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Chapter 3 The External Assessment

Chapter 3 The External Assessment. Strategic Management: Concepts and Cases . 9 th edition Fred R. David PowerPoint Slides by Anthony F. Chelte Western New England College. Chapter Outline. The Nature of an External Audit Economic Forces

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Chapter 3 The External Assessment

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  1. Chapter 3The 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

  2. Chapter Outline • The Nature of an External Audit • Economic Forces • Social, Cultural, Demographic, and Environmental Forces Fred R. David Prentice Hall

  3. Chapter Outline • Political, Governmental, and Legal Forces • Technological Forces • Competitive Forces Fred R. David Prentice Hall

  4. Chapter Outline • Competitive Analysis: • Porter’s Five-Forces Model • Sources of External Information • Forecasting Tools and Techniques Fred R. David Prentice Hall

  5. Chapter Outline • The Global Challenge • Industry Analysis: • The External Factor Evaluation Matrix • The Competitive Profile Matrix Fred R. David Prentice Hall

  6. The External Assessment Prediction is very difficult, especially about the future. -- Neils Bohr Fred R. David Prentice Hall

  7. External Strategic Management Audit Also called: • Environmental scanning • Industry analysis Fred R. David Prentice Hall

  8. 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

  9. Nature of External Audit Purpose: • Development of Finite List: • Opportunities • Threats to be avoided Fred R. David Prentice Hall

  10. Key External Forces Five (5) broad categories: • Economic forces • Social, cultural, demographic, & environmental forces • Political, governmental, and legal forces • Technological factors • Competitive forces Fred R. David Prentice Hall

  11. Relationships Between Key External Forces and an Organization Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Key External Forces Opportunities & Threats Fred R. David Prentice Hall

  12. Performing an External Audit Gather competitive intelligence on factors: • Social • Cultural • Demographic • Environmental • Economic • Political, legal, governmental • technological Fred R. David Prentice Hall

  13. Performing an External Audit Sources of information include: • Internet • Libraries (corporate, university, public) • Suppliers • Distributors • Customers • Competition Fred R. David Prentice Hall

  14. Performing an External Audit Key factors: • Vary over time • Vary by industry Fred R. David Prentice Hall

  15. 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

  16. Key External Factors Key External Factors: • Oriented to long-term & annual objectives • Measurable • Applicable to all competing firms • Hierarchical • Overall company • Divisional or functional areas Fred R. David Prentice Hall

  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 Fred R. David Prentice Hall

  18. 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

  19. 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

  20. Social, Cultural, Demographic & Environmental Forces Major impact on: • Products • Services • Markets • customers Fred R. David Prentice Hall

  21. Social, Cultural, Demographic & Environmental Forces Consider: United States— • Population growing older • Less Caucasian • Gap between rich and poor widening • 65 and older will rise to 18.5% of population by 2025 • By 2075, no racial or ethnic majority Fred R. David Prentice Hall

  22. Social, Cultural, Demographic & Environmental Forces • World population > 6 billion • U.S. population < 300 million • Great potential for domestic production expansion to other markets • Domestic only is a risky strategy Fred R. David Prentice Hall

  23. Social, Cultural, Demographic & Environmental Forces • NAFTA • U.S. exports to Mexico increased 170% • 2000, U.S. trade deficits: • Mexico -- $25 billion • China -- $84 billion • Japan -- $81 billion • 2001 Recession (U.S. and World) • > 60,000 laid off along Mexico Border with U.S. Fred R. David Prentice Hall

  24. Social, Cultural, Demographic & Environmental Forces Trends for the 2000’s – • More educated consumers • Population aging • Minorities more influential • Local rather than federal solutions • Fixation with youth decreasing • Hispanics increase to 15% by 2021 • African Americans increase to 14% by 2021 Fred R. David Prentice Hall

  25. Social, Cultural, Demographic & Environmental Forces Key variables – • Childbearing rates • Number of special-interest groups • Number of marriages • Number of divorces • Number of births • Number of deaths • Immigration & emigration rates Fred R. David Prentice Hall

  26. 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

  27. 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

  28. Monitor Key Variables • Value placed on leisure time • Recycling • Waste management • Air & water pollution • Ozone depletion • Endangered species Fred R. David Prentice Hall

  29. Political, Govt., & Legal Forces Government Regulation • Key opportunities & key threats • Antitrust legislation (Microsoft) • Tax rates • Lobbying efforts • Patent laws Fred R. David Prentice Hall

  30. Political, Govt., & Legal Forces Increasing Global Interdependence • Impact of political variables • Formulation of Strategies • Implementation of Strategies Fred R. David Prentice Hall

  31. 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

  32. 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

  33. 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

  34. Key Political, Government & Legal Variables • Environmental protection laws • Equal employment legislation • Level of government subsidies • Antitrust legislation/enforcement • Sino-American relationships • Russian-American relationships • European-American relationships Fred R. David Prentice Hall

  35. Key Political, Government & Legal Variables • 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 Fred R. David Prentice Hall

  36. Technological Forces Revolutionary technological forces: • Profound impact on organizations • Internet • Semiconductors • XML technologies • UWB communications Fred R. David Prentice Hall

  37. 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

  38. Technological Forces Capitalizing on Information Technology (IT) • Chief Information Officer (CIO) • Chief Technology Officer (CTO) Fred R. David Prentice Hall

  39. Technological Forces Technology-based issues • Underlie nearly every strategic decision Fred R. David Prentice Hall

  40. Competitive Forces Collection and evaluation of information on competitors is essential for successful strategy formulation Fred R. David Prentice Hall

  41. Competitive Forces Competition in virtually all industries can be described as intense. Fred R. David Prentice Hall

  42. Competitive Forces Identifying rival firms • Strengths • Weaknesses • Capabilities • Opportunities • Threats • Objectives • Strategies Fred R. David Prentice Hall

  43. Competitive Forces Key Questions About Competitors: • Their strengths • Their weaknesses • Their objectives and strategies • Their responses to all external variables (e.g. social, political, demographic, etc.) • Their vulnerability to our alternative strategies Fred R. David Prentice Hall

  44. Competitive Forces Key Questions About Competitors: • Our vulnerability to successful strategic counterattack • Our product and service positioning relative to competitors • Entry and exit of firms in the industry • Key factors for our current position in industry Fred R. David Prentice Hall

  45. Competitive Forces Key Questions About Competitors: • Sales and profit rankings of competitors over time • Nature of supplier and distributor relationships • The threat of substitute products or services Fred R. David Prentice Hall

  46. Competitive Forces Sources of Corporate Information: • 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 Fred R. David Prentice Hall

  47. Competitive Forces 7 Characteristics of most competitive U.S. firms: • Market share matters • Understand what business you are in • Broke or not, fix it • Innovate or evaporate Fred R. David Prentice Hall

  48. Competitive Forces 7 Characteristics of most competitive U.S. firms: • Acquisition is essential to growth • People make a difference • No substitute for quality Fred R. David Prentice Hall

  49. Competitive Forces Competitive Intelligence Programs: • Systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’ own goals. Fred R. David Prentice Hall

  50. Competitive Analysis: Porter’s Five-Forces Model Potential development of substitute products Rivalry among competing firms Bargaining power of suppliers Bargaining power of consumers Potential entry of new competitors Fred R. David Prentice Hall

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