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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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -2 External Strategic Management Audit – Environmental Scanning – Industry Analysis Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -5 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -6 External Audit • Gather competitive intelligence • Assimilate information • Evaluate Resulting in a list of the most important key external factors Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -7 Performing External Audit Long-term Orientation External Factors Measurable Applicable to Competing Firms Hierarchical Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -8 Industrial Organization (I/O) View Industry factors are more important than internal factors Performance determined by industry forces Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -9 I/O Perspective Firm Performance Industry Properties Economies of Scale Barriers to Market Entry Product Differentiation The Economy Level of Competitiveness Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -10 GDP growth rate ◦ Disposable income ◦ Consumer optimism Currency trends ◦ Affect export/import strategy ◦ Where to manufacture 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% 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 ◦ ◦ 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. Choose two companies in similar lines of business From the most recent Annual Reports ◦ ◦ ◦ ◦ ◦ ◦ ◦ 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 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 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 Exports became cost competitive in world markets Imports and foreign travel for Thai people became more expensive Thailand’s tourism industry gained Multinational in-country company response to the crisis 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) 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 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 Currently, W Europe overvalued, many Asian currencies (excl Japan) undervalued Demographic variables are a factor in country wealth ◦ Working age population relative to non-working ◦ China and Thailand will soon have shrinking % working age ◦ Often overlooked implications of large % population = elderly Socioeconomic Variables ◦ Per Capita income Issues in using per capita income as an indicator: ◦ Transactions are valued in an international currency (monetization of transactions) Official exchange rates seldom reveal true buying power within a country 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) 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -24 Low population growth rate, falling rate by 2050 ◦ 69MM 2010 ◦ 73MM 2030 ◦ 68MM 2060 Low birth rate ◦ ◦ ◦ ◦ 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 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -36 Political, Governmental, and Legal Forces Government Regulation Key opportunities & threats Antitrust legislation Tax rates Lobbying activities Patent laws Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -37 Protectionist policies Governments taking equity stakes in companies Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 338 Internet ◦ Alters product life cycles ◦ Speed of distribution ◦ Consumer access to information about products and companies Automation – capital intensive versus labor Data mining – access to aggregated information about consumers Communication technologies 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 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 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) Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -41 Technological Forces Essential for nearly every strategic decision Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -42 Competitive Forces Collection & evaluation of data on competitors is essential for successful strategy formulation Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -43 Competitive Forces Identify Rival Firms’ •Strengths •Weaknesses •Capabilities •Opportunities •Threats •Objectives •Strategies Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -44 Competitive Forces Competition in virtually all industries can be described as intense Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -46 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -48 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -49 Internet Employees Managers Suppliers Distributors Customers Creditors Consultants Trade journals Want ads Newspaper articles Government filings Competitors Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 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 Objectives of Competitive Intelligence Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -51 The number and significance of markets that a firm competes in with rivals Market Commonality Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -52 Extent to which the type and amount of a firm’s internal resources are comparable to a rival Resource Similarity Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -53 1. 2. 3. 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -56 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -57 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -58 Rivals have excess capacity Consumer demand is falling Rivals have excess inventory Rivals sell similar products/services Mergers are common in the industry Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -59 Potential Entry of New Competitors Barriers to entry are important Quality, pricing, and marketing can overcome barriers Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -60 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -61 The Five-Forces Model • Potential development of substitute products –Pressure increases when: • Prices of substitutes decrease • Consumers’ switching costs decrease Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 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 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -64 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -65 Customer surveys Market research Speeches at professional or shareholder meetings Television programs Interviews and conversations with stakeholders Sources of External Information: Unpublished Sources Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -66 Periodicals Journals Reports Government documents Abstracts Books Directories Newspapers Manuals Sources of External Information: Published Sources Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -67 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -68 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -70 Economic Social Cultural Demographic Environmental Political Governmental Technological Competitive Legal Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -74 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -75