sm-external assessment (3) 20071_22 & 20072_5

8/3/2019 SM-External Assessment (3) 20071_22 & 20072_5

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Strategic Management ± Day 3

External Assessment



2

Strategic Management Model

External Audit

Chapter 3

Internal Audit

Chapter 4

Long-TermObjectives

Chapter 5

Generate,Evaluate,

SelectStrategies

Chapter 6

ImplementStrategies:

Mgmt Issues

Chapter 7

ImplementStrategies:Marketing,Fin/Acct,R&D, CIS

Chapter 8

Measure &Evaluate

Performance

Chapter 9

Vision&

Mission

Chapter 2

Strategy FormulationStrategy Formulation Strategy

Implementation

Strategy

Implementation

Strategy

Evaluation

Strategy

Evaluation



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External Assessment

The opportunities and t hreats existing in any situation always exceed

t he resources needed to exploit t he opportunities or avoid t he

t hreats.

Thus, Strategy is essentially a problem of allocating resources. If strategy is to be successful, it must allocate superior resources

against a decisive opportunity

(william Cohen)

If everyone is t hinking alike, t hen somebody is not t hinking

(George Patton)



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External Assessment

It is not t he Strongest of t he species t hat survive,

nor t he most intelligent, but t he one most

responsive to C hange

(C harles Dawin)



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Introduction

External Strategic Management Audit is sometimes called

Environmental Scanning or Industry Analysis

External Audit focuses on identifying and evaluating Trends and

Events beyond the Control of a Single Firm. Examples are:

Increased Foreign Investment

Concurrence of WTO

Consumer fear of Traveling

Stock Market Volatility

etc.

External Audit reveals key opportunities and threats confronting an

organization so that managers can Formulate Strategies to take

advantage of the opportunities and avoid the impact of threats



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External Audit

Develop a F inite List of opportunities that could

benefit a firm; and Threats that should be avoided.

The T erm F inite suggests t hat External Audit is not

aimed at Developing an Ex haustive List of every possible factors t hat could influence t he Business;

rat her, it is aimed at Identifying Key Variables t hat

Offer Actionable Responses



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Key External Forces

External Forces can be divided into 5 broad

categories.

1. Economic Forces

2. Social, Cultural, Demographic, and Environmental Forces

3. Political, Governmental, and Legal Forces

4. Technological Forces

5. Competitive Forces



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Key External Forces

Economic Forces

Increasing numbers of 2-income households is an

economic trend in the Asian Countries. As affluence

increases, individuals place a premium on time. Improved

Customer Service, immediate Availability, Trouble-Free

Operation of Products, and Dependable Maintenance and

Repair Services are becoming more important



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Key External Forces

Economic Forces

Economic Factors have a direct impact on the potential

attractiveness of various strategies. E.g.

When Interest Rate Rises, funds needed for capital expansion

become more costly or unavailable

When Interest Rate Rises, discretionary Income declines, and

the demand of discretionary goods fall



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Key Economic Variables

Availability of credit

Level of disposable income

Interest rates

Inflation rates

Federal government budget deficits

Gross domestic product trend

Consumption patterns



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Key Economic Variables

Unemployment trends

Value of the dollar in world markets

Stock market trends

Foreign countries¶ economic conditions

Import/export factors

Income differences by region/customer

Price fluctuations

Exportation of labor & capital Monetary policies

Fiscal policies

Tax rates



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Key External Forces

Social, Cultural, Demographic, and

Environmental Forces

Increasing numbers of families in Asia are adopting to live

alone rather than in combined families

Increasing number of People worldwide purchases online

but this trend has not yet been increased in purchasing the

Clothes Online.



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Summary of important Social, Cultural,Demographic, and Environmental Forces

Number of marriages

Number of divorces

Number of births

Number of deaths

Immigration & emigration rates

Life expectancy rates

Per capita income

Attitudes toward business Average disposable income

Buying habits

Attitudes toward saving

Value placed on leisure time



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Key External Forces

Political, Governmental, and Legal Forces

Federal, Provincial and District Governments are major

regulators, deregulators, subsidizers, employers.

For Industries that depend heavily on Government

Contracts or Subsidies, Political Forecasts can be the most

important part of an External Audit.

Changes in patent laws, antitrust legislation, tax rates, and

lobbying activities can affect firms significantly.



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Key External Forces

Technological Forces

Revolutionary Technologies Changes and Discoveries

having a dramatic impact on Organization.

The Internet is changing the very nature of opportunities

and threats in the life cycles of products, increasing the

speed of distribution, creating new products and services,

and erasing limitations of traditional geographic markets.



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Key External Forces

Competitive Forces

The most important part of an external audit is identifying

the rival firms and determining their Strengths,

Weaknesses, Capabilities, Opportunities, Threats,

Objectives, and Strategies.

Collecting and Evaluating Information on Competitors is

essential for successful Strategy Formulation.



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Key External Forces

Competitive Forces

Identifying the Competitors is not always easy because

many firms have divisions that compete in different

industries

Most multidivisional firms generally do not provide sales

and profit information on a divisional basis for competitive

reason.

Privately held firms do not publish any financial or

marketing information

Many Business use the Internet to obtain

most of their information on Competitors



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Key Questions About Competitors

1 What are the major Competitors¶ Strengths?

2 What are the major Competitors¶ Weaknesses?

3 What are the major Competitors¶ 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 counterattacks by our major

competitors?

7 How are our Products or Services positioned relative to major competitors?

8 To what extent are new firms entering and old firms leaving the 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 ? Why have these rankings changed that way?

11 What is the nature of Supplier and Distributor relationships in the industry?

12 To what extent could Substitute products or services be a threat to competitors in this industry?



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Competitive Analysis:Porter¶s Five-Force Model

Potential developmentof substitute products

Rivalry amongcompeting firms

Bargaining powerof suppliers

Potential entry of newcompetitors

Bargaining powerof consumers

According to Porter, the nature of competitiveness in any industry can be

viewed as a composite of 5 forces



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Porter¶s Five-Force Model

Rivalry Among Competing Firms

Rivalry among competitors is usually the most powerful of

the five competitive forces

The strategies pursued by one firm can be successful only

to extent that they provide competitive advantage over the

strategies pursued by the rival firms

Changing in Strategy by one firm may be met with

retaliatory countermoves, such as:

Lowering Prices

Enhancing Quality

Adding Features

Providing Services

Extending Warranties Increasing Advertising



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Rivalry Among Competing Firms

The intensity of rivalry among competing firms tends to

increase as the number of competitors increase, as

competitors become more equal in size and capability, asdemand for industry¶s products declines, and as price

cutting becomes common

Rivalry also increases when consumers can switch brands

easily; when barriers to leaving the market are high; when

fixed costs are high; when the product is perishable, when

rival firms are diverse in strategies, origins, and culture.

As Rivalry among Competing Firmsintensifies, Industry Profile decline, in

some cases to the point where an

industry becomes unattractive



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Potential Entry of New Competitors

Whenever new firms can easily enter a particular industry,

the intensity of competitiveness among firms increases.

Despite numerous barriers to entry, new firms sometimes

enter industries with higher-quality products, lower prices,

and substantial marketing resources

Barriers to entry includes :

Lowering Prices Enhancing Quality

Adding Features

Providing Services

Extending Warranties

Increasing Advertising



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Potential Entry of New Competitors

Barriers to entry includes :

The need to gain Economies of Scale Quickly

The need to gain Technology and Specialized know-how

Lack of Experience

Strong Customer Loyalty

Strong Brand Preference

Large Capital Requirements

Lack of Adequate Distribution Channels

Government Regulatory Policies Tariffs

Lack of Access to Raw Material

Possession of Patents

Potential Saturation of Market



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The Strategist¶s job is to:

- Identify Potential new firms entering the Market,

- Monitor the new rival firms¶ strategies

- Counterattack as needed

- Capitalize on existing Strengths and Opportunities



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Potential Development of Substitute Products

Competitive pressures arising from substitute products

increase; as the relative price of substitute products

declines and as consumers¶ switching cost decreases

The Competitive Strength of Substitute Products is

measured by the inroads into the market share those

products obtain, as well as those firms¶ plans for increased

capacity and market penetration



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Bargaining Power of Suppliers

The bargaining power of suppliers affects the intensity of

competition in an industry, especially when there is a large

number of suppliers, when there are only a few goodsubstitute raw materials, or when the cost of switching raw

materials is especially costly. Firms may pursue a Backward

Integration Strategy to gain control or

ownership of Suppliers. This Strategy issuccessful when Suppliers are unreliable,

too costly, or not capable of meeting a

firm¶s needs on a consistent basis



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Bargaining Power of Consumers

When customers are concentrated or large, or buy in

volume, their bargaining power represents a major force

affecting the intensity of competition in an industry.

Rival firms may offer extended warranties or special

services to gain customer loyalty whenever the bargaining

power of consumers is substantial

Bargaining Power of Consumers also is Higher when the

products being purchased are standard or undifferentiated.

When this is the case, the consumers often can negotiate

selling price, warranty coverage, and accessory packages

to a reater extent.



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Sources of External Information

The information may be available to organizations

from both published and unpublished sources.

Unpublished Sources include:

Customer SurveysMarket Research

Speeches¶ at Professionals and Shareholders¶ Meetings

Etc.

Published Sources include:

PeriodicalsJournals

Reports

Government Documents

Abstracts

Books, Directories, Newspapers, etc.



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Industry AnalysisThe External Factor Evaluation (EFE) Matrix

EFE Matrix allows Strategists to summarize &

evaluate following information

CompetitivePoliticalCultural

TechnologicalEnvironmentalSocial

GovernmentalDemographicEconomic



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EFE Matrix is usually developed in five steps

Step 1:

List Key External Factors as identified in the

External-audit process.

Include total of from 10-20 factors (both

opportunities and threats)

Opportunities first then Threats



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Dawn Newspaper

Sr.# Opportunities Type Wt Rating Score

1. WTO implementations will reduce prices of imported machinery (press related parts ) E

2 Reading Newspaper after lunch in office hours has become the trend of big cities S

3 Cost reduction in most innovative Publishing Software. T

4 Liberal approach for freedom of press by President of Pakistan G

5 Financially Strong Group C

Total



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Dawn Newspaper

Sr.# Threats Type Wt Rating Score

1. High Cost of raw materials including paper, ink etc. E

2 Change of Culture towards reading news from websites S

3 More TV Channels may decrease the sale of Newspaper T

4 As per government regulation, Wage Board (where salaries of employees of publishing industry) is announced by GOP

G

5 Competitors are involved in Concentrating diversification strategies C

Total:



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Step 2:

Assign to each factor a weight that ranges from

0.0 (not important) to 1.0 (very important).

These weightings indicate the relative

importance of that factor to being successful in

the firm¶s industry

Opportunities often receive higher weights thanthreats, but threats too can receive high weights if

they are especially severe or threatening.



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Dawn Newspaper

Sr.# Opportunity/Threat Type Wt Rating Score

1. WTO implementations will reduce prices of imported machinery (press related parts ) E .05

2 Reading Newspaper after lunch in office hours has become the trend of big cities S .2

3 Cost reduction in most innovative Publishing Software. T .15

4 Liberal approach for freedom of press by President of Pakistan G .1

5 Financially Strong Group C .2

Opportunities:

.7



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Dawn Newspaper


1. High Cost of raw materials including paper, ink etc. E .05

2 Change of Culture towards reading news from websites S .05

3 More TV Channels may decrease the sale of Newspaper T .1


G .05

5 Competitors are involved in Concentrating diversification strategies C .05

Total: .3



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Step 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.

4=Superior Response

3=response is above average

2=response is average

1=response is poor

Ratings are based on effectiveness of the firm¶s

strategies

Ratings are company-based whereas the

weights are Industry Based



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Dawn Newspaper


1. WTO implementations will reduce prices of imported machinery (press related parts ) E .05 1

2 Reading Newspaper after lunch in office hours has become the trend of big cities S .2 4

3 Cost reduction in most innovative Publishing Software. T .15 4

4 Liberal approach for freedom of press by President of Pakistan G .1 3

5 Financially Strong Group C .2 3

Opportunities:

.7



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Dawn Newspaper


1. High Cost of raw materials including paper, ink etc. E .05 1

2 Change of Culture towards reading news from websites S .05 2

3 More TV Channels may decrease the sale of Newspaper T .1 2


G .05 2

5 Competitors are involved in Concentrating diversification strategies C .05 3

Total: .3



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Step 4:

Multiply each factor¶s weight by its rating to

determine a weighted average.

Step 5:

Sum the weighted Scores for each variable todetermine the total weighted score for the

organization



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Dawn Newspaper


1. WTO implementations will reduce prices of imported machinery (press related parts ) E .05 1 .05

2 Reading Newspaper after lunch in office hours has become the trend of big cities S .2 4 .8

3 Cost reduction in most innovative Publishing Software. T .15 4 .6

4 Liberal approach for freedom of press by President of Pakistan G .1 3 .3

5 Financially Strong Group C .2 3 .6

Opportunities: .7 2.35



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Dawn Newspaper


1. High Cost of raw materials including paper, ink etc. E .05 1 .05

2 Change of Culture towards reading news from websites S .05 2 .1

3 More TV Channels may decrease the sale of Newspaper T .1 2 .2


G .05 2 .1

5 Competitors are involved in Concentrating diversification strategies C .05 3 .15

Total (Threats): .3 .6

Total (Opportunities) .7 2.35

Grand Total: 1.0 2.95



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Analysis:Regardless of the no. of key opportunities and Threats is included in an

EFE Matrix, the highest possible total weighted score for an

organization is 4.0 and the lowest possible total weighted score is

1.0

The Average Total Weighted Score is 2.5

The Total Weighted Score of 4.0 indicates that an organization is

responding in outstanding way to existing opportunities and

threats in the Industry

In Other Words, Organization¶s strategies effectively take advantage

of existing opportunities and minimize the potential adverseeffects of external threats

Total Score of 1.0 indicates that the firm¶s strategies are not

capitalizing on opportunities or avoiding external threats.



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IFE Factors

KEY EXTERNAL FACTORS

OPPUR T UNI T IES

1. Pakistan¶s economy continues to grow with over 6.5% GDP

2. Improved technology is reducing costs

3. Stock market is performing well

3. Government is promoting FDI4. Consumer Financing trend is increasing

5. Over all change in culture towards plastic money

6. Government is promoting SME and agricultural lending

7. High profit margins in banking industry due to double digit interest rates

TH REAT S

1. Credit expansion may introduce debt creation

2. Lack of proper regulations towards E-transactions

3. Mergers and Acquisitions results in strong competitors, which results in high competition

4. Upcoming Elections 2008

5. SBP regulations

T O T AL



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EFE Factors

Opportunities

1. Increasing Demand of Oil.

2. Higher Demand for Gas & LPG.

3. Petroleum Policy of 2001 (More Incentives).

4. High Economic Growth Rate of the Countr y.

5. Offshore Explorations (Arabian Sea Coast).

6. Iran Pakistan India Gas Pipeline.

Threats

1. Substantial Decrease in the Oil and Ener gy Prices.

2. Conflicts of Interest with Related Parties Transactions.

3. Increasing Competition especially from Multinationals.

4. Political Instability in the Countr y.

5. Terrorist Attacks on Some Fields and Unrest in Baluchistan.



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Competitive Profile Matrix (CPM)

CPM identifies a firm¶s major competitors and

its particular strengths and weaknesses in

relation to a sample firm¶s strategic position.

The weights and total weighted scores in

both CPM and EFE have the same meaning



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Analysis:

Advertising and Global Expansion are the most important Critical SuccessFactors as indicated by a weight of 0.20

Avon¶s and L¶Oreal¶s Product Quality is Superior , as evidenced by a rating of 4.

L¶Oreal¶s Financial Position is Good as indicated by rating of 3 P&G is the weakest firm overall, as indicated by a Total Weighted Score of

2.80

The factors may expand to:Breadth of Product Line

Effectiveness of Sales Distribution

Location of Facilities

Production Capacity

Experience

Union Relations

Technological Advantages

E-Commerce Expertise



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Conclusion

Increasing T urbulence in markets and industries around t he world means t he

external audit has become an explicit and vital part of t he Strategic Management

Process.

F irms t hat do not mobilize and empower t heir managers and employees to Identify,Monitor, F orecast, and Evaluate Key External F orces may fail to anticipate

emerging opportunities and t hreats and, consequently, may pursue ineffective

strategies, miss opportunities, and invite organizational demise

Major responsibility of Strategists is to ensure development of an effective

external-audit system. This may include using I T to devise a competitive intelligent

system t hat works.

The E F E Matrix and Porter¶s 5- F orce Model can help Strategists evaluate t he

market and Industry, but t hese tools must be accompanied by good intuitive

judgment.

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