the external assessment chapter 3: fred r. david 8 … · the external assessment powerpoint slides...

© 2001 Prentice Hall

Ch. 3-1

Strategic ManagementStrategic ManagementConcepts & CasesConcepts & Cases

8th editionFred 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 ModelComprehensive Strategic Management Model

Vision &

MissionStatements

Chapter 2

ExternalAudit

Chapter 3

InternalAudit

Chapter 4

Long-TermObjectives

Chapter 5

Generate,Evaluate,

SelectStrategies

Chapter 6

ImplementStrategies:

Mgmt Issues

Chapter 7

ImplementStrategies:Marketing,Fin/Acct,R&D, CISChapter 8

Measure &Evaluate

Performance

Chapter 9

© 2001 Prentice Hall

Ch. 3-3

External AssessmentExternal Assessment

“If you're not faster than your competitor, you’re in a tenuous position, and if you’re only half as fast, you’re terminal.”

—George Salk—

© 2001 Prentice Hall

Ch. 3-4

External Assessment External Assessment (Cont’d)(Cont’d)

“The idea is to concentrate our strength against our competitor’s relative weakness.”

—Bruce Henderson—

© 2001 Prentice Hall

Ch. 3-5

External Assessment (Cont’d)External Assessment (Cont’d)

External StrategicExternal Strategic--Management AuditManagement Audit

• Industry analysis• Environmental scanning

© 2001 Prentice Hall

Ch. 3-6

External Assessment External Assessment (Cont’d)(Cont’d)

External audit:External audit:

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

© 2001 Prentice Hall

Ch. 3-7

External Assessment External Assessment (Cont’d)(Cont’d)

External audit focuses onExternal audit focuses on:

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

© 2001 Prentice Hall

Ch. 3-8

External Assessment External Assessment (Cont’d)(Cont’d)

External audit revealsExternal audit reveals:• Key opportunities• Key threats

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

© 2001 Prentice Hall

Ch. 3-9

External Assessment External Assessment (Cont’d)(Cont’d)

External AuditExternal Audit

Aimed at identifying key variables that offer actionableactionable responses

© 2001 Prentice Hall

Ch. 3-10

External Assessment External Assessment (Cont’d)(Cont’d)

Key External ForcesKey External Forces

Five (5) broad categories:

• Economic forces

• Social, cultural, demographic, & environmental forces

© 2001 Prentice Hall

Ch. 3-11

External Assessment External Assessment (Cont’d)(Cont’d)

Key External Forces Key External Forces (Cont’d)(Cont’d)

Five (5) broad categories:

• Political, governmental, & legal forces

• Technological forces

• Competitive forces

© 2001 Prentice Hall

Ch. 3-12

External Assessment External Assessment (Cont’d)(Cont’d)

KeyExternalForces

CompetitorsSuppliers

DistributorsCreditors

CustomersEmployees

CommunitiesManagers

StockholdersLabor Unions

Special Interest GroupsProductsServices

Opportunities&

Threats

© 2001 Prentice Hall

Ch. 3-13

External Assessment External Assessment (Cont’d)(Cont’d)

Process of External AuditProcess 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 External Assessment (Cont’d)(Cont’d)

Key External FactorsKey External Factors:

Vary over time&

Vary by industry

© 2001 Prentice Hall

Ch. 3-15

External Assessment External Assessment (Cont’d)(Cont’d)

Key External FactorsKey External Factors::

• Important to achieving long-term objectives

• Measurable• Applicable to all competing firms• Hierarchical

© 2001 Prentice Hall

Ch. 3-16

External Assessment External Assessment (Cont’d)(Cont’d)

Examples of Key External FactorsExamples 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 ForcesEconomic Forces

Monitor Key Economic VariablesMonitor 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 Economic Forces (Cont’d)(Cont’d)

Monitor Key Economic VariablesMonitor Key Economic Variables: : (Cont’d)(Cont’d)

� 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 Economic Forces (Cont’d)(Cont’d)

Monitor Key Economic VariablesMonitor Key Economic Variables: : (Cont’d)(Cont’d)

� 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 & Environmental Forces

• Social, cultural, demographic, and environmental changes:

Major impact on:�Products�Services�Markets�Customers

© 2001 Prentice Hall

Ch. 3-21

Social & Environmental Forces Social & Environmental Forces (Cont’d)(Cont’d)

• 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 Social & Environmental Forces (Cont’d)(Cont’d)

53.3346 m30 mOceania

28.52392 m305 mNorth America

16.08729 m628 mEurope

60.52809 m504 mLatin America

140.321.8 b749 mAfrica

47.225.3 b3.6 bAsia

% Increase% Increase2050205019981998CountryCountry

© 2001 Prentice Hall

Ch. 3-23

Social & Environmental Forces Social & Environmental Forces (Cont’d)(Cont’d)

EE--commerce Perspectivecommerce Perspective

Question:“Is the Internet Revolution Bypassing

Poor, Minorities?”

Answer:Yes!

© 2001 Prentice Hall

Ch. 3-24

Social & Environmental Forces Social & Environmental Forces (Cont’d)(Cont’d)

• 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 Social & Environmental Forces (Cont’d)(Cont’d)

• 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 Social & Environmental Forces (Cont’d)(Cont’d)

•• Key social, cultural, demographic, & Key social, cultural, demographic, & environmental variables: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 Social & Environmental Forces (Cont’d)(Cont’d)

Key social, cultural, demographic, & Key social, cultural, demographic, & environmental variables: environmental variables: (Cont’d)(Cont’d)

� 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 Social & Environmental Forces (Cont’d)(Cont’d)

Key social, cultural, demographic, & Key social, cultural, demographic, & environmental variables: environmental variables: (Cont’d)(Cont’d)

� 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 Social & Environmental Forces (Cont’d)(Cont’d)

Key social, cultural, demographic, & Key social, cultural, demographic, & environmental variables: environmental variables: (Cont’d)(Cont’d)

� 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 Political, Govt., & Legal Forces

Government RegulationGovernment Regulation

• Key opportunities & key threats

�Antitrust legislation (Microsoft)�Tax rates�Lobbying efforts�Patent laws

© 2001 Prentice Hall

Ch. 3-31

Political, Govt., & Legal Forces Political, Govt., & Legal Forces (Cont’d)(Cont’d)

Increasing Global InterdependenceIncreasing Global Interdependence

• Impact of political variables

�Formulation of strategies�Implementation of strategies

© 2001 Prentice Hall

Ch. 3-32

Political, Govt., & Legal Forces Political, Govt., & Legal Forces (Cont’d)(Cont’d)

Increasing Global InterdependenceIncreasing 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 Political, Govt., & Legal Forces (Cont’d)(Cont’d)

Globalization of IndustryGlobalization 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 Political, Govt., & Legal Forces (Cont’d)(Cont’d)

•• Key Political, govt., & legal variables: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 Political, Govt., & Legal Forces (Cont’d)(Cont’d)

•• Key Political, govt., Key Political, govt., & legal variables: & legal variables: (Cont’d)(Cont’d)

� 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 Political, Govt., & Legal Forces (Cont’d)(Cont’d)

•• Key Political, govt., Key Political, govt., & legal variables:& legal variables:(Cont’d)(Cont’d)

� 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 Forces

Technological ChangeTechnological Change

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

© 2001 Prentice Hall

Ch. 3-38

Technological Forces Technological Forces (Cont’d)(Cont’d)

Internet impact on opportunities & threats: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 Technological Forces (Cont’d)(Cont’d)

Internet impact on opportunities & threats: Internet impact on opportunities & threats: (Cont’d)(Cont’d)

• Altering economies of scale• Changing entry barriers• Redefining relationships

� Industries & suppliers, creditors, customers, and competitors

© 2001 Prentice Hall

Ch. 3-40

Technological Forces Technological Forces (Cont’d)(Cont’d)

Capitalizing on Information Technology (IT)

• Chief Information Officer (CIO)

• Chief Technology Officer (CTO)

© 2001 Prentice Hall

Ch. 3-41

Competitive Forces Competitive Forces External Audit & Competing FirmsExternal Audit & Competing Firms

• Identifying rival firms�Strengths�Weaknesses�Capabilities�Opportunities�Threats�Objectives�Strategies

© 2001 Prentice Hall

Ch. 3-42

Competitive Forces Competitive Forces (Cont’d)(Cont’d)

Competitor InformationCompetitor Information• Sources:

�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

© 2001 Prentice Hall

Ch. 3-43

Competitive Forces Competitive Forces (Cont’d)(Cont’d)

Most competitive firms in AmericaMost 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 Competitive Forces (Cont’d)(Cont’d)

Most competitive firms in America Most competitive firms in America (Cont’d)(Cont’d)

• Seven Characteristics

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

© 2001 Prentice Hall

Ch. 3-45

Competitive Analysis: Porter’s FiveCompetitive Analysis: Porter’s Five--Forces Forces ModelModel

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 Global Challenge Differences U.S. and MNCs 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)Industry Analysis (EFE)

External Factor Evaluation MatrixExternal Factor Evaluation MatrixSummarize & evaluate:

CompetitivePoliticalCultural

TechnologicalEnvironmentalSocial

GovernmentalDemographicEconomic

© 2001 Prentice Hall

Ch. 3-48

Industry Analysis (EFE) Industry Analysis (EFE) (Cont’d)(Cont’d)

FiveFive--Step process: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) Industry Analysis (EFE) (Cont’d)(Cont’d)

FiveFive--step process: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

© 2001 Prentice Hall

Ch. 3-50

Industry Analysis (EFE) Industry Analysis (EFE) (Cont’d)(Cont’d)

FiveFive--step process: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

.201.20Clinton Administration

.202.10Bad media exposure from FDA

.102.05Smokeless market SE region U.S.

.153.05Production limits on tobacco

.202.10Legislation against the tobacco industry

Threats.303.10More social pressure to quit smoking

2.101.00TOTAL

.604.15Pinkerton leader in discount market

.051.05Astronomical Internet growth

.153.05Increased demand

.151.15Global markets untapped

Weightedscore

RatingWeightUST—Key External Factors

Opportunities

© 2001 Prentice Hall

Ch. 3-52

Industry Analysis (EFE) Industry Analysis (EFE) (Cont’d)(Cont’d)

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

© 2001 Prentice Hall

Ch. 3-53

Industry Analysis (EFE) Industry Analysis (EFE) (Cont’d)(Cont’d)

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) Industry Analysis (EFE) (Cont’d)(Cont’d)

ImportantImportant

• 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)Industry Analysis (CPM)

Competitive Profile MatrixCompetitive Profile Matrix

• Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic position

© 2001 Prentice Hall

Ch. 3-56

(CPM) Procter Avon L’Oreal & Gamble

2.803.253.151.00Total

0.1530.2040.0510.05Market Share

0.4020.4020.8040.20Global Expansion

0.2020.4040.4040.10Customer Loyalty

0.4530.4530.6040.15Financial Position

0.3030.3030.4040.10Management

0.4040.3030.3030.10Price Competition

0.3030.4040.4040.10Product Quality

0.6030.8040.2010.20Advertising

ScoreRatingScoreRatingScoreRatingWeightCritical Success Factor

© 2001 Prentice Hall

Ch. 3-57

Key Terms & ConceptsKey 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 (Cont’d)Key Terms & Concepts (Cont’d)

• External forces• Industry analysis• Information Technology

(IT)• Industrial policies• Internet learning from

the partner• Linear regression

• Lifecare facilities• Porter’s Five-Forces

Model• Netscape• On-Line databases• Rightsizing• Trend extrapolation• World Wide Web (www)