Lesson 2 Flashcards
Explain how external analysis relates to the overall strategic planning process.
- External analysis, also known as industry analysis relates to the overall strategic planning process.
- It is often more important to achieving strategic advantage than internal analysis because the company must assess risks and opportunities in the external environment if they are to succeed in their given industry
describe the purpose of an external audit (or industry analysis).
• The purpose of an external audit/industry analysis is to develop a finite list of opportunities that could benefit a firm and threats that should be avoided.
• The 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.
• Firms should either be able to respond offensively or defensively to the factors by formulating strategies that take advantage of external opportunities or that minimize the impact of potential threats.
• 5 key external forces are:
1. Economic forces
2. Social, cultural, demographic and natural environment forces
3. Political, governmental, and legal forces
4. Technological forces
5. Competitive forces
discuss the 10 major external forces that affect organizations: economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive. STEEP
- economic
- social
- cultural
- demographic
- environmental
- political
- governmental
- legal
- technological
- competitive
discuss the importance of gathering competitive intelligence
Competitive Intelligence is
-a systematic and ethical process for gathering and analysing activities about the competition’s activities and general business trends to further a businesses own goals.
Objectives are:
- to provide a general understanding of an industry and its competitors
- to id areas in which competitors are vulnerable and to assess the impact strategic actions would have on them
- to id potential moves that a competitor might take that could endanger a firm’s position in the market.
- 95% of info is publically available
- Sources include trade journals, ads, newspapers, internet, govt filings, clients, suppliers, etc…
discuss market commonality and resource similarity in relation to competitive analysis
Market commonality - defined as the # 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 with a competitor
One way to analyze competitiveness betwn 2 rivals is to investigate market commonality and resource similarity issues while looking for areas of potential competitive advantage along each firm’s value chain
explain how five forces analysis can help an organization identify competitive advantages, competitive threats, and strategic issues.
Five forces model of competition:
- Rivalry among competing firms
- Potential entry of new competitors
- Potential development of substitute products
- Bargaining power of suppliers
- Bargaining power of consumers
Steps:
Id key aspects or elements of each competitive force that affects the firm
-evaluate how strong and important each element is for the firm
- decide whether the collective strength of the elements is worth the firm entering or staying in the industry
develop balanced scorecard metrics for external analysis
Measures & Objectives
Rate of industry growth - measures rivalry in existing marketplace
Degree of brand switching - measures # of clients who moved to or from company yo assess switching costs for buyers and therefore measure the threat of rivalry and buyer power
# of new entrants to industry - assess threat of new entrants by measuring the # of new entrants in industry
Degree of innovation - rank innovation level against industry standards
Level of govt regulation - create a scale of govt regulation that can be monitored for change
# of substitute products/services - review available substitutes in the marketplace to determin whether market share may be lost
# of suppliers - assess the # of suppliers of a key input to determine the degree of supplier power in the industry
Volume of supplier sales - assess the relative volume of the company’s purchases to overall supplier sales to assess supplier power
Focus on supplier relationships - formulate a ranking system for how committed a company is to supplier relationships to ensure balance between supplier power and the company
# of buyers - track the number of buyers in the marketplace to determine the degree of buyer power (a few key buyers can be more critical than numerous ones)
Average buyer volume - to indicate buyer power and guide a company’s commitment to buyer relationships
Price sensitivity of buyers - price-sensitive buyers tend to have more power. Tracking this factor may help a company focus on a particular group of buyers in the marketplace.
describe key sources of external information, including the Internet
Unpublished sources - customer surveys, market research, speeches, tv programs, interviews and conversations with stakeholders
Published sources - periodicals, journals, reports, gov’t documents, abstracts, books, directories, newspapers and manuals
Key internet sites:
- marketwatch.multexinvestor.com
- moneycentral.msn.com
- finance.yahoo.com
- clearstation.com
- us.etrade.com
- hoovers.com
discuss important forecasting tools used in strategic management.
Quantitative techniques
- linear regression - based on assumption future is same as the past.
- most appropriate when historical data is available & when the relationships among key variables are expected to remain the same in the future
- as historical relationships become less stable, quantitative forecasts become less accurate
Qualitative techniques
discuss the importance of monitoring external trends and events.
- enables mgmt. to identify key external opportunities and threats
explain the process of developing an External Factor Evaluation (EFE) Matrix.
5 steps
- List key external factors as identified in the external audit process. Include 15 - 20 factors including both opportunities and threats. List opportunities first, then threats. Use %s, ratios and comparative #s when possible
- Assign a weight range from 0.0 to 1.0 to each factor. The weight indicates the relative importance of the factor to being successful in the industry. Opportunities typically have higher weights. The sum of all weights must = 1.0
- Assign a rating between 1&4 to each key external factor to indicate how effectively the firm’s current strategies respond to the factor. 4=superior, 1 = poor. Ratings are based on effectiveness of firm’s strategies
- Multiply each factor’s weight by its rating to determine a weighted score
- Sum the weighted scores for each variable to determine the total weighted score for the organization.
Explain the process of developing a Competitive Profile Matrix
The competitive profile matrix identifies a firm’s major competitors and its particular strengths and weaknesses in relation to a sample firm’s strategic position. THe weights and total weighted scores in both a CPM and EFE have the same meaning, but critical success factors in a CPM include both internal and external issues. The ratings refer to strengths and weaknesses where 4 = major strength and 1 = major weakness. 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 sample firm. This comparative analysis provides important internal strategic information.
