Ch 3 -1Copyright © 2011 Pearson Education. Strategic Management: Concepts and Cases Arab World Edition Fred R. David Abbas J. Ali Abdulrahman Y. Al-Aali

Ch 3 -1 Copyright © 2011 Pearson Education

Strategic Management: Concepts and CasesArab World EditionFred R. DavidAbbas J. AliAbdulrahman Y. Al-Aali

Chapter 3: The External Assessment


Chapter Outline

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• The Nature of the External Assessment

• The Industrial Organization (I/O) View

• Economic Forces and Social and Demographic Forces

• Political, Governmental, and Legal Forces

• Technological Forces

• Industry Forces

• Competitive Analysis: Porter’s Five-Forces Model

Copyright © 2011 Pearson Education

Chapter Outline (cont’d)

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• Operating Environment Forces

• Sources of External Information

• Forecasting Tools & Techniques

• Global Challenge

• Industry Analysis: The External Factor Evaluation (EFE) Matrix

• Competitive Profile Matrix (CPM)


Every convenience brings its own inconvenience. – Arab Saying

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External Assessment

“To seize opportunities and overcome threats and difficulties, we have to actively confront changing conditions.”– Abdul Wahab Ben Naser Al Munthery, CEO, Al-Batina Group, Oman


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Figure 3-1


Source: Adapted from Fred R. David, “How Companies Define Their Mission” Long Range Planning 22, no. 3 (June 1988): 40

The purpose of performing an external Assessment is to Identify and examine a finite list of opportunities that could benefit a firm and threats that should be avoided . These factors are out of the firm’s control , but exercise significant influence on the direction and the operation of the firm Firms should be able to actively respond to these factors by formulating better strategies by which firms can take advantages of external opportunities and minimize the impact of potential threats

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The Natural of an External Assessment


The Natural of an External Assessment

• The external assessment consists of:_ • General environment assessment (5 key broad forces)• Immediate environment assessment

Industry environment Operating environment

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

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The key external force encompasses five broad categories (general environment)

1. Economic forces2. Social and demographic forces 3. Political & governmental forces 4. Environmental forces 5. Technological forces

© 2009 Pearson Education, Inc. Publishing as Prentice Hall

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The Industry Environment


• The immediate environment consists of the operating environment and the industry environment

• According to Porter; the industry environment is shaped by many forces:

Entry barriers Buyer power suppliers power Rivalry Substituted product

The Operating Environment

• The operating environment is representing the forces that have immediate impact on the success or failure of a firm.

• Firms have frequently and proactively interact with the operating environment.

• The operating environment includes • Customers • Suppliers • Creditors (funders)• Labors• Competitors


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Why the external assessment is important?

1. External factors affect the consumer \ customer demand 2. External factors affect the type of products developed3. External factors affect the nature of positioning and market

segmentation strategies4. External factors affect the type of service offered 5. External factors affect the choice of business to acquire or

sell 6. External factors directly affect both suppliers &distribution7. Identifying and evaluating the external opportunities and

threats enables organization to develop a clear mission , to design better strategies by which it can achieve its long term objectives and to develop the suitable policies for the annual objectives .


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First : A company must gather competitive intelligence and information:

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The Process of Performing External Assessment


•Political

•Governmental

•Legal

•Technological

•Industry trends

•Economic

•Social

•Cultural

•Demographic

•Environmental

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• Magazine – trade journal –newspapers

• Internet

• Libraries

• Suppliers

• Distributors

• Salespersons

• Customers

• Competitors


Sources of these information include:

• Second• A meeting of managers is needed to identify the most

important opportunities and threats facing the firm .• These key external factors should be listed on flipcharts or a

whiteboard .• A prioritized list of these factors could be obtained by

asking all managers to rank factors that identified (1= most important opportunity or threats to 20= the least important opportunity or threats )

• Note: these external factors are vary over time and vary by industry

• Third • The final list must be widely distributed in the organization

Ch 3 -15Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

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According the researches results the following factors are often critical success factors in organizations

• Market share

• Breadth of competing products

• World economies

• Foreign subsidiaries

• Price competitiveness


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Success factors (cont’d)

• Technological advancements

• Population shifts

• Interest rates

• Pollution abatement


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• According to York P. Freund the key external :- Must be the base for setting and achieving the long-term and

the annual objectives Must be measurable Applicable to all competing firms Hierarchy In its effect on organization; some will pertain all

the organization while others may be narrowly focused on one function or division


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Industrial Organization (I/O) Approach


The industrial organization (I\O) approach to CA advocated that external (industry) factors are more important than internal factors in a firm achieving competitive advantages as determined by industry forces.

(I\O) theory contents that the industry in which a firm chooses to compete has a stronger influence on the firm’s performance than do the internal functional decisions. Research has found that approximately 20% of a firm’s profitability can be explained by the industry, whereas 36% of the variance in profitability is attributed to the firm’s internal factors.

Remote Environment (Arab World)(1)Economic Forces

• Uncertainties and fluctuations in oil prices

• Increased the trend towards individual savings plans

• Many industries in the Arab countries (e.g. Gulf) are highly

dependent on the trends (fluctuations) in the dollar’s value

• High worldwide demand for oil

• Resource-poor and labor-abundant countries in the region

( Djibouti-Jordan ) greatly benefit from the thriving economics


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(2)Social and Demographic Forces:

• Arab world in general has a high rate of birth

• According to the Human Development Report 2009:- The Arab world is one of the most youthful region in the world

• The youth segment group is one of the largest and fastest-growing in the Arab world.

• About 60 % of the population in the Arab world is under 25 years of age with a median age of 22 years compared to a global average of 28 .

• Life expectancy has advanced substantially because of the improving in health condition and lifestyle

• On the other hand, by 2050 = 25% population > 60 years or older



Source: Based on World Population Ageing 1950-2050 (United Nations, New York, 2002).

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(2)Social and Demographic Forces

• According to pervious table the older segments are ranging from a low of 3.1% in Qatar to 8.5% in Lebanon

• These older segments are positively affecting the need for special service & goods as such health-care , financial service ,travel ,crime prevention ,more entertainment, state park facilities ,transportation…..etc.

• On the other hand ,the population of the world population will reach 7 billion in 2012,and 9 billion by 2050, the Arab world population has just over300 million as a result, applying only domestic strategy has became very risky .


(2)Social and Demographic Forces

• Social and Demographic trends are shaping the way by which the Arabs live, work, produce, and consume , some new trends are creating a different type of consumer and a need for new goods, services and strategies as example .

• More Arab households with people living in urban areas

and away from the birthplaces of their parents or

grandparents which increasing the number of Arabs

who are entering colleges and universities , that’s why

many of them are traveling abroad.


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(3) Political, Governmental, and Legal Forces

Political , governmental and legal factors represent key

opportunities & threats for all organizations :

• Antitrust legislation

• Tax rates

• Lobbying efforts

• Patent laws


(3)Political, Governmental, and Legal ForcesArab Countries

• Arab countries as Egypt- UAE- and Saudi Arabia have various agencies such as the industrial development authority in Egypt and the Authority of the Saudi General Investment that have played significant roles in persuading their own governments to accelerate market reform and provide assistances to compete in the global marketplace

• These increasing global interdependence among economic , markets , governments and organizations makes it is imperative that firms consider the significant impact of political variables on the formulation and implementation of competitive strategies .


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(3) Political, Governmental, and Legal Forces

• In other words, local ,state ,and federal laws , regulatory agencies and special-interest groups have a major impact on the strategies of all organizations . That’s why many organizations have altered strategies in the past because of the impact of political , governmental and legal variables


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(4) Environmental Forces

• The impacted areas:1. Water resources2. Sea-level rise3. Human health4. Food production5. Tourism6. Biodiversity7. Land-use and urban planning


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(4) Environmental Forces

• In Arab world, many institutions have been called for preserve the

environment and take corrective action to stop the continuing

expansion of the desert and increasing pollution

• The overexploitation of land , water shortages,

desertification ,pollution and climate change are the most serious

threats to Arab human security

• According to the Arab Human Development Report 2009 :-

1. The region faces growing challenges to the security of its population from

environmental stresses

2. The Lack of water and increasing the pollution threaten agriculture and food

production

3. The desert has formed more than two-thirds of the total land area of the

region


(4) Environment Forces

• 4-Climate change also will affect the region through :- water shortages reduced agricultural production large population transfers to foreign countries lower levels of economic activity threats to national security Many companies in the Arab world have been developed programs

and polices to enhance their contributions to a safe and healthy environment (Dallah – Qatar Telecom- Kuwaiti National Petroleum- Emirates Group)

Many countries in the Arab world have enacted laws to save and preserve the environment. In 1999 the UAE government (which has a ministry specialized in environment protection) established the federal environment law to protect the land , ground , soil, water, sea, …..etc


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(5)Technological Forces

• Technological forces represent the major opportunities and threats for organizations :_

• It affect organization’s products, services , markets , supplies distributors , competitors ….etc

• It can create new markets • It can reduce or eliminate cost barriers between business ,

create shorter production runs, create shorter production runs , changing values and expectations of employees , managers , and customers , create more advanced competitive advantages

• For business today the technological opportunities & threats are the most important part of the external strategic – management audit


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• Two new jobs are developed in organizations :-

• Chief Information Officer (CIO) is more a manager , managing the overall external – audit process

• Chief Technology Officer (CTO) is more a technician focusing on the technical issues such as data acquisition – data processing – decision support system and software & hardware acquisition



• Note;

• Not all sectors of the economy are affected equally by technological developments . As ex.

• The communications, electronics, and pharmaceutical industries are much more volatile than the textile, forestry, and material industry


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The Immediate Environment INDUSTRY FORCES

OPERATING FORCES


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Industry Forces

• Collecting and evaluating information on competitors

is essential for successful strategy formulation.


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Industry Forces

Need to look at:

• Strengths

• Weaknesses

• Capabilities

• Opportunities

• Threats

• Objectives

• Strategies

Identifying Rival Firms


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Key Questions Concerning Competitors

• What are the major competitors strengths?

• What are the major competitors weaknesses?

• What are the major competitors objectives and strategies?

• How will the major competitors most likely respond to the current external variables?

• how vulnerable are the major competitors to our alternative strategies?


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Key Questions Concerning Competitors (cont’d)

• How are our goods or services positioned relative to major competitors?

• To what extent are new firms entering and old firms leaving this industry?

• What are the sales/profit rankings of competitors over time?

• What is the nature of supplier & distributor relationships?

• What is the threat of substitute products/services?


competitive intelligence programs

• Competitive intelligence is the process of monitoring the competitive environment and analyzing the findings in the context of internal issues .

• Good competitive intelligence is one of the keys to success .• The more information and knowledge a firm can obtain about

its competitors , the more likely it is that it can formulate and implement effective strategies .

• For any company the major competitors’ weaknesses can represent external opportunities, however the major competitors’ strengths may represent key threats


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competitive intelligence programs

• Companies need an effective competitive intelligence program.

• For three important reasons :-1. To provide a general understanding of an industry and its

competitors 2. To identify areas in which competitors are weak and to assess

the impact of the strategic actions on the competitors 3. To identify potential moves that might be taken by competitors

and that may have a negative effect on the company position


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Porter’s Five-Forces Model of Competition

1. It is a framework for industry analysis and business strategy development .It derives five forces that determine the competitive intensity and therefore attractiveness of the industry . Attractiveness in this context refers to…… the overall industry profitability.

An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. However an attractive industry would be one approaching "pure competition", in which a high profits for a firms is


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Porter’s Five-Forces Model of Competition


Steps to Determine if an Acceptable Profit Can Be Earned

1. Identify key aspects or elements of each competitive force

2. Evaluate how strong and important each element is for the

firm

3. Decide whether the collective strength of the elements is

worth the firm entering or staying in the industry


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The Five-Forces Model

1- Rivalry Among Competing Firms

• Most powerful of the five forces

• Focus on competitive advantage of strategies


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2-Potential Entry of New Competitors

• Barriers to entry are important; whenever new firms

can easily enter a particular industry ; the intensity

of competitiveness among firms increase

• Quality, pricing, and marketing can overcome

barriers

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3-Potential Development of Substitute Products

• Pressures increase when consumers’ switching costs

decrease

• Firm’s plans for increased capacity & market

penetration



• 4-Bargaining Power of Suppliers

• Suppliers number & volume affect intensity of competition

• suppliers power is higher when products are custom or

differentiated


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Conditions Where Suppliers Gain Bargaining Power

1. Few number of suppliers

2. High quality of the raw material

3. Few substitutes raw material

4. High cost of switching raw material

5. Good brand name of the suppliers

6. After-sales service

Backward integration strategy can gain control and can be

effective especially when suppliers are unreliable, too costly

and not capable of meeting a firm needs


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5- Bargaining Power of Consumers

• Customers concentrated or buying in volume affects

intensity of competition

• Consumer power is higher where products are standard

or undifferentiated


Conditions Where Consumers Gain Bargaining Power

• If they can inexpensively/easily switch

• If they are particularly important

• If sellers are struggling in the face of falling consumer

demand

• If they are informed about sellers’ products, prices, and costs

• If they have discretion in whether and when they purchase

the product


Operating Environment Forces

• Customers

• Creditors

• Suppliers

• Labor market

• Competitors


- In the Arab world, these forces are not generally identified and classified

Sources of External Information

• Unpublished sources • Customer survey • Market research• Meeting with stakeholders • Interviews

• Published sources • Periodicals • Internet • Reports


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Forecasting Tools

• Quantitative Methods• Qualitative Methods


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The External Factor Evaluation (EFE) Matrix

CompetitivePolitical and legalCultural

TechnologicalEnvironmentalSocial

GovernmentalDemographicEconomic

Summarize & Evaluate


(EFE) Matrix• The main purpose of this matrix is to allow the strategists to

summarize and evaluate the external variables in terms of threats & opportunity

• Five steps must be undertaken :-1. List key external factors as identified in the external –

analysis process (10 -up to 20 factors)2. Assign to each factor a weight that ranges from 0.0 (not

important) to 1.0 (very important).The weight indicates the relative importance of that factor to being successful in the firm’s industry ….note the sum of all weights must equal to one (1.0)

3. Assign a rating between 1 and 4 to each key external factor to indicate how the firms’ current strategies effectively responded to the factor since 4 = superior ;3= above average ; 2 = the average ; 1= poor respond

•


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• 4- multiply each factor’s weight by its rating to determine the weighted score for each facto

• 5- sum the weighted score for each variable to determine the total weighted score for the organization


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Notes:-

1. Total weighted score of 4.0 It is the highest possible total weighted score for an

organization is 4.0 (an organization is responding in an outstanding way to existing opportunities& avoiding threats in its industry )

2.Total weighted score of 1.0 It is the lowest possible total weighted score for an

organization is 1.0 (an organization’s strategies are not capitalizing on opportunities or avoiding threats in its industry )

3. Total weighted score of 2.5 It is the average (The midpoint)


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The local Ten – Theatre Cinema

• The most important factors to being successful in this business (industry)is 0.12 weight

• This firm is doing very well in regard to handling two factors TDB university (4) and healthy eating (4)

• The total weighted scores 2.58 above the average (2.5) though we could say that this cinema is doing slightly well in exploiting opportunity and avoiding threats in the external environment


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Industry Analysis EFE

Important

Understanding the factors used in the EFE Matrix is more

important than the actual weights and ratings assigned.


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Industry Analysis: Competitive Profile Matrix (CPM)

Competitive Profile Matrix (CPM)

Identifies firm’s major competitors and their strengths &

weaknesses in relation to a sample firm’s strategic positions.


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Assignment (2)

as Individual Task

• Identify five key economic variables that could represent major opportunities or threats to the STC company .

• List three opportunities and three threats that could represent key factors facing the King Saud University.

• According to the external analysis process , define the main levels by which this analysis can be undertaken and explain each level in details ? Which force do you feel is most important for banking sector ? Why?

• Deadline:- Next Wednesday


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Documents

Ch 3 -1Copyright © 2011 Pearson Education. Strategic Management: Concepts and Cases Arab World Edition Fred R. David Abbas J. Ali Abdulrahman Y. Al-Aali