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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
Fred R. David
Prentice Hall

Ch.3-1

External Strategic Management Audit

Also called:
Environmental scanning
Industry analysis

Fred R. David
Prentice Hall

Ch.3-2

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
Fred R. David
Prentice Hall

Ch.3-3

Nature of External Audit


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

Fred R. David
Prentice Hall

Ch.3-4

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
Fred R. David
Prentice Hall

Ch.3-5

Relationships Between Key External Forces


and an Organization

Key
External
Forces

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

Fred R. David
Prentice Hall

Opportunities
&
Threats

Ch.3-6

Performing an External Audit


Gather competitive intelligence on factors:
Social
Cultural
Demographic
Environmental
Economic
Political, legal, governmental
technological
Fred R. David
Prentice Hall

Ch.3-7

Performing an External Audit


Sources of information include:
Internet
Libraries (corporate, university, public)
Suppliers
Distributors
Customers
Competition
Fred R. David
Prentice Hall

Ch.3-8

Performing an External Audit


Key factors:
Vary over time
Vary by industry

Fred R. David
Prentice Hall

Ch.3-9

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

Fred R. David
Prentice Hall

Ch.3-10

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

Fred R. David
Prentice Hall

Ch.3-11

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
Fred R. David
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Ch.3-12

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

Fred R. David
Prentice Hall

Ch.3-13

Monitor Key Economic Variables:

Price fluctuations
Exportation of labor & capital
Monetary policies
Fiscal policies
Tax rates
ECC policies
OPEC policies
LDC policies

Fred R. David
Prentice Hall

Ch.3-14

Social, Cultural, Demographic &


Environmental Forces
Major impact on:
Products
Services
Markets
customers

Fred R. David
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Ch.3-15

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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Ch.3-16

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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Ch.3-17

Monitor Key Variables

Value placed on leisure time


Recycling
Waste management
Air & water pollution
Ozone depletion
Endangered species

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Ch.3-18

Political, Govt., & Legal Forces


Government Regulation
Key opportunities & key threats

Antitrust legislation (Microsoft)


Tax rates
Lobbying efforts
Patent laws
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Ch.3-19

Political, Govt., & Legal Forces


Increasing Global Interdependence

Impact of political variables


Formulation of Strategies
Implementation of Strategies

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Ch.3-20

Political, Govt., & Legal Forces


Increasing Global Interdependence

Strategists in a global economy

Forecast political climates


Legalistic skills
Diverse world cultures

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Ch.3-21

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
Fred R. David
Prentice Hall

Ch.3-22

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

Fred R. David
Prentice Hall

Ch.3-23

Technological Forces
Revolutionary technological forces:

Profound impact on organizations

Internet
Semiconductors
XML technologies
UWB communications
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Ch.3-24

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
Fred R. David
Prentice Hall

Ch.3-25

Competitive Forces

Collection and evaluation of information on


competitors is essential for successful
strategy formulation

Fred R. David
Prentice Hall

Ch.3-26

Competitive Forces

Competition in virtually all industries can be


described as intense.

Fred R. David
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Ch.3-27

Competitive Forces
Identifying rival firms

Strengths
Weaknesses
Capabilities
Opportunities
Threats
Objectives
Strategies
Fred R. David
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Ch.3-28

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

Fred R. David
Prentice Hall

Ch.3-29

Industry Analysis (EFE)


External Factor Evaluation Matrix
Summarize & evaluate:
Economic

Demographic

Governmental

Social

Environmental

Technological

Cultural

Political

Competitive

Fred R. David
Prentice Hall

Ch.3-30

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


(not important to very important)
Fred R. David
Prentice Hall

Ch.3-31

Industry Analysis (EFE)

Five-step process:

Assign 1-4 rating to each factor


Firms current strategies response to the
factor
Response poor - superior

Multiply each factors weight by its rating


Produces a weighted score

Fred R. David
Prentice Hall

Ch.3-32

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
Fred R. David
Prentice Hall

Ch.3-33


Factor

Weight Rating Weighted


score

Opportunities
High-end in-home entertainment sales are growing nationally

0.15

0.60

Forecast for continued growth of expensive housing in Dade &


Broward counties
Wealthy foreigners buy expensive entertainment equipment for
their homes in South Florida
Current customers refer new prospects with little prompting

0.16

0.64

0.07

0.21

0.12

0.36

Direct mailing lists are available by household income

0.06

0.18

0.13

0.13

New technologies such as satellite broadcast compete with


current technologies
Declining incomes in South Florida versus the U.S.

0.10

0.10

0.08

0.16

South Florida highly dependent on trade with Latin America

0.07

0.07

Economy depends on air transport, a volatile industry

0.06

0.12

Threats
Large chains could expand upward into their niche

Total

1.00
Fred R. David
Prentice Hall

2.57
Ch.3-34

Industry Analysis (EFE)

Important

Understanding of the factors used in the


EFE Matrix is more important than the
actual weights and ratings assigned.

Fred R. David
Prentice Hall

Ch.3-35

Industry Analysis (CPM)


Competitive Profile Matrix

Identifies firms major competitors


and their strengths & weaknesses
in relation to a sample firms
strategic position
Major weakness major strength
Fred R. David
Prentice Hall

Ch.3-36

(CPM)
Critical Success
Factor

Avon

LOreal

Procter
& Gamble

Weight Rating Score Rating Score Rating Score

Advertising

0.20

Product Quality

0.10

Price Competition

0.10

Management

0.10

Financial Position

0.15

Customer Loyalty

0.10

Global Expansion

0.20

Market Share

0.05

Total

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
Fred R. David
Prentice Hall

4
4
3
3
3
4
2
4

0.80

0.60

0.40

0.30

0.30

0.40

0.30

0.30

0.45

0.45

0.40

0.20

0.40

0.40

0.20

0.15

3.25

2.80
Ch.3-37