EXTERNAL EXTERNAL ENVIRONMENT ENVIRONMENT

ANALYSISANALYSIS

Presented By:

CATHERINE T. SANTOSBusiness Policy & Strategic Management29 October 2005

ObjectivesObjectives

Learn how to conduct an external strategic-management audit.

To discuss the ten major external forces that affect organizations: economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive.

To be able to conduct competitive analysis using Porter’s Five-Forces Model.

Explain how to develop EFE Matrix and Competitive Profile Matrix.

IntroductionIntroduction

Many situational considerations enter into crafting strategy. These factors & its influence on the strategy-making process differ for each situation.

What an organization can and cannot do strategy-wise is always affected by major forces in its external environment.

STRATEGY-SHAPING FACTORS STRATEGY-SHAPING FACTORS EXTERNAL TO THE COMPANYEXTERNAL TO THE COMPANY

Societal,Political,

Regulatory,And

CommunityCitizenship

Considerations

CompanyOpportunities

And Threats

CompetitiveConditions andOver-All IndustryAttractiveness

The External AssessmentThe External Assessment The Nature of an External Audit Economic Forces Social, Cultural, Demographic, and Environmental

Forces Political, Governmental, and Legal Forces Technological Forces Competitive Forces Competitive Analysis: Porter’s Five Forces Model Industry Analysis: The External Factor Evaluation

(EFE) Matrix Competitive Profile Matrix

The Nature of An External AuditThe Nature of An External AuditExternal audit is sometimes called environmental scanning or industry analysis.FOCUS: identify & evaluate trends and events beyond the control of an organization.PURPOSE: develop a list of key variables that could benefit the firm; and threats that should be avoided.KEY EXTERNAL FORCES INCLUDE:1. Economic Forces2. Social, Cultural, Demographic, and Environmental Forces3. Political, Governmental, and Legal Forces4. Technological Forces5. Competitive Forces

The Process of Performing an The Process of Performing an External AuditExternal Audit

1. Gather competitive intelligence & information on economic, social, cultural, demographic, environmental, political, governmental, legal, and technological trends.

2. Assimilate & evaluate the information gathered by having a list of the opportunities & threats. Rank it with 1 as the most important.

3. A final list of the most important key external factors should be communicated & distributed within the firm.

The Economic ForcesThe Economic Forces Key Economic Variables to be Monitored:

Availability of Credit Level of disposable income Propensity of people to spend Interest rates & inflation rates Money market rates Consumption patterns Unemployment trends Value of Dollar in the world market Stock market trends Foreign countries’ economic condition Price Fluctuations

The Social, Cultural, Demographic, and The Social, Cultural, Demographic, and Environmental ForcesEnvironmental Forces

Society shapes one’s beliefs, values, and norms. It defines:

1. Views of Themselves

2. Views of Others

3. Views of Organizations – refers to their attitude toward corporations, government agencies, trade unions, and other organizations.

4. Views of Society

5. Views of Nature

6. Views of the Universe

DEMOGRAPHIC ENVIRONMENT INCLUDE: Age Family Size – number of persons in the family Family Life Cycle – Young, single; young married Gender Income Occupation Education Religion Race Generation Nationality Social Class – lower, middle, upper

The Political, Governmental and The Political, Governmental and Legal ForcesLegal Forces

This environment is composed of laws, government agencies, and pressure groups that influence & limit various organizations & individuals.

Key Variables:

1. Government regulations or deregulations

2. Changes in tax laws ; special tariffs

3. Political action committees

4. Number, severity, and location of government protests

5. Number of patents; changes in patent laws

6. Environmental protection laws

7. Size of government budgets

8. Political conditions of foreign countries.

Technological ForcesTechnological Forces In this environment, we should monitor the

following:1. Accelerating Pace of Change – new ideas and their successful implementation.2. Opportunities for Innovation – revolutionizing products and services.3. Varying Research & Development Budgets – researches toward breakthroughs.4. Increased Regulation of Technological Change – public needs assurance of their safety as products become complex.

COMPETITIVE FORCESCOMPETITIVE FORCES Collection and evaluation of information on

competitors is essential for a successful business strategy formulation.

Major information about competitors include their:1. Strengths & weaknesses2. Objectives & strategies3. Response to current key factors4. Vulnerability to alternative company strategy5. Product Positioning.

COMPETITIVE ANALYSISCOMPETITIVE ANALYSIS

PORTER’S FIVE-FORCES MODEL

PORTER’S FIVE-FORCES MODEL OF COMPETITIONPORTER’S FIVE-FORCES MODEL OF COMPETITIONFIRMS IN OTHER

INDUSTRIESOFFERING

SUBSTITUTEPRODUCTS

SUPPLIERSOF KEY

INPUTSBUYERS

POTENTIALNEW

ENTRANTS

RIVALRYAMONG

COMPETINGSELLERS

Competitive pressures created by jockeyingFor better market position

And competitive advantage

CompetitivePressuresGrowing outOf suppliersAbility to ExerciseBargaining powerAnd leverage

Competitive pressures coming from the market attempts of outsiders to win buyers over their product

Competitive pressuresGrowing out of Buyers abilityTo exerciseBargaining powerAnd leverage

Competitive pressures coming from the threat of entry of new rivals

PORTER’S FIVE-FORCES MODEL OF COMPETITIONPORTER’S FIVE-FORCES MODEL OF COMPETITIONFIRMS IN OTHER

INDUSTRIESOFFERING

SUBSTITUTEPRODUCTS

SUPPLIERSOF KEY

INPUTSBUYERS

POTENTIALNEW

ENTRANTS

RIVALRYAMONG

COMPETINGSELLERS

Competitive pressures created by jockeyingFor better market position

And competitive advantage

CompetitivePressuresGrowing outOf suppliersAbility to ExerciseBargaining powerAnd leverage

Competitive pressures coming from the market attempts of outsiders to win buyers over their product

Competitive pressuresGrowing out of Buyers abilityTo exerciseBargaining powerAnd leverage

Competitive pressures coming from the threat of entry of new rivals

INDUSTRY ANALYSISINDUSTRY ANALYSIS

The EXTERNAL FACTOR EVALUATION (EFE) MATRIX

External Factor Evaluation (EFE) External Factor Evaluation (EFE) MatrixMatrix

It allows strategists to summarize & evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information.

FIVE STEPS:1. List key external factors as identified in the external-audit process.

2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important).

3. Assign a 1-to- 4 rating to each key external factor to indicate how effectively the firm’s current strategies respond to the factor. Where:

4 = response is superior3 = response is above average2 = response is average1 = response is poor

4. Multiply each factor’s weight by its rating to determine a weighted score.5. Sum the weighted scores for each variable to determine the total weighted score for the organization.

KEY EXTERNAL FACTORS WEIGHT RATING WEIGHTED SCORE

Opportunities

1. Global markets are practically untapped by smokeless tobacco market

.15 1 .15

2. Increased demand caused by public banning of smoking

.05 3 .15

3. Astronomical internet advertising growth .05 1 .05

4. Pinkerton is leader in discount tobacco market .15 4 .60

5. More social pressure to quit smoking, thus leading users to switch to alternatives

.10 3 .30

Threats

1. Legislation against the tobacco industry .10 2 .20

2. Production limits on tobacco increases competition for production

.05 3 .15

3. Smokeless tobacco market is concentrated in southeast region of United States

.05 2 .10

4. Bad media exposure from the FDA .10 2 .20

5. Clinton administration .20 1 .20

TOTAL 1.00 2.10

AN EXAMPLE EXTERNAL FACTOR EVALUATION MATRIX FOR UST, INC.

Strategic Management Concepts & Cases 9th Edition Fred R. David page 111

The COMPETITIVE PROFILE MATRIX The COMPETITIVE PROFILE MATRIX (CPM)(CPM)

It identifies a firm’s major competitors and its particular strengths & weaknesses in relation to a sample firm’s strategic position.

Critical success factors in a CPM include both internal & external issues. Rating:4 = major strength3 = minor strength2 = minor weakness1 = major weakness

AVON L’OREAL PROCTER & GAMBLE

CRITICAL SUCCESS FACTORS

WEIGHT RATING SCORE RATING SCORE RATING SCORE

ADVERTISING .20 1 .20 4 .80 3 .60

PRODUCT QUALITY .10 4 .40 4 .40 3 .30

PRICE COMPETITIVENESS

.10 3 .30 3 .30 4 .40

MANAGEMENT .10 4 .40 3 .30 3 .30

FINANCIAL POSITION .15 4 .60 3 .45 3 .45

CUSTOMER LOYALTY .10 4 .40 4 .40 2 .20

GLOBAL EXPANSION .20 4 .80 2 .40 2 .40

MARKET SHARE .05 1 .05 4 .20 3 .15

TOTAL 1.00 3.15 3.25 2.80

AN EXAMPLE OF COMPETITIVE PROFILE MATRIX

Strategic Management Concepts & Cases 9th Edition Fred R. David page 112

References:

Strategic Management Concepts & Cases9th Edition

Fred R. David

Strategic Management Concepts 11th Edition

By Thompson Strickland

Marketing Management 11th Edition

By Philip Kotler

www.quickmba.com