Chapter 3 The External Assessment

Strategic Management: Concepts and Cases. 9th edition Fred R. David

PowerPoint Slides by Anthony F. Chelte Western New England College
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Chapter Outline
The Nature of an External Audit

Economic Forces Social, Cultural, Demographic, and Environmental Forces

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Chapter Outline
Political, Governmental, and Legal Forces Technological Forces Competitive Forces
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Chapter Outline
Competitive Analysis:
Porters Five-Forces Model

Sources of External Information Forecasting Tools and Techniques

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Chapter Outline
The Global Challenge

Industry Analysis:
The External Factor Evaluation Matrix

The Competitive Profile Matrix

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The External Assessment

Prediction is very difficult, especially about the future. -- Neils Bohr

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External Strategic Management Audit

Also called:
Environmental scanning Industry analysis

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External Strategic Management Audit

External Audit:
Identification and evaluation of trends and events beyond control of single firm
Increased foreign competition Populations shifts Aging society Information technology Computer revolution
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Nature of External Audit

Purpose:
Development of Finite List:
Opportunities Threats to be avoided

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Key External Forces

Five (5) broad categories:
1. Economic forces 2. Social, cultural, demographic, & environmental forces 3. Political, governmental, and legal forces 4. Technological factors 5. Competitive forces
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Relationships Between Key External Forces and an Organization

Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services

Key External Forces

Opportunities & Threats

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Performing an External Audit

Gather competitive intelligence on factors:
Social Cultural Demographic Environmental Economic Political, legal, governmental technological
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Performing an External Audit

Sources of information include:
Internet Libraries (corporate, university, public) Suppliers Distributors Customers Competition
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Performing an External Audit

Key factors:
Vary over time Vary by industry

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Performing an External Audit

Variables include:
Market share Breadth of competing products World economies Foreign affiliates Proprietary account advantages Price competitiveness Technological advancements Interest rates Pollution abatement

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Key External Factors

Key External Factors: 1. 2. 3. 4.

Oriented to long-term & annual objectives Measurable Applicable to all competing firms Hierarchical
Overall company Divisional or functional areas
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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
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Monitor Key Economic Variables:

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
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Monitor Key Economic Variables:

Price fluctuations Exportation of labor & capital Monetary policies Fiscal policies Tax rates ECC policies OPEC policies LDC policies
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Social, Cultural, Demographic & Environmental Forces

Major impact on:
Products Services Markets customers

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Social, Cultural, Demographic & Environmental Forces

Consider:
United States
Population growing older Less Caucasian Gap between rich and poor widening 65 and older will rise to 18.5% of population by 2025 By 2075, no racial or ethnic majority
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Social, Cultural, Demographic & Environmental Forces

World population > 6 billion

U.S. population < 300 million

Great potential for domestic production expansion to other markets

Domestic only is a risky strategy

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Social, Cultural, Demographic & Environmental Forces

NAFTA

U.S. exports to Mexico increased 170% 2000, U.S. trade deficits:

Mexico -- $25 billion China -- $84 billion Japan -- $81 billion

> 60,000 laid off along Mexico Border with U.S.

2001 Recession (U.S. and World)

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Social, Cultural, Demographic & Environmental Forces

Trends for the 2000s

More educated consumers Population aging Minorities more influential Local rather than federal solutions Fixation with youth decreasing Hispanics increase to 15% by 2021 African Americans increase to 14% by 2021
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Social, Cultural, Demographic & Environmental Forces

Key variables

Childbearing rates Number of special-interest groups Number of marriages Number of divorces Number of births Number of deaths Immigration & emigration rates
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Monitor Key Variables

Life expectancy rates Per capita income Attitudes toward business Average disposable income Buying habits Ethical concerns Attitudes toward saving
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Monitor Key Variables

Racial equality Average level of education Government regulation Attitudes toward customer service Attitudes toward product quality Energy conservation Social responsibility
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Monitor Key Variables

Value placed on leisure time Recycling Waste management Air & water pollution Ozone depletion Endangered species
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Political, Govt., & Legal Forces

Government Regulation Key opportunities & key threats
Antitrust legislation (Microsoft) Tax rates Lobbying efforts Patent laws
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Political, Govt., & Legal Forces

Increasing Global Interdependence
Impact of political variables
Formulation of Strategies Implementation of Strategies

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Political, Govt., & Legal Forces

Increasing Global Interdependence

Strategists in a global economy

Forecast political climates Legalistic skills Diverse world cultures

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Political, Govt., & Legal Forces

Globalization of Industry
Worldwide trend toward similar consumption patterns Global buyers & sellers E-commerce Instant transmission of money & information across continents
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Political, Govt., & Legal Forces

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
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Key Political, Government & Legal Variables

Environmental protection laws Equal employment legislation Level of government subsidies Antitrust legislation/enforcement Sino-American relationships Russian-American relationships European-American relationships
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Key Political, Government & Legal Variables

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
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Technological Forces
Revolutionary technological forces:

Profound impact on organizations

Internet Semiconductors XML technologies UWB communications

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Technological Forces
Internet changes the nature of opportunities and threats -

Alters life cycle of products Increases speed of distribution Creates new products and services Eases limitations of geographic markets Alters economies of scale Changes entry barriers
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Technological Forces
Capitalizing on Information Technology (IT)

Chief Information Officer (CIO)

Chief Technology Officer (CTO)

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Technological Forces
Technology-based issues
Underlie nearly every strategic decision

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Competitive Forces

Collection and evaluation of information on competitors is essential for successful strategy formulation

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Competitive Forces

Competition in virtually all industries can be described as intense.

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Competitive Forces
Identifying rival firms

Strengths Weaknesses Capabilities Opportunities Threats Objectives Strategies

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Competitive Forces
Key Questions About Competitors:

Their strengths Their weaknesses Their objectives and strategies Their responses to all external variables (e.g. social, political, demographic, etc.) Their vulnerability to our alternative strategies
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Competitive Forces
Key Questions About Competitors:

Our vulnerability to successful strategic counterattack Our product and service positioning relative to competitors Entry and exit of firms in the industry Key factors for our current position in industry
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Competitive Forces
Key Questions About Competitors:

Sales and profit rankings of competitors over time Nature of supplier and distributor relationships The threat of substitute products or services

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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
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Competitive Forces
7 Characteristics of most competitive U.S. firms:
1.
2.

3.
4.

Market share matters Understand what business you are in Broke or not, fix it Innovate or evaporate
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Competitive Forces
7 Characteristics of most competitive U.S. firms:
5. 6.

7.

Acquisition is essential to growth People make a difference No substitute for quality

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Competitive Forces
Competitive Intelligence Programs:

Systematic and ethical process for gathering and analyzing information about the competitions activities and general business trends to further a business own goals.
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Competitive Analysis: Porters FiveForces Model

Potential development of substitute products

Bargaining power of suppliers

Rivalry among competing firms

Bargaining power of consumers

Potential entry of new competitors

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Global Challenge
International Challenge faced by U.S. firms:
How to gain and maintain exports to other nations How to defend domestic markets against imported goods

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Industry Analysis (EFE)

External Factor Evaluation Matrix Summarize & evaluate:
Economic
Social Cultural Demographic Environmental Political Governmental Technological Competitive

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Industry Analysis (EFE)

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

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Industry Analysis (EFE)

Five-step process:
Assign 1-4 rating to each factor
Firms current strategies response to the factor

Multiply each factors weight by its rating

Produces a weighted score

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Industry Analysis (EFE)

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, 1.0. Average = 2.5
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USTKey External Factors

Opportunities
Global markets untapped Increased demand Astronomical Internet growth Pinkerton leader in discount market

Weight .15

Rating

Weighted score

1 3 1 4

.15 .15 .05 .60

.05 .05 .15

More social pressure to quit smoking

.10
.10

3
2

.30
.20

Threats
Legislation against the tobacco industry

Production limits on tobacco

Smokeless market SE region U.S. Bad media exposure from FDA Clinton Administration TOTAL
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.05
.05 .10 .20 1.00

3
2 2 1

.15
.10 .20 .20 2.10
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Industry Analysis (EFE)

Total weighted score of 4.0 =
Organization response is outstanding to threats & weaknesses

Total weighted score of 1.0 =

Firms strategies not capitalizing on opportunities or avoiding threats
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Industry Analysis (EFE)

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.
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Industry Analysis (EFE)

Important

Understanding of the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.

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Industry Analysis (CPM)

Competitive Profile Matrix

Identifies firms major competitors and their strengths & weaknesses in relation to a sample firms strategic position

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(CPM)
Critical Success Factor Advertising

Avon

LOreal

Procter & Gamble

Weight Rating Score Rating Score Rating Score

0.20

Product Quality
Price Competition Management Financial Position Customer Loyalty Global Expansion Market Share

0.10
0.10 0.10 0.15 0.10 0.20 0.05

1 4 3 4 4 4 4 1

0.20

0.40
0.30 0.40 0.60 0.40 0.80 0.05

4 4 3 3 3 4 2 4

0.80

0.60

0.40
0.30 0.30 0.45 0.40 0.40 0.20

3
4 3 3 2 2 3

0.30
0.40 0.30 0.45 0.20 0.40 0.15

Total

1.00

3.15
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3.25

2.80
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Key Terms

America Online Chief Information Officer (CIO) Chief Technology Officer (CTO) Competitive advantages Competitive analysis Competitive intelligence (CI) Competitive Profile Matrix (CPM)
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Key Terms

Critical success factors Cyberspace Decruiting Director of competitive analysis Downsizing Econometric models Environmental scanning External audit External Factor Evaluation (EFE) Matrix
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Key Terms

External forces Industry analysis Information Technology (IT) Industrial policies Internet learning from the partner Linear regression

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Key Terms

Porters Five-Forces Model Netscape On-Line databases Rightsizing Trend extrapolation World Wide Web (www)

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