s. mgmt 3 (david)
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STRATEGIC MANAGEMENT
Fred R. David
EXTERNAL AUDIT External Audit refers to a list of opportunities that
could benefit a firm and threats that should be avoided.
External Audit is aimed at identifying key variables that offer actionable response , where firms should be able to response offensively or defensively
Firms aim to formulate strategies that take advantage of external opportunities or minimize the impact of potential threats
KEY EXTERNAL FORCES
Economic forces Social, cultural, demographic and
Environmental forces Political, Governmental and Legal Forces Technological forces Competitive forces
WHAT DOES EXTERNAL CHANGES ENTAIL?
Changes in external forces means changes in consumer demands for both industrial
and consumer product and services.
External forces affect: the types of product developed, nature of positioning, market segmentation strategies, type of services offered and the choices of business
to acquire or sell
External forces directly affect both suppliers and distributors, customers, stockholders, governments
THE INDUSTRIAL ORGANIZATION VIEW
The Industrial Organization (I/O)approach dictates External industries factors are more important than internal
factors for a firm to achieve competitive advantage Ex. Porter’s 5 Forces
Maintaining Competitive Position within industry
I/O approach was predominant between 1960 -1980s
I/O perspective entails that firms competes in attractive industries and avoids faltering or weak industries
I/O theorist believes that a firm’s choice of industry has a stronger influence on a firm’s performance than internal functional decision (marketing, finance etc)
Firms’ performance is based on: Economies of scales, Barriers to market entry, Product differentiation, Level of competitiveness (Unilever, GP, Apple, Nokia)
ECONOMIC FORCES
Economic Forces play a key role for a firm’s success or failure and have a direct impact on potential attractiveness of a firms product or services
In times of recession, consumer confidence and disposable income are very low, while debt and unemployment are high
During these times firms must differentiate themselves and play their part and focus on aspects such as customer service immediate availability trouble free operation of product dependable maintenance and repair service.
This is important as brand loyalty will fall due to budget crunch and brand switching becomes a high possibility among consumers
ECONOMIC FORCES (CONT’D)
When the market climbs, consumer and business wealth expands which generates various opportunities and threats for various organizations i.e. pharmaceuticals companies, tourism,
entertainment, car industry etc.Potential markets
Latent market—an undiscovered market; demand would be there if product was there
Incipient market—market will emerge as macro environmental trends continue Economical, Technological, Socio-culture trends
SOCIAL, CULTURAL, DEMOGRAPHIC & ENVIRONMENTAL FORCES
Social, Cultural, demographic and Environmental changes have a major impact on all product, services, markets and customers as a whole.
These factors shape the way people live, work, produce and consumer
New trends are creating different types of consumers, thus the need for different products, different services and different strategies. i.e. Nivea for Men, Alcohol, Mobile, Family units (Nuclear family vs single)
Demand Patter Analysis Consumption patterns helps assessing market opportunities
Income Elasticity Measurement Relationship between demand for a good and changes in
income
THE DETERMINANTS OF CULTURE
7-11
DEMOGRAPHIC SEGMENTATION
Income Population Age distribution Gender Education Occupation
What are the trends?
SOCIAL, CULTURAL, DEMOGRAPHIC & ENVIRONMENTAL FORCES
Baby Boomers Examples
restaurants Hotels airlines cruise lines tours resorts theme parks luxury product recreational vehicles home builders furniture producers travel services pharmaceutical firm Automakers funeral homes
POLITICAL, GOVERNMENTAL AND LEGAL FORCES
Political, Governmental and legal factors represent opportunities and threats for both small and large firms alike.
Firms that rely on government contracts, subsidies, political forecasts becomes an important part of external audit as it affects Patent laws Antitrust legislation Tax rates Lobbying activities
The increasing interdependence among economies, market, government and organizations makes it imperative that firms consider the possible impact of political variables on formulation and implementation of competitive strategies.
i.e Autocratic VS. Democratic , Bribes vs. giftsUS Steel Mills Japanese Manufacturer Chinese Manufacturer worldwide distribution
POLITICAL, GOVERNMENTAL AND LEGAL FORCES
In Europe, John Deere, Gillette, Ralph Lauren Polo, Cargill, General Mills are moving their head quarters from France, Netherlands and Germany to Switzerland and Ireland to avoid costs associated with tax harmonization (an effort to end competitive tax breaks among member countries).
Political forecasting is critical for MNC’s that depend on foreign countries for Natural resources Facilities Distribution Special assistance consumers
Strategists must be able to deal with it from a legislatively and politically
These individuals meet government officials, attend hearing and government sponsored conferences, giving public speeches, meeting trade groups, industry association and government agency directors
POLITICAL, GOVERNMENTAL AND LEGAL FORCES
This allows them leverage for entering or expanding international
operations
Interest groups also play a role on strategies for small and large business alike as they can bring about political or governmental actions such as:
Governmental Regulations Changes in Tax Laws Special Tariffs Number of Patents Change in Patent laws Level of government Subsidies Import-Export regulations Lobbying Activities
TECHNOLOGICAL FORCES Internet – is acting as a global economic engine which boosts
productivity
Firms use internet as it saves them billions of dollars in distribution and transaction cost from direct sales and self service system
Most firms are aware of this and have tried to capitalize on e-commerce and have incorporated CIO & CTO
CIO – responsible for managing external audit process such as developing, maintaining and updating database
CTO focus on technical issues such as data processing & data acquisition, software and hardware acquisition
CIO & CTO work together to ensure that information needed to formulate, implement and evaluate strategies are available when needed
TECHNOLOGICAL FORCES Technological forces act as a major opportunities and
threats to various firms
Technological advancement can dramatically affect organizations’ product, service, market share, suppliers, distribution,
competitors, customers, manufacturing process and competitive position (JIT, TQM, CAD, CAM)
Technological advancement can create new market Ex. SATNAV, APPLE)
Technological changes : can lower cost barriers between firms (emails) create short production runs create shortage in technical skills (CAD, CAM)
Technological Advancement can create new advantages
TECHNOLOGICAL FORCES Technology is often delegated to lower organizational level
without an understanding of their strategic implications Less precedence than positioning product Forecasting sales Monitoring distributors
Knowledge and Technologically Driven firms are most affected by technological changes i.e. Communications, electronics, aeronautics, pharmaceutical
industries Identifying opportunity for tech change can attribute opportunity
Shopping online is becoming more predominant in Europe and in the western world due to convenience i.e. Staples, Asda, Walmart
COMPETITIVE FORCES Gathering and evaluating competators is essential for the success of a business
which are always intense and often cut throat (Fiat 2003)
7 characteristics of Competitive companies
1. Market share matters
2. Understand and remember what business you are in
3. Whether it’s broke or not, fix it, make it better (from product to company)
4. Innovate or evaporate – especially for Technological firms
5. Acquisition is essential to growth – successful purchases are in niche that add value
6. People make a difference
7. There’s no substitute for quality and no greater threat tan failing be cost competitive on a global basis
CUT THROAT COMPETITION Competitive Intelligence in business is similar to military and is the
key to success
Mission of a CI program: Obtaining competitors information of industry and competitors Identify areas in which competitors are vulnerable Identify potential moves by competitor which can endangers firms' positions Usage Formulate and implement effective strategies Competitors' weakness can become an external opportunities Assess situation and initiate strategic actions
Firms spend millions of dollars tracking their competitors which ultimately benefit their company in the form of increased revenues, lower cost and better decision making
However there are a great number of corporate spies and espionage that takes place in America
Though this violates antitrust statues, it is still exercised. Internet has became the ultimate tool to gather competitors information
(employees, managers, suppliers, distributors, customers, consultants)
COMPETITION CONT’D Other source of competition includes – trade journals,
want ads, newspaper articles, suppliers, competitors themselves
Unethical tactics include – bribes, wiretapping, computer break-ins
Uniliver sued Proctor and Gamble over corporate espionage activities to obtain the secret of Unilever hair care business.
P & G allegedly took about 80 documents from Unilevers Chicago office (Pantene, Head & Shoulder Vs. Sunsilk, Finess)
Twitter vs. Facebook
COOPERATION AMONG COMPETITION There are multiple cases where competition comes together for
a short project each bringing their own set of expertise and strength
Both firms must contribute something distinctive such as technology, distribution, basic research or manufacturing capacity
Lockheed & British Aerospace PLC teamed up to compete against U.S. fighter Jet
BA – offered it’s expertise in short take off, vertical landing technologies and low cost design and manufacturing
Lockheed offered - large data and technology infrastructures, integrate complex IT systems, and offer the skill and talent of 12 software maturity
AOL, Yahoo, Micorsoft 2003 teamed up against SPAM
COMPETITION CONT’D Americans are very sceptical and suspicious about
working with competitors. Joint venture and cooperative arrangements brings about paranoia.
They believe information not covered in formal agreements often gets traded day to day dealing with engineers, marketers and product developers
Domestic companies are joining forces to beat competitive foreign firms to reap mutual benefits
Asian and European firms enter into cooperative agreements due to the ‘learning from the partner’ concept
American technological know-how can be easily mimicked
PORTER’S 5 FORCES
Michael Porter shares the I/O perspective and believes that organizational performance will be primarily determined by industry forces
1. Rivalry among Competing firms2. Potential entry of New competitors3. Potential development of substitute products4. Bargaining power of supplier 5. Bargaining power of consumers
PORTER’S 5 FORCESMichael Porter shares the I/O perspective and believes that organizational performance will be primarily determined by industry forces
Ch 3 -26Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
The Five-Forces Model
Most powerful of the five forces Focus on competitive advantage of
strategies
Rivalry Among Competing Firms
Ch 3 -27Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
The Five-Forces Model
Barriers to entry are important Quality, pricing, and marketing can
overcome barriers
Potential Entry of New Competitors
Ch 3 -28Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
The Five-Forces Model
Pressures increase when consumers’ switching costs decrease
Firm’s plans for increased capacity & market penetration
Potential Development of Substitute Products
Ch 3 -29Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
The Five-Forces Model
Large number of suppliers & few substitutes affects intensity of competition
Backward integration can gain control or ownership of suppliers
Bargaining Power of Suppliers
Ch 3 -30Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
The Five-Forces Model
Customers concentrated or buying in volume affects intensity of competition
Consumer power is higher where products are standard or undifferentiated
Bargaining Power of Consumers
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