strategic management chapter 3 of external audit

Copyright © 2011 Pearson Education, Inc.
Publishing as Prentice Hall
Ch 3 -1
Chapter 3
The External Assessment
Strategic Management:
Concepts & Cases
13th Edition
Fred David

Ch 3 -2

Ch 3 -3
External Strategic
Management Audit
– Environmental Scanning
– Industry Analysis

Ch 3 -4
Identify & evaluate factors beyond the
control of a single firm
 Increased foreign competition
 Population shifts
 Aging society
 Fear of traveling
 Stock market volatility
External Strategic
Management Audit

Ch 3 -5
Purpose of an External Audit
 Develop a finite list of
 opportunities that could benefit a firm
 threats that should be avoided
External Strategic
Management Audit

Ch 3 -6

Ch 3 -7
 Gather competitive intelligence
 Assimilate information
 Evaluate
Resulting in a list of the most
important key external factors
External Audit

Ch 3 -8
Performing External Audit
External
Factors
Measurable
Long-term Orientation
Applicable to
Competing Firms
Hierarchical

Ch 3 -9

Ch 3 -10
Social, Cultural, Demographic, and
Natural Environmental Forces
 US Facts
 Aging population
 Less White
 Widening gap between rich & poor
 2025 = 18.5% population > 65 years
 2075 = no ethnic or racial majority

Ch 3 -11
 Trends
 More American households with
people living alone
 Aging Americans – affects all
organizations
Social, Cultural, Demographic, and
Natural Environmental Forces

Ch 3 -12
Political, Governmental, and
Legal Forces
Key opportunities & threats
 Antitrust legislation
 Tax rates
 Lobbying activities
 Patent laws
Government Regulation

Ch 3 -13
Political, Governmental, and
Legal Forces
 Protectionist policies
 Governments taking equity stakes
in companies

Ch 3 -14
Technological Forces
Major Impact –
•Internet

Ch 3 -15
Competitive Forces
Collection & evaluation of data on
competitors is essential for successful
strategy formulation

Ch 3 -16
Competitive Forces
•Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies
Identify Rival Firms’

Ch 3 -17
Key Questions Concerning
Competitors
 Their strengths
 Their weaknesses
 Their objectives and strategies
 Their responses to external variables
 Their vulnerability to our alternative
strategies
 Our vulnerability to strategic counterattack

Ch 3 -18
Key Questions Concerning
Competitors
 Our product/service positioning
 Entry and exit of firms in the industry
 Key factors for our current position in industry
 Sales/profit ranking of competitors over time
 Nature of supplier and distributor
relationships
 The threat of substitute products/services

Ch 3 -19
Competitive Intelligence
 A systematic and ethical process for
gathering and analyzing information
about the competition’s activities and
general business trends to further a
business’s own goals

Ch 3 -20
Sources of Competitive Intelligence
 Internet
 Employees
 Managers
 Suppliers
 Distributors
 Customers
 Creditors
 Consultants
 Trade journals
 Want ads
 Newspaper articles
 Government filings
 Competitors

Ch 3 -21
Objectives of Competitive Intelligence
 Provide a general understanding of industry
and competitors
 Identify areas where competitors are
vulnerable and assess impact of actions on
competitors
 Identify potential moves that a competitor
might make

Ch 3 -22
The Five-Forces Model of Competition

Ch 3 -23
Steps to Determine if an Acceptable
Profit Can Be Earned
1. Identify key aspects or elements of each
competitive force
2. Evaluate how strong and important each
element is for the firm
3. Decide whether the collective strength of
the elements is worth the firm entering or
staying in the industry

Ch 3 -24
The Five-Forces Model
 Rivalry among competing firms
 Most powerful of the five forces
 Focus on competitive advantage of
strategies over other firms

Ch 3 -25
Conditions that Cause High Rivalry
Among Competing Firms
 High number of competing firms
 Similar size of firms competing
 Similar capability of firms competing
 Falling demand for the industry’s products
 Falling product/service prices in the
industry

Ch 3 -26
 Consumers can switch brands easily
 Barriers to leaving the market are high
 Barriers to entering the market are low
 Fixed costs are high among firms
competing
 The product is perishable

Ch 3 -27
 Rivals have excess capacity
 Consumer demand is falling
 Rivals have excess inventory
 Rivals sell similar products/services
 Mergers are common in the industry

Ch 3 -28
 Potential development of substitute
products
 Pressure increases when:
 Prices of substitutes decrease
 Consumers’ switching costs
decrease

Ch 3 -29
 Bargaining Power of Suppliers is
increased when there are:
 Large numbers of suppliers
 Few substitutes
 Costs of switching raw materials is high
 Backward integration is gaining control or
ownership of suppliers

Ch 3 -30
 Bargaining power of consumers
 Customers being concentrated or
buying in volume affects intensity of
competition
 Consumer power is higher where
products are standard or
undifferentiated

Ch 3 -31
Conditions Where Consumers Gain
Bargaining Power
 If buyers can inexpensively switch
 If buyers are particularly important
 If sellers are struggling in the face of falling
consumer demand
 If buyers are informed about sellers’
products, prices, and costs
 If buyers have discretion in whether and
when they purchase the product

Ch 3 -32
Sources of External Information:
Unpublished Sources
 Customer surveys
 Market research
 Speeches at professional or shareholder
meetings
 Television programs
 Interviews and conversations with
stakeholders

Ch 3 -33
Published Sources
 Periodicals
 Journals
 Reports
 Government documents
 Abstracts
 Books
 Directories
 Newspapers
 Manuals

Ch 3 -34
Web Sites
 http://marketwatch.multexinvestor.com
 http://moneycentral.msn.com
 http://finance.yahoo.com
 www.clearstation.com
 https://us.etrade.com/e/t/invest/markets
 www.hoovers.com

Ch 3 -35
Industry Analysis: The External
Factor Evaluation (EFE) Matrix
 Economic
 Social
 Cultural
 Demographic
 Environmental
 Political
 Governmental
 Technological
 Competitive
 Legal

Ch 3 -36
EFE Matrix Steps
1. List key external factors
2. Weight from 0 to 1
3. Rate effectiveness of current strategies
4. Multiply weight * rating
5. Sum weighted scores

Ch 3 -37

Ch 3 -38

Ch 3 -39
Total weighted score of 4.0
 Organization response is outstanding to threats
and weaknesses
Industry Analysis EFE
Total weighted score of 1.0
 Firm’s strategies not capitalizing on opportunities
or avoiding threats

Ch 3 -40
Industry Analysis: Competitive Profile
Matrix (CPM)
 Identifies firm’s major competitors and
their strengths & weaknesses in
relation to a sample firm’s strategic
positions
 Critical success factors include
internal and external issues

Ch 3 -41

strategic management chapter 3 of external audit

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