Post on 29-Jul-2018
Fred R. David
Prentice Hall
Ch.3-1
Chapter 3
The External Assessment
Strategic Management:
Concepts and Cases. 9th edition
Fred R. David
PowerPoint Slides by
Anthony F. Chelte
Western New England College
Fred R. David
Prentice Hall
Ch.3-2
External Strategic Management Audit
Also called:
– Environmental scanning
– Industry analysis
Fred R. David
Prentice Hall
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
Fred R. David
Prentice Hall
Ch.3-4
Purpose:
– Development of Finite List:
• Opportunities
• Threats to be avoided
Nature of External Audit
Fred R. David
Prentice Hall
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
Key External Forces
Fred R. David
Prentice Hall
Ch.3-6
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
&
Threats
Fred R. David
Prentice Hall
Ch.3-7
Performing an External Audit
Gather competitive intelligence on factors:
– Social
– Cultural
– Demographic
– Environmental
– Economic
– Political, legal, governmental
– technological
Fred R. David
Prentice Hall
Ch.3-8
Performing an External Audit
Sources of information include:
– Internet
– Libraries (corporate, university, public)
– Suppliers
– Distributors
– Customers
– Competition
Fred R. David
Prentice Hall
Ch.3-9
Performing an External Audit
Key factors:
– Vary over time
– Vary by industry
Fred R. David
Prentice Hall
Ch.3-10
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
– Pollution abatement
Fred R. David
Prentice Hall
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
• Divisional or functional areas
Fred R. David
Prentice Hall
Ch.3-12
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
Fred R. David
Prentice Hall
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
•
Fred R. David
Prentice Hall
Ch.3-14
Monitor Key Economic Variables:
• Price fluctuations
• Exportation of labor & capital
• Monetary policies
• Fiscal policies
• Tax rates
• ECC policies
• OPEC policies
• LDC policies
Fred R. David
Prentice Hall
Ch.3-15
Social, Cultural, Demographic &
Environmental Forces
Major impact on:
– Products
– Services
– Markets
– customers
Fred R. David
Prentice Hall
Ch.3-16
Monitor Key Variables
• Life expectancy rates
• Per capita income
• Attitudes toward business
• Average disposable income
• Buying habits
• Ethical concerns
• Attitudes toward saving
Fred R. David
Prentice Hall
Ch.3-17
Monitor Key Variables
• Racial equality
• Average level of education
• Government regulation
• Attitudes toward customer service
• Attitudes toward product quality
• Energy conservation
• Social responsibility
Fred R. David
Prentice Hall
Ch.3-18
Monitor Key Variables
• Value placed on leisure time
• Recycling
• Waste management
• Air & water pollution
• Ozone depletion
• Endangered species
Fred R. David
Prentice Hall
Ch.3-19
Political, Govt., & Legal Forces
Government Regulation
• Key opportunities & key threats • Antitrust legislation (Microsoft)
• Tax rates
• Lobbying efforts
• Patent laws
Fred R. David
Prentice Hall
Ch.3-20
Political, Govt., & Legal Forces
Increasing Global Interdependence
• Impact of political variables
– Formulation of Strategies
– Implementation of Strategies
Fred R. David
Prentice Hall
Ch.3-21
Political, Govt., & Legal Forces
Increasing Global Interdependence
• Strategists in a global economy
• Forecast political climates
• Legalistic skills
• Diverse world cultures
Fred R. David
Prentice Hall
Ch.3-22
Political, Govt., & Legal Forces
Globalization of Industry
• Worldwide trend toward similar consumption patterns
• Global buyers & sellers • E-commerce • Instant transmission of money &
information across continents
Fred R. David
Prentice Hall
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
• Changes in patent laws
Fred R. David
Prentice Hall
Ch.3-24
Technological Forces
Revolutionary technological forces:
• Profound impact on organizations
• Internet
• Semiconductors
• XML technologies
• UWB communications
Fred R. David
Prentice Hall
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
• Changes entry barriers
Fred R. David
Prentice Hall
Ch.3-26
Competitive Forces
Collection and evaluation of information on
competitors is essential for successful
strategy formulation
Fred R. David
Prentice Hall
Ch.3-27
Competitive Forces
Competition in virtually all industries can be
described as intense.
Fred R. David
Prentice Hall
Ch.3-28
Competitive Forces
Identifying rival firms
• Strengths
• Weaknesses
• Capabilities
• Opportunities
• Threats
• Objectives
• Strategies
Fred R. David
Prentice Hall
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
Fred R. David
Prentice Hall
Ch.3-30
Industry Analysis (EFE)
External Factor Evaluation Matrix
Summarize & evaluate:
Competitive Political Cultural
Technological Environmental Social
Governmental Demographic Economic
Fred R. David
Prentice Hall
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
(not important to very important)
Fred R. David
Prentice Hall
Ch.3-32
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
• Produces a weighted score
Fred R. David
Prentice Hall
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
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
Total 1.00 2.57
Fred R. David
Prentice Hall
Ch.3-34
Fred R. David
Prentice Hall
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.
Fred R. David
Prentice Hall
Ch.3-36
Industry Analysis (CPM)
Competitive Profile Matrix
• Identifies firm’s major competitors
and their strengths & weaknesses
in relation to a sample firm’s
strategic position
• Major weakness – major strength
Fred R. David
Prentice Hall
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