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