Chapter Outline

The Nature of an External Audit

Economic Forces Social, Cultural, Demographic, and Environmental Forces

Chapter Outline
Political, Governmental, and Legal Forces Technological Forces Competitive Forces

Chapter Outline
Competitive Analysis:
Porters Five-Forces Model

Sources of External Information Forecasting Tools and Techniques

Chapter 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 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

Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services

Key External Forces

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:
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. 2. 3. 4.

Oriented to long-term & annual objectives Measurable Applicable to all competing firms Hierarchical
Overall company Divisional or functional areas

Economic Forces
Monitor 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

> 60,000 laid off along Mexico Border with U.S.

2001 Recession (U.S. and World)

Social, Cultural, Demographic & Environmental Forces

Trends for the 2000s

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

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:
Moodys Manuals Standard Corporation Descriptions Value Line Investment Surveys Duns Business Rankings Standard & Poors Industry Surveys Industry Week Forbes, Fortune, Business Week

Competitive Forces
7 Characteristics of most competitive U.S. firms:
1.
2.

3.
4.

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:
5. 6.

7.

Acquisition is essential to growth People make a difference No substitute for quality

Competitive Forces
Competitive Intelligence Programs:

Systematic and ethical process for gathering and analyzing information about the competitions activities and general business trends to further a business own goals.

Competitive Analysis: Porters FiveForces Model

Potential development of substitute products

Bargaining power of suppliers

Rivalry among competing firms

Bargaining power of consumers

Potential entry of new competitors

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
Social Cultural Demographic Environmental Political Governmental Technological Competitive

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
Firms current strategies response to the factor

Multiply each factors weight by its rating

Produces a weighted score

Industry Analysis (EFE)

Five-step process:

Sum the weighted scores for each

Determines

the total weighted score for the organization.

Highest possible weighted score for the organization is 4.0; the lowest, 1.0. Average = 2.5

USTKey External Factors

Opportunities
Global markets untapped Increased demand Astronomical Internet growth Pinkerton leader in discount market

Weight .15

Rating

Weighted score

1 3 1 4

.15 .15 .05 .60

.05 .05 .15

More social pressure to quit smoking

.10
.10

3
2

.30
.20

Threats
Legislation against the tobacco industry

Production limits on tobacco

Smokeless market SE region U.S. Bad media exposure from FDA Clinton Administration TOTAL

.05
.05 .10 .20 1.00

3
2 2 1

.15
.10 .20 .20 2.10

Industry Analysis (EFE)

Total weighted score of 4.0 =
Organization response is outstanding to threats & weaknesses

Total weighted score of 1.0 =

Firms 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 firms major competitors and their strengths & weaknesses in relation to a sample firms strategic position

(CPM)
Critical Success Factor Advertising

Avon

LOreal

Procter & Gamble

Weight Rating Score Rating Score Rating Score

0.20

Product Quality
Price Competition Management Financial Position Customer Loyalty Global Expansion Market Share

0.10
0.10 0.10 0.15 0.10 0.20 0.05

1 4 3 4 4 4 4 1

0.20

0.40
0.30 0.40 0.60 0.40 0.80 0.05

4 4 3 3 3 4 2 4

0.80

0.60

0.40
0.30 0.30 0.45 0.40 0.40 0.20

3
4 3 3 2 2 3

0.30
0.40 0.30 0.45 0.20 0.40 0.15

Total

1.00

3.15

3.25

2.80

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

Porters Five-Forces Model Netscape On-Line databases Rightsizing Trend extrapolation World Wide Web (www)