Strategic Management: Chapter 3 (The External Assessment)

Fix this statement "to expand in Europe" to make it actionable

"The value of the euro has increased 5 percent versus the U.S. dollar in the last twelve months"

Do Political, Governmental, and Legal Forces matter for strategic decisions?

Absolutely (instant Tweeting and emailing) aerospace = lobby for Republicans Automotive = Democrats

CI

Competitive intelligence - system for gathering and analyzing information about the competition's activities

"value of the dollar" = 7 year high Effect of strong dollar on McDonald's

Domestic firms with big overseas sales, such as McDonald's, also are hurt by a strong dollar. Its revenue from abroad is lowered because, for example, 100 euros earned in Europe, when translated back to U.S. dollars for reporting purposes, is worth maybe $75. To combat this "loss," some companies try to raise prices in their European or Mexican stores, but that carries a risk of alienating shoppers, angering retailers, and giving local competitors a price edge.

How does one gain competitive intelligence without breaking the law?

Don't spy

True or False Solely relying on external factors is key for keeping a strategic advantage

False you need both internal and external

True or False? The goal of an external audit is to have a extensive list of all the possible factors that could influence a business.

False, it's aimed at identifying key variables that offer actionable responses actionable responses - (we need to take action) - Firms should respond offensively or defensively to minimize the impact of threats

External Audit

Focuses on identifying/evaluating trends and events beyond the control of a single firm (increased foreign competition, population shifts, aging society, taxing Internet sales).

Forecasting Tools and Techniques

Forecasts = educated assumptions about future trends/events Super complex

A key feature of business analytics

It enables a firm to learn from experience and make current/future decisions based on prior info (Netflix uses machine learning for movie recommendations)

Business Analytics

MIS technique that involves using software to mine huge volumes of data to help executives make decisions (Predictive Analysis, machine learning, data mining) Data mining = using the history of a firm's interactions to generate a predictive model (Every business = risk management endeavor) (Can revea where competitors are weak)

Is the statement "the stock market is volatile" actionable?

No, because there's no apparent strategy the firm could formulate to capitalize on that factor

Key Social, Cultural, Demographic, and Natural Environment Variables

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

What is Michael Porter known for?

Porter's Five-Forces Model (focuses on analyzing external forces and industry variables as a basis for getting and keeping competitive advantage.

Positives/Negatives for an older US (Baby Boomers retiring)

Pros Good for restaurants, hotels, airlines, cruise lines, tours, resorts, theme parks, luxury products , etc.

Data analytics firms

Splunk (reports ever-increasing revenues/profits)

Starbucks public stands on political issues

Starbucks = support of same sex marriage NAM wanted Starbucks to pay a price (Middle East as well, such as Qatar)

What would be an actionable statement?

The GDP of Brazil is 6.8%" It's actionable because the firm should open 100 new stores in Brazil select factors that will be helpful in deciding what to recommend the firm should do, rather than selecting vague terms

5 states with the lowest/highest state taxes

The extent that a state is unionized can be a significant political factor in strategic-planning decisions.

Step 2 of the external audit

The information that's gathered should be assimilated and evaluated

Purpose of an external audit

To develop a finite list of opportunities that could benefit a firm (as well as threats that should be avoided)

True or False? Suppliers, distributors, salespersons, customers, and competitors represent other sources of vital information.

True

True or False Competitive advantage is determined by competitive positioning within an industry

True, according to IO - compete in attractive industries - avoid the weak industries - gain full understanding of external factors that relate to an attractive industry (economies of scale, barriers to market entry, product differentiation, the economy, level of competitiveness

Social, Cultural, Demographic, and Natural Environment Forces

US = 76 million baby boomers plan to retire soon, and younger taxpayers are concerned about who will pay their Social Security. Trend for an older US

Commoditization

When products become more and more indistinguishable

Planning would be impossible without _______

assumptions assumptions are the best present estimates of the impact of major external factors (By identifying future occurrences that could have a major effect on the firm, strategists can carry the strategic-management process forward.

10 Economic Forces that affect organizations How did underemployment help DollarTree, Walmart, TJ. Maxx?

because of reduced income, it hurt regularly priced corporations. But not budget oriented.

Changes in external forces translate into changes in consumer _______

consumer demand for both industrial and consumer products and services

When the market rises, business wealth _____

expands (rising interest rates, stock prices, and discretionary income)

Identifying and evaluating ___ opportunities and threats enables a clear mission

external

Most managers rely on published forecasts to identify

external opportunities and threats (No forecasts are perfect, and some are completely inaccurate)

External strategic management audit

focuses on identifying and evaluating trends and events beyond the control of a single firm. Sometimes called environmental scanning OR industry analysis. Also called "environmental scanning" or "industry analysis"

Research is clear that benign neglect of a company's ___________n could quickly hurt sales, especially given the new normal behavior of customers consulting their smartphones for even the smallest of purchases.6

online-reputation Firms must monitor online reviews

What does an external audit reveal?

opportunities and threats confronting an organization (managers need to formulate strategies to take advantage of the opportunities and avoid/reduce the impact of threats.

In order for this data to be useful, it must be _______ and _______ to be useful

quantified and actionable

CVS

removed tobacco from their store ($4 billion in lost annual sales) US Cuba = ended hostility

Porter's Five-Forces Model

widely used to develop strategies 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

3 objectives of CI

(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. (95% of the information available is accessible to the public)

EFE Matrix

- External Factor Evaluation Matrix (Allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive info)

Labor Unions in US

- Labor union density fell sharply in the last decade - organized public-sector issues are being debated Wisconsin = eliminated collective bargaining rights for the state's public-employee unions Ohio has similar bill that'll curve union rights for 400,000 workers (New York has the larges union density, and North Carolina has the lowest)

Industrial Organization (I/O) view of strategic planning

- advocates that external (industry) factors are more important than internal ones for gaining and sustaining competitive advantage. Michael Porter = organizational performance will be primarily determined by industry forces

Potential Entry of new competitors

- depends on how easy a new firm can enter an industry Barriers to entry = (economies of scale, technology, know-how, the lack of experience, strong customer loyalty, brand preference, large capital) Even with numerous barriers, new firms can enter industries with higher-quality products, lower prices, and substantial marketing resources (Disney building a park in Shangai, but DreamWorks is nearing completion of a theme park)

Chipotle (summary)

- food - Food with integrity (goal = sustainable grown food, responsibly with animals) - 2015 = Chipotle extended many benefits = (tuition reimbursements, sick pay, paid vacation) -- JD Cummings = We want to invest in the best people we have and keep them with us"

Political forecasts for industries that heavily rely on government contracts or subsidies

1. Changes in patent laws, antitrust legislation, tax rates, lobbying activities can affect firms

Bargaining Power of Consumers

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 product (Rival firms may have extended warranties, special services, volume discounts, negotiable selling prices, accessory packages)

How do you get competitive intelligence/information?

1. Individuals can be asked to monitor various sources of information (magazines, trade journals, newspapers) persons can submit periodic scanning reports (continuous stream of timely strategic information)

10 advantages of a strong dollar for domestic 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

5 steps of the EFE Matrix

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.

Seven characteristics to describe competitors

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.

Results of technological advancements (5 of them)

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.

Conditions That Cause High Rivalry Among Competing Firms

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

1st step to an external audit

1. a company must gather competitive intelligence and information about a) economic b) social c) cultural d) demographic e) environmental f) political g) governmental h) legal i) technological trends

Bargaining power of suppliers

1. affects intensity of competition (especially if there's few) Strategic Partners to influence bargaining power (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

Two important firms that are growing because of IT (information technology)

1. chief information officer (CIO) 2. chief technology officer (CTO) Both work together to ensure that information is needed to formulate, implement, and evaluate strategies is available and when it's needed. (Cybersecurity spending skyrocketed to $50billion ^Sony was a victim of a massive cyberattack (PSN)

Advantages of a strong dollar

1. companies with substantial outside US operations see their oversee expenses, such as salaries paid in euros, become cheaper 2. it gives US companies greater firepower for international acquisitions 3. Companies importing goods have greater buying power because their dollars now go further overseas

5 broad categories of external forces

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

Competitive Profile Matrix (CPM)

1. identifies a firm's major competitors and its particular strengths and weaknesses in relation to a sample firm's strategic position 4= major strength, 3= minor strength, 2= minor weakness, and 1= major weakness.

Process of evaluating the information

1. meeting or series of meetings of managers (collectively identify the most important opportunities and threats facing the firm) managers must individually rank these factors from 1 to 20 (1 = most important) - A prioritized list of factors is revealed

Rivalry increases when consumers

1. more competitors 2. as competitors adapt to be on the same level 3. demand declines 4. price cutting 5. consumers switch brands easily 6. barriers for leaving market are high 7. high fixed costs 8. perishable products commodities = gas, food (highly competitive)

Development of substitute products

1. plastic containers completing with glass 2. Presence of substitute products puts a ceiling on the price that'll be charged before consumers switch to the substitute (glasses industry faces pressure from laser eye surgery) TV faces competition from Newspapers

External forces affect the types of forces

1. types of products developed 2. the nature of positioning 3. market segmentation strategies 4. type of services offered 5. distributors

Sources of External Info

2 types = Unpublished and Published Unpublished = customer surveys, market research, speeches, TV, interviews, and conversations with stakehodlers Published sources = periodicals, jounals, reports, gov documents, abstracts, books, directories, newspapers, manuals 3 good websites 1. http://morningstar.com 2. www.hoovers.com 3. http://globaledge.msu.edu/industries/

Technological forces that affect the external environment

3d printing the cloud mobile devices biotech robotics AI Wearable tech will make up 35% of global Internet (Branch offices for banking started to close because of mobile tech)

Highest weighted score of EFE Matrix

4 (organization is responding in an outstanding way to threats in its industry) lowest = 1 average = 2.5

Published Forecasts

IBISWorld—Provides online USA Industry Reports (NAICS), U.S. Industry iExpert Summaries, and U.S. Business Environment Profiles. A global version of IBIS is also available. • Lexis-Nexis Academic—Provides online access to newspaper articles (including New York Times and Washington Post) and business information (including SEC filings). • Lexis-Nexis Company Dossier—Provides online access to extensive, current data on 13 million companies. It collects and compiles information into excellent documents. • Mergent Online—Provides online access to Mergent's (formerly Moody's/FISOnline) Manuals, which include trend, descriptive, and statistical information on hundreds of public companies and industries. Company income statements and balance sheets are provided. • Regional Business News—Provides comprehensive full-text coverage for regional business publications; incorporates coverage of more than 80 regional business publications covering all metropolitan and rural areas within the United States. • Standard & Poor's NetAdvantage—Provides online access to Standard & Poor's Industry Surveys, stock reports, corporation records, The Outlook, mutual fund reports, and more. • Value Line Investment Survey—Provides excellent online information and advice on approximately 1,700 stocks, more than 90 industries, the stock market, and the economy. Company income statements and balance sheets are provided.

3 important points for identifying/prioritizing key external factors in strategic planning.

Make sure the factors are 1. specific - (quantified to the extent possible) 2. actionable - (meaningful in terms of having strategic implications) 3. stated as external trends, events, or facts (rather than strategies the firm could pursue)

Can a firm go through every factor they identify?

No Prioritization is absolutely essential in strategic planning (no organization can do everything) - tough choices among good choices have to be made

Most powerful out of all the 5 forces

Rivalry (strategies pursued by one firm can be successful only to the extent that they provide competitive advantage over the strategies of rival firms) (Verizon acquired AOL for $4.4 billion and launched it's own video streaming service)

An important part of an eternal audit is identifying the rival firms and determining their ________

SWOT + Objectives and Strategies collecting info on your competitor is essential

Protectionism

Safeguard their own domestic industries (EU) tightened their trade rules India = tariffs on foreign steel trade constraints = harder for economic growth