lecture no 07 the external assessment
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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. - PowerPoint PPT PresentationTRANSCRIPT
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
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:– 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
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
• World population > 6 billion
• U.S. population < 300 million• Great potential for domestic production
expansion to other markets
• Domestic only is a risky strategy
Social, Cultural, Demographic & Environmental Forces
• 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.
Social, Cultural, Demographic & Environmental Forces
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
Social, Cultural, Demographic & Environmental Forces
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
Monitor Key Variables
• Racial equality• Average level of education• Government regulation• Attitudes toward customer service• Attitudes toward product quality• Energy conservation• Social responsibility
Monitor Key Variables
• 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
Political, Govt., & Legal Forces
Increasing Global Interdependence
• Impact of political variables– Formulation of Strategies– Implementation of Strategies
Political, Govt., & Legal Forces
Increasing Global Interdependence
• Strategists in a global economy• Forecast political climates• Legalistic skills• Diverse world cultures
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
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
Technological Forces
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
Technological Forces
Capitalizing on Information Technology (IT)
• Chief Information Officer (CIO)
• 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• 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
Industry Analysis (EFE)
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
Industry Analysis (EFE)
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
Industry Analysis (EFE)
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
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
• 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