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Strategic Management ± Day 3
External Assessment
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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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Porter¶s Five-Force Model
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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Porter¶s Five-Force Model
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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Porter¶s Five-Force Model
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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Porter¶s Five-Force Model
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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Porter¶s Five-Force Model
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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Porter¶s Five-Force Model
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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Porter¶s Five-Force Model
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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Industry AnalysisThe External Factor Evaluation (EFE) Matrix
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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Industry AnalysisThe External Factor Evaluation (EFE) Matrix
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
Sr.# Threats Type Wt Rating Score
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
4 As per government regulation, Wage Board (where salaries of employees of publishing industry) is announced by GOP
G .05
5 Competitors are involved in Concentrating diversification strategies C .05
Total: .3
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Industry AnalysisThe External Factor Evaluation (EFE) Matrix
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
Sr.# Opportunity/Threat Type Wt Rating Score
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
Sr.# Threats Type Wt Rating Score
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
4 As per government regulation, Wage Board (where salaries of employees of publishing industry) is announced by GOP
G .05 2
5 Competitors are involved in Concentrating diversification strategies C .05 3
Total: .3
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Industry AnalysisThe External Factor Evaluation (EFE) Matrix
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
Sr.# Opportunity/Threat Type Wt Rating Score
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
Sr.# Threats Type Wt Rating Score
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
4 As per government regulation, Wage Board (where salaries of employees of publishing industry) is announced by GOP
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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Industry AnalysisThe External Factor Evaluation (EFE) Matrix
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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Industry AnalysisThe External Factor Evaluation (EFE) Matrix
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.
Ä