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STRATEGY MANAGEMENT
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The External Assesment
Open debate: • Why is important to a firm to develop an external assessment? • Discuss major external forces that affect organisaBons
“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” –Charles Darwin
Strategic Management
Dunia Moreno
• Strategic Management. Strategic Management reduced model:
Develop Vision and Mission statements
Perform external audit
Establish long-‐term objecBves
Perform internal audit
Measure & evaluate performance
Feedback
Feedback
Strategy formulaBon
Strategy implementaBon
Strategy evaluaBon
Generate, evaluate and select Strategies
Implement strategies
Management, MarkeBng, Finance and ProducBon issues
The purpose of an external audit is to develop a finite list of opportuniBes that could benefit a firm and threats that should be avoided. As the term finite suggests, the external audit is not aimed at developing an exhausBve list of every possible factor that could influence the business; rather, it is aimed at idenBfying key variables that offer acBonable responses. Firms should be able to respond either offensively or defensively to the factors by formulaBng strategies that take advantage of external opportuniBes or that minimize the impact of potenBal threats.
• To perform an external audit, a company first must gather compeBBve intelligence and informaBon about social, cultural, demographic, environmental, economic, poliBcal, legal, governmental, and technological trends.
• Once informaBon is gathered, it should be assimilated and
evaluated. These key external factors can vary over Bme and by industry.
The Process of Performing an External Audi
External forces:
1. Economic forces 2. Social, cultural, demographic and environmental forces 3. Poli<cal, legal and governmental forces 4. Technological forces 5. Compe<<ve forces
• RelaBonships between key external forces and an organisaBon:
1. Economic forces 2. Social, cultural, demographic and environmental forces 3. Poli<cal, legal and governmental forces 4. Technological forces 5. Compe<<ve forces
Compe<tors Suppliers Distributors Creditors Customers Employees Communi<es Managers Stockholders Labour unions Governments Trade associa<ons Special interest groups Products Services Markets Natural environment
AN ORGANISATION’S OPPORTUNITIES AND THREATS
External trends and events significantly affect all products, services, markets and organisa<ons in the world
Table 3.1 – 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
• Government budget deficits
• Gross domestic product trend
• Consumption patterns
• Unemployment trends
• Worker productivity levels
• Value of $, €, £,¥, in world markets
• Stock market trends
• Foreign countries’ economic conditions
• Import / Export factors
• Demand shifts for different categories of goods and services
• Income differences by region and consumer groups
• Price fluctuations
• Monetary policies
• Tax rates
• Fiscal policies
• UE policies / USA policies / OPEC policies / LDC Coalitions of lesser developed countries
1) Economic forces:
2) Social, Cultural, Demographic and Environmental Forces These external forces have a major impact upon virtually all products, services, markets and customers.
• For example: US is ge[ng older and less Caucasian – Ge[ng older is good news for restaurants, hotels, airlines, funeral homes, resorts, health care… but not for another products and services
– Caucasian tastes are not the same than those from African-‐Americans, NaBve Americans, Asians…
• Environmental Forces: Except terrorism, no greater threat to business and society exists than the conBnuous degradaBon of our natural environment.
Table 3.2 – Key Social, cultural, Demographic and environmental variables • Childbearing rates
• Nº of special interest groups • Nº of marriages / Nº of divorces
• Nº of births / Nº of deaths
• Immigration and emigration rates
• Social Security programs
• Life expectancy rates
• Per capita income • Location of retailing, manufacturing and
service business
• Attitudes toward business
• Lifestyles
• Traffic congestion
• Inner-city environments
• Average disposable income • Trust in government
• Attitudes toward work
• Buying habits • Ethical concerns
• Attitudes toward saving
• Sex roles
• Attitudes toward investing
• Racial equality
• Use of birth control • Average level of education
• Government regulation
• Attitudes toward retirement / leisure time / product quality / customer service
• Pollution control
• Attitudes toward foreign peoples
• Energy conservation
• Social programs • Nº of Churches / Churches
members
• Social responsibility
• Attitudes toward careers
• Population changes by race, age, sex… / by city, county, state, region and country
• Attitudes toward authority
• Regional changes in tasted and preferences
• Nº of women and minorities workers
• % Recycling / Waste management / Air pollution / endanger species
• Nº of high school and college graduates
Table 3.3 – Some poliBcal Government and legal variables
• Government regulations or deregulations
• Changes in tax laws
• Special tariffs
• Political action committees
• Number, severity and location of government protest
• Nº of patents and changes in patent laws
• Level of defence expenditures
• Legislation on equal employment
• Level of government subsidies
• Antitrust legislation
• Relationships between main areas in the world (China, Russia, USA, UE, Japan, Africa…)
• Import-export regulations
• Government fiscal and monetary policy changes
• Political conditions in foreign countries
• Special local, state and federal laws
• Lobbying activities
• Size of government budgets
• World oil, currency and labour markets
• Location and severity of terrorist activities
• Local, state and national elections
3) PoliBcal, Governmental and legal forces
4) Technological forces: -‐ RevoluBonary technological changes and discoveries -‐ Internet
-‐ E-‐commerce -‐ Faster distribuBon
An effecBve technology strategy is built on a penetraBng analysis of technology opportuniBes an threats, and an assessment of the relaBve importance of these factors to overall corporate strategy. Not all sectors are affected equally by technological developments. The communicaBon, electronics, aeronauBcs and pharmaceuBcal industries are much volaBle than the texBle, forestry or metal industries. Ex. Office depot was the first office supply Co. to establish web site distribuBon.
4) CompeBBve forces: CollecBng and evaluaBng informaBon on compeBtors is essenBal for successful strategy formulaBon. Moreover, firms do not publish any financial or markeBng informaBon.
Table 3.4 – Key quesBons about compeBtors
1. What are the major competitors’ strengths?
2. What are the major competitors’ weaknesses?
3. What are the major competitor’s objectives and strategies?
4. How will the major competitors most likely respond to current economic, social, cultural, demographic, environmental, political, governmental, legal, technological and competitive trends affecting our industry?
5. How vulnerable are the major competitors to our alternative company strategies?
6. How vulnerable are our alternative strategies to successful counterattack by our major competitors?
7. How are our products or services positioned relative to major competitors?
8. To what extend are new firms entering and old firms leaving this industry?
9. What key factors have resulted in our present competitive position in this industry?
10. How have the sales and profit rankings of major competitors in the industry changed over recent years?
11. What is the nature of supplier and distributors relationships in this industry?
5 Groups: you will have to look for real examples of real companies affected by: -‐ Economic forces -‐ Social, cultural, demographic and environmental forces -‐ PoliBcal, legal and governmental forces -‐ Technological forces -‐ CompeBBve forces
ForecasBng tools:
1-‐EFE Matrix 2-‐CompeBBve Matrix
1-‐ The external Factor Evalua<on Matrix (EFE Matrix): This matrix allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, poli=cal, governmental, legal, technological and compe==ve informaBon.
EFE Matrix can be developed in 5 steps:
1. List key external factors. Include a total of 10 to 20 factors, including both OpportuniBes and Threats, that affect the firm and its industry. List the opportuniBes first and then the threats. Be as specific as possible, using percentages, raBos and comparaBve numbers whenever possible.
Table 3.5 – EFE Matrix example: Local Ten-‐Theatre Cinema Complex Key external Factors
Opportunities
1. Rowan County is growing 8% annually in population 2. TDB University is expanding 6% annually 3. Major competitor across town recently ceased operations 4. Demand for going to cinema growing 10% annually 5. Two new neighbourhoods being developed within 3 miles 6. Disposable income among citizens grew 5% in prior year 7. Unemployment rate in county declined to 3,1% Threats
8. Trend toward healthy eating eroding concessions sales 9. Demand for online movies and DVDs growing 10%/year 10. Commercial property adjacent to cinemas for sale 11. TDB University installing an on-campus movie-theatre 12. County and City property taxes increasing 25% this year 13. Local religious groups object to R-rated movies being shown 14. Movies rented from local Blockbuster store up 12% 15. Movies rented last quarter from Time Warner up 15%
List key external factors.
2. Assign to each factor a weight that ranges from: 0.0 – not important, to 1.0 – very important. The weight indicates the relaBve importance of that factor of being successful in the firm’s industry. THE SUM OF ALL WEIGHTS ASSIGNED TO THE FACTORS MUST EQUAL 1,0.
Table 3.5 – EFE Matrix example: Local Ten-‐Theatre Cinema Complex Key external Factors Weight Opportunities
1. Rowan County is growing 8% annually in population 0,05 2. TDB University is expanding 6% annually 0,08 3. Major competitor across town recently ceased operations 0,08 4. Demand for going to cinema growing 10% annually 0,07 5. Two new neighbourhoods being developed within 3 miles 0,09 6. Disposable income among citizens grew 5% in prior year 0,06 7. Unemployment rate in county declined to 3,1% 0,03 Threats
8. Trend toward healthy eating eroding concessions sales 0,12 9. Demand for online movies and DVDs growing 10%/year 0,06 10. Commercial property adjacent to cinemas for sale 0,06 11. TDB University installing an on-campus movie-theatre 0,04 12. County and City property taxes increasing 25% this year 0,08 13. Local religious groups object to R-rated movies being shown 0,04 14. Movies rented from local Blockbuster store up 12% 0,08 15. Movies rented last quarter from Time Warner up 15% 0,06 Total 1.00
Assign a weight.
3. Assign a raBng between 1 and 4 to each key external factor to indicate how effecBvely the firm’s current strategies respond to the factor:
4= The response is superior 3= The response is above average 2= The response is average 1= the response is poor
Ra=ngs are thus company-‐based, while in step 2 are industry-‐based. It is important to note that both threats and opportuniBes can receive a 1, 2, 3 or 4.
Table 3.5 – EFE Matrix example: Local Ten-‐Theatre Cinema Complex Key external Factors Weight Rating Opportunities
1. Rowan County is growing 8% annually in population 0,05 3 2. TDB University is expanding 6% annually 0,08 4 3. Major competitor across town recently ceased operations 0,08 3 4. Demand for going to cinema growing 10% annually 0,07 2 5. Two new neighbourhoods being developed within 3 miles 0,09 1 6. Disposable income among citizens grew 5% in prior year 0,06 3 7. Unemployment rate in county declined to 3,1% 0,03 2 Threats
8. Trend toward healthy eating eroding concessions sales 0,12 4 9. Demand for online movies and DVDs growing 10%/year 0,06 2 10. Commercial property adjacent to cinemas for sale 0,06 3 11. TDB University installing an on-campus movie-theatre 0,04 3 12. County and City property taxes increasing 25% this year 0,08 2 13. Local religious groups object to R-rated movies being shown 0,04 3 14. Movies rented from local Blockbuster store up 12% 0,08 2 15. Movies rented last quarter from Time Warner up 15% 0,06 1 Total 1.00
4. MulBply each factor’s weight by its raBng to determine a weighted score. 5. Sum the weighted scores for each variable to determine the total weighted score for the organisaBon. The highest possible total weighted score for an organisaBon is 4.0, regardless the number or opportuniBes and threats listed.
ü If the total weighted score is 4.0 indicates that an organisaBon is responding in an outstanding way to exisBng opportuniBes and threats.
ü A total score of 1.0 indicates that the firm’s strategies are not capitalizing on opportuniBes or avoiding external threats.
Table 3.5 – EFE Matrix example: Local Ten-‐Theatre Cinema Complex Key external Factors Weight Rating Weighted
Score Opportunities
1. Rowan County is growing 8% annually in population 0,05 3 0,15 2. TDB University is expanding 6% annually 0,08 4 0,32 3. Major competitor across town recently ceased operations 0,08 3 0,24 4. Demand for going to cinema growing 10% annually 0,07 2 0,14 5. Two new neighbourhoods being developed within 3 miles 0,09 1 0,09 6. Disposable income among citizens grew 5% in prior year 0,06 3 0,18 7. Unemployment rate in county declined to 3,1% 0,03 2 0,06 Threats
8. Trend toward healthy eating eroding concessions sales 0,12 4 0,48 9. Demand for online movies and DVDs growing 10%/year 0,06 2 0,12 10. Commercial property adjacent to cinemas for sale 0,06 3 0,18 11. TDB University installing an on-campus movie-theatre 0,04 3 0,12 12. County and City property taxes increasing 25% this year 0,08 2 0,16 13. Local religious groups object to R-rated movies being shown 0,04 3 0,12 14. Movies rented from local Blockbuster store up 12% 0,08 2 0,16 15. Movies rented last quarter from Time Warner up 15% 0,06 1 0,06 Total 1.00 2,58
• QuesBons: – Which is the most important factor for being successful in the industry based on the example given?
• Why?
– Which are the factors where the cinema complex is doing beker?
• Why?
– What does the total weighted score mean? (2,58)
2 -‐ The compe<<ve profile matrix (CPM): The CompeBBve Profile Matrix idenBfies a firm’s major compeBtors and its parBcular strengths and weaknesses in relaBon to a sample firm’s strategic posiBon.
1. List the criBcal success factors – factors that we consider KEY in order to be successful in the industry: – Examples: adverBsing, product quality, management, financial posiBon, public image, global expansion, market share.
2. Assign to each factor a weight that ranges from: 0.0 – not important, to 1.0 – very important The weight indicates the relaBve importance of that factor to being successful in the firm’s industry. THE SUM OF ALL WEIGHTS ASSIGNED TO THE FACTORS MUST EQUAL 1,0
3. Assign a raBng between 1 and 4 to each CriBcal Success Factor. This rates refer to strengths and weaknesses and the values are as follows:
– 1= Major weakness – 2= Minor weakness – 3= Minor strength – 4= Major strength
4. MulBply each factor’s weight by its raBng to determine a weighted score for each compeBtor. 5. Sum the weighted scores for each variable to determine the total weighted score for compeBtors. The highest possible total weighted score for each compeBtor is 4.0, regardless the Key success factors.
Table 3.6 – CompeBBve Profile Matrix example
Critical Success Factors Weight Rating Score Rating Score Rating Score
Advertising 0,20 1 0,20 4 0,80 3 0,60 Product Quality 0,10 4 0,40 3 0,30 2 0,20 Price Competitiveness 0,10 3 0,30 2 0,20 4 0,40 Management 0,10 4 0,40 3 0,20 3 0,30 Financial position 0,15 4 0,60 2 0,30 3 0,45 Customer Loyalty 0,10 4 0,40 3 0,30 2 0,20 Global Expansion 0,20 4 0,80 1 0,20 2 0,40 Market Share 0,05 1 0,05 4 0,20 3 0,15
Total 1.00 3,15 2,50 2,70
Company 1 Company 2 Company 3
• Main differences between CPM and EFE Matrix: – CPM: criBcal success factors are broader, they do not include specific or factual data
– EFE Matrix talks about OpportuniBes and Threats – CPM Matrix talks about Strengths and Weaknesses of our compeBtors
– CPM: We can compare raBngs and total weighted scores for rival firms to our firm
• Class exercise: 1. Develop an EFE Matrix for my university: Purpose: More colleges and universiBes are embarking upon strategic-‐management process. InsBtuBons are consciously and systemaBcally idenBfying and evaluaBng external opportuniBes and threats facing higher educaBon in your state, the naBon and the world
– Work in groups to prepare the EFE Matrix for MBA – Present in class your results and compare them with those
from other groups – Discuss differences
• Class exercises: 2. Develop a CompeBBve Profile Matrix for my university: Purpose: Your college or university competes with all other educaBonal insBtuBons in the world, especially those in your own state/region. State funds, students, faculty, staff and federal funds are areas of compeBBveness. Other areas include specific programs, outside programs, academic reputaBon, locaBon and career services. The purpose of this exercise is to give you pracBce, thinking compeBBvely about the business of educaBon in your state
– Work in groups & idenBfy 2 colleges or universiBes in G.C. Discuss in your groups about parBcular strengths and weaknesses of those compeBtors
– Prepare a CPM that includes MBA and the 2 compeBng insBtuBons, include at least the following factors in your analysis: TuiBon costs, Quality of faculty, academic reputaBon, average class size, campus landscaping, athleBc programs, quality of students, graduate programs, locaBon, grade of success ge[ng job aoer finishing
– Present and discuss the results in class