Strategic Management Concepts & Cases

Fred R. David
8th edition

Chapter 3: The External Assessment

PowerPoint Slides By: Anthony F. Chelte

Western New England College

Ch. 3-1 2001 Prentice Hall

Comprehensive Strategic Management Model

External Audit

Chapter 3

Vision & Mission Statements

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

Chapter 4

Ch. 3-2 2001 Prentice Hall

External Assessment
If you're not faster than your competitor, youre in a tenuous position, and if youre only half as fast, youre terminal.
George Salk
Ch. 3-3 2001 Prentice Hall

External Assessment (Contd)

The idea is to concentrate our strength against our competitors relative weakness.
Bruce Henderson
Ch. 3-4 2001 Prentice Hall

External Assessment (Contd)

External Strategic-Management Audit

Industry analysis Environmental scanning

Ch. 3-5 2001 Prentice Hall

External Assessment (Contd)

External audit:

Focuses on identifying & evaluating events beyond the immediate control of the firm
Ch. 3-6 2001 Prentice Hall

External Assessment (Contd)

External audit focuses on:

Increased foreign competition Population shifts Demographics (e.g., aging population) Information technology
Ch. 3-7 2001 Prentice Hall

External Assessment (Contd)

External audit reveals:
Key opportunities Key threats

Managers then formulate strategies:

Take advantage of opportunities Avoid/reduce impact of threats

Ch. 3-8 2001 Prentice Hall

External Assessment (Contd)

External Audit

Aimed at identifying key variables that offer actionable responses

Ch. 3-9 2001 Prentice Hall

External Assessment (Contd)

Key External Forces
Five (5) broad categories:

Economic forces Social, cultural, demographic, & environmental forces

Ch. 3-10 2001 Prentice Hall

External Assessment (Contd)

Key External Forces (Contd)
Five (5) broad categories:

Political, governmental, & legal forces

Technological forces
Competitive forces
Ch. 3-11 2001 Prentice Hall

External Assessment (Contd)

Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services
2001 Prentice Hall

Key External Forces

Opportunities & Threats

Ch. 3-12

External Assessment (Contd)

Process of External Audit:

Involve as many managers & employees as possible Gather competitive intelligence Information about social, demographic, cultural, environmental, etc. Monitor sources of information (key magazines, articles, etc.) Utilization of Internet Suppliers, distributors, customers as sources of information
Ch. 3-13 2001 Prentice Hall

External Assessment (Contd)

Key External Factors:
Vary over time & Vary by industry

Ch. 3-14 2001 Prentice Hall

External Assessment (Contd)

Key External Factors:

Important to achieving long-term objectives Measurable Applicable to all competing firms Hierarchical
Ch. 3-15 2001 Prentice Hall

External Assessment (Contd)

Examples of Key External Factors:

Market share Breadth of competing products World economies Proprietary & key account advantages Price competitiveness Technological advancements Interest rates
Ch. 3-16 2001 Prentice Hall

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
Ch. 3-17 2001 Prentice Hall

Economic Forces (Contd)

Monitor Key Economic Variables:

(Contd)

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
Ch. 3-18 2001 Prentice Hall

Economic Forces (Contd)

Monitor Key Economic Variables:

(Contd)

Price fluctuations Exportation of labor & capital Monetary policies Fiscal policies Tax rates ECC policies OPEC policies LDC policies
Ch. 3-19 2001 Prentice Hall

Social & Environmental Forces

Social, cultural, demographic, and environmental changes:

Major impact on:

Products Services Markets Customers
Ch. 3-20 2001 Prentice Hall

Social & Environmental Forces

(Contd)

World population > 6 billion U.S. population < 300 million

Great

potential for domestic production expansion to other markets

Domestic only is a risky strategy

Ch. 3-21 2001 Prentice Hall

Social & Environmental Forces

(Contd)
1998 Country 2050 % Increase

Asia Africa Latin America Europe

3.6 b 749 m 504 m 628 m

5.3 b 1.8 b 809 m 729 m

47.22 140.32 60.52 16.08

North America
Oceania

305 m
30 m

392 m
46 m

28.52
53.33
Ch. 3-22

2001 Prentice Hall

Social & Environmental Forces

(Contd)
E-commerce Perspective
Question:

Is the Internet Revolution Bypassing

Poor, Minorities?
Answer: Yes!

Ch. 3-23 2001 Prentice Hall

Social & Environmental Forces

(Contd)

Internet revolution is widening the gap between rich & poor 42% U.S. households have personal computers 80% of them are in households w/family income > $75,000
Ch. 3-24 2001 Prentice Hall

Social & Environmental Forces

(Contd)

Internet usage lowest (3%) among Americans earning $10K or less

26.7% of White Americans use Internet at home compared to 9.2% Blacks & 8.8% of Hispanics

90% shares of common stock of American companies held by the wealthiest 10% of Americans
Ch. 3-25 2001 Prentice Hall

Social & Environmental Forces

(Contd)

Key social, cultural, demographic, & environmental variables:

Childbearing rates Number of special-interest groups Number of marriages Number of divorces Number of births Number of deaths Immigration & emigration rates
Ch. 3-26 2001 Prentice Hall

Social & Environmental Forces

(Contd)
Key social, cultural, demographic, & environmental variables: (Contd)

Life expectancy rates Per capita income Attitudes toward business Average disposable income Buying habits Ethical concerns Attitudes toward saving
Ch. 3-27 2001 Prentice Hall

Social & Environmental Forces

(Contd)
Key social, cultural, demographic, & environmental variables: (Contd)

Racial equality Average level of education Government regulation Attitudes toward customer service Attitudes toward product quality Energy conservation Social responsibility
Ch. 3-28 2001 Prentice Hall

Social & Environmental Forces

(Contd)
Key social, cultural, demographic, & environmental variables: (Contd)

Value placed on leisure time Recycling Waste management Air & water pollution Ozone depletion Endangered species
Ch. 3-29 2001 Prentice Hall

Political, Govt., & Legal Forces

Government Regulation

Key opportunities & key threats

Antitrust

legislation (Microsoft) Tax rates Lobbying efforts Patent laws

Ch. 3-30 2001 Prentice Hall

Political, Govt., & Legal Forces

(Contd) Increasing Global Interdependence

Impact of political variables

Formulation

of strategies Implementation of strategies

Ch. 3-31 2001 Prentice Hall

Political, Govt., & Legal Forces

(Contd) Increasing Global Interdependence

Strategists in a global economy

Forecast

political climates Legalistic skills Diverse world cultures

Ch. 3-32 2001 Prentice Hall

Political, Govt., & Legal Forces

(Contd)
Globalization of Industry

Worldwide trend toward similar consumption patterns Global buyers & sellers E-commerce Instant transmission of money & information across continents
Ch. 3-33 2001 Prentice Hall

Political, Govt., & Legal Forces

(Contd)

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
Ch. 3-34 2001 Prentice Hall

Political, Govt., & Legal Forces

(Contd)

Key Political, govt., & legal variables: (Contd)

Environmental

protection laws Equal employment legislation Level of government subsidies Antitrust legislation/enforcement Sino-American relationships Russian-American relationships European-American relationships
Ch. 3-35 2001 Prentice Hall

Political, Govt., & Legal Forces

(Contd)

Key Political, govt., & legal variables:(Contd)

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
Ch. 3-36 2001 Prentice Hall

Technological Forces
Technological Change

Dramatic effect on business

Fiber

optics Biometrics EFT Computer engineering Superconductivity advancements

Ch. 3-37 2001 Prentice Hall

Technological Forces (Contd)

Internet impact on opportunities & threats:

Altering life cycles of products Increasing speed of distribution Creating new products & services Erasing limitations of traditional geographic markets

Ch. 3-38 2001 Prentice Hall

Technological Forces (Contd)

Internet impact on opportunities & threats:
(Contd)

Altering economies of scale Changing entry barriers Redefining relationships

Industries

& suppliers, creditors, customers, and competitors

Ch. 3-39 2001 Prentice Hall

Technological Forces (Contd)

Capitalizing on Information Technology (IT)

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

Ch. 3-40 2001 Prentice Hall

Competitive Forces
External Audit & Competing Firms

Identifying rival firms

Strengths Weaknesses Capabilities Opportunities Threats Objectives Strategies
Ch. 3-41 2001 Prentice Hall

Competitive Forces (Contd)

Competitor Information

Sources:
Moodys

Manuals Standard Corporation Descriptions Value Line Investment Surveys Duns Business Rankings Standard & Poors Industry Surveys Industry Week Forbes, Fortune, Business Week
Ch. 3-42 2001 Prentice Hall

Competitive Forces (Contd)

Most competitive firms in America

Seven Characteristics Market share matters Understand what business you are in Broke or not, fix it Innovate or evaporate
Ch. 3-43 2001 Prentice Hall

Competitive Forces (Contd)

Most competitive firms in America
(Contd)

Seven Characteristics
Acquisition

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

Ch. 3-44 2001 Prentice Hall

Competitive Analysis: Porters Five-Forces Model

Potential development of substitute products

Bargaining power of suppliers

Rivalry among competing firms

Bargaining power of consumers

Potential entry of new competitors

Ch. 3-45 2001 Prentice Hall

Global Challenge
Differences U.S. and MNCs

Affect strategic management:

Language Culture Politics Economy Government

interference Labor relations Trade barriers

Ch. 3-46 2001 Prentice Hall

Industry Analysis (EFE)

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

Ch. 3-47 2001 Prentice Hall

Industry Analysis (EFE)

(Contd)
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

Ch. 3-48 2001 Prentice Hall

Industry Analysis (EFE)

(Contd)
Five-step process:

Assign 1-4 rating to each factor

Firms

factor

current strategies response to the

Multiply each factors weight by its rating

Produces

a weighted score
Ch. 3-49 2001 Prentice Hall

Industry Analysis (EFE)

(Contd)
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
Ch. 3-50 2001 Prentice Hall

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
2001 Prentice Hall

.05
.05 .10 .20 1.00

3
2 2 1

.15
.10 .20 .20 2.10
Ch. 3-51

Industry Analysis (EFE)

(Contd)
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
Ch. 3-52 2001 Prentice Hall

Industry Analysis (EFE)

(Contd)

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.
Ch. 3-53 2001 Prentice Hall

Industry Analysis (EFE)

(Contd)

Important

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

Ch. 3-54 2001 Prentice Hall

Industry Analysis (CPM)

Competitive Profile Matrix

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

Ch. 3-55 2001 Prentice Hall

(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
2001 Prentice Hall

3.25

2.80
Ch. 3-56

Key Terms & Concepts

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

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

Ch. 3-57

2001 Prentice Hall

Key Terms & Concepts (Contd)

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

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

Ch. 3-58 2001 Prentice Hall