the external assessment chapter 3. if everyone is thinking alike then somebody isn’t thinking
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THE EXTERNAL ASSESSMENT Chapter 3
If everyone is thinking alike then somebody isn’t thinking
Chapters Objectives Describe how to conduct an external strategic-
management audit Discuss 10 major external forces that affect
Organization Identify key sources of external information,
including the internet Discuss forecasting tools used in SM Explain how to develop an EFE Matrix Explain how to develop a Competitive Profile
Matrix
Tools & concepts needed to conduct an external strategic management audit (environmental scanning or industry analysis)
Firm evaluate trends & events beyond the control
Ext Audit reveals key opportunities & threatsManagers formulate strategies to take adv of
opportunities & avoid threats
Affect products, services, markets & Organizations in the world (acquire & sell)
Changes in consumer demands
Factors affect suppliers & distributors
Foreign business & countries learn, adapt, innovate to compete successfully in the Marketplace
Key External Factors
Economies of Scale
Industry Properties
Barriers to market entry
Product differentiation
Level of competitiveness
I/O Perspective Firm Performance
I/O approach External factors more important than internal factors in firms Competitive advantage)I/O Theorists contend that the industry in which a firm chooses to compete has a stronger influence on the firms competitive performance than do the internal functional decisions managers make in Marketing, finance, and the like 20% firm’s profitability can be explained by the industry36% profitability attributed to the firms internal factors
Porter’s Five Forces Model is an Example of I/O perspective
CompetitorsSuppliers
DistributorsCreditors
CustomersEmployees
CommunitiesManagers
StockholdersLabor Unions
Special Interest GroupsProductsServices
Key External Forces
Opportunities&
Threats
Key External Forces & the Organization
•Company must gather competitive intelligence & information about External forces•Sources ( key magazines, trade journals & newspapers.. Internet, university- Suppliers, distributors, salespersons, customers & competitors
Performing External Audit
External Factors
Measurable
Long-term orientation
Applicable to competing firms
Hierarchical
Managers meet & identify most important opportunities & threats facing the firmKey external factors listed on flip charts/blackboard Managers prioritized list by ranking the factors identified (1-20) imp- least O/TCOMPETING PRODUCTS/ WORLD ECONOMIES, FOREIGN AFFLIATES, PRICE COMPETIVIENESS, TECHNOLOGICAL ADVANCEMENTS, POPULATION SHIFTS
The Industrial Organizational (I/O) View
• I/O approach to competitive advantage advocates that external (industry ) factors are more important than internal factors in a firm achieving CA
• Proponents of I/O view (Michael Porter) –Organizational performance will be primarily determined by industry forces– Porter’s Five-Forces Model
Assignment for discussion
Economic ForcesSocial, Cultural, Demographic &
Environmental ForcesPolitical, Governmental & Legal ForcesTechnological ForcesCompetitive ForcesCompetitive Intelligence Programs
Economic Forces
• Economic forces produce many opportunities and threats for mangers– Interests rate– Inflation – Unemployment – Economic growth
Volunteer
Economic Forces
Representing the overall economic health of the country or region in which the Organization functions
(Consumer purchasing power, Unemployment rate, interest rates, labor market,)
are all part of Org economic environment
One significant recent trend in the economic environment is the frequency of mergers & acquisitions
Social, Cultural, Demographic & Environmental Forces
• US getting older & Less Caucasian
• People/households making more purchases on line
• Census data – Aging population – Trend towards older America is good news for
• Tours• Restaurants • Hotels• Airlines• pharma
Sociocultural Forces
• Sociocultural Forces are pressures emanating from the social structure of a country or society or from the national culture – Social structure – National Culture
Managers and Organizations also must respond to social changes
within a society Americans becoming more personal fitness and health
conscious
Demographic Forces
• Are the outcomes of changes in or changing attitudes toward the characteristics of a population such as age, gender, ethnic origin, race, sexual orientation and social class– Women seeking employment– Changes in the age distribution of a
population
Social, Cultural, Demographic & Environmental Forces
U.S. Facts
•Aging population
•Less Caucasian
•Widening gap between rich & poor
•2025 = 18.5% population >65 years
•2075 = no ethnic or racial majority
Political and Legal ForcesChanges in laws and regulations
Laws constrain the operations of org & managers thus create both opportunities & threats
Deregulation & privatization(create challenges for Org & managersEnvironmental protectionPreservation of endangered species Emphasis on safety in the workplaceLegal constraints against discrimination
Successful managers carefully monitor changes in laws and regulations in order to take advantage of the Opp they create and counter threats they
pose
Technological Forces– Combination of skills and equipments that
managers use in the design, production and distribution of goods and services
– Technological forces are the outcomes of changes in the technology that managers use to design , produce or distribute goods and services
– Tech change can make established products obsolete overnight
• Telecommuting / Teleconferencing • CIO/CTO new positions to effectively capitalize on
e-commerce
Competitive Forces
Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies
Identifying Rival Firms
Identify major competitors not
always easy because many firms have divisions that compete in different
industries
Formally defined by Society of CI Professionals --- systematic & Ethical process for gathering & analyzing information about competitors9 out of 10 large companies have employees
dedicated solely to gather CIFunction on the Org charts (Director of
Competitive Analysis)Bribery , wiretapping and computer break ins
should never be used
Competitive Intelligence Programs
The Five-Forces Model of Competition
Potential development of substitute products
Rivalry among competing firms
Bargaining power of suppliers
Potential entry of new competitors
Bargaining power of consumers
The Five Forces Model
• Helps managers isolate particular forces in the external environment that are potential threats
• Porter argued that when managers analyze O/T they should pay particular attention to these five forces
• They affect how much a profit organizations competing within the same industry can expect to make
Rivalry among competing firmsPowerful of the five competitive forcesThe more the companies compete against
one another for customers– (by lowering prices of the products/ increasing advertising) – the lower is the level of industry profits ( low prices mean less profits)
As rivalry among competing firms intensifies, industry profits decline– industry becomes unattractive
Coke & Pepsi ( price wars, comparative advertising, new product introduction)
Potential Entry of New Competitors Whenever new firms can easily enter a
particular industry, the intensity of competitiveness among firms increases
Barriers to entry, such as economies of the scale, strong customer loyalty, strong brand preferences….. Are low the easier it is for companies to enter an industry (industry profits to be low)
Example: GM offering employee discounts- to all customers purchasing new cars
Threat is high for local hamburger restaurant than Ford & Toyota
When the threats of new firms entering the market is strong, Firms generally fortify their positions and take actions to deter new entrants, such as lowering prices, extending warranties and adding features………
Potential Development of Substitute Products
Often, the output of one industry is a substitute for the output of another industry plastic may be a substitute for steel in some
applications eyeglasses / contact lenses laser eye surgerySugar Companies artificial sweetners
Competitive pressures arising from substitute products increase as the relative price of substitute products declines & as consumers’ switching costs decreases
Bargaining Power of Suppliers
If there are only a few suppliers of an important input, then suppliers can drive up the price of that input & expensive inputs result in lower profits for the producer
Firms may pursue a backward integration strategy to gain control or ownership of suppliers
Local electric co. is the only source of electricity in your community therefore it can charge what it wants for its product
• Backward integration strategy to gain control of ownership of suppliers. This strategy is especially effective when suppliers are unreliable, too costly or not capable of meeting a firm’s needs on a consistent basis.
Bargaining Power of Consumers
• If only a few large customers are available to buy an industry’s output, they can bargain to drive down the price of that output. As a result producer make lower profits
• Rival firms may offer extended warranties or special services to gain customer loyalty whenever the bargaining power of consumers is substantial
Sources Of External Information
Published & Unpublished sourcesCustomer survey-Market research-
Speeches at meetings- TV programs-Interviews
Journals-Government documents- books- newspaper
Internet
Forecasting Tools & Techniques
Truth is we all make implicit forecasts throughout our daily lives
Organization forecast (project) their own resources & profits annually
Making Assumptions
Best present estimates of the impactOf major external factors, over which the
managersHas little if any control,
but which may exert a significantImpact on performance
or ability to achieve desired results
Industry Analysis: The External Factor Evaluation (EFE) Matrix
CompetitivePoliticalCultural
Technological
EnvironmentalSocial
Governmental
DemographicEconomic
Summarize & Evaluate
Developed in Five Steps: (Open Book)
EFE – Poultry Firm
Key External Factors Weight RatingWtd
Score
Opportunities (cont’d)1. Demand for chicken increasing 8 % annually
0.07 4 0.28
2. Demand for prepared food incaresing 10% annually
0.08 4 0.32
3.Leading competitor could be acquired for $1billion
0.02 1 0.02
Threats 0.10 1 0.10
1. Leading competitor increased its ad expenses 30%
0.06 1 0.06
EFE – Gateway Computers (2003) (cont’d)
Key External Factors Weight RatingWtd
Score
Threats (cont’d)2. Illegal immigrant problem plagues the firm
0.09 3 0.27
3. 0.05 1 0.05
4. 0.05 3 0.15
5. 0.05 4 0.20
6. 0.05 3 0.15
EFE – Gateway Computers (2003) (cont’d)
Key External Factors Weight RatingWtd
Score
Threats (cont’d)
7. 0.05 2 0.10
8. 0.05 3 0.15
Total 1.00 2.56
Five steps in developing EFE Matrix(Step1)
List key external factors as identified in the External audit process
Include 10-20 factors including both opportunities & threats that affect the firm & its industry
List opportunities first & then the threats Be specific as possible using percentages,
ratios and comparative numbers whenever possible
EFE matrix (step 2) Continue…….Assign to each factor a weight that ranges from
0.0(not important) to 1.0(very important)The weight indicates the relative importance of that
factor to being successful in the firm’s industry.Opportunities often receive higher weights than
threats, but threats too can receive high weights if they are especially severe or threatening
Appropriate weights can be determined by comparing successful with unsuccessful competitors or discussing a factor (reaching a consensus)
The sum of all weights assigned to the factors must equal 1.0
EFE matrix step 3 continue….
assign rating between 1&4 to each key external factor indicate how effectively the firm’s current strategies respond to the factor , where 4= the response is superior, 3= response is above average, 2=average, 1=poor
Ratings are based on effectiveness of the firm’s strategies
Ratings are company based, whereas the weights in step 2 are industry based
Both threats & opp can receive a 1,2,3 or 4
EFE Matrix step 4 & 5
Multiply each factor’s weight by its rating to determine a weighted score
Sum the weighted score for each variable to determine total weighted score for the organization
Total weighted score of 4.0• Organization response is outstanding to threats
and weaknesses• Firms strategy effectively taking advantage of
existing opportunities and minimizing the effects of external threats
Industry Analysis EFE
Total weighted score of 1.0• Firm’s strategies not capitalizing on opportunities or
avoiding threats
Industry Analysis: Competitive Profile Matrix (CPM)
Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions
CPM 4 ----- Major Strength3 ----- Minor Strength2 ----- Minor Weakness1 ----- Major Weakness
Critical success factors in a CPM are broader (do not include factual or specific date)
CSF in CPM not grouped into O/T as they are in EFE
Ratings & Total weighted scores for rival firms can be compared to the sample firm
Comparative analysis provides important internal strategic information
Weights & total weights scores in both CPM & EFE having the same
meaning Ratings refer to
strengths & weakness
Gateway Apple Dell
CSF’s Wt Rating Wt’d Score
Rating Wt’d Score
Rating Wt’d Score
Market share 0.15 3 0.45 2 0.30 4 0.60
Inventory sys 0.08 2 0.16 2 0.16 4 0.32
Fin position 0.10 2 0.20 3 0.30 3 0.30
Prod. Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distr 0.10 3 0.30 2 0.20 3 0.30
Global Exp. 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15
Apple has the best product quality and management experience ; Dell has the best market share and inventory system; Gateway
has the best price as indicated by the ratings
Gateway Apple Dell
CSF’s (cont’d) Wt Rating Wt’d Score
Rating
Wt’d Score
Rating Wt’d Score
Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12
E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Serv 0.10 3 0.30 2 0.20 4 0.40
Price competitive
0.02 4 0.08 1 0.02 3 0.06
Mgt. experience
0.01 2 0.02 4 0.04 2 0.02
Total 1.00 2.83 2.47 3.49
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