Lecture No 07 The External Assessment

Lecture No 07

The External Assessment

Lecture Outline

• The Nature of an External Audit

• Economic Forces

• Social, Cultural, Demographic, and Environmental Forces

Lecture Outline

• Political, Governmental, and Legal Forces

• Technological Forces

• Competitive Forces

Lecture Outline

• Competitive Analysis:–Porter’s Five-Forces Model

• Sources of External Information

• Forecasting Tools and Techniques

Lecture Outline

• The Global Challenge

• Industry Analysis:– The External Factor Evaluation Matrix

• The Competitive Profile Matrix

The External Assessment

Prediction is very difficult, especially about the future.

-- Neils Bohr

External Strategic Management Audit

Also called:– Environmental scanning– Industry analysis

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

Nature of External Audit

Purpose:

– Development of Finite List:• Opportunities• Threats to be avoided

Key External Forces

Five (5) broad categories:

1. Economic forces2. Social, cultural, demographic, &

environmental forces3. Political, governmental, and legal forces4. Technological factors5. Competitive forces

Relationships Between Key External Relationships Between Key External Forces and an OrganizationForces and an Organization

Opportunities&

Threats

Key External Forces

CompetitorsSuppliers

DistributorsCreditors

CustomersEmployees

CommunitiesManagers

StockholdersLabor Unions

Special Interest GroupsProductsServices

Performing an External Audit

Gather competitive intelligence on factors:– Social– Cultural– Demographic– Environmental– Economic– Political, legal, governmental– technological


Sources of information include:– Internet– Libraries (corporate, university, public)– Suppliers– Distributors– Customers– Competition


Key factors:– Vary over time– Vary by industry


Variables include:– Market share– Breadth of competing products– World economies– Foreign affiliates– Proprietary account advantages– Price competitiveness– Technological advancements– Interest rates– Pollution abatement

Key External Factors

Key External Factors:

1. Oriented to long-term & annual objectives2. Measurable3. Applicable to all competing firms4. Hierarchical

• Overall company• Divisional or functional areas

Economic ForcesMonitor 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

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

Monitor Key Economic Variables:

• Price fluctuations• Exportation of labor & capital• Monetary policies• Fiscal policies• Tax rates• ECC policies• OPEC policies• LDC policies

Social, Cultural, Demographic & Environmental Forces

Major impact on:

– Products– Services–Markets– customers


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


• World population > 6 billion

• U.S. population < 300 million• Great potential for domestic production

expansion to other markets

• Domestic only is a risky strategy


• 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.


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


Key variables –• Childbearing rates• Number of special-interest groups• Number of marriages• Number of divorces• Number of births• Number of deaths• Immigration & emigration rates

Monitor Key Variables

• Life expectancy rates• Per capita income• Attitudes toward business• Average disposable income• Buying habits• Ethical concerns• Attitudes toward saving


• Racial equality• Average level of education• Government regulation• Attitudes toward customer service• Attitudes toward product quality• Energy conservation• Social responsibility


• Value placed on leisure time• Recycling• Waste management• Air & water pollution• Ozone depletion• Endangered species

Political, Govt., & Legal Forces

Government Regulation

• Key opportunities & key threats• Antitrust legislation (Microsoft)• Tax rates• Lobbying efforts• Patent laws


Increasing Global Interdependence

• Impact of political variables– Formulation of Strategies– Implementation of Strategies


Increasing Global Interdependence

• Strategists in a global economy• Forecast political climates• Legalistic skills• Diverse world cultures


Globalization of Industry

• Worldwide trend toward similar consumption patterns

• Global buyers & sellers

• E-commerce

• Instant transmission of money & information across continents


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

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

Thank You

Lecture No 08

Lecture Outline

• Key Political, Government & Legal Variables• Technological Forces• Competitive Forces• Porter’s Five-Forces Model• Industry Analysis (EFE)• Industry Analysis (CPM)

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

Technological Forces

Revolutionary technological forces:

• Profound impact on organizations• Internet• Semiconductors• XML technologies• UWB communications


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


Capitalizing on Information Technology (IT)

• Chief Information Officer (CIO)

• Chief Technology Officer (CTO)


Technology-based issues

– Underlie nearly every strategic decision

Competitive Forces

Collection and evaluation of information on competitors is essential for successful strategy formulation

Competitive Forces

Competition in virtually all industries can be described as intense.

Competitive Forces

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

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

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

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

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

Competitive Forces

7 Characteristics of most competitive U.S. firms:

1. Market share matters2. Understand what business you are in3. Broke or not, fix it4. Innovate or evaporate

Competitive Forces

7 Characteristics of most competitive U.S. firms:

5. Acquisition is essential to growth6. People make a difference7. No substitute for quality

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.

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

Global Challenge

International Challenge faced by U.S. firms:

– How to gain and maintain exports to other nations

– How to defend domestic markets against imported goods

Industry Analysis (EFE)

External Factor Evaluation MatrixExternal Factor Evaluation MatrixSummarize & evaluate:

CompetitivePoliticalCultural

Technological

EnvironmentalSocial

Governmental

DemographicEconomic


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


Five-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


Five-step process:

• Sum the weighted scores for eachDetermines the total weighted score for

the organization.

• Highest possible weighted score for the organization is 4.0; the lowest, 1.0. Average = 2.5

.201.20 Clinton Administration

.202.10 Bad media exposure from FDA

.102.05 Smokeless market SE region U.S.

.153.05 Production limits on tobacco

.202.10 Legislation against the tobacco industry

Threats

.303.10 More social pressure to quit smoking

2.101.00TOTAL

.604.15 Pinkerton leader in discount market

.051.05 Astronomical Internet growth

.153.05 Increased demand

.151.15 Global markets untapped

Weighted

scoreRatingWeight

UST—Key External FactorsOpportunities


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


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.


Important

• Understanding of the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.

Industry Analysis (CPM)

Competitive Profile Matrix

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

(CPM) Procter Avon L’Oreal &

Gamble

2.803.25

3.15

1.00Total

0.1530.20

40.05

10.05Market Share

0.4020.40

20.80

40.20Global Expansion

0.2020.40

40.40

40.10Customer Loyalty

0.4530.45

30.60

40.15Financial Position

0.3030.30

30.40

40.10Management

0.4040.30

30.30

30.10Price Competition

0.3030.40

40.40

40.10Product Quality

0.6030.80

40.20

10.20Advertising

ScoreRating

Score

Rating

Score

Rating

Weight

Critical Success Factor

Key Terms

• America Online• Chief Information Officer (CIO)• Chief Technology Officer (CTO)• Competitive advantages• Competitive analysis• Competitive intelligence (CI)• Competitive Profile Matrix (CPM)

Key Terms

• Critical success factors• Cyberspace• Decruiting• Director of competitive analysis• Downsizing• Econometric models• Environmental scanning• External audit• External Factor Evaluation (EFE) Matrix

Key Terms

• External forces• Industry analysis• Information Technology (IT)• Industrial policies• Internet learning from the partner• Linear regression

Key Terms

• Porter’s Five-Forces Model• Netscape• On-Line databases• Rightsizing• Trend extrapolation• World Wide Web (www)

Thank You

Lecture No 07 The External Assessment

Documents

Transcript of Lecture No 07 The External Assessment