Chapter 3 The External Assessment

Copyright 2005 Prentice Hall

A COMPREHENSIVE STRATEGIC MANAGEMENT MODEL

Perform External Audits Generate, Evaluate and Select strategies Implement Strategies Management Issues Implement Strategies Mktg, Fin, Acc, R&D and MIS Issues Measure and Evaluate Performance

Develop M-V Statements

Establish Long term Objectives

Perform Internal Audits

Strategy Formulation

Strategy Implementation

Strategy Evaluation

Source: Fred R. David, 2007

External Strategic Management Audit

-- Environmental Scanning -- Industry Analysis
Identify & Evaluate factors beyond the control of a single firm Increased foreign competition Population shifts Information technology

External Strategic Management Audit

Purpose of External Audit

Identify
Opportunities Threats

Key External Forces

Political, governmental & legal forces Economic forces Social, cultural, demographic & environmental forces Technological forces

Competitive forces

External Audit Sources of Information

Internet
Libraries Suppliers Distributors Customers

Competition

Performing External Audit

-- Key Factors

Vary over time Vary by industry

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

Price competitiveness Technological advancements Interest rates Pollution abatement

Performing External Audit

Long-term orientation

External Factors

Measurable Applicable to competing firms Hierarchical

Industrial Organization (I/O) View

-- Industry factors more important than internal factors

Performance determined by industry forces

I/O Perspective: Firm Performance

Industry Properties
Economies of Scale Barriers to market entry Product differentiation Level of competitiveness

Political, Government & Legal Forces Government Regulation

Key opportunities & threats
Antitrust legislation Tax rates Lobbying efforts Patent laws

Key Political, Governmental, & Legal Variables

Regulation/deregulation Tax law changes Special tariffs PACs Voter participation rates Number of patents Changes in patent laws Environmental protection laws Equal employment legislation Government subsidies Anti-trust enforcement Global relationships Import/export regulations Political conditions Location and severity of terrorist activity

Economic Forces
Key Economic Variables to Be Monitored

Shift to a service economy Availability of credit Level of disposable income Propensity of people to spend Interest rates Inflation rates Money market rates Federal government budget deficits Gross domestic product trend Consumption patterns 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 different categories of goods and services Income differences by region and consumer groups Price fluctuations Export of labor and capital from the United States Monetary policies Fiscal policies Tax rates Organization of Petroleum Exporting Countries (OPEC) policies Coalitions of Lesser Developed Countries (LCD) policies

Social, Cultural, Demographic & Environmental Forces

Major Impact

Products

Services
Markets

Customers

Key Social, Cultural, Demographic & Environmental Variables

Childbearing rates Number of special interest groups Number of marriages & divorces Number of births & deaths Immigration & emigration rates

Technological Forces
Major Impact

Internet
Communications Semiconductors
Technology-based issues

Essential for nearly every strategic decision

Competitive Forces
Collection & evaluation of data on competitors is essential for successful strategy formulation Competition on virtually all industries can be described as intense.

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 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 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 5. Acquisition is essential to growth 6. People make a difference 7. No substitute for quality

The Five-Forces Model of Competition

Potential development of substitute products

Bargaining power of suppliers

Rivalry among competing firms

Bargaining power of consumers

Potential entry of new competitors

The Five-Forces Model

Rivalry Among Competing Firms Most powerful of the five forces Focus on competitive advantage of strategies Potential Entry of New Competitors Barriers to entry are important Quality, pricing, and marketing can overcome barriers Potential Development of Substitute Products Pressures increase when consumers switching costs decrease Firms plans for increased capacity & market penetration Bargaining Power of Suppliers Large number of suppliers & few substitutes affects intensity of competition Backward integration can gain control or ownership of suppliers Bargaining Power of Consumers Customers concentrated or buy in volume affects intensity of competition Consumer power is higher where products are standard or undifferentiated

Industry Analysis: The External Factor Evaluation (EFE) Matrix Summarize & Evaluate
Economic Social Cultural Demographic Environmental Political Governmental Technological Competitive

EFE Gateway Computers (2003) Key External Factors

Weight Rating Wtd Score

Opportunities
1. Global PC market expected to grow 20% in 2004 2. Cost of PC component parts expected to decrease 10% - 2004 3. Internet use growing rapidly 4. China entered WTO; lowered taxes for importing PCs 5. The average income for PC worker has declined from $40K/yr to $30k/yr

0.10
0.10 0.05

3
3 2

0.30
0.30 0.10

0.10
0.05

1
3

0.10
0.15

EFE Gateway Computers (2003) (contd) Key External Factors

Weight Rating Wtd Score

Opportunities (contd)
6. Modernization of business firms and government agencies 7. U.S. (& world) economies recovering 8. 30% of Chinese population can afford a PC; only 10% of homes have a PC

0.05
0.05 0.05 0.10 0.10

2
3 1 1 1

0.10
0.15 0.05 0.10 0.05

Threats
1. Intense rivalry in industry

EFE Gateway Computers (2003) (contd) Key External Factors

Weight Rating Wtd Score

Threats (contd)
2. Severe price cutting in PC industry 3. Different countries have different regs and infrastructure for PCs 0.10 0.05 2 1 0.20 0.05

4. Palm & PDA becoming substitutes

5. Demand exceeds supply of experienced PC workers 6. Birth rate in U.S. declining annually

0.05
0.05 0.05

3
4 3

0.15
0.20 0.15

EFE Gateway Computers (2003) (contd) Key External Factors

Weight Rating Wtd Score

Threats (contd)
7. U.s. consumers and businesses delaying purchase of PCs 8. PC firms diversifying into consumer electronics 0.05 0.05 2 3 0.10 0.15

Total

1.00

2.40

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

Industry Analysis EFE

Important --

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

Industry Analysis: Competitive Profile Matrix (CPM)

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

Gateway

Apple
Rating Wtd Score

Dell
Rating Wtd Score

CSFs
Market share

Wt

Rating

Wtd Score

0.15

0.45

0.30

0.60

Inventory sys
Fin position Prod. Quality Cons. Loyalty

0.08
0.10 0.08 0.02

2
2 3 3

0.16
0.20 0.24 0.06

2
3 4 3

0.16
0.30 0.32 0.06

4
3 3 4

0.32
0.30 0.24 0.08

Sales Distr
Global Exp. Org. Structure

0.10
0.15 0.05

3
3 3

0.30
0.45 0.15

2
2 3

0.20
0.30 0.15

3
4 3

0.30
0.60 0.15

Gateway CSFs (contd)

Prod. Capacity
Wt Rating Wtd Score

Apple
Rating Wtd Score

Dell
Rating Wtd Score

0.04

0.12

0.12

0.12

E-commerce
Customer Serv Price competitive

0.10
0.10 0.02

3
3 4

0.30
0.30 0.08

3
2 1

0.30
0.20 0.02

3
4 3

0.30
0.40 0.06

Mgt. experience
Total

0.01
1.00

0.02
2.83

0.04
2.47

0.02
3.49

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.