2001 Prentice Hall

Ch. 3-1
Strategic Management
Concepts & Cases
8
th
edition
Fred R. David
Chapter 3:
The External Assessment
PowerPoint Slides By:
Anthony F. Chelte
Western New England College

2001 Prentice Hall
Ch. 3-2
Comprehensive Strategic Management Model
Vision
&
Mission
Statements

Chapter 2
External
Audit


Chapter 3
Internal
Audit



Chapter 4
Long-Term
Objectives



Chapter 5
Generate,
Evaluate,
Select
Strategies

Chapter 6
Implement
Strategies:
Mgmt Issues


Chapter 7
Implement
Strategies:
Marketing,
Fin/Acct,
R&D, CIS
Chapter 8
Measure &
Evaluate
Performance


Chapter 9

2001 Prentice Hall
Ch. 3-3
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

2001 Prentice Hall
Ch. 3-4
External Assessment (Contd)
The idea is to concentrate our strength
against our competitors relative
weakness.

Bruce Henderson

2001 Prentice Hall
Ch. 3-5
External Assessment (Contd)
External Strategic-Management Audit

Industry analysis
Environmental scanning



2001 Prentice Hall
Ch. 3-6
External Assessment (Contd)
External audit:

Focuses on identifying &
evaluating events beyond the
immediate control of the firm

2001 Prentice Hall
Ch. 3-7
External Assessment (Contd)
External audit focuses on:

Increased foreign competition
Population shifts
Demographics (e.g., aging population)
Information technology




2001 Prentice Hall
Ch. 3-8
External Assessment (Contd)
External audit reveals:
Key opportunities
Key threats

Managers then formulate strategies:
Take advantage of opportunities
Avoid/reduce impact of threats

2001 Prentice Hall
Ch. 3-9
External Assessment (Contd)
External Audit


Aimed at identifying key variables that
offer actionable responses

2001 Prentice Hall
Ch. 3-10
External Assessment (Contd)
Key External Forces

Five (5) broad categories:

Economic forces

Social, cultural, demographic, &
environmental forces

2001 Prentice Hall
Ch. 3-11
External Assessment (Contd)
Key External Forces (Contd)

Five (5) broad categories:

Political, governmental, & legal forces

Technological forces

Competitive forces

2001 Prentice Hall
Ch. 3-12
External Assessment (Contd)
Key
External
Forces
Competitors
Suppliers
Distributors
Creditors
Customers
Employees
Communities
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
Opportunities
&
Threats

2001 Prentice Hall
Ch. 3-13
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

2001 Prentice Hall
Ch. 3-14
External Assessment (Contd)
Key External Factors:

Vary over time
&
Vary by industry


2001 Prentice Hall
Ch. 3-15
External Assessment (Contd)
Key External Factors:

Important to achieving long-term
objectives
Measurable
Applicable to all competing firms
Hierarchical

2001 Prentice Hall
Ch. 3-16
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


2001 Prentice Hall
Ch. 3-17
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

2001 Prentice Hall
Ch. 3-18
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


2001 Prentice Hall
Ch. 3-19
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

2001 Prentice Hall
Ch. 3-20
Social & Environmental Forces
Social, cultural, demographic, and
environmental changes:

Major impact on:
Products
Services
Markets
Customers


2001 Prentice Hall
Ch. 3-21
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


2001 Prentice Hall
Ch. 3-22
Social & Environmental Forces
(Contd)
53.33 46 m 30 m Oceania
28.52 392 m 305 m North America
16.08 729 m 628 m Europe
60.52 809 m 504 m Latin America
140.32 1.8 b 749 m Africa
47.22 5.3 b 3.6 b Asia
% Increase 2050 1998 Country

2001 Prentice Hall
Ch. 3-23
Social & Environmental Forces
(Contd)
E-commerce Perspective

Question:
Is the Internet Revolution Bypassing
Poor, Minorities?

Answer:
Yes!

2001 Prentice Hall
Ch. 3-24
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


2001 Prentice Hall
Ch. 3-25
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


2001 Prentice Hall
Ch. 3-26
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

2001 Prentice Hall
Ch. 3-27
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

2001 Prentice Hall
Ch. 3-28
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

2001 Prentice Hall
Ch. 3-29
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

2001 Prentice Hall
Ch. 3-30
Political, Govt., & Legal Forces
Government Regulation

Key opportunities & key threats

Antitrust legislation (Microsoft)
Tax rates
Lobbying efforts
Patent laws

2001 Prentice Hall
Ch. 3-31
Political, Govt., & Legal Forces
(Contd)
Increasing Global Interdependence

Impact of political variables

Formulation of strategies
Implementation of strategies

2001 Prentice Hall
Ch. 3-32
Political, Govt., & Legal Forces
(Contd)
Increasing Global Interdependence

Strategists in a global economy
Forecast political climates
Legalistic skills
Diverse world cultures

2001 Prentice Hall
Ch. 3-33
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


2001 Prentice Hall
Ch. 3-34
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

2001 Prentice Hall
Ch. 3-35
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

2001 Prentice Hall
Ch. 3-36
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

2001 Prentice Hall
Ch. 3-37
Technological Forces
Technological Change

Dramatic effect on business
Fiber optics
Biometrics
EFT
Computer engineering
Superconductivity advancements

2001 Prentice Hall
Ch. 3-38
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



2001 Prentice Hall
Ch. 3-39
Technological Forces (Contd)
Internet impact on opportunities & threats:
(Contd)

Altering economies of scale
Changing entry barriers
Redefining relationships
Industries & suppliers, creditors,
customers, and competitors



2001 Prentice Hall
Ch. 3-40
Technological Forces (Contd)

Capitalizing on Information Technology (IT)


Chief Information Officer (CIO)

Chief Technology Officer (CTO)

2001 Prentice Hall
Ch. 3-41
Competitive Forces
External Audit & Competing Firms

Identifying rival firms
Strengths
Weaknesses
Capabilities
Opportunities
Threats
Objectives
Strategies



2001 Prentice Hall
Ch. 3-42
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



2001 Prentice Hall
Ch. 3-43
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

2001 Prentice Hall
Ch. 3-44
Competitive Forces (Contd)
Most competitive firms in America
(Contd)
Seven Characteristics

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

2001 Prentice Hall
Ch. 3-45
Competitive Analysis: Porters Five-Forces Model
Potential development
of substitute products
Rivalry among
competing firms
Bargaining power
of suppliers
Potential entry of new
competitors
Bargaining power
of consumers

2001 Prentice Hall
Ch. 3-46
Global Challenge
Differences U.S. and MNCs

Affect strategic management:
Language
Culture
Politics
Economy
Government interference
Labor relations
Trade barriers

2001 Prentice Hall
Ch. 3-47
Industry Analysis (EFE)
External Factor Evaluation Matrix
Summarize & evaluate:

Competitive Political Cultural
Technological Environmental Social
Governmental Demographic
Economic

2001 Prentice Hall
Ch. 3-48
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

2001 Prentice Hall
Ch. 3-49
Industry Analysis (EFE)
(Contd)
Five-step process:
Assign 1-4 rating to each factor
Firms current strategies response to the
factor
Multiply each factors weight by its
rating
Produces a weighted score

2001 Prentice Hall
Ch. 3-50
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

2001 Prentice Hall
Ch. 3-51
.20 1 .20 Clinton Administration
.20 2 .10 Bad media exposure from FDA
.10 2 .05 Smokeless market SE region U.S.
.15 3 .05 Production limits on tobacco
.20 2 .10 Legislation against the tobacco industry
Threats
.30 3 .10 More social pressure to quit smoking
2.10 1.00 TOTAL
.60 4 .15 Pinkerton leader in discount market
.05 1 .05 Astronomical Internet growth
.15 3 .05 Increased demand
.15 1 .15 Global markets untapped
Weighted
score
Rating Weight
USTKey External Factors
Opportunities

2001 Prentice Hall
Ch. 3-52
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

2001 Prentice Hall
Ch. 3-53
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.


2001 Prentice Hall
Ch. 3-54
Industry Analysis (EFE)
(Contd)

Important

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

2001 Prentice Hall
Ch. 3-55
Industry Analysis (CPM)
Competitive Profile Matrix

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

2001 Prentice Hall
Ch. 3-56
(CPM) Procter
Avon LOreal & Gamble
2.80 3.25 3.15 1.00
Total
0.15 3 0.20
4
0.05
1
0.05
Market Share
0.40 2 0.40
2
0.80
4
0.20
Global Expansion
0.20 2 0.40
4
0.40
4
0.10
Customer Loyalty
0.45 3 0.45
3
0.60
4
0.15
Financial Position
0.30 3 0.30
3
0.40
4
0.10
Management
0.40 4 0.30
3
0.30
3
0.10
Price Competition
0.30 3 0.40
4
0.40
4
0.10
Product Quality
0.60 3 0.80
4
0.20
1
0.20
Advertising
Score Rating Score Rating Score Rating Weight
Critical Success
Factor

2001 Prentice Hall
Ch. 3-57
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

2001 Prentice Hall
Ch. 3-58
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)