STRATEGIC MANAGEMENT

Fred R. David

EXTERNAL AUDIT External Audit refers to a list of opportunities that

could benefit a firm and threats that should be avoided.

External Audit is aimed at identifying key variables that offer actionable response , where firms should be able to response offensively or defensively

Firms aim to formulate strategies that take advantage of external opportunities or minimize the impact of potential threats

KEY EXTERNAL FORCES

Economic forces Social, cultural, demographic and

Environmental forces Political, Governmental and Legal Forces Technological forces Competitive forces

WHAT DOES EXTERNAL CHANGES ENTAIL?

Changes in external forces means changes in consumer demands for both industrial

and consumer product and services.

External forces affect: the types of product developed, nature of positioning, market segmentation strategies, type of services offered and the choices of business

to acquire or sell

External forces directly affect both suppliers and distributors, customers, stockholders, governments

THE INDUSTRIAL ORGANIZATION VIEW

The Industrial Organization (I/O)approach dictates External industries factors are more important than internal

factors for a firm to achieve competitive advantage Ex. Porter’s 5 Forces

Maintaining Competitive Position within industry

I/O approach was predominant between 1960 -1980s

I/O perspective entails that firms competes in attractive industries and avoids faltering or weak industries

I/O theorist believes that a firm’s choice of industry has a stronger influence on a firm’s performance than internal functional decision (marketing, finance etc)

Firms’ performance is based on: Economies of scales, Barriers to market entry, Product differentiation, Level of competitiveness (Unilever, GP, Apple, Nokia)

ECONOMIC FORCES

Economic Forces play a key role for a firm’s success or failure and have a direct impact on potential attractiveness of a firms product or services

In times of recession, consumer confidence and disposable income are very low, while debt and unemployment are high

During these times firms must differentiate themselves and play their part and focus on aspects such as customer service immediate availability trouble free operation of product dependable maintenance and repair service.

This is important as brand loyalty will fall due to budget crunch and brand switching becomes a high possibility among consumers

ECONOMIC FORCES (CONT’D)

When the market climbs, consumer and business wealth expands which generates various opportunities and threats for various organizations i.e. pharmaceuticals companies, tourism,

entertainment, car industry etc.Potential markets

Latent market—an undiscovered market; demand would be there if product was there

Incipient market—market will emerge as macro environmental trends continue Economical, Technological, Socio-culture trends

SOCIAL, CULTURAL, DEMOGRAPHIC & ENVIRONMENTAL FORCES

Social, Cultural, demographic and Environmental changes have a major impact on all product, services, markets and customers as a whole.

These factors shape the way people live, work, produce and consumer

New trends are creating different types of consumers, thus the need for different products, different services and different strategies. i.e. Nivea for Men, Alcohol, Mobile, Family units (Nuclear family vs single)

Demand Patter Analysis Consumption patterns helps assessing market opportunities

Income Elasticity Measurement Relationship between demand for a good and changes in

income

THE DETERMINANTS OF CULTURE

7-11

DEMOGRAPHIC SEGMENTATION

Income Population Age distribution Gender Education Occupation

What are the trends?

SOCIAL, CULTURAL, DEMOGRAPHIC & ENVIRONMENTAL FORCES

Baby Boomers Examples

restaurants Hotels airlines cruise lines tours resorts theme parks luxury product recreational vehicles home builders furniture producers travel services pharmaceutical firm Automakers funeral homes

POLITICAL, GOVERNMENTAL AND LEGAL FORCES

Political, Governmental and legal factors represent opportunities and threats for both small and large firms alike.

Firms that rely on government contracts, subsidies, political forecasts becomes an important part of external audit as it affects Patent laws Antitrust legislation Tax rates Lobbying activities

The increasing interdependence among economies, market, government and organizations makes it imperative that firms consider the possible impact of political variables on formulation and implementation of competitive strategies.

i.e Autocratic VS. Democratic , Bribes vs. giftsUS Steel Mills Japanese Manufacturer Chinese Manufacturer worldwide distribution

POLITICAL, GOVERNMENTAL AND LEGAL FORCES

In Europe, John Deere, Gillette, Ralph Lauren Polo, Cargill, General Mills are moving their head quarters from France, Netherlands and Germany to Switzerland and Ireland to avoid costs associated with tax harmonization (an effort to end competitive tax breaks among member countries).

Political forecasting is critical for MNC’s that depend on foreign countries for Natural resources Facilities Distribution Special assistance consumers

Strategists must be able to deal with it from a legislatively and politically

These individuals meet government officials, attend hearing and government sponsored conferences, giving public speeches, meeting trade groups, industry association and government agency directors

POLITICAL, GOVERNMENTAL AND LEGAL FORCES

This allows them leverage for entering or expanding international

operations

Interest groups also play a role on strategies for small and large business alike as they can bring about political or governmental actions such as:

Governmental Regulations Changes in Tax Laws Special Tariffs Number of Patents Change in Patent laws Level of government Subsidies Import-Export regulations Lobbying Activities

TECHNOLOGICAL FORCES Internet – is acting as a global economic engine which boosts

productivity

Firms use internet as it saves them billions of dollars in distribution and transaction cost from direct sales and self service system

Most firms are aware of this and have tried to capitalize on e-commerce and have incorporated CIO & CTO

CIO – responsible for managing external audit process such as developing, maintaining and updating database

CTO focus on technical issues such as data processing & data acquisition, software and hardware acquisition

CIO & CTO work together to ensure that information needed to formulate, implement and evaluate strategies are available when needed

TECHNOLOGICAL FORCES Technological forces act as a major opportunities and

threats to various firms

Technological advancement can dramatically affect organizations’ product, service, market share, suppliers, distribution,

competitors, customers, manufacturing process and competitive position (JIT, TQM, CAD, CAM)

Technological advancement can create new market Ex. SATNAV, APPLE)

Technological changes : can lower cost barriers between firms (emails) create short production runs create shortage in technical skills (CAD, CAM)

Technological Advancement can create new advantages

TECHNOLOGICAL FORCES Technology is often delegated to lower organizational level

without an understanding of their strategic implications Less precedence than positioning product Forecasting sales Monitoring distributors

Knowledge and Technologically Driven firms are most affected by technological changes i.e. Communications, electronics, aeronautics, pharmaceutical

industries Identifying opportunity for tech change can attribute opportunity

Shopping online is becoming more predominant in Europe and in the western world due to convenience i.e. Staples, Asda, Walmart

COMPETITIVE FORCES Gathering and evaluating competators is essential for the success of a business

which are always intense and often cut throat (Fiat 2003)

7 characteristics of Competitive companies

1. Market share matters

2. Understand and remember what business you are in

3. Whether it’s broke or not, fix it, make it better (from product to company)

4. Innovate or evaporate – especially for Technological firms

5. Acquisition is essential to growth – successful purchases are in niche that add value

6. People make a difference

7. There’s no substitute for quality and no greater threat tan failing be cost competitive on a global basis

CUT THROAT COMPETITION Competitive Intelligence in business is similar to military and is the

key to success

Mission of a CI program: Obtaining competitors information of industry and competitors Identify areas in which competitors are vulnerable Identify potential moves by competitor which can endangers firms' positions Usage Formulate and implement effective strategies Competitors' weakness can become an external opportunities Assess situation and initiate strategic actions

Firms spend millions of dollars tracking their competitors which ultimately benefit their company in the form of increased revenues, lower cost and better decision making

However there are a great number of corporate spies and espionage that takes place in America

Though this violates antitrust statues, it is still exercised. Internet has became the ultimate tool to gather competitors information

(employees, managers, suppliers, distributors, customers, consultants)

COMPETITION CONT’D Other source of competition includes – trade journals,

want ads, newspaper articles, suppliers, competitors themselves

Unethical tactics include – bribes, wiretapping, computer break-ins

Uniliver sued Proctor and Gamble over corporate espionage activities to obtain the secret of Unilever hair care business.

P & G allegedly took about 80 documents from Unilevers Chicago office (Pantene, Head & Shoulder Vs. Sunsilk, Finess)

Twitter vs. Facebook

COOPERATION AMONG COMPETITION There are multiple cases where competition comes together for

a short project each bringing their own set of expertise and strength

Both firms must contribute something distinctive such as technology, distribution, basic research or manufacturing capacity

Lockheed & British Aerospace PLC teamed up to compete against U.S. fighter Jet

BA – offered it’s expertise in short take off, vertical landing technologies and low cost design and manufacturing

Lockheed offered - large data and technology infrastructures, integrate complex IT systems, and offer the skill and talent of 12 software maturity 

AOL, Yahoo, Micorsoft 2003 teamed up against SPAM

COMPETITION CONT’D Americans are very sceptical and suspicious about

working with competitors. Joint venture and cooperative arrangements brings about paranoia.

They believe information not covered in formal agreements often gets traded day to day dealing with engineers, marketers and product developers

Domestic companies are joining forces to beat competitive foreign firms to reap mutual benefits

Asian and European firms enter into cooperative agreements due to the ‘learning from the partner’ concept

American technological know-how can be easily mimicked

PORTER’S 5 FORCES

Michael Porter shares the I/O perspective and believes that organizational performance will be primarily determined by industry forces

1. Rivalry among Competing firms2. Potential entry of New competitors3. Potential development of substitute products4. Bargaining power of supplier 5. Bargaining power of consumers

PORTER’S 5 FORCESMichael Porter shares the I/O perspective and believes that organizational performance will be primarily determined by industry forces

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The Five-Forces Model

Most powerful of the five forces Focus on competitive advantage of

strategies

Rivalry Among Competing Firms

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The Five-Forces Model

Barriers to entry are important Quality, pricing, and marketing can

overcome barriers

Potential Entry of New Competitors

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The Five-Forces Model

Pressures increase when consumers’ switching costs decrease

Firm’s plans for increased capacity & market penetration

Potential Development of Substitute Products

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The Five-Forces Model

Large number of suppliers & few substitutes affects intensity of competition

Backward integration can gain control or ownership of suppliers

Bargaining Power of Suppliers

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The Five-Forces Model

Customers concentrated or buying in volume affects intensity of competition

Consumer power is higher where products are standard or undifferentiated

Bargaining Power of Consumers