch 3 -39
Technological Forces
Major Impact
Internet
Communications
Semiconductors
Ch 3 -40
Significance of IT
Chief Information Officer (CIO)
Chief Technology Officer (CTO)
Ch 3 -41
Technology-based issues
Essential for nearly every strategic decision
Ch 3 -42
Technological Forces: example on OT
Internet is O to increase GM e-selling. Internet is T from others to compete at us market.
Ch 3 -43
Competitive Forces
Collection & evaluation of data on competitors is essential for successful strategy formulation
Ch 3 -44
Competitive Forces
Competition on virtually all industries can be described as intense
Ch 3 -45
Competitive Forces
Identifying Rival Firms
Strengths
Weaknesses Capabilities
Opportunities
Threats Objectives Strategies
Key Questions Concerning Competitors
Their strengths
Their weaknesses
Their objectives and strategies Their responses to external variables
Their vulnerability to our alternative strategies

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

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?

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
Ch 3 -50
Competitive Forces
7 Characteristics of Most Competitive U.S. Firms:
5. Acquisition is essential to growth 6. People make a difference 7. No substitute for quality
Ch 3 -51
The Five-Forces Model of Competition
Ch 3 -52
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 -53
The Five-Forces Model
Rivalry Among Competing Firms
Most powerful of the five forces Focus on competitive advantage of strategies
Ch 3 -54
Potential Entry of New Competitors
Barriers to entry are important Quality, pricing, and marketing can overcome barriers
Ch 3 -55
Potential Development of Substitute Products
Pressures increase when consumers switching costs decrease Firms plans for increased capacity & market penetration
Ch 3 -56
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 -57
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 -58
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 -59
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 -60
The Global Challenge

Faced by U.S. Firms
Gain & maintain exports to other nations
Defend domestic markets against imported goods
Ch 3 -61
Global Perspective
Chinas Automobile Producers Heading to the United States in 2008
Chinas auto exports doubled in 2006 China produces more cars than Germany and is the worlds third largest automobile producer Changfeng Group first Chinese automaker in the Detroit Auto Show
Ch 3 -62
Multinational Corporations (MNCs)

Simultaneously globally competitive & nationally responsive
Ch 3 -63
Globalization
Worldwide integration of:
Strategy formulation Strategy implementation Strategy evaluation

The Global Challenge Globalization of Industries Similar consumption patterns: encourage businesses to sell products overseas, e.g., computers which are used in US the same as in Palestine.
Global buyers and sellers E-commerce Instant transmission of money & information Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall
Ch 3 -65
Teamwork
1.
Identify the OT to the business you wrote vision & mission. Key variables: Economic: $ value, per capita income, available of credit at banks. Social, Cultural, Demographic, and Environmental Forces: population age and size, level of education to consumer. Political, Governmental, and Legal Forces: Tax rates,
2.
3.
political stability, law and order.

4.
Technological Forces: internet, communication development.
Ch 3 -66
There are five steps in developing The External Factor Evaluation (EFE) Matrix
1.
2.
3.
4.
5.
List key external factors as identified in the external-audit process. Include a total of 10-20 factors from both the opportunities and threats. Assign to each factor a weight from .0 (not important) to 1.0 (very important). These weights show the relative importance. The total of all the weights should equal 1.0. Assign a 1-4 rating to each factor to indicate how effectively the firms current response strategy: 1= the response is poor, 2 = the response is average, 3 = the response is above average, and 4 = the response is superior. Multiply each factors weight by its rating to get a weighted score. Sum the weighted scores for each variable to determine the total weighted score for the organization.
Ch 3 -67
Industry Analysis: The External Factor Evaluation (EFE) Matrix Summarize & Evaluate
Economic Social Cultural Demographic Environmental Political Governmental Technological Competitive
Ch 3 -68
Ch 3 -69
Ch 3 -70
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
Ch 3 -71
Industry Analysis EFE
Important
Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.
Ch 3 -72
Industry Analysis: The External Factor Evaluation (EFE) Matrix: teamwork.
Apply the EFE to the previous case.
Ch 3 -73
Industry Analysis: Competitive Profile Matrix (CPM)
Identifies firms major competitors and their strengths & weaknesses in relation to a sample firms strategic positions
Ch 3 -74
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 -75
Review
Explain how to conduct an external strategic-management audit. An effective approach for conducting an external strategic-management audit consists of four basic steps: (1) select key variables, (2) select key sources of information, (3) use forecasting tools and techniques, and (4) construct an EFE Matrix.
Ch 3 -76
Review
Identify a recent economic, social, political, or technological trend that significantly affects financial institutions. EconomicInterest rates remain low. SocialMany states are passing no smoking ordinances. PoliticalEastern European countries are experiencing political instability. TechnologicalUse of the Internet is doubling every 100 days.
Ch 3 -77
Review
Discuss the following statement: Major opportunities and threats usually result from an interaction among key environmental trends rather than from a single external event or factor. This statement is accurate. It reveals how complex the external audit part of strategy formulation can be. There are an infinite number of interactions among key external factors.
Ch 3 -78
Review
Use Porters five-forces model to evaluate competitiveness within the Gaza banking industry. Porter identifies five competitive forces that determine the intensity of competition in an industry and the total value of profits created in a particular industry. The five forces are 1) new entrants, 2) substitute products or services, 3) bargaining power of suppliers, 4) bargaining power of buyers, and 5) rivalry among existing firms. A key to selecting appropriate generic strategies is to analyze these competitive forces in terms of trends, opportunities, and threats facing the firm.
Ch 3 -79
Review
What major forecasting techniques would you use to identify (1) economic opportunities and threats and (2) demographic opportunities and threats? Why are these techniques most appropriate? With the advent of sophisticated computers, simultaneous systems of regression equations have become the most widely used approach for forecasting economic variables. Scenario development is the most popular of all techniques for social and demographic forecasting, although surveys and market research are also widely used.
Ch 3 -80
Review
Give some advantages and disadvantages of cooperative versus competitive strategies. Cooperative strategies are generally less costly than competitive strategies. Cooperative strategies between domestic and foreign companies can facilitate entry into world markets. However, competitive strategies recognize that survival of the fittest is an underlying philosophy of business not only in the United States, but also in most of the world. Identifying competitors strengths and weaknesses is, thus, an integral and vital part of the external audit.
Ch 3 -81
Review
Lets say your boss develops an EFE Matrix that includes 62 factors. How would you suggest reducing the number of factors to 20? Answer: Let a group of knowledgeable individuals in the organization evaluate the relative importance of each factor by assigning a 1 = not important, 2 = somewhat important, and 3 = very important. Then add the ratings each factor receives. The 20 factors with the highest sum score should be included in the EFE Matrix.
Ch 3 -82
Review
Do you agree with I/O theorists that external factors are more important than internal factors in a firm achieving competitive advantage? Explain both your and their position. While I/O theorists claim that industry factors are more important than internal factors, research findings suggest that only 20% of a firms profitability can be explained by industry factors and 36% explained by internal factors. Regardless, it is not a question of whether external or internal factors are more important. Rather, effective integration and understanding of both external and internal factors is the key to securing and keeping a competitive advantage.
Ch 3 -83
Review
List the 9 external areas that give rise to opportunities and threats. Answer: The ten external areas are economic, social, cultural, demographic, environmental, political, government, legal, and technological.
Ch 3 -84

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Chapter 3 The External Assessment

Strategic Management: Concepts & Cases 12th Edition Fred David

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

The strategic plan- project

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

External Strategic Management Audit

Environmental Scanning Industry Analysis

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

External Strategic Management Audit

Purpose of External Audit

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Social Cultural Demographic Environmental Governmental Legal Technological

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

External Audit Sources of Information

Performing External Audit

Vary over time Vary by industry

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Performing External Audit Variables

Proprietary account advantages

Performing External Audit Variables

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Performing External Audit

Measurable Applicable to Competing Firms Hierarchical

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industrial Organization (I/O) View

Industry factors more important than internal factors

Performance determined by industry forces

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industrial Organization (I/O) View

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Industrial Organization (I/O) View

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Identify opportunities & threats

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

OT on economic issues: Example

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Social, Cultural, Demographic, and Environmental Forces

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Social, Cultural, Demographic, and Environmental Forces

World population approaching 7 billion

World population = 8 billion by 2028

U.S. population < 300 million

Social, Cultural, Demographic, and Environmental Forces

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Social, Cultural, Demographic, and Environmental Forces

More educated consumers Aging population Minorities more influential

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Key Social, Cultural, Demographic, and Environmental Variables

Number of special interest groups

Immigration & emigration rates

Social, Cultural, Demographic, and Environmental Forces: summary

Monitor Key Variables

Per Capita Income Attitudes Toward Business Avg. Disposable Income

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Social, Cultural, Demographic, and Environmental Forces:

Monitor Key Variables

Ethical Concerns Attitudes Toward Saving Racial Equality

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall

Social, Cultural, Demographic, and Environmental Forces:

Avg. Educational Level