MAN 009 - PPT - MODULE 2 - CANVAS - New 1.ppt

The External
and Internal
Assessment

Chapter Objectives
1. Discuss the major external forces
2. Discuss important forecasting tools used in
strategic management.
3. Discuss the importance of monitoring external
trends and events
4. Explain how to develop an EFE Matrix.
5. Explain how to develop a Competitive Profile
Matrix.
6. Discuss market commonality and resource
similarity in relation to competitive analysis.
3-2
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Chapter Objectives
7. Describe how to perform an internal strategic-
management audit.
8. Discuss the Resource-Based View (RBV) in strategic
management.
9. Identify the basic functions or activities that make
up management, marketing, finance/accounting
production/operations, research and development,
and management information systems.
10.Discuss an Internal Factor Evaluation (IFE) Matrix.
4-3
Copyright ©2013 Pearson
Education, Inc. publishing as
Prentice Hall

External Audit
External audit
 focuses on identifying and evaluating trends
and events beyond the control of a single
firm
 reveals key opportunities and threats
confronting an organization so that managers
can formulate strategies to take advantage of
the opportunities and avoid or reduce the
impact of threats
3-4

The Nature of an External Audit
The external audit is aimed at identifying
key variables that offer actionable
responses
 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.
3-5

A Comprehensive Strategic-
Management Model
3-6

Key External Forces
External forces can be divided into eight(8)
broad categories:
1. Economic factors.
2. Social factors,
3. Cultural factors,
4. Demographic factors,
5. Natural environment factors,
6. political, governmental, and legal factors,
7. technological factors, and
8. competitive factors
3-7

Relationships Between Key External
Forces and an Organization
3-8

The Process of Performing an
External Audit
First, gather competitive intelligence and
information about economic, social,
cultural, demographic, environmental,
political, governmental, legal, and
technological trends.
3-9

External Audit
Information should be assimilated and
evaluated
A final list of the most important key
external factors should be communicated
3-10

External Audit
Key external factors should be:
1. important to achieving long-term and annual
objectives
2. measurable
3. applicable to all competing firms, and
4. hierarchical in the sense that some will pertain
to the overall company and others will be more
narrowly focused on functional or divisional
areas
3-11

The Industrial Organization
(I/O) View
The Industrial Organization (I/O)
approach to competitive advantage
advocates that external (industry) factors
are more important than internal factors in
a firm for achieving competitive
advantage.
3-12

Economic Forces
3-13

Key Social, Cultural, Demographic, and
Natural Environment Variables
3-14

Political, Governmental, and
Legal Forces
The increasing global interdependence
among economies, markets,
governments, and organizations makes it
imperative that firms consider the
possible impact of political variables on
the formulation and implementation of
competitive strategies.
3-15

Political, Government, and
Legal Variables
3-16

Technological Forces
The Internet has changed the very nature of
opportunities and threats by:
altering the life cycles of products,
increasing the speed of distribution,
creating new products and services,
erasing limitations of traditional geographic
markets,
changing the historical trade-off between
production standardization and flexibility.
3-17

The Internet is altering economies of
scale, changing entry barriers, and
redefining the relationship between
industries and various suppliers,
creditors, customers, and competitors
3-18

Many firms now have a Chief
Information Officer (CIO) and a Chief
Technology Officer (CTO) who work
together to ensure that information
needed to formulate, implement, and
evaluate strategies is available where and
when it is needed
3-19

Technological advancements can:
Create new markets,
Result in a proliferation of new and improved
products,
Change the relative competitive cost positions in
an industry,
Render existing products and services obsolete.
3-20

Competitive Forces
An important part of an external audit is
identifying rival firms and determining
their strengths, weaknesses, capabilities,
opportunities, threats, objectives, and
strategies
3-21

Competitive Forces
Characteristics of the most competitive
companies:
1.Market share matters
2.Understand and remember precisely what business
you are in
3.Whether it’s broke or not, fix it–make it better
4.Innovate or evaporate
5.Acquisition is essential to growth
6.People make a difference
7.There is no substitute for quality
3-22

Market Commonality and
Resource Similarity
Market
commonality
 the number and
significance of
markets that a firm
competes in with
rivals
Resource
similarity
 the extent to which
the type and
amount of a firm’s
internal resources
are comparable to
a rival
3-23

The Five-Forces Model of
Competition
3-24

The Five-Forces Model of
Competition
1. Identify key aspects or elements of each
competitive force that impact the firm.
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.
3-25

The Five-Forces Model
Rivalry among competing firms
 Most powerful of the five forces
 Focus on competitive advantage of strategies
over other firms
3-26

3-27

Potential Entry of New Competitors
 Barriers to entry are important
 Quality, pricing, and marketing can overcome
barriers
3-28

Potential development of substitute
products
 Pressure increases when:
• Prices of substitutes decrease
• Consumers’ switching costs decrease
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
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
3-31

Conditions Where Consumers Gain
Bargaining Power
1. If buyers can inexpensively switch
2. If buyers are particularly important
3. If sellers are struggling in the face of falling
consumer demand
4. If buyers are informed about sellers’ products,
prices, and costs
5. If buyers have discretion in whether and when
they purchase the product
3-32

Forecasting Tools and
Techniques
Forecasts
 educated assumptions about future trends
and events
 quantitative, qualitative techniques
3-33

Industry Analysis: The External
Factor Evaluation (EFE) Matrix
Economic
Social
Cultural
Demographic
Environmental
Political
Governmental
Technological
Competitive
Legal
3-34

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
3-35

EFE Matrix for a Local Ten-
Theater Cinema Complex
3-36

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
3-37

An Example Competitive
Profile Matrix
3-38

Key Internal Forces
Distinctive competencies
 A firm’s strengths that cannot be easily
matched or imitated by competitors
Building competitive advantages involves
taking advantage of distinctive
competencies.
4-39
Prentice Hall

The Resource-Based View (RBV)
The Resource-Based View (RBV)
approach
 contends that internal resources are more
important for a firm than external factors in
achieving and sustaining competitive
advantage
4-40
Prentice Hall

Proponents of the RBV contend that
organizational performance will primarily
be determined by internal resources that
can be grouped into three all-
encompassing categories: physical
resources, human resources, and
organizational resources
4-41
Prentice Hall

For a resource to be valuable, it must be
either (1) rare, (2) hard to imitate, or (3)
not easily substitutable
These three characteristics of resources
enable a firm to implement strategies that
improve its efficiency and effectiveness
and lead to a sustainable competitive
advantage
4-42
Prentice Hall

Example Cultural Products
Defined
4-43

Management
 The functions of management consist of
five basic activities: planning, organizing,
motivating, staffing, and controlling.
 These activities are important to assess in
strategic planning because an organization
should continually capitalize on its
management strengths and improve on its
management weaknesses.
4-44
Prentice Hall

The Basic Functions of
Management
4-45

Marketing
Marketing
 the process of defining, anticipating, creating,
and fulfilling customers’ needs and wants for
products and services
4-46
Prentice Hall

Functions of Marketing
Customer analysis
Selling products/services
Product and service planning
Pricing Distribution
Marketing research
Opportunity analysis
4-47

Finance/Accounting Functions
The functions of finance/accounting
comprise three decisions:
1. the investment decision
2. the financing decision
3. the dividend decision
4-48
Prentice Hall

Investment decision
 the allocation and reallocation of capital and
resources to projects, products, assets, and
divisions of an organization
Financing decision
 determines the best capital structure for the
firm and includes examining various methods
by which the firm can raise capital
4-49
Prentice Hall

Dividend decisions
 concern issues such as the percentage of
earnings paid to stockholders, the stability of
dividends paid over time, and the repurchase
or issuance of stock
 determine the amount of funds that are
retained in a firm compared to the amount
paid out to stockholders
4-50
Prentice Hall

A Summary of Key
Financial Ratios
4-51

A Summary of Key
Financial Ratios
4-52

A Summary of Key
Financial Ratios
4-53

A Summary of Key
Financial Ratios
4-54

Production/Operations
4-55
Production/operations function
 consists of all those activities that transforms
inputs into goods and services
Production/operations management deals
with inputs, transformations, and outputs
that vary across industries and markets.

The Basic Functions (Decisions)
Within Production/Operations
4-56

Research and Development Audit
1. Does the firm have R&D facilities? Are they adequate?
2. If outside R&D firms are used, are they cost-effective?
3. Are the organization’s R&D personnel well qualified?
4. Are R&D resources allocated effectively?
5. Are management information and computer systems
adequate?
6. Is communication between R&D and other
organizational units effective?
7. Are present products technologically competitive?
4-57
Prentice Hall

Management Information
Systems
 A management information system’s purpose is
to improve the performance of an enterprise by
improving the quality of managerial decisions
 An effective information system thus collects,
codes, stores, synthesizes, and presents
information in such a manner that it answers
important operating and strategic questions
4-58
Prentice Hall

Benchmarking
Benchmarking
 an analytical tool used to determine whether
a firm’s value chain activities are competitive
compared to rivals and thus conducive to
winning in the marketplace
 entails measuring costs of value chain
activities across an industry to determine
“best practices”
4-59
Prentice Hall

The Internal Factor Evaluation
(IFE) Matrix
1. List key internal factors as identified in the internal-audit
process
2. Assign a weight that ranges from 0.0 (not important) to
1.0 (all-important) to each factor
3. Assign a 1-to-4 rating to each factor to indicate whether
that factor represents a strength or weakness
4. Multiply each factor’s weight by its rating to determine a
weighted score for each variable
5. Sum the weighted scores for each variable to
determine the total weighted score for the organization
4-60
Prentice Hall

A Sample Internal Factor Evaluation
Matrix for a Retail Computer Store
4-61

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