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Slide 1: 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
Slide 2: Chapter Outline • The Nature of an External Audit • Economic Forces • Social, Cultural, Demographic, and Environmental Forces Fred R. David Prentice Hall Ch.3-2
Slide 3: Chapter Outline • Political, Governmental, and Legal Forces • Technological Forces • Competitive Forces Fred R. David Prentice Hall Ch.3-3
Slide 4: Chapter Outline • Competitive Analysis: – Porter’s Five-Forces Model • Sources of External Information • Forecasting Tools and Techniques Fred R. David Prentice Hall Ch.3-4
Slide 5: Chapter Outline • The Global Challenge • Industry Analysis: – The External Factor Evaluation Matrix • The Competitive Profile Matrix Fred R. David Prentice Hall Ch.3-5
Slide 6: The External Assessment Prediction is very difficult, especially about the future. -- Neils Bohr Fred R. David Prentice Hall Ch.3-6
Slide 7: External Strategic Management Audit Also called: – Environmental scanning – Industry analysis Fred R. David Prentice Hall Ch.3-7
Slide 8: 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.3-8
Slide 9: Nature of External Audit Purpose: – Development of Finite List: • Opportunities • Threats to be avoided Fred R. David Prentice Hall Ch.3-9
Slide 10: 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.3-10
Slide 11: 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 Fred R. David Prentice Hall Ch.3-11
Slide 12: Performing an External Audit Gather competitive intelligence on factors: – Social – Cultural – Demographic – Environmental – Economic – Political, legal, governmental – technological Fred R. David Prentice Hall Ch.3-12
Slide 13: Performing an External Audit Sources of information include: – Internet – Libraries (corporate, university, public) – Suppliers – Distributors – Customers – Competition Fred R. David Prentice Hall Ch.3-13
Slide 14: Performing an External Audit Key factors: – Vary over time – Vary by industry Fred R. David Prentice Hall Ch.3-14
Slide 15: 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.3-15
Slide 16: 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 Ch.3-16 Fred R. David Prentice Hall
Slide 17: 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 Prentice Hall Ch.3-17
Slide 18: 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 Ch.3-18 Fred R. David Prentice Hall
Slide 19: Monitor Key Economic Variables: • • • • • • • • Price fluctuations Exportation of labor & capital Monetary policies Fiscal policies Tax rates ECC policies OPEC policies LDC policies Ch.3-19 Fred R. David Prentice Hall
Slide 20: Social, Cultural, Demographic & Environmental Forces Major impact on: – Products – Services – Markets – customers Fred R. David Prentice Hall Ch.3-20
Slide 21: 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 Fred R. David Prentice Hall Ch.3-21
Slide 22: 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 Fred R. David Prentice Hall Ch.3-22
Slide 23: 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. Ch.3-23 – 2001 Recession (U.S. and World) • Fred R. David Prentice Hall
Slide 24: Social, Cultural, Demographic & Environmental Forces Trends for the 2000’s – – – – – – – – 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 Fred R. David Prentice Hall Ch.3-24
Slide 25: 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 Fred R. David Prentice Hall Ch.3-25
Slide 26: Monitor Key Variables • • • • • • • Life expectancy rates Per capita income Attitudes toward business Average disposable income Buying habits Ethical concerns Attitudes toward saving Fred R. David Prentice Hall Ch.3-26
Slide 27: Monitor Key Variables • • • • • • • Racial equality Average level of education Government regulation Attitudes toward customer service Attitudes toward product quality Energy conservation Social responsibility Fred R. David Prentice Hall Ch.3-27
Slide 28: Monitor Key Variables • • • • • • Value placed on leisure time Recycling Waste management Air & water pollution Ozone depletion Endangered species Ch.3-28 Fred R. David Prentice Hall
Slide 29: Political, Govt., & Legal Forces Government Regulation • Key opportunities & key threats • • • • Antitrust legislation (Microsoft) Tax rates Lobbying efforts Patent laws Fred R. David Prentice Hall Ch.3-29
Slide 30: Political, Govt., & Legal Forces Increasing Global Interdependence • Impact of political variables – Formulation of Strategies – Implementation of Strategies Fred R. David Prentice Hall Ch.3-30
Slide 31: Political, Govt., & Legal Forces Increasing Global Interdependence • Strategists in a global economy • • • Forecast political climates Legalistic skills Diverse world cultures Fred R. David Prentice Hall Ch.3-31
Slide 32: 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.3-32
Slide 33: 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.3-33
Slide 34: 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 Fred R. David Prentice Hall Ch.3-34
Slide 35: 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 Ch.3-35 Fred R. David Prentice Hall
Slide 36: Technological Forces Revolutionary technological forces: • Profound impact on organizations • • • • Internet Semiconductors XML technologies UWB communications Fred R. David Prentice Hall Ch.3-36
Slide 37: 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.3-37
Slide 38: Technological Forces Capitalizing on Information Technology (IT) • • Chief Information Officer (CIO) Chief Technology Officer (CTO) Fred R. David Prentice Hall Ch.3-38
Slide 39: Technological Forces Technology-based issues – Underlie nearly every strategic decision Fred R. David Prentice Hall Ch.3-39
Slide 40: Competitive Forces Collection and evaluation of information on competitors is essential for successful strategy formulation Fred R. David Prentice Hall Ch.3-40
Slide 41: Competitive Forces Competition in virtually all industries can be described as intense. Fred R. David Prentice Hall Ch.3-41
Slide 42: Competitive Forces Identifying rival firms • • • • • • • Strengths Weaknesses Capabilities Opportunities Threats Objectives Strategies Fred R. David Prentice Hall Ch.3-42
Slide 43: 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 Fred R. David Prentice Hall Ch.3-43
Slide 44: 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 Fred R. David Prentice Hall Ch.3-44
Slide 45: 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 Fred R. David Prentice Hall Ch.3-45
Slide 46: Competitive Forces Sources of Corporate Information: • • • • • • • Moody’s Manuals Standard Corporation Descriptions Value Line Investment Surveys Dun’s Business Rankings Standard & Poor’s Industry Surveys Industry Week Forbes, Fortune, Business Week Fred R. David Prentice Hall Ch.3-46
Slide 47: Competitive Forces 7 Characteristics of most competitive U.S. firms: Market share matters 2. Understand what business you are in 3. Broke or not, fix it 4. Innovate or evaporate 1. Fred R. David Prentice Hall Ch.3-47
Slide 48: Competitive Forces 7 Characteristics of most competitive U.S. firms: Acquisition is essential to growth 2. People make a difference 3. No substitute for quality 1. Fred R. David Prentice Hall Ch.3-48
Slide 49: Competitive Forces Competitive Intelligence Programs: • Systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’ own goals. Fred R. David Prentice Hall Ch.3-49
Slide 50: Competitive Analysis: Porter’s FiveForces Model Potential development of substitute products Bargaining power of suppliers Rivalry among competing firms Bargaining power of consumers Potential entry of new competitors Ch.3-50 Fred R. David Prentice Hall
Slide 51: 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 Fred R. David Prentice Hall Ch.3-51
Slide 52: Industry Analysis (EFE) External Factor Evaluation Matrix Summarize & evaluate: Economic Social Cultural Demographic Environmental Political Governmental Technological Competitive Fred R. David Prentice Hall Ch.3-52
Slide 53: 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 Ch.3-53 Fred R. David Prentice Hall
Slide 54: Industry Analysis (EFE) • • Five-step process: Assign 1-4 rating to each factor • Firm’s current strategies response to the factor • Multiply each factor’s weight by its rating • Produces a weighted score Fred R. David Prentice Hall Ch.3-54
Slide 55: 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.3-55
Slide 56: UST—Key External Factors Opportunities Global markets untapped Increased demand Astronomical Internet growth Pinkerton leader in discount market More social pressure to quit smoking Weight .15 Rating Weighted score 1 3 1 4 3 2 3 2 2 1 .15 .15 .05 .60 .30 .20 .15 .10 .20 .20 2.10 Ch.3-56 .05 .05 .15 .10 .10 .05 .05 .10 .20 1.00 Fred R. David Prentice Hall Threats Legislation against the tobacco industry Production limits on tobacco Smokeless market SE region U.S. Bad media exposure from FDA Clinton Administration TOTAL
Slide 57: Industry Analysis (EFE) Total weighted score of 4.0 = Organization response is outstanding to threats & weaknesses Total weighted score of 1.0 = Firm’s strategies not capitalizing on opportunities or avoiding threats Fred R. David Prentice Hall Ch.3-57
Slide 58: 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. Fred R. David Prentice Hall Ch.3-58
Slide 59: Industry Analysis (EFE) Important • Understanding of the factors used in the EFE Matrix is more important than the actual weights and ratings assigned. Ch.3-59 Fred R. David Prentice Hall
Slide 60: Industry Analysis (CPM) Competitive Profile Matrix • Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic position Fred R. David Prentice Hall Ch.3-60
Slide 61: (CPM) Critical Success Factor Advertising Product Quality Price Competition Management Financial Position Customer Loyalty Global Expansion Market Share Avon L’Oreal Procter & Gamble Weight Rating Score Rating Score Rating Score 0.20 0.10 0.10 0.10 0.15 0.10 0.20 0.05 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 4 4 3 3 3 4 2 4 0.80 0.40 0.30 0.30 0.45 0.40 0.40 0.20 3.25 3 3 4 3 3 2 2 3 0.60 0.30 0.40 0.30 0.45 0.20 0.40 0.15 2.80 Ch.3-61 Total Fred R. David Prentice Hall
Slide 62: Key Terms • • • • • • • America Online Chief Information Officer (CIO) Chief Technology Officer (CTO) Competitive advantages Competitive analysis Competitive intelligence (CI) Competitive Profile Matrix (CPM) Fred R. David Prentice Hall Ch.3-62
Slide 63: Key Terms • • • • • • • • • Critical success factors Cyberspace Decruiting Director of competitive analysis Downsizing Econometric models Environmental scanning External audit External Factor Evaluation (EFE) Matrix Fred R. David Prentice Hall Ch.3-63
Slide 64: Key Terms • • • • • • External forces Industry analysis Information Technology (IT) Industrial policies Internet learning from the partner Linear regression Fred R. David Prentice Hall Ch.3-64
Slide 65: Key Terms • • • • • • Porter’s Five-Forces Model Netscape On-Line databases Rightsizing Trend extrapolation World Wide Web (www) Fred R. David Prentice Hall Ch.3-65