Strategic Management

By
Tauseef Iqbal Khan
Faculty Member- IQRA University
Notable Quotes

• It is not the strongest of the species that

survive, nor the most intelligent, but the one
most responsive to change.
• Things are always different- the art is
figuring out which differences matter.
Chapter 3 The External Assessment
Objectives
• Describe how to conduct an external strategic-management
audit
• Discuss 10 major external forces that affect organizations:
economic, social, cultural, demographic, environmental,
political, governmental, legal, technological, and competitive
• Describe key sources of external information, including the
Internet
• Discuss important forecasting tools used in strategic
management
• Discuss the importance of monitoring external trends and
events
Chapter 3 The External Assessment
• Explain how to develop an EFE Matrix.
• Explain how to develop a Competitive Profile Matrix.
• Discuss the importance of gathering competitive intelligence.
• Describe the trend toward cooperation among competitors.
• Discuss market commonality and resource similarity in relation to
competitive analysis.
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
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.
A Comprehensive Strategic-
Management Model
Key External Forces
External forces can be divided into five broad categories:
1. economic forces
2. social, cultural, demographic, and natural environment forces
3. political, governmental, and legal forces
4. technological forces
5. competitive forces
Relationships Between Key External Forces
and an Organization
 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.
 The Process of Performing an
External Audit

• Information should be assimilated and evaluated

• A final list of the most important key external factors should be
communicated
 The Process of Performing an
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
 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.
 The Industrial Organization
(I/O) View

• Firm performance is based more

on industry properties Economies of scale

Barriers to market entry

Product differentiation

The economy

Level of competitiveness
 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.
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.
Technological Forces
• The Internet is altering economies of scale, changing entry barriers,
and redefining the relationship between industries and various
suppliers, creditors, customers, and competitors
Technological Forces
• 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
Technological Forces
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.
Competitive Forces
• An important part of an external audit is identifying rival firms
and determining their strengths, weaknesses, capabilities,
opportunities, threats, objectives, and strategies
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
Key Questions About Competitors
 Competitive Intelligence
Programs
• Competitive intelligence (CI)
• 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
 Competitive Intelligence
Programs
The three basic objectives of a CI program are:
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
3. to identify potential moves that a competitor might make that
would endanger a firm’s position in the market
 Market Commonality and
Resource Similarity

• Market commonality • Resource similarity

• the number and significance of • the extent to which the type and
markets that a firm competes in amount of a firm’s internal
with rivals resources are comparable to a
rival
The Five-Forces Model of
Competition
 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.
The Five-Forces Model
• Rivalry among competing firms
• Most powerful of the five forces
• Focus on competitive advantage of strategies over other firms
The Five-Forces Model
The Five-Forces Model
• Potential Entry of New Competitors
• Barriers to entry are important
• Quality, pricing, and marketing can overcome barriers
Barriers to Entry
• Need to gain economies of scale quickly
• Need to gain technology and specialized know-how
• Lack of experience
• Strong customer loyalty
• Strong brand preferences
• Large capital requirements
• Lack of adequate distribution channels
Barriers to Entry
• Government regulatory policies
• Tariffs
• Lack of access to raw materials
• Possession of patents
• Undesirable locations
• Counterattack by entrenched firms
• Potential saturation of the market
The Five-Forces Model
• Potential development of substitute products
• Pressure increases when:
• Prices of substitutes decrease
• Consumers’ switching costs decrease
The Five-Forces Model
• 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
The Five-Forces Model
• 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
 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
Sources of External Information
• Unpublished sources include customer surveys, market research,
speeches at professional and shareholders’ meetings, television
programs, interviews, and conversations with stakeholders.
• Published sources of strategic information include periodicals,
journals, reports, government documents, abstracts, books,
directories, newspapers, and manuals.
Forecasting Tools and Techniques
• Forecasts
• educated assumptions about future trends and events
• quantitative, qualitative techniques
Making Assumptions
• Assumptions
• 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.
Industry Analysis: The External Factor
Evaluation (EFE) Matrix
• Economic • Political
• Social • Governmental
• Cultural • Technological
• Demographic • Competitive
• Environmental • Legal
EFE Matrix Steps
1. List key external factors (Not more than 15)
2. Weight from 0 to 1 (Industry Specific)
3. Rate effectiveness of current strategies (Company specific).
4. Rate 1 means response is ‘poor’, 2 means response is
‘average’, 3 is ‘above average’ and 4 is ‘superior’
5. Multiply weight * rating
6. Sum weighted scores
7. Maximum score can be “4” while “1” can be minimum. Average
score is 2.5. So if EFE score is above 2.5 means organization is
exploiting opportunities and combating threats
EFE Matrix for a Local Ten-Theater
Cinema Complex
 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
An Example Competitive
Profile Matrix