Chapter 1 The Nature of Strategic Management

Copyright 2007 Prentice HallCh 3 -1Chapter 3 The External AssessmentStrategic Management: Concepts & Cases11th EditionFred David

1Copyright 2007 Prentice HallCh 3 -2Chapter OutlineThe Nature of the External AuditThe Industrial Organization (I/O) ViewSocial, Cultural, Demographic & Environmental ForcesCopyright 2007 Prentice HallCh 3 -3Chapter Outline (contd)Political, Governmental, and Legal ForcesTechnological ForcesCompetitive ForcesCopyright 2007 Prentice HallCh 3 -4Chapter Outline (contd)Porters Five-Forces ModelSources of External InformationForecasting Tools & TechniquesCopyright 2007 Prentice HallCh 3 -5Chapter Outline (contd)Global ChallengeThe External Factor Evaluation (EFE) MatrixCompetitive Profile Matrix (CPM)Copyright 2007 Prentice HallCh 3 -6

It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. Charles DarwinExternal Assessment

Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map. Wayne Calloway, Former CEO, PepsiCo6Copyright 2007 Prentice HallCh 3 -7External Strategic Management Audit

-- Environmental Scanning

-- Industry Analysis7Copyright 2007 Prentice HallCh 3 -8

Identify & Evaluate factors beyond the control of a single firmIncreased foreign competitionPopulation shiftsAging societyFear of travelingStock market volatility

External Strategic Management Audit8Copyright 2007 Prentice HallCh 3 -9

Purpose of External AuditIdentifyOpportunitiesThreats

External Strategic Management Audit9Copyright 2007 Prentice HallCh 3 -10Key External ForcesEconomic forcesSocial, cultural, demographic & environmental forcesPolitical, governmental & legal forcesTechnological forcesCompetitive forces10Copyright 2007 Prentice HallCh 3 -11

CompetitorsSuppliersDistributorsCreditorsCustomersEmployeesCommunitiesManagersStockholdersLabor UnionsSpecial Interest GroupsProductsServicesMarketsNatural Environment

Key External ForcesOpportunities&ThreatsKey External Forces & the Organization11Copyright 2007 Prentice HallCh 3 -12

Gather competitive intelligence

SocialCulturalDemographicEnvironmentalGovernmentalLegal TechnologicalExternal Audit

12Copyright 2007 Prentice HallCh 3 -13External Audit Sources of InformationInternetLibrariesSuppliersDistributorsSalespersonsCustomersCompetition

13Copyright 2007 Prentice HallCh 3 -14Performing External Audit

-- Key FactorsVary over timeVary by industry14Copyright 2007 Prentice HallCh 3 -15Performing External Audit -- VariablesMarket shareBreadth of competing productsWorld economiesForeign affiliatesProprietary account advantages15Copyright 2007 Prentice HallCh 3 -16Performing External Audit -- VariablesPrice competitivenessTechnological advancementsInterest ratesPollution abatement16Copyright 2007 Prentice HallCh 3 -17Performing External AuditExternal FactorsMeasurableLong-term orientationApplicable to competing firmsHierarchical17Copyright 2007 Prentice HallCh 3 -18Industrial Organization (I/O) View

-- Industry factors more important than internal factors

Performance determined by industry forces18Copyright 2007 Prentice HallCh 3 -19

Economies of ScaleIndustry PropertiesBarriers to market entryProduct differentiationLevel of competitivenessI/O Perspective Firm Performance19Copyright 2007 Prentice HallCh 3 -20Research FindingsApproximately 20% of a firms profitability can be explained by the industry, whereas 36% of the variance in profitability is attributed to the firms internal factors

Copyright 2007 Prentice HallCh 3 -21Economic Forces

Copyright 2007 Prentice HallCh 3 -22Economic ForcesTrends in the dollars valueEuropean UnionLayoffsEconomic standard of livingCopyright 2007 Prentice HallCh 3 -23Economic Standard of Living

Copyright 2007 Prentice HallCh 3 -24Russias EconomyPolitical bureaucracyIllegal actions by officialsand policemenState-run gas; monopolypurchase of newspaperForeign direct investment

Copyright 2007 Prentice HallCh 3 -25Economic ForcesAvailability of creditLevel of disposable incomeInterest ratesInflation rates

25Copyright 2007 Prentice HallCh 3 -26Social, Cultural, Demographic & Environmental ForcesMajor Impact ProductsServicesMarketsCustomers26Copyright 2007 Prentice HallCh 3 -27Social, Cultural, Demographic & Environmental ForcesU.S. FactsAging populationLess CaucasianWidening gap between rich & poor2025 = 18.5% population >65 years2075 = no ethnic or racial majority27Copyright 2007 Prentice HallCh 3 -28Social, Cultural, Demographic & Environmental ForcesFactsWorld population approaching 7 billionWorld population = 8 billion by 2028World population = 9 billion by 2054U.S. population < 300 million28Copyright 2007 Prentice HallCh 3 -29TrendsMore American households with people living aloneBy 2021 Hispanics will be largest minority groupAging Americans affects all organizationsPopulation shift to the south and westLess interested in fitness and exerciseDecimation and degradation of the natural environmentSocial, Cultural, Demographic & Environmental ForcesCopyright 2007 Prentice HallCh 3 -30U.S. Mexico Border North Americas fastestgrowing region1,500 maquiladorasNo longer largestexporter to U.S.

Copyright 2007 Prentice HallCh 3 -31Social, Cultural, Demographic & Environmental ForcesGlobal trends2003 China largest exporter to U.S.2003 Asia receives highest foreign direct investmentCheaper labor and utilities than MexicoChina joined WTO

31Copyright 2007 Prentice HallCh 3 -32Global trendsChinas labor rates less than MexicoChina provides more site location incentives than MexicoSocial, Cultural, Demographic & Environmental Forces

32Copyright 2007 Prentice HallCh 3 -33Social, Cultural, Demographic & Environmental Forces

More educated consumersAging populationMinorities more influentialLocal rather than federal solutions21st Century Trends33Copyright 2007 Prentice HallCh 3 -34Social, Cultural, Demographic & Environmental Forces (contd)

Fixation with youth decreasingHispanics increase to 15% by 2021African American increase to 14% by 202121st Century Trends34Copyright 2007 Prentice HallCh 3 -35Key Social, Cultural, Demographic & Environmental Variables

Number of marriages & divorcesNumber of special interest groupsNumber of births & deathsImmigration & emigration ratesChildbearing rates35Copyright 2007 Prentice HallCh 3 -36Actuarial ratesMonitor KeyVariablesPer capita incomeAttitudes toward businessAvg. disposable incomeSocial, Cultural, Demographic & Environmental Forces36Copyright 2007 Prentice HallCh 3 -37Consumer behaviorMonitor KeyVariablesEthical concernsAttitudes toward savingRacial equalitySocial, Cultural, Demographic & Environmental Forces37Copyright 2007 Prentice HallCh 3 -38Avg. educational levelMonitor KeyVariablesGovernmental regulationAttitudes toward customer serviceAttitudes toward qualitySocial, Cultural, Demographic & Environmental Forces38Copyright 2007 Prentice HallCh 3 -39Energy conservationMonitor KeyVariablesSocial responsibilityLeisure time valuesRecyclingSocial, Cultural, Demographic & Environmental Forces39Copyright 2007 Prentice HallCh 3 -40Waste managementMonitor KeyVariablesAir & water pollutionOzone depletionEndangered speciesSocial, Cultural, Demographic & Environmental Forces40Copyright 2007 Prentice HallCh 3 -41Political, Government & Legal Forces

Key opportunities & threatsAntitrust legislationTax ratesLobbying effortsPatent lawsGovernment Regulation41Copyright 2007 Prentice HallCh 3 -42Political, Government & Legal Forces

Political variables impact Formulation of strategiesImplementation of strategiesIncreasing Global Interdependence42Copyright 2007 Prentice HallCh 3 -43Political, Government & Legal Forces

Strategists in a global economy Forecast political climatesLegalistic skillsDiverse world cultures

Increasing Global Interdependence43Copyright 2007 Prentice HallCh 3 -44Political, Government & Legal ForcesWorldwide trend toward similar consumption patternsGlobal buyers and sellersE-commerceTechnology for instant currency transfersGlobalization of Industry

44Copyright 2007 Prentice HallCh 3 -45Key Political, Governmental, & Legal Variables

Special tariffsTax law changesPACsVoter participation ratesRegulation/deregulation45Copyright 2007 Prentice HallCh 3 -46Key Political, Governmental, & Legal Variables (contd)

Environmental protection lawsChanges in patent lawsEqual employment legislationGovernment subsidiesNumber of patents46Copyright 2007 Prentice HallCh 3 -47Key Political, Governmental, & Legal Variables (contd)

Import/export regulationsGlobal relationshipsPolitical conditions Location and severity of terrorist activityAnti-trust enforcement47Copyright 2007 Prentice HallCh 3 -48Technological ForcesMajor Impact InternetCommunicationsSemiconductors

48Copyright 2007 Prentice HallCh 3 -49Technological ForcesSignificance of ITChief Information Officer (CIO)Chief Technology Officer (CTO)

49Copyright 2007 Prentice HallCh 3 -50Technological ForcesEssential for nearly every strategic decision

Technology-based issues50Copyright 2007 Prentice HallCh 3 -51Competitive ForcesCollection & evaluation of data on competitors is essential for successful strategy formulation51Copyright 2007 Prentice HallCh 3 -52Competitive ForcesCompetition on virtually all industries can be described as intense.

52Copyright 2007 Prentice HallCh 3 -53Competitive ForcesStrengthsWeaknessesCapabilitiesOpportunitiesThreatsObjectivesStrategiesIdentifying Rival Firms53Copyright 2007 Prentice HallCh 3 -54Key Questions Concerning Competitors

Their objectives and strategiesTheir weaknessesTheir responses to external variables Their vulnerability to our alternative strategiesTheir strengths54Copyright 2007 Prentice HallCh 3 -55Key Questions Concerning Competitors (contd)

Entry and exit of firms in the industryOur product/service positioningKey factors for our current position in industrySales/profit rankings of competitors over timeOur vulnerability to strategic counterattack55Copyright 2007 Prentice HallCh 3 -56Key Questions Concerning Competitors (contd)

The threat of substitute products/servicesNature of supplier & distributor relationships

Should we keep our strategies secret from employees and stakeholders?56Copyright 2007 Prentice HallCh 3 -57Competitive ForcesMoodys ManualsStandard Corporation DescriptionsValue Line Investment SurveysDuns Business RankingsStandard & Poors Industry SurveysIndustry WeekForbes, Fortune, Business WeekSources of Corporate Information57Copyright 2007 Prentice HallCh 3 -58Competitive ForcesMarket share mattersUnderstand what business you are inBroke or not, fix itInnovate or evaporate7 Characteristics of most Competitive U.S. Firms:

58Copyright 2007 Prentice HallCh 3 -59Competitive ForcesAcquisition is essential to growthPeople make a differenceNo substitute for quality7 Characteristics of most Competitive U.S. Firms:

59Copyright 2007 Prentice HallCh 3 -60The Five-Forces Model of CompetitionPotential development of substitute productsRivalry among competing firmsBargaining power of suppliersPotential entry of new competitorsBargaining power of consumersCopyright 2007 Prentice HallCh 3 -61Steps to Determine if an Acceptable Profit Can be EarnedIdentify key aspects or elements of each competitive forceEvaluate how strong and important each element is for the firmDecide whether the collective strength of the elements is worth the firm entering or staying in the industryCopyright 2007 Prentice HallCh 3 -62The Five-Forces ModelMost powerful of the five forcesFocus on competitive advantage of strategiesRivalry Among Competing Firms62Copyright 2007 Prentice HallCh 3 -63The Five-Forces ModelBarriers to entry are importantQuality, pricing, and marketing can overcome barriersPotential Entry of New Competitors63Copyright 2007 Prentice HallCh 3 -64The Five-Forces ModelPressures increase when consumers switching costs decreaseFirms plans for increased capacity & market penetrationPotential Development of Substitute Products64Copyright 2007 Prentice HallCh 3 -65The Five-Forces ModelLarge number of suppliers & few substitutes affects intensity of competitionBackward integration can gain control or ownership of suppliersBargaining Power of Suppliers65Copyright 2007 Prentice HallCh 3 -66The Five-Forces ModelCustomers concentrated or buying in volume affects intensity of competitionConsumer power is higher where products are standard or undifferentiatedBargaining Power of Consumers66Copyright 2007 Prentice HallCh 3 -67Conditions where Consumers GainBargaining PowerIf they can inexpensively switchIf they are particularly importantIf sellers are struggling in the face of falling consumer demandIf they are informed about sellers products, prices and costs.If they have discretion in whether and when they purchase the product. Copyright 2007 Prentice HallCh 3 -68Forecasting Tools and TechniquesForecasts are educated assumptions about future trends and eventsQuantitative techniques Most appropriate when historical data is available and there is a constant relationshipQualitative techniques

Copyright 2007 Prentice HallCh 3 -69The Global ChallengeFaced by U.S. Firms --Gain & maintain exports to other nationsDefend domestic markets against imported goods

69Copyright 2007 Prentice HallCh 3 -70The Global ChallengeSimultaneously globally competitive & nationally responsiveMultinational Corporations (MNCs)70Copyright 2007 Prentice HallCh 3 -71The Global ChallengeWorldwide integration of:Strategy formulationStrategy implementationStrategy evaluationGlobalization71Copyright 2007 Prentice HallCh 3 -72The Global ChallengeSimilar consumption patternsGlobal buyers and sellersE-commerceInstant transmission of money & informationGlobalization of Industries72Copyright 2007 Prentice HallCh 3 -73Industry Analysis: The External Factor Evaluation (EFE) MatrixCompetitivePoliticalCulturalTechnologicalEnvironmentalSocialGovernmentalDemographicEconomicSummarize & Evaluate73Copyright 2007 Prentice HallCh 3 -74

Copyright 2007 Prentice HallCh 3 -75

Copyright 2007 Prentice HallCh 3 -76

Total weighted score of 4.0Organization response is outstanding to threats and opportunitiesIndustry Analysis EFE

Total weighted score of 1.0Firms strategies not capitalizing on opportunities or avoiding threats76Copyright 2007 Prentice HallCh 3 -77Industry Analysis EFE

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

Important --77Copyright 2007 Prentice HallCh 3 -78Industry Analysis: Competitive Profile Matrix (CPM)Identifies firms major competitors and their strengths & weaknesses in relation to a sample firms strategic positions78Copyright 2007 Prentice HallCh 3 -79GatewayAppleDellCSFsWtRatingWtd ScoreRatingWtd ScoreRatingWtd ScoreMarket share0.1530.4520.3040.60Inventory sys0.0820.1620.1640.32Fin position0.1020.2030.3030.30Prod. Quality0.0830.2440.3230.24Cons. Loyalty0.0230.0630.0640.08Sales Distr0.1030.3020.2030.30Global Exp.0.1530.4520.3040.60Org. Structure0.0530.1530.1530.15Copyright 2007 Prentice HallCh 3 -80GatewayAppleDellCSFs (contd)WtRatingWtd ScoreRatingWtd ScoreRatingWtd ScoreProd. Capacity0.0430.1230.1230.12E-commerce0.1030.3030.3030.30Customer Serv0.1030.3020.2040.40Price competitive0.0240.0810.0230.06Mgt. experience0.0120.0240.0420.02Total1.002.832.473.49Copyright 2007 Prentice HallCh 3 -81Industry Analysis CPM

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. Important --81Copyright 2007 Prentice HallCh 3 -82

Key Terms & ConceptsFor Review (Chapter 3)AOLCompetitive AnalysisChief Information Officer (CIO)Competitive Intelligence(CI)Chief Technology Officer(CTO)Competitive ProfileMatrix (CPM)Competitive AdvantageDecruiting82Copyright 2007 Prentice HallCh 3 -83

Key Terms & ConceptsFor Review (Chapter 3)Director of CompetitiveAnalysisExternal Factor EvaluationMatrix (EFE)DownsizingExternal ForcesEnvironmental ScanningIndustry AnalysisExternal AuditIndustrial Organizational(I/O)83Copyright 2007 Prentice HallCh 3 -84

Key Terms & ConceptsFor Review (Chapter 3)Information Technology(IT)Lifecare FacilitiesInternetPorters Five-ForcesModelLearning from the PartnerRightsizingLinear RegressionWorld Wide Web84Copyright 2007 Prentice HallCh 3 -85

Key Terms & ConceptsFor Review (Chapter 3)Tax HarmonizationForeign Direct Investment85