Chapter 03

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Fred R. David Prentice Hall

Ch.3-1

Chapter 3 The External Assessment

Strategic Management:

Concepts and Cases. 9

th

edition

Fred R. David

PowerPoint Slides by Anthony F. Chelte

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External Strategic Management Audit

Also called:

– Environmental scanning – Industry analysis

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Ch.3-3

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

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Purpose:

– Development of Finite List:

• Opportunities

• Threats to be avoided

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Ch.3-5

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

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Relationships Between Key External Forces and an Organization Key External Forces Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions

Special Interest Groups Products

Services

Opportunities &

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Ch.3-7

Performing an External Audit

Gather competitive intelligence on factors:

– Social – Cultural

– Demographic – Environmental – Economic

– Political, legal, governmental – technological

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Performing an External Audit

Sources of information include:

– Internet

– Libraries (corporate, university, public) – Suppliers

– Distributors – Customers – Competition

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Ch.3-9

Performing an External Audit

Key factors:

– Vary over time – Vary by industry

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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

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Ch.3-11

Key External Factors

Key External Factors:

1. Oriented to long-term & annual objectives 2. Measurable

3. Applicable to all competing firms 4. Hierarchical

• Overall company

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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

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Ch.3-13

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

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Monitor Key Economic Variables:

• Price fluctuations

• Exportation of labor & capital

• Monetary policies • Fiscal policies • Tax rates • ECC policies • OPEC policies • LDC policies

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Ch.3-15

Social, Cultural, Demographic &

Environmental Forces

Major impact on:

– Products – Services – Markets – customers

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Monitor Key Variables

•

Life expectancy rates

•

Per capita income

•

Attitudes toward business

•

Average disposable income

•

Buying habits

•

Ethical concerns

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Ch.3-17

Monitor Key Variables

•

Racial equality

•

Average level of education

•

Government regulation

•

Attitudes toward customer service

•

Attitudes toward product quality

•

Energy conservation

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Monitor Key Variables

•

Value placed on leisure time

•

Recycling

•

Waste management

•

Air & water pollution

•

Ozone depletion

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Ch.3-19

Political, Govt., & Legal Forces

Government Regulation

• Key opportunities & key threats

• Antitrust legislation (Microsoft)

• Tax rates

• Lobbying efforts • Patent laws

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Political, Govt., & Legal Forces

Increasing Global Interdependence

• Impact of political variables

– Formulation of Strategies

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Ch.3-21

Political, Govt., & Legal Forces

Increasing Global Interdependence

•

Strategists in a global economy

• Forecast political climates

• Legalistic skills

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Political, Govt., & Legal Forces

Globalization of Industry

• Worldwide trend toward similar consumption patterns

• Global buyers & sellers • E-commerce

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Ch.3-23

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

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Technological Forces

Revolutionary technological forces:

•

Profound impact on organizations

• Internet

• Semiconductors

• XML technologies

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Ch.3-25

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

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Competitive Forces

Collection and evaluation of information on

competitors is essential for successful

strategy formulation

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Ch.3-27

Competitive Forces

Competition in virtually all industries can be

described as intense.

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Competitive Forces

Identifying rival firms

• Strengths • Weaknesses • Capabilities • Opportunities • Threats • Objectives • Strategies

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Ch.3-29 Competitive Analysis: Porter’s

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

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Industry Analysis (EFE)

External Factor Evaluation Matrix

Summarize & evaluate:

Competitive Political Cultural Technological Environmental Social Governmental Demographic Economic

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Ch.3-31

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

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Industry Analysis (EFE)

• Five-step process:

• Assign 1-4 rating to each factor

• Firm’s current strategies response to the factor

• Response poor - superior

• Multiply each factor’s weight by its rating

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Ch.3-33

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

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Factor Weight Rating Weighted score

Opportunities

High-end in-home entertainment sales are growing nationally 0.15 4 0.60

Forecast for continued growth of expensive housing in Dade & Broward counties

0.16 4 0.64

Wealthy foreigners buy expensive entertainment equipment for their homes in South Florida

0.07 3 0.21

Current customers refer new prospects with little prompting 0.12 3 0.36

Direct mailing lists are available by household income 0.06 3 0.18

Threats

Large chains could expand upward into their niche 0.13 1 0.13

New technologies such as satellite broadcast compete with current technologies

0.10 1 0.10

Declining incomes in South Florida versus the U.S. 0.08 2 0.16

South Florida highly dependent on trade with Latin America 0.07 1 0.07

Economy depends on air transport, a volatile industry 0.06 2 0.12

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Ch.3-35

Industry Analysis (EFE)

Important

•

Understanding of the factors used in the

EFE Matrix is more important than the

actual weights and ratings assigned.

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Industry Analysis (CPM)

Competitive Profile Matrix

• Identifies firm’s major competitors

and their strengths & weaknesses

in relation to a sample firm’s

strategic position

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Ch.3-37

(CPM) Procter

Avon L’Oreal & 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