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April 10, 2023
EXTERNAL ENVIRONMENT Session 3
Professor Hilda L. TeodoroAteneo Graduate School of Business
2 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
Scan InternalEnvironment
Identify StrategicFactors•Strengths•Weaknesses
Identify StrategicFactors•Opportunities•Threats
Define new:•Mission•Goals
Formulate Strategy•Corporate•Business•Functional
Implement Strategyvia Changes in:•Leadership•Structure•Human Resources•Information and control systems
THE STRATEGIC MANAGEMENT PROCESS
Evaluate Current•Mission•Goals
•Strategies
Scan ExternalEnvironment
3 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
SESSION 2: AGENDA
External Analysis
General Environment
Industry Analysis
Michael Porter Video on 5 Forces
Group Discussion: CPM, MVS, EFE
4 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
THE EXTERNAL ASSESSMENT
Identification and evaluation of trends and events beyond control of a single firm
Increased foreign competitionPopulations shiftsAging societyInformation technologyComputer revolution
“…External audit is not aimed at developing an exhaustive list of every possible factor that could influence the business; rather it is aimed at identifying key variables that offer actionable responses.” FRED DAVID
5 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
EXTERNAL ASSESSMENT
1. Economic trends
2. Social, Cultural and Demographic trends
3. Technological developments
4. Legal, Political, and Government forces
5. Competitive forces
Development of Finite List: Opportunities
Threats to be avoided
THE EXTERNAL ASSESSMENT
FRED DAVID
6 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
ECONOMIC FORCES
Industry ShiftsAvailability of CreditLevel of Disposable IncomeConsumption patternsInterest/inflationMoney market ratesBudget deficitsGross domestic product trendUnemployment trendsWorker productivity levelsExchange ratesStock Market trendsForeign economic conditionsImport/export factors
Demand shifts for different categories of products and servicesIncome differences by region/consumer groupsPrice fluctuationsExport of labor and capitalMonetary policiesFiscal policiesTax ratesEEC policiesOPEC policiesUnemployment trendsPropensity of people to spend
FRED DAVID
7 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
SOCIO-CULTURAL FORCES
Child bearing ratesNumber of special interest groupsNumber of marriages/divorcesImmigration/emigration ratesLife expectancy ratesPer capita incomeLocation of businessesAttitudes and lifestylesTraffic congestionBuying habitsEthical concernsSavings/investing
Sex rolesBirth controlLevel of educationGovernment regulationTrust in governmentPollution controlEnergy programsSocial programsNumber of churchesPopulation changes by location and by age, sex, etc.Number of high school and college graduatesWaste management
FRED DAVID
8 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
LEGAL/POLITICAL FORCES
Government regulations/deregulationsChanges in tax laws Special tariffsPolitical action committeesVoter participationNumber and severity of protest against governmentPatents and changesEnvironmental protection lawsLevel of defense spending
Antitrust legislationGeopoliticsImport/export regulationsFiscal & monetary policiesLobbying activitiesSize of gov’t budgetsWorld oil, currency, & labor marketsTerrorismLocal and national elections
FRED DAVID
9 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
TECHNOLOGICAL FORCES
• A firm must be aware of technological changes that might influence its industry
• TECHNOLOGICAL FORECASTING - key lies in accurately predicting future technological capabilities and their probable impacts
• Internet changes the nature of opportunities and threats • Alters life cycle of products• Increases speed of distribution• Creates new products and services• Eases limitations of geographic markets• Alters economies of scale• Changes entry barriers
PEARCE & ROBINSON
10 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
COMPETITOR ANALYSIS
Purpose is to analyze each major competitor in sufficient detail so as to be able to construct the strategy the competitor is pursuing.
Not an easy task
Some are small and privately held
Others don’t have a clearly articulated strategy – discern their implied strategy
Others say one thing and do something else.
BCG
11 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
COMPETITOR ANALYSIS INCLUDES
A knowledge of the competitors priorities, objectives and goals
An understanding of their abilities and problems
How important this specific business is when compared with their other businesses.
What will they be doing in the future and how it will be accomplished.
BCG
12 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
COMPETITOR PROFILE:
Market shareBreadth of product lineEffectiveness of sales distributionProprietary and key account advantagesPrice competitivenessAdvertising and promotion effectivenessLocation and age of facilityCapacity and productivityExperience
PEARCE & ROBINSON
Raw material costsFinancial positionRelative product qualityR&D advantages positionCaliber of personnelGeneral imagesCustomer profilesPatents and copyrightsUnion relationsTechnological positionCommunity reputation
Collection and evaluation of information on competitors is essential for successful strategy formulation. FRED DAVID
13 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
COMPETITIVE PROFILE MATRIX
Identifies a firm’s major competitors and their strengths and weaknesses in relation to the firm’s strategic position.Include both internal and external issuesIdentifies the Key Success FactorsCritical success factors are broader than EFE & IFE.Critical success factors must apply to all competitors.Numbers reveal the relative strength of firms, but their implied precision is an illusion.
FRED DAVID
14 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
COMPETITIVE PROFILE MATRIX
List (5-8) critical success factors identified.Assign a weight to each factor. The sum of all weights must equal 1.0.Assign a 1-4 rating to each factor to indicate whether that factor represents a
4 – major strength.3 – minor strength.2 – minor weakness.1 – major weakness.
Multiply each factor by its rating to determine a weighted score .Sum the weighted scores to determine total score for the organization.
FRED DAVID
15 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
CPM - COMPETITIVE PROFILE MATRIX
SARAP CANNER ARIESCRITICAL SUCCESS
FACTORS Weight
Rating ScoreRatin
gScore
Rating
Score
1Product quality and performance
0.40 4 1.60 2 0.80 3 1.20
2 Effective distribution 0.20 3 0.60 2 0.40 2 0.40
3 Market share 0.15 4 0.60 2 0.30 3 0.45
4 Brand management 0.10 3 0.30 2 0.20 2 0.20
5 Customer loyalty 0.15 3 0.45 2 0.30 2 0.30
Total 1.00 3.55 2.00 2.55
16 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
PORTER’S 5 FORCES OF COMPETITIVE ANALYSIS
THREAT OF NEW ENTRANTS
BARGAINING POWER OF
BUYERS
RIVALRY AMONG COMPETITORS
BARGAINING POWER OF SUPPLIERS
THREAT OF SUBSTITUTE PRODUCTS
MICHAEL E. PORTER
The collective strength of the 5 forces determines the attractiveness of the industry.
The 5 forces determine industry profitability because they influence the prices, costs, and required investment of firms in an industry.
17 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
THREAT OF NEW ENTRANTS BARRIERS TO ENTRY
Economies of scale
Brand Identity
Differentiation
Capital requirements
Switching costs
Access to distribution
Absolute cost advantages
Government policy
Expected retaliation
These factors tend
to raise barriers to
market entry by new
entrants
MICHAEL E. PORTER
18 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
BARGAINING POWER OF BUYERS
Buyer volume
Big ticket items
Low switching costs
Standardized or undifferentiated products
Purchase is not very important to buyer
Buyer has all the relevant information
These factors tend to increase customer
bargaining power
Buyers can reduce industry profitability by
forcing down prices, demanding more service, playing one competitor
against another
Buyers can reduce industry profitability by
forcing down prices, demanding more service, playing one competitor
against anotherMICHAEL E. PORTER
19 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
THREAT OF SUBSTITUTE PRODUCTS
Low switching costs Whether buyers view the substitutes as being satisfactory in terms of quality, performance, and other relevant attributesWhether attractively priced substitutes are available
Substitute: look different
but can perform the
same function as
your product
MICHAEL E. PORTER
TV Antenna vs Cable
20 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
BARGAINING POWER OF SUPPLIERS
Dominated by a few suppliers
Suppliers are more concentrated than buyers
No substitutes
Supplier has more important customers
Differentiated product
High switching costs
Tend to increase supplier
bargaining power
Suppliers can raise prices, or reduce quality
Squeeze profitability
MICHAEL E. PORTER
21 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
RIVALRY AMONG COMPETITORS
Numerous rivals
Slow growth
High fixed costs
Low differentiation
Low switching costs
Large capacity increments
High exit barriers
Tend to increase rivalry among existing
competitors
MICHAEL E. PORTER
22 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
EFEAssign a weight to each factor
KEY EXTERNAL FACTORS WT Rating
WTD Score
Rating Rationale
EXTERNAL OPPORTUNITIES
1-E Increased GDP level 0.02 2 0.04 Hasn’t really taken advantage of the growth in GDP
2-E Increased level of health expenditures 0.08 2 0.16 Has not really taken full advantage of this increase
3-S Rapid growth of the older population 0.05 4 0.20
Focused on the older population coming out with medicines that address their medical problems very effectively.
4-S Big unsatisfied acute pain market 0.20 3 0.60 Rated as the most effective coxib in the market
5-S Increase in number of HMOs 0.05 2 0.10 Slow penetration of the HMO market
EXTERNAL THREAT
1-EIncreasing cost of sales due to fluctuation in peso.
0.05 2 0.10 Cost of goods driven by mother co as supplier.
2-PCost containment pressures from the government
0.05 1 0.05 Lack of response to this threat
3-P Unpredictable, unstable political situation 0.10 1 0.10 Lack of response to this threat
4-C Introduction of newer coxibs 0.20 3 0.60 Still rated as the most effective coxib in the market
5-CGreater promotional resources of competitors
0.20 3 0.60 Started to increase its own promotional materials
Total EFE Score 1.00 2.55
E=Economic, S=Socio-cultural, P=Political, T=Technological, C=Competitive
Assign a 1–4 rating effectiveness of co. strategies
23 ATENEO GRADUATE SCHOOL OF BUSINESS
HILDA L. TEODORO
The External Factor Evaluation Matrix (EFE)
1. List critical success factors identified.2. Assign a weight to each factor. The sum of all weights must equal 1.0. 3. Assign a 1-4 rating to each critical factor to indicate how effectively the firm’s currents strategies respond to the factor.
4 – superior 3 - above average2 – average 1 - poor
4. Multiply each factor by its rating to determine a weighted score .5. Sum the weighted scores for each variable to determine total score for the organization.
FRED DAVID