CHP 3: The External Assessment

future trends and events

Assumptions are needed only for______ that are most likely to have a significant effect on the company's business. Based on the best information at the time, assumptions serve as checkpoints on the validity of strategies.

facts, figures, trends, and research.

Assumptions must be made based on Strive for the firm's assumptions to be more accurate than rival firm's assumptions.

-proprietary business intelligence -reveal where competitors are weak -understanding consumer behav -used to decrease expenses

Business analytics can help with

products developed, the nature of positioning and market segmentation strategies, the type of services offered, and the choice of businesses to acquire or sell.

External forces affect the types of

(1) economic forces; (2) social, cultural, demographic, and natural environment forces; (3) political, governmental, and legal forces; (4) technological forces; and (5) competitive forces.

External forces can be divided into five broad categories:

suppliers and distributors.

External forces have a direct impact on both

backward integration

Firms may pursue a _______ strategy to gain control or ownership of suppliers. This strategy is especially effective when suppliers are unreliable, too costly, or not capable of meeting a firm's needs on a consistent basis.

major competitive advantages.

Firms that have the best information generally make the most accurate assumptions, which can lead to

assist each other

It is often in the best interest of both suppliers and producers to _____ with reasonable prices, improved quality, development of new services, just-in-time deliveries, and reduced inventory costs, thus enhancing long-term profitability for all concerned.

4.0 1.0

Regardless of the number of key opportunities and threats included in an EFE Matrix, the highest possible total weighted score for an organization is ____ and the lowest possible total weighted score is ____.

published sources unpublished sources websites databases libraries

SOURCES OF EXTERNAL INFORMATION

flexibility usefulness timeliness cross functional cooperation

Special characteristics of a successful CI program include

1. Economic Forces 2. Social, cultural, demographic, and natural environment forces 3. political, governmental and legal forces 4. technological forces 5. competitive forces

TEN EXTERNAL FORCES THAT AFFECT ORGANIZATIONS

Is not spying Is not a crystal ball Is not a simple Google search Is not one-size-fits-all Is not useful if no one is listening Is not a job for one, smart person Is not a fad Is not driven by software or technology Is not based on internal assumptions about the market Is not a spreadsheet.9

The Fuld website explains that competitive intelligence is not the following:

2.5

The average total weighted score is __.

competitive advantage.

The bargaining power of consumers can be the most important force affecting

to monitor the new rival firms' strategies, to counterattack as needed, and to capitalize on existing strengths and opportunities

The strategist's job is to identify potential new firms entering the market, .

business analytics

an MIS technique that involves using software to mine huge volumes of data to help executives make decisions. Sometimes called predictive analytics, machine learning, or data mining, this software enables a researcher to assess and use the aggregate experience of an organization, which is a priceless strategic asset for a firm.

Porter's Five Forces Model

ex of I/O View

Competitive intelligence (CI)

, as formally defined by the Society of Competitive Intelligence Professionals (SCIP), is 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 (SCIP website). -key to success

usually the most powerful of the five forces -

1. Rivalry Among Competing Firms

1. Leads to lower exports 2. Leads to higher imports 3. Makes U.S. goods expensive for foreign consumers 4. Helps keep inflation low 5. Allows U.S. firms to purchase raw materials cheaply from other countries 6. Allows USA to service its debt better 7. Spurs foreign investment 8. Encourages Americans to travel abroad 9. Leads to lower oil prices because oil globally is priced in U.S. dollars 10. Encourages Americans to spend money because they can buy more for their money

3-2 Ten Advantages of a Strong Dollar for Domestic Firms

1. What are the strengths of our major competitors? 2. What are the weaknesses of our major competitors? 3. What are the objectives and strategies of our major competitors? 4. How will our 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 extent 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 our 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 this industry? 12. To what extent could substitute products or services be a threat to our competitors?

3-5 Key Questions About Competitors

experience and to make current and future decisions based on prior information through predictive modeling

A key distinguishing feature of business analytics is that it enables a firm to learn from

not capitalizing on opportunities or avoiding external threats.

A total score of 1.0 indicates that the firm's strategies are

outstanding way to existing opportunities and threats in its industry. In other words, the firm's strategies effectively take advantage of existing opportunities and minimize the potential adverse effects of external threats.

A total weighted score of 4.0 indicates that an organization is responding in an

1. Rivalry among competing firms 2. Potential entry of new competitors 3. Potential development of substitute products 4. Bargaining power of suppliers 5. Bargaining power of consumers

According to Porter, a Harvard Business School professor, the nature of competitiveness in a given industry can be viewed as a composite of five forces:

companies choose to spend money and do business.

Although interrelated, every country has its own economic situation, and those situations impact where

opportunities and threats confronting an organization, so managers can formulate strategies to take advantage of the opportunities and avoid or reduce the impact of threats.

An external audit reveals key

decline

As rivalry among competing firms intensifies, industry profits ____, in some cases to the point where an industry becomes inherently unattractive.

standard or undifferentiated.

Bargaining power of consumers also is higher when the products being purchased are _____When this is the case, consumers often can negotiate selling price, warranty coverage, and accessory packages to a greater extent.

the need to gain economies of scale quickly, the need to gain technology and specialized know-how, the lack of experience, strong customer loyalty, strong brand preferences, large capital requirements, lack of adequate distribution channels, government regulatory policies, tariffs, lack of access to raw materials, possession of patents, undesirable locations, counterattack by entrenched firms, and potential saturation of the market.

Barriers to entry, however, can include

demand

Changes in external forces translate into changes in consumer _____ for both industrial and consumer products and services.

strategy formulation, implementation, and evaluation decisions.

Competitive information is equally applicable for _______ An effective CI program allows all areas of a firm to access consistent and verifiable information in making decisions. All members of an organization—from the CEO to custodians—are valuable intelligence agents and should feel themselves to be a part of the CI

increase declines decrease

Competitive pressures arising from substitute products _____ as the relative price of substitute products ____ and as consumers' costs of switching _____.

1. When the number of competing firms is high 2. When competing firms are of similar size 3. When competing firms have similar capabilities 4. When the demand for the industry's products is falling 5. When the product or service prices in the industry is falling 6. When consumers can switch brands easily 7. When barriers to leaving the market are high 8. When barriers to entering the market are low 9. When fixed costs are high among competing firms 10. When the product is perishable 11. When rivals have excess capacity 12. When consumer demand is falling 13. When rivals have excess inventory 14. When rivals sell similar products/services 15. When mergers are common in the industry

Conditions That Cause High Rivalry Among Competing Firms

1. If they can inexpensively switch to competing brands or substitutes 2. If they are particularly important to the seller 3. If sellers are struggling in the face of falling consumer demand 4. If they are informed about sellers' products, prices, and costs 5. If they have discretion in whether and when they purchase the product12

Consumers gain increasing bargaining power under the following circumstances:

1. List 20 key external factors as identified in the external-audit process, including both opportunities and threats that affect the firm and its industry. List the opportunities first and then the threats. Be as specific as possible, using percentages, ratios, and comparative numbers whenever possible. Recall that Edward Deming said, "In God we trust. Everyone else bring data." In addition, utilize "actionable" factors as defined earlier in this chapter. 2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The weight indicates the relative importance of that factor to being successful in the firm's industry. Opportunities often receive higher weights than threats, but threats can receive high weights if they are especially severe or threatening. Appropriate weights can be determined by comparing successful with unsuccessful competitors or by discussing the factor and reaching a group consensus. The sum of all weights assigned to the factors must equal 1.0. 3. Assign a rating between 1 and 4 to each key external factor to indicate how effectively the firm's current strategies respond to the factor, where 4 = the response is superior, 3 = the response is above average, 2 = the response is average, and 1 = the response is poor. Ratings are based on effectiveness of the firm's strategies. Ratings are thus company-based, whereas the weights in Step 2 are industry-based. It is important to note that both threats and opportunities can receive a 1, 2, 3, or 4. 4. Multiply each factor's weight by its rating to determine a weighted score. 5. Sum the weighted scores for each variable to determine the total weighted score for the organization.

Five steps of the EFE Matrix

1. must gather competitive intelligence and information about economic, social, cultural, demographic, environmental, political, governmental, legal, and technological trends. 2. These persons can submit periodic scanning reports to the person(s) who coordinate the external audit. This approach provides a continuous stream of timely strategic information and involves many individuals in the external-audit process. 3. After information is gathered, it should be assimilated and evaluated. A meeting or series of meetings of managers is needed to collectively identify the most important opportunities and threats facing the firm. 4. A prioritized list of these factors must be obtained by requesting that all managers individually rank the factors identified, from 1 (for the most important opportunity/ threat) to 20 (for the least important opportunity/threat). 5. Then, by summing the rankings, or the number of checkmarks, a prioritized list of factors is revealed. Prioritization is absolutely essential in strategic planning because no organization can do everything that would benefit the firm; tough choices among good choices have to be made.

How to conduct an external audti

QUANTIFIED AND ACTIONABLE

IT IS CRUCIAL THAT EXTERNAL FACTORS ARE

mission, to design strategies to achieve long-term objectives, and to develop policies to achieve annual objectives.

Identifying and evaluating external opportunities and threats enables organizations to develop a clear

(1) specific (i.e., quantified to the extent possible); (2) actionable (i.e., meaningful in terms of having strategic implications) and (3) stated as external trends, events, or facts rather than as strategies the firm could pursue.

Important Note: When identifying and prioritizing key external factors in strategic planning, make sure the factors selected are

plastic container producers competing with glass, paperboard, and aluminum can producers, and acetaminophen manufacturers competing with other manufacturers of pain and headache remedies.

In many industries, firms are in close competition with producers of substitute products in other industries. Examples are

(1) reduce inventory and logistics costs (e.g., through just-in-time deliveries), (2) accelerate the availability of next-generation components, (3) enhance the quality of the parts and components being supplied and reduce defect rates, and (4) squeeze out important cost savings for both themselves and their suppliers.11

In more and more industries, sellers are forging strategic partnerships with select suppliers in an effort to

14.3 percent better than the second, but it does suggest that the first firm is better in some areas.

Just because one firm receives a 3.20 overall rating and another receives a 2.80 in a CPM, it does not necessarily follow that the first firm is precisely

Shift to a service economy in the USA Demand shifts for different goods and services Availability of credit Income differences by region and consumer groups Level of disposable income Price fluctuations Propensity of people to spend Foreign countries' economic conditions Interest rates Monetary and fiscal policies Inflation rates Stock market trends Gross domestic product trends Tax rate variation by country and state Consumption patterns European Economic Community (EEC) policies Unemployment trends Value of the dollar in world markets Import/export factors Organization of Petroleum Exporting Countries (OPEC) policies

Key Economic Variables to be Monitored

Population changes by race, age, and geographic area Attitudes toward retirement Regional changes in tastes and preferences Energy conservation Number of marriages Attitudes toward product quality Number of divorces Attitudes toward customer service Number of births Pollution control Number of deaths Attitudes toward foreign peoples Immigration and emigration rates Energy conservation Social Security programs Social programs Life expectancy rates Number of churches Per capita income Number of church members Social media pervasiveness Social responsibility issues

Key Social, Cultural, Demographic, and Natural Environment Variables

forecasts

Key external opportunities and threats can be effectively identified only through good .

attractive industries, avoiding weak or faltering industries, and gaining a full understanding of key external factor relationships within that attractive industry.

Managing strategically from the I/O perspective entails firms striving to compete in

perfect

No forecast is ____—some are even wildly inaccurate. This fact accents the need for strategists to devote sufficient time and effort to study the underlying bases for published forecasts and to develop internal forecasts of their own.

Chief Information Officer (CIO)

Oversees all uses of IT and ensures the strategic alignment of IT with business goals and objectives -more of a manager, managing firm's relationship with stakeholders

Chief Technology Officer (CTO)

Responsible for ensuring the throughput, speed, accuracy, availability, and reliability of IT -more a technician, focusing on technical issues such as data acquisition, data processing, decision support systems, and software and hardware acquisition

1. They represent major opportunities and threats that must be considered in formulating strategies. 2. They can dramatically affect organizations' products, services, markets, suppliers, distributors, competitors, customers, manufacturing processes, marketing practices, and competitive position. 3. They can create new markets, result in a proliferation of new and improved products, change the relative competitive cost positions in an industry, and render existing products and services obsolete. 4. They can reduce or eliminate cost barriers between businesses, create shorter production runs, create shortages in technical skills, and result in changing values and expectations of employees, managers, and customers. 5. They can create new competitive advantages that are more powerful than existing advantages.

Results of technological advancements are varied, as shown in the following list:

1. Strive to continually increase market share. 2. Use the vision/mission as a guide for all decisions. 3. Realize that the adage "If it's not broke, don't fix it" has been replaced by "Whether it's broke or not, fix it"; in other words, continually strive to improve everything about the firm. 4. Continually adapt, innovate, improve—especially when the firm is successful. 5. Strive to grow through acquisition whenever possible. 6. Hire and retain the best employees and managers possible. 7. Strive to stay cost-competitive on a global basis.

Seven characteristics describe the most competitive companies:

Environmental regulations USA vs. other country relationships Number of patents Political conditions in foreign countries Changes in patent laws Global price of oil changes Equal employment laws Local, state, and federal laws Level of defense expenditures Import-export regulations Unionization trends Tariffs Antitrust legislation Local, state, and national elections

Some Political, Governmental, and Legal Variables

trade journals, want ads, newspaper articles, and government filings, as well as customers, suppliers, distributors, competitors themselves, and the Internet.

Sources of competitive information include

few suppliers, when there are few good substitute raw materials, or when the cost of switching raw materials is especially high.

The bargaining power of suppliers affects the intensity of competition in an industry, especially when there are

market share those products obtain, as well as those firms' plans for increased capacity and market penetration.

The competitive strength of substitute products is best measured by the inroads into the

sample firm.

The critical success factors in a CPM are not grouped into opportunities and threats as they are in an EFE. In a CPM, the ratings and total weighted scores for rival firms can be compared to the ____ This comparative analysis provides important internal strategic information. Avoid assigning the same rating to firms included in your CPM analysis.

data mining

The history of a firm's interaction with its customers, suppliers, distributors, employees, rival firms, and more can all be tapped with ______ to generate predictive models.

rivals' plans for expanding production capacity, as well as by their sales and profit growth numbers.

The magnitude of competitive pressure derived from the development of substitute products is generally evidenced by

ceiling

The presence of substitute products puts a _____on the price that can be charged before consumers will switch to the substitute product. Price ceilings equate to profit ceilings and more intense competition among rivals.

managers and employees as possible.

The process of performing an external audit must involve as many

finite list of opportunities that could benefit a firm as well as threats that should be avoided.

The purpose of an external audit is to develop a

(1) to provide a general understanding of an industry and its competitors, (2) to identify areas in which competitors are vulnerable and to assess the impact strategic actions would have on competitors, and (3) to identify potential moves that a competitor might make that would endanger a firm's position in the market.10

The three basic objectives of a CI program are

internal and external

The weights and total weighted scores in both a CPM and an EFE have the same meaning. However, critical success factors in a CPM include both _______ and _____ issues; therefore, the ratings refer to strengths and weaknesses, where 4 = major strength, 3 = minor strength, 2 = minor weakness, and 1 = major weakness.

bribery, wiretapping, and computer hacking

Unethical tactics such as ________________ should never be used to obtain information. All the information a company needs can be collected without resorting to unethical tactics.

• Hire top executives from rival firms. • Reverse engineer rival firms' products. • Use surveys and interviews of customers, suppliers, and distributors. • Conduct drive-by and on-site visits to rival firm operations. • Search online databases. • Contact government agencies for public information about rival firms. • Systematically monitor relevant trade publications, magazines, and newspapers.

Various legal and ethical ways to obtain competitive intelligence include the following:

major force affecting the intensity of competition in an industry.

When customers are concentrated or large in number or buy in volume, their bargaining power represents a

"opportunity."

When rival firms sense weakness, typically they will intensify both marketing and production efforts to capitalize on the

deter new entrants, such as lowering prices, extending warranties, adding features, or offering financing specials

When the threat of new firms entering the market is strong, incumbent firms generally fortify their positions and take actions to

competitiveness among firms increases.

Whenever new firms can easily enter a particular industry, the intensity of

assumptions based on available information must always be made.

Wild guesses should never be made in formulating strategies, but reasonable

The Industrial Organization view of strategic planning

advocates that external (industry) factors (economies of scale, barriers to market entry, product differentiation, the economy, and level of competitiveness) are more important than internal ones (internal resources, capabilities, structure, and operations) for gaining and sustaining competitive advantage.

benefit from measuring and managing risk.

all businesses can benefit from measuring, tracking, and computing the risk associated with hundreds of strategic and tactical decisions made every day. Business analytics enables a company to

external factor evalutation (EFE) matrix

allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information, David, Fred R; David, Forest R.. Strategic Management (p. 77). Pearson Education. Kindle Edition.

Porter's Five Forces Model

analyzes the competitive forces within the environment in which a company operates to assess the potential for profitability in an industry

assumptions

as the "best present estimates of the impact of major external factors, over which the manager has little if any control, but which may exert a significant impact on performance or the ability to achieve desired results."13

forecasts

educated assumptions about future trends and events quantitative, qualitative techniques

external audti

focuses on identifying and evaluating trends and events beyond the control of a single firm, such as increased foreign competition, population shifts to coastal areas of the United States, an aging society, and taxing Internet sales.

new york california nebraska connecticut illinois

highest state taxes

Competitive Profile Matrix (CPM)

identifies a firm's major competitors and its particular strengths and weaknesses in relation to a sample firm's strategic position.

unpublished sources

include customer surveys, market research, speeches at professional and shareholders' meetings, TV programs, interviews, and converstations with stakeholders

Competitive advantage

is determined largely by competitive positioning within an industry, according to I/O advocates.

wyoming alaska nevada florida south dakota

lowest state taxes

published sources

periodicals, journals, reports, government documents, abstracts, books, directories, newspapers, and manuals

actionable responses.

rather, the external audit is aimed at identifying key variables that offer _______ Firms should be able to respond either offensively or defensively to the factors by formulating strategies that take advantage of external opportunities or that minimize the impact of potential threats.

IOT, 3D printing, the cloud, mobile devices, biotech, analytics, autotech, robotics, and artificial intelligence monitoring reviews electronic banking cybersecurity

technological trends