Chapter 3 The External Assessment

1. Chapter 3 The External Assessment Strategic Management: Concepts & Cases Dr. Ayham Jaaron

2. Chapter Outline The Nature of the External Audit The Industrial Organization (I/O) View Social, Cultural, Demographic & Environmental Forces

3. Chapter Outline (cont’d) Political, Governmental, and Legal Forces Technological Forces Competitive Forces

4. Chapter Outline (cont’d) Porter’s Five-Forces Model Sources of External Information Forecasting Tools & Techniques

5. Chapter Outline (cont’d) Global Challenge The External Factor Evaluation (EFE) Matrix Competitive Profile Matrix (CPM)

6. External Assessment It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. –Charles Darwin Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map. – Wayne Calloway, Former CEO, PepsiCo

7. External Strategic Management Audit -- Environmental Scanning -- Industry Analysis

8. External Strategic Management Audit Identify & Evaluate factors beyond the control of a single firm • Increased foreign competition • Population shifts • Aging society • Fear of traveling • Stock market volatility

9. External Strategic Management Audit Purpose of External Audit • Identify • Opportunities • Threats

10. Key External Forces • Economic forces • Social, cultural, demographic & environmental forces • Political, governmental & legal forces • Technological forces • Competitive forces

11. Key External Forces & the Organization Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Markets Natural Environment Key External Forces Opportunities & Threats

12. External Audit Gather competitive intelligence – • Social • Cultural • Demographic • Environmental • Governmental • Legal • Technological

13. External Audit – Sources of Information • Internet • Libraries • Suppliers • Distributors • Salespersons • Customers • Competition

14. Performing External Audit -- Key Factors • Vary over time • Vary by industry

15. Performing External Audit -- Variables • Market share • Breadth of competing products • World economies • Foreign affiliates • Proprietary account advantages

16. Performing External Audit -- Variables • Price competitiveness • Technological advancements • Interest rates • Pollution abatement/reduction

17. Performing External Audit Long-term orientation External Factors Measurable Applicable to competing firms Hierarchical

18. Industrial Organization (I/O) View -- Industry factors more important than internal factors • Performance determined by industry forces

19. I/O Perspective Firm Performance Industry Properties Economies of Scale Barriers to market entry Product differentiation Level of competitiveness

20. Research Findings “Approximately 20% of a firm’s profitability can be explained by the industry, whereas 36% of the variance in profitability is attributed to the firm’s internal factors”

21. Economic Forces

22. Economic Forces • Trends in the dollar’s value • European Union • Layoffs • Economic standard of living

23. Economic Standard of Living

24. Russia’s Economy • Political bureaucracy • Illegal actions by officialsand policemen • State-run gas; monopolypurchase of newspaper • Foreign direct investment

25. Social, Cultural, Demographic & Environmental Forces • Major Impact – • Products • Services • Markets • Customers

26. Social, Cultural, Demographic & Environmental Forces • Western societies’ Facts • Aging population • Less specific races. • Widening gap between rich & poor • 2025 = 18.5% population >65 years • 2075 = no ethnic or racial majority

27. Social, Cultural, Demographic & Environmental Forces • Facts • World population approaching 7 billion • World population = 8 billion by 2028 • World population = 9 billion by 2054

28. Social, Cultural, Demographic & Environmental Forces • Trends • More European and American households with people living alone • By 2021 Hispanics will be largest minority group • Aging people – affects all organizations • Population shift to the south and west • Less interested in fitness and exercise • Decimation and degradation of the natural environment

29. U.S. – Mexico Border • North America’s fastestgrowing region • 1,500 foreign manufacturer • No longer the largestexporter to U.S.

30. Social, Cultural, Demographic & Environmental Forces • Global trends • 2003 – China largest exporter to U.S. • 2003 ––Asia receives highest foreign direct investment • Cheaper labor and utilities than Mexico • China joined WTO

31. Social, Cultural, Demographic & Environmental Forces • Global trends • China’s labor rates less than Mexico • China provides more site location incentives than Mexico

32. Social, Cultural, Demographic & Environmental Forces 21st Century Trends • More educated consumers • Aging population • Minorities more influential • Local rather than federal solutions

33. Social, Cultural, Demographic & Environmental Forces (cont’d) 21st Century Trends • Youth decreasing • Hispanics increase to 15% by 2021 • African American increase to 14% by 2021

34. Key Social, Cultural, Demographic & Environmental Variables Childbearing rates Number of special interest groups Number of marriages & divorces Number of births & deaths Immigration rates

35. Social, Cultural, Demographic & Environmental Forces Actuarial rates Monitor Key Variables Per capita income Attitudes toward business Avg. disposable income

36. Social, Cultural, Demographic & Environmental Forces Consumer behavior Monitor Key Variables Ethical concerns Attitudes toward saving Racial equality

37. Social, Cultural, Demographic & Environmental Forces Avg. educational level Monitor Key Variables Governmental regulation Attitudes toward customer service Attitudes toward quality

38. Social, Cultural, Demographic & Environmental Forces Energy conservation Monitor Key Variables Social responsibility Leisure time values Recycling

39. Social, Cultural, Demographic & Environmental Forces Waste management Monitor Key Variables Air & water pollution Ozone depletion Endangered species

40. Political, Government & Legal Forces Government Regulation Key opportunities & threats • Antitrust legislation • Tax rates • Lobbying efforts • Patent laws

41. Political, Government & Legal Forces Increasing Global Interdependence Strategists in a global economy – • Forecast political climates • Legalistic skills • Diverse world cultures

42. Political, Government & Legal Forces Globalization of Industry • Worldwide trend toward similar consumption patterns • Global buyers and sellers • E-commerce • Technology for instant currency transfers

43. Key Political, Governmental, & Legal Variables Regulation/deregulation Tax law changes Special tariffs Voter participation rates

44. Key Political, Governmental, & Legal Variables (cont’d) Number of patents Changes in patent laws Environmental protection laws Equal employment legislation Government subsidies

45. Key Political, Governmental, & Legal Variables (cont’d) Anti-trust enforcement Global relationships Import/export regulations Political conditions Location and severity of terrorist activity

46. Technological Forces • Major Impact – • Internet • Communications • Semiconductors

47. Technological Forces • Significance of IT • Chief Information Officer (CIO) • Chief Technology Officer (CTO)

48. Technological Forces Technology-based issues Essential for nearly every strategic decision

49. Competitive Forces Collection & evaluation of data on competitors is essential for successful strategy formulation

50. Competitive Forces Competition on virtually all industries can be described as intense.