Henan Agricultural University Zheng Ch 3 -1 Chapter 3 The External Assessment.

Henan Agricultural University Zheng Ch 3 -1

Chapter 3 The External Assessment


Chapter Outline

The Nature of the External Audit

The Industrial Organization (I/O) View

Social, Cultural, Demographic & Environmental Forces


Chapter Outline (cont’d)

Political, Governmental, and Legal Forces

Technological Forces

Competitive Forces



Porter’s Five-Forces Model

Forecasting Tools & Techniques



The External Factor Evaluation (EFE) Matrix

Competitive Profile Matrix (CPM)


External environments

OrganizationInternal environments

External ‘mirco’ or ‘near’ environments

External ‘macro’ or ‘far’ environments


External Strategic Management Audit

-- Environmental Scanning

-- Industry Analysis


Identify & Evaluate factors beyond the control of a single firm Increased foreign competition Population shifts Aging society Fear of traveling Stock market volatility



Purpose of External Audit Identify

Opportunities Threats



Key External Forces

•Social, cultural, demographic forces

•Political, governmental & legal forces

•Economic forces

•Natural forces

•Technological forces

The five influences are often interlinked


CompetitorsSuppliers

DistributorsCreditors

CustomersEmployees

CommunitiesManagers

StockholdersLabor Unions

Special Interest GroupsProductsServicesMarkets

Natural Environment

Key External Forces

Opportunities&

Threats

Key External Forces & the Organization


Gather competitive intelligence –

Social Cultural Demographic Environmental Governmental Legal Technological

External Audit


Performing External Audit

-- Key Factors Vary over time Vary by industry


SPENT can be used as follows:

CHECKLIST - like an environmental audit to identify all influences

KEY FACTORS - having identified many factors , can narrow them down to most important

IMPACT - must analyse the likely & differential impact of each of the influences

THE FAR ENVIRONMENT


socio-demographic influences

Social culture (values, attitudes & beliefs) impacts on demand for products and services, attitudes to work, ethics, etc.

Demography –the impact of the size and structure of the population on the workforce and patterns of demand


Social, Cultural, Demographic Forces

Major Impact –

•Products

•Services

•Markets

•Customers


Actuarial rates

Monitor KeyVariables

Per capita income

Attitudes toward business

Avg. disposable income



Consumer behavior


Ethical concerns

Attitudes toward saving

Racial equality



Avg. educational level


Governmental regulation

Attitudes toward customer service

Attitudes toward quality


Social responsibility

Leisure time values


Political, Government & Legal Forces

Key opportunities & threats Antitrust legislation Tax rates Lobbying efforts Patent laws

Government Regulation



Political variables impact – Formulation of strategies Implementation of strategies

Increasing Global Interdependence



Strategists in a global economy – Forecast political climates Legalistic skills Diverse world cultures

Increasing Global Interdependence


Economic Forces

•Availability of credit

•Level of disposable income

•Interest rates

•Inflation rates


Economic influences 经济因素：

1. 宏观经济的总体状况— GDP 增长率（ fiscal policy ， etc. ） 2. 中央银行的利率水平 Interest rate （ monetary policy) 3. 消费者物价指数 CPI （ levels of inflation) 4. 劳动力的供给 Supply of labour 5. 消费者收入水平 levels of income 6. 产业集群 Clusters 7. 关税种类及水平、汇率等 Tariff, exchange rate 8. 各种经济 - 政治联盟 Economical-Political bodies


Michael Porter -- Clusters and the New Economics of Competition Clusters: critical masses in one place of linked industries and

institutions--from suppliers to universities to government agencies--that enjoy unusual competitive success in a particular field.

Clusters affect competition in three broad ways Increasing the productivity of companies based in the area Driving the direction and pace of innovation The most Stimulating the formation of new businesses within the cluster

Competitive advantage lies increasingly in local things--knowledge, relationships, and motivation--that distant rivals cannot replicate

Famous examples are found in Silicon Valley and Hollywood


Natural influences

The impact of natural events upon business activity can be very powerful and difficult to predict or avoid

For business affected by natural impact, the effects can be very costly and far-reaching


Waste management


Air & water pollution

Ozone depletion

Endangered species

Natural & Environmental Forces

Energy conservation

Recycling


Technical influences

Changes in technology affect the products available to customers, the quality, the cost of the products and their functionality


Technological Forces

Essential for nearly every strategic decision

Technology-based issues


The importance of the SPENT analysis process

The importance of the process is to identify issues that will have an impact on the organization and the industry

Categorizing them correctly between the factors is of secondary importance


Economies of Scale

Industry Properties

Barriers to market entry

Product differentiation

Level of competitiveness

I/O Perspective Firm Performance


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


The intensity of rivalry among competitors in the industry

The number and size of the competitors in the industry

The maturity of the industry The differentiations of products in the industry


Industrial lifecycle

Industry sales

Time

Introduction Maturity Growth Decline


KFS

The key factors for success are those resources, skills and attributes of firms in the industry that are essential to deliver profitability

KFS are common to all the major organizations in the industry and usually do not differentiate on company from another

KFS will vary from one industry to another


The Five-Forces Model of Competition

Potential development of substitute products

Rivalry among competing firms

Bargaining power of suppliers

Potential entry of new competitors

Bargaining power of consumers


The Five-Forces Model

Most powerful of the five forces Focus on competitive advantage of

strategies

Rivalry Among Competing Firms


The intensity of rivalry among competitors in the industry

The maturity of the industry The number and size of the competitors in the

industry The differentiations of products in the industry Merger & acquisition

Free-flowing information on the Internet


The threat of new entrants to the industry Economies of scale available to existing

competitors The capital costs of entry Brand loyalty and customer switching costs

Switching costs: the cost of changing to a new supplier, one of the key strategic manoeuvres in maintaining customer loyalty

Access to input and distribution channels The resistance offered by existing businesses



Barriers to entry are important Quality, pricing, and marketing can

overcome barriers

Potential Entry of New Competitors



Pressures increase when consumer’s switching costs decrease

Firm’s plans for increased capacity & market penetration

Potential Development of Substitute Products


The threat of substitute products The extent to which the price and

performance of the substitute can match the industry’s product

The willingness of buyers to switch to the substitute


The bargaining power of suppliers

The number and size of resource suppliers The cost of switching to another resource The uniqueness and scarcity of the resource

that suppliers provide



Large number of suppliers & few substitutes affects intensity of competition

Backward integration can gain control or ownership of suppliers

Bargaining Power of Suppliers



Customers concentrated or buying in volume affects intensity of competition

Consumer power is higher where products are standard or undifferentiated

Bargaining Power of Consumers


Conditions where Consumers GainBargaining Power

If they can inexpensively switch If they are particularly important If sellers are struggling in the face of falling

consumer demand If the selling price is important to the total costs of

the buyers If they are informed about seller’s products, prices

and costs. If they have discretion in whether and when they

purchase the product.


Strategic groups within an industry

Five Forces Model undertakes only a general analysis of competitors

Strategic groups explore in more detail the competitive forces acting within parts of an industry

Strategic groups of firms within an industry follow the same strategies or have very similar dimensions （ same market segments, similar technology, etc.)


Strategic groups in the automobile industry

qu

ality

National Regional Global

Super-premium

Premium

Regular

Economy

Geographic coverage


Mobility barriers

Mobility barriers: factors that deter the movement of firms from one strategic position to another

Some firms can enjoy systematic advantages over others, through economies of scale, absolute cost advantages, famous brand names, high quality products, etc.


Competitive Forces

Collection & evaluation of data on competitors is essential for successful strategy formulation


Competitive Forces

Competition on virtually all industries can be described as intense.


Competitors analysis

Competitors analysis model Objective of competitors Hypothesis of competitors Current strategies of competitors Competences of competitors


Forecasting Tools and Techniques

Forecasts are educated assumptions about future trends and events Quantitative techniques – Most appropriate when

historical data is available and there is a constant relationship

Qualitative techniques


Total weighted score of 4.0 Organization response is outstanding to threats

and weaknesses

Industry Analysis EFE

Total weighted score of 1.0Firm’s strategies not capitalizing on

opportunities or avoiding threats

The average total weighted score is 2.5


Industry Analysis EFE

Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.

Important --


Industry Analysis: Competitive Profile Matrix (CPM)

Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions


Industry Analysis: Competitive Profile Matrix (CPM)

There are some important differences between the EFE and CPM. First, the critical success factors in a CPM are

broader. These factors are also not grouped into

opportunities and threats as in the EFE. In a CPM, the ratings and weighted scores can

be compared to rival firms


Industry Analysis CPM

Just because one firm receives a 3.2 rating and another receives a 2.8 rating, it does not follow that the first firm is 20 percent better than the second.

Important --


Industry Analysis CPM

Numbers reveal the relative strength of firms, but their implied precision is an illusion

The aim of this analysis is not to arrive a single number, but rather to assimilate and evaluate information in a meaningful way that aids in decision making

Important --

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Henan Agricultural University Zheng Ch 3 -1 Chapter 3 The External Assessment.

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