Transcript LEC 07.ppt

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
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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 forces
2. Social, cultural, demographic, &
environmental forces
3. Political, governmental, and legal forces
4. Technological factors
5. Competitive forces
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
Performing an External Audit
Gather competitive intelligence on factors:
– Social
– Cultural
– Demographic
– Environmental
– Economic
– Political, legal, governmental
– technological
Performing an External Audit
Sources of information include:
– Internet
– Libraries (corporate, university, public)
– Suppliers
– Distributors
– Customers
– Competition
Performing an External Audit
Key factors:
– Vary over time
– Vary by industry
Performing an External Audit
Variables include:
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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:
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Oriented to long-term & annual objectives
Measurable
Applicable to all competing firms
Hierarchical
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Overall company
Divisional or functional areas
Economic Forces
Monitor Key Economic Variables:
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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:
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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:
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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
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
Social, Cultural, Demographic &
Environmental Forces
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World population > 6 billion
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U.S. population < 300 million
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Great potential for domestic production
expansion to other markets
Domestic only is a risky strategy
Social, Cultural, Demographic &
Environmental Forces
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NAFTA
U.S. exports to Mexico increased 170%
– 2000, U.S. trade deficits:
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Mexico -- $25 billion
China -- $84 billion
Japan -- $81 billion
2001 Recession (U.S. and World)
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> 60,000 laid off along Mexico Border with U.S.
Social, Cultural, Demographic &
Environmental Forces
Trends for the 2000’s –
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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
Social, Cultural, Demographic &
Environmental Forces
Key variables –
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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
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Life expectancy rates
Per capita income
Attitudes toward business
Average disposable income
Buying habits
Ethical concerns
Attitudes toward saving
Monitor Key Variables
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Racial equality
Average level of education
Government regulation
Attitudes toward customer service
Attitudes toward product quality
Energy conservation
Social responsibility
Monitor Key Variables
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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
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Antitrust legislation (Microsoft)
Tax rates
Lobbying efforts
Patent laws
Political, Govt., & Legal Forces
Increasing Global Interdependence
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Impact of political variables
– Formulation of Strategies
– Implementation of Strategies
Political, Govt., & Legal Forces
Increasing Global Interdependence
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Strategists in a global economy
Forecast political climates
• Legalistic skills
• Diverse world cultures
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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
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
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
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Thank You
Lecture No 08
Lecture Outline
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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
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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:
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Profound impact on organizations
Internet
• Semiconductors
• XML technologies
• UWB communications
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Technological Forces
Internet changes the nature of opportunities and
threats -•
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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
Technological Forces
Capitalizing on Information Technology (IT)
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Chief Information Officer (CIO)
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Chief Technology Officer (CTO)
Technological Forces
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
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Strengths
Weaknesses
Capabilities
Opportunities
Threats
Objectives
Strategies
Competitive Forces
Key Questions About Competitors:
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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
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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
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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:
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Market share matters
Understand what business you are in
Broke or not, fix it
Innovate or evaporate
Competitive Forces
7 Characteristics of most competitive U.S.
firms:
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Acquisition is essential to growth
People make a difference
No substitute for quality
Competitive Forces
Competitive Intelligence Programs:
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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
Bargaining power
of suppliers
Rivalry among
competing firms
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 Matrix
Summarize & evaluate:
Economic
Demographic
Governmental
Social
Environmental
Technological
Cultural
Political
Competitive
Industry Analysis (EFE)
Five-Step process:
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List key external factors (10-20)
Opportunities & threats
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Assign weight to each (0 to 1.0)
Sum of all weights = 1.0
Industry Analysis (EFE)
Five-step process:
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Assign 1-4 rating to each factor
• Firm’s current strategies response to the factor
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Multiply each factor’s weight by its rating
• Produces a weighted score
Industry Analysis (EFE)
Five-step process:
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Sum the weighted scores for each
Determines the total weighted score for
the organization.
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Highest possible weighted score for
the organization is 4.0; the lowest, 1.0.
Average = 2.5
UST—Key External Factors
Weight
Rating
Weighted
score
Global markets untapped
.15
1
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Increased demand
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3
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Astronomical Internet growth
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1
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Pinkerton leader in discount market
.15
4
.60
More social pressure to quit smoking
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Legislation against the tobacco industry
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Production limits on tobacco
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Smokeless market SE region U.S.
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Bad media exposure from FDA
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Clinton Administration
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Opportunities
Threats
TOTAL
1.00
2.10
Industry Analysis (EFE)
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
Industry Analysis (EFE)
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.
Industry Analysis (EFE)
Important
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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
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Identifies firm’s major competitors and
their strengths & weaknesses in
relation to a sample firm’s strategic
position
(CPM)
Critical Success
Factor
Avon
L’Oreal
Procter
& Gamble
Weight Rating Score Rating Score Rating Score
Advertising
0.20
Product Quality
0.10
Price Competition
0.10
Management
0.10
Financial Position
0.15
Customer Loyalty
0.10
Global Expansion
0.20
Market Share
0.05
Total
1.00
1
4
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1
0.20
0.40
0.30
0.40
0.60
0.40
0.80
0.05
3.15
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4
0.80
3
0.60
0.40
3
0.30
0.30
4
0.40
0.30
3
0.30
0.45
3
0.45
0.40
2
0.20
0.40
2
0.40
0.20
3
0.15
3.25
2.80
Key Terms
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America Online
Chief Information Officer (CIO)
Chief Technology Officer (CTO)
Competitive advantages
Competitive analysis
Competitive intelligence (CI)
Competitive Profile Matrix (CPM)
Key Terms
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Critical success factors
Cyberspace
Decruiting
Director of competitive analysis
Downsizing
Econometric models
Environmental scanning
External audit
External Factor Evaluation (EFE) Matrix
Key Terms
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External forces
Industry analysis
Information Technology (IT)
Industrial policies
Internet learning from the partner
Linear regression
Key Terms
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Porter’s Five-Forces Model
Netscape
On-Line databases
Rightsizing
Trend extrapolation
World Wide Web (www)
Thank You