Download Chapter 1 The Nature of Strategic Management

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Instructor:
E-mail Address:
Office:
Michael Cooke
[email protected]
IC room 817
Class hours:
Class Location:
Friday 09:00-12:00
IC room 822
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Ch 3 -2
External Strategic
Management Audit
–
Environmental Scanning
– Industry Analysis
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Ch 3
-3
External Strategic
Management Audit
Identify & evaluate factors beyond the
control of a single firm
– Increased foreign competition
– Population shifts
– Aging society
– Fear of traveling
– Stock market volatility
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Ch 3 -4
External Strategic
Management Audit
Purpose of an External Audit
◦ Develop a finite list of
 opportunities that could benefit a
firm
 threats that should be avoided
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Ch 3
-5
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Ch 3 -6
External Audit
• Gather competitive intelligence
• Assimilate information
• Evaluate
Resulting in a list of the most
important key external factors
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Ch 3 -7
Performing External Audit
Long-term Orientation
External
Factors
Measurable
Applicable to
Competing Firms
Hierarchical
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Ch 3 -8
Industrial Organization
(I/O) View
Industry factors are more important
than internal factors
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Performance determined by industry
forces
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Ch 3 -9
I/O Perspective Firm Performance
Industry Properties
Economies of Scale
Barriers to Market Entry
Product Differentiation
The Economy
Level of Competitiveness
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Ch 3 -10
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GDP growth rate
◦ Disposable income
◦ Consumer optimism
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Currency trends
◦ Affect export/import strategy
◦ Where to manufacture
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Interest rates and liquidity
◦ Slope of yield curve affects GDP growth and access to
capital
◦ Cost of borrowing affects investment decisions
 At the macro level interest rates affect GDP growth
 At the micro level it affects hurdle rates and choices
-Example 1: Net rental income 6%, interest cost 8%
-Example 2: Average P/E ratio 15/1, risk free interest 7%
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Financial risk factors The Company is exposed to credit risk, liquidity risk and
market risk. Market risk arises from currency risk, interest rate risk and fair value
risk associated with investments. The Company has a risk management program
in place to monitor and actively manage such risks.
Market Risk
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Foreign exchange risk The Company is exposed to foreign exchange risk arising from various
currency exposures. To minimize foreign exchange risk arising from operating activities, the
Company’s foreign exchange management policy requires all normal business transactions to be in
local currency, or cash- in currency be matched up with cash-out currency. The Company limits all
speculative foreign exchange transactions and operates a system to manage receivables and
payables denominated in foreign currency.
Interest rate risk Interest rate risk is defined as the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market interest rates. The Company is
exposed to interest rate risk mainly arising through interest bearing liabilities and assets. In order
to avoid interest rate risk, the Company maintains minimum external borrowing by facilitating cash
pooling systems on a regional and global basis.
Credit risk Credit risk arises during the normal course of transactions and
investing activities, where clients or other party fails to discharge an
obligation. The Company monitors and sets the counterparty’s credit limit on
a periodic basis based on the counterparty’s financial conditions, default
history and other important factors. To minimize such risk, the Company
transacts only with banks which have strong international credit rating
Liquidity risk
The Company manages its liquidity risk to maintain adequate net working capital
by constantly managing projected cash flows.
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Choose two companies in similar lines of
business
From the most recent Annual Reports
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Revenue 2010 and 2011
Cost of Goods 2010 and 2011
Gross profit for each period, and GP %
Research and Development as % of Revenue each pd
Receivables as % of revenue each period
Inventories as % of revenue each period
Company comments about FX risk and interest rate
risk
A couple of comments about any differences
among the companies that seem noteworthy
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The US dollar is the most common reserve
currency
◦ Oil and many other commodities traded in dollars
◦ Easily converted nearly anywhere in the world
◦ An artifact from post WWII when US dollar was the only
strong currency
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Euro is relatively new, sometimes considered an
alternative to the dollar
Japanese yen is important because of Japan’s role
in the world economy
Chinese yuan is not widely used outside China
due to restrictions - this could quickly change
◦ In a fixed exchange system the local currency is pegged
to another currency
 Hong Kong Dollar pegged to US dollar
 No exchange risk in trade between the two countries
 Requires intervention by Hong Kong government
◦ Basket of currencies approach
 Singapore Dollar managed against several currencies
 Chinese Yuan thought to be managed against a basket
 Not tied to the fortunes of one foreign currency
◦ Variable (floating) exchange rates
 Pose risks for importers and exporters
 Rates are an extremely important factor for
international trade
 Difficult or impossible to predict
 Governments may intervene in the float without
warning to protect exports
◦ Barter might be used where countries impose rigid FX
controls (USSR) or where local currencies are worthless
◦ Goods imported from Japan to USA become more
expensive in USA
 Company purchasing equipment made in Japan would
pay more in US dollars for the same product
 Banks will agree to a forward rate, locking in the current
rate to a future period
◦ Japanese companies might choose to relocate
manufacturing facilities to USA as the yen rises
 Profits of US subsidiaries lower in yen terms
 Foreign exchange losses on parts imported from Japan
Korea
Indonesia
Malaysia
Phillippines
Singapore
Thailand
Hong Kong
China
Taiwan
1994
1995
1996
1997
803
2160.8
2.62
26.42
1.53
25.15
7.73
8.62
26.46
771
2248.6
2.5
25.71
1.42
24.91
7.74
8.35
26.49
804
2342.3
2.52
26.22
1.41
25.34
7.73
8.31
27.46
951
2909.4
2.81
29.47
1.48
31.36
7.74
8.29
28.7
Sources: Columbia University and IMF
1997f
1695
4650
3.89
39.98
1.68
47.25
7.75
8.28
32.64
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Exports became cost competitive in world markets
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Imports and foreign travel for Thai people became more expensive
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Thailand’s tourism industry gained
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Multinational in-country company response to the crisis
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Inflow of foreign currencies caused baht to gain
◦ How would a Japanese manufacturer with operations in Thailand and Japan respond
to a 50% devaluation of the baht?
◦ Products from Thailand became cheaper relative to currencies that did not devalue
◦ Airlines chose to base fares to and from BKK in Thai baht
◦ Tourists perceived ‘value for money’ in Thailand, with services and local products in
Thai baht
◦ Emphasize product value
◦ Change the product mix or package size (cheaper, smaller)
◦ Increase local procurement (use Thai goods rather than use imports)
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Currency can be under or overvalued relative to
another
PPP is an estimate of real purchasing power
◦ When Thai baht were officially 55-1 dollar
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Currency undervalued
Thai economy looked small in dollar terms
But Thai people could buy Thai products and services
In PPP terms the Thai economy was larger than in $ terms
◦ In theory, currency nominal value will eventually = PPP
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Currently, W Europe overvalued, many Asian
currencies (excl Japan) undervalued
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Demographic variables are a factor in country wealth
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Working age population relative to non-working
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China and Thailand will soon have shrinking % working age
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Often overlooked implications of large % population = elderly
Socioeconomic Variables
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Per Capita income
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Issues in using per capita income as an indicator:
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Transactions are valued in an international currency
(monetization of transactions)
Official exchange rates seldom reveal true buying power
within a country
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Gray
Services are provided in-country using local currency
Goods not traded across borders (housing, etc)
Use Purchasing Power Parity to estimate buying power
and Black Market sectors of the economy (cash or barter)
Income inequality – Gini index
 Lower number means more income equality
 Scandinavian countries have least inequality
 Thailand, China, USA relatively unequal (higher index)
20
World Gini Compared to USA
The Atlantic http://cdn.theatlantic.com/static/mt/assets/international/gini%20map%20twotonefull%20pos.jpg
Income Inequality in Selected Countries
 South Africa (2)
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65
(2005)
59.3 (1994)
Thailand (12) 53.6 (2009)
42
(2002)
China
(27) 48
(2009)
41.5 (2007)
USA
(42) 45
(2007)
40.8 (1997)
Germany (124) 27
(2006)
30
(1994)
Sweden
(136) 23
(2005)
25
(1992)
Implication: Low per capita GNP can mask affluent areas/segments.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2172rank.html
Social, Cultural, Demographic, and
Natural Environmental Forces
Major Impact –
•Products
•Services
•Markets
•Customers
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Ch 3 -24
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Low population growth rate, falling rate by 2050
◦ 69MM 2010
◦ 73MM 2030
◦ 68MM 2060
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Low birth rate
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world 6.9BB
world 8.3BB
world 9.6BB
Thailand = 1.00% of world
Thailand = 0.88% of world
Thailand = 0.71% of world
12.8/1,000 is similar to China
20.1/1,000 is replacement rate
Declining family size. Declining % under 15 years of age.
More women delay marriage or never marry
Low urbanization, high rate of change
◦ Thailand 34% urban, change 1.8% per year
◦ China 47% urban, change 2.3% per year
◦ USA 82% urban, change 1.2% per year
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Longer lives
◦ Increasing number of retired (age 65+ =11.4% in 2020)
◦ Decreasing number of working age (similar to China)
Population forecast: http://populationpyramid.net/Thailand/2050/
http://link.springer.com/article/10.1007%2FBF03031794?LI=true#page-4
Population Pyramid Thailand
Population Pyramid China
Ch 3 -29
Population Pyramid Philippines
2008 population 96MM
2050 population 172MM
Population Pyramid Malaysia
2008 population 25MM
2050 population 43MM
Population Pyramid Cambodia
2008 population 14MM
2050 population 24MM
Population Pyramid Japan
2008 population 127MM
2050 population 94MM
Ethiopia
2008 population 83MM
2050 population 278MM
Implications of Demographic Shift
• Smaller households require different housing
• Families with fewer children spend more/child
• With fewer people of working age
– Cost of labor will rise
– Low skill jobs will go to countries with younger
populations
– Need to move to higher value added (skills)
• More retirees and elderly – a unique market
• Japanese model
– Higher value added industries
– Investment abroad
• Pressures for immigration from labor surplus
countries
Social, Cultural, Demographic, and
Natural Environmental Forces
 Trends
◦ More American households with
people living alone
◦ Aging Americans – affects all
organizations
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Ch 3
-36
Political, Governmental, and
Legal Forces
Government Regulation
Key opportunities & threats
Antitrust legislation
 Tax rates
 Lobbying activities
 Patent laws
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Ch 3
-37
 Protectionist
policies
 Governments
taking equity
stakes in companies
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Ch
338
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Internet
◦ Alters product life cycles
◦ Speed of distribution
◦ Consumer access to information about products and
companies
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Automation – capital intensive versus labor
Data mining – access to aggregated information
about consumers
Communication technologies
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Bigger and more profound than e-commerce or
internet alone
Growth of worldwide secure financial settlements
◦ Rapid spread of ATMs from the mid-90s for example
◦ Ease of doing financial transactions across borders
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Rapid spread of cellular technology connected whole
regions to the outside world, from late 1990s
Rapid decrease in the price of bandwidth late 1990s
◦ Large scale long distance data transfer became viable
 Fiber optic technology means very cheap prices across oceans
 Google and others have mix of local and central content
◦ Offshore factories and suppliers have real time access
◦ Distributors have real time access to retail inventory
◦ Medical information and other data intensive documents
exchanged real time
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Cultural diffusion via better communication
◦ Often thought of as from developed countries to LDCs
◦ Growing exposure and interest work in both directions
Technological Forces
Significance of IT
•Chief Information Officer (CIO)
•Chief Technology Officer (CTO)
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Ch 3
-41
Technological Forces
Essential for nearly every
strategic decision
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Ch 3
-42
Competitive Forces
Collection & evaluation of data on
competitors is essential for successful
strategy formulation
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Ch 3
-43
Competitive Forces
Identify Rival Firms’
•Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies
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Ch 3
-44
Competitive Forces
Competition in virtually all
industries can be described as
intense
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Ch 3
-45
 Their
 Their
 Their
 Their
 Their
strengths
weaknesses
objectives and strategies
responses to external variables
vulnerability to our alternative
strategies
 Our vulnerability to strategic
counterattack
Key Questions Concerning
Competitors
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Ch 3
-46
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Our product/service positioning
Entry and exit of firms in the industry
Key factors for our current position in
industry
Sales/profit ranking of competitors over
time
Nature of supplier and distributor
relationships
The threat of substitute products/services
Key Questions Concerning
Competitors
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Ch 3
-47
Market share matters
 Understanding what business you are in
 Broke or not, fix it
 Innovate or evaporate
 Acquisition is essential to growth
 People make a difference
 No substitute for quality

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Ch 3 -48
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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
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Ch 3 -49
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Internet
Employees
Managers
Suppliers
Distributors
Customers
Creditors
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Consultants
Trade journals
Want ads
Newspaper articles
Government filings
Competitors
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Ch 3 -50
Provide a general understanding of
industry and competitors
 Identify areas where competitors are
vulnerable and assess impact of actions
on competitors
 Identify potential moves that a competitor
might make
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Objectives of Competitive
Intelligence
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Ch 3
-51
 The
number and
significance of markets that
a firm competes in with
rivals
Market Commonality
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Ch 3
-52
 Extent
to which the type
and amount of a firm’s
internal resources are
comparable to a rival
Resource Similarity
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Ch 3
-53
1.
2.
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Identify key aspects or elements of each
competitive force
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
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Ch 3 -55
 Rivalry
among competing firms
◦ Most powerful of the five forces
◦ Focus on competitive advantage
of strategies over other firms
The Five-Forces Model
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Ch 3
-56
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High number of competing firms
Similar size of firms competing
Similar capability of firms competing
Falling demand for the industry’s
products
Falling product/service prices in the
industry
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Ch 3 -57
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Consumers can switch brands easily
Barriers to leaving the market are high
Barriers to entering the market are low
Fixed costs are high among firms
competing
The product is perishable
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Ch 3 -58
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Rivals have excess capacity
Consumer demand is falling
Rivals have excess inventory
Rivals sell similar products/services
Mergers are common in the industry
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Ch 3 -59
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Potential Entry of New
Competitors
 Barriers
to entry are important
 Quality, pricing, and marketing can
overcome barriers
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Ch 3 -60
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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
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Ch 3 -61
The Five-Forces Model
• Potential development of substitute
products
–Pressure increases when:
• Prices of substitutes decrease
• Consumers’ switching costs decrease
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Ch 3 -62

Often overlooked or underestimated by
established industry players
◦ HP in 2004 saw Personal Computers as a commodity
 Build cheap in high volume
 Main competitor thought to be Dell Computer of TX
 $3BB R&D under-utilized
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Substitutes can restructure entire industries
◦ Common in technology industries
◦ Always a threat in the petroleum industry
 But cost of entry for substitutes is high
 Once a substitute gains entry, costs may rapidly drop
 Pattern is to have price spikes, followed by periods of prices
too low for substitutes to thrive
◦ Synthetic rubber became a substitute when war cut
natural rubber supplies
 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
The Five-Forces Model
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Ch 3
-64
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If buyers can inexpensively switch
If buyers are particularly important
If sellers are struggling in the face of
falling consumer demand
If buyers are informed about sellers’
products, prices, and costs
If buyers have discretion in whether and
when they purchase the product
Conditions Where Consumers Gain
Bargaining Power
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Ch 3
-65
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Customer surveys
Market research
Speeches at professional or shareholder
meetings
Television programs
Interviews and conversations with
stakeholders
Sources of External Information:
Unpublished Sources
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Ch 3
-66
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Periodicals
Journals
Reports
Government documents
Abstracts
Books
Directories
Newspapers
Manuals
Sources of External Information:
Published Sources
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Ch 3
-67
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http://marketwatch.multexinvestor.com
http://moneycentral.msn.com
http://finance.yahoo.com
www.clearstation.com
https://us.etrade.com/e/t/invest/markets
www.hoovers.com
WWW.Bloomberg.com
Sources of External Information:
Web Sites
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Ch 3
-68
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Forecasts use or make assumptions about
future trends and events
Quantitative techniques – most appropriate
when historical data is available and there is
a constant relationship
Qualitative techniques (opinions, intuition)
All forecasts should be informed by
knowledge of business and markets
Estimates of future events
based upon the best available
information in the present
Assumptions
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Ch 3
-70
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Economic
Social
Cultural
Demographic
Environmental
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Political
Governmental
Technological
Competitive
Legal
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Ch 3 -71
1.
2.
3.
4.
5.
List key external factors
Weight from 0 to 1
Rate effectiveness of current strategies
Multiply weight * rating
Sum weighted scores
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Ch 3 -72
Industry Analysis EFE
Total weighted score of 4.0
 Organization response is outstanding to
threats and weaknesses
Total weighted score of 1.0

Firm’s strategies not capitalizing on opportunities
or avoiding threats
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Ch 3
-73
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
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Ch 3
-74
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Ch 3 -75