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Lecture 3
External Evaluation
Strategy Formulation
Vision & Mission
External Opportunities & Threats
Internal Strengths & Weaknesses
Long-Term Objectives
Alternative Strategies
Strategy Selection
External Assessment
It is not the strongest of the species that
survive, nor the most intelligent, but the
one most responsive to change. –
Charles Darwin
Nothing focuses the mind better than the
constant sight of a competitor who wants
to wipe you off the map. –
Wayne Calloway, Former CEO, PepsiCo
External Strategic Management Audit
•
Identify & Evaluate factors beyond the control of
a single firm such as:
 Increased foreign competition
 Population shifts
 Aging society
 Stock market volatility
 Determine if such factors are:
• Opportunities
• Threats
Performing External Audit – factors
•Related to long term and annual,
objectives
•Measurable; e.g. Market share; Price
competitiveness
•Applicable to competitors
•Pertain to the overall organisation (wide
scope) and to narrow areas or functions
within the company.
Key External Forces associated with the
external: audit
1. Economic forces
2. Social, cultural, demographic &
environmental forces
3. Political, governmental & legal forces
4. Technological forces
5. Competitive forces
Economic Forces
•
•
•
•
Trends in the dollar’s value
European Union
Layoffs
Economic standard of living
Ch 3 -8
Cpyright © 2009 Pearson
Education, Inc.
Social, Cultural, Demographic & Environmental
Forces
•
• Aging population
• Major Impact –
• Widening gap between rich &
poor
• Products
• World population = 8 billion by
2028
• Services
• Decimation and degradation of
the natural environment
• Markets
• Customers
Some important Facts
• More educated consumers
•
Global “facts”
• China largest exporter to U.S.
• China and Asia provide
cheaper labor and utilities than
Mexico
Would these have an impact upon Ryanair or Google
Social, Cultural, Demographic &
Environmental Forces
• Sample of variables that should be monitored :
–
–
–
–
–
–
Number of nativity and mortality rates,
immigration and emigration rates
Average disposable income
Average educational level
Government regulation; e.g. mortgage to salary
Air and Water pollution
Competitive Forces
7 Characteristics of most Competitive
Firms:
1. Market share matters
2. Understand what business you are in
3. Innovate or evaporate
4. Acquisition is essential to growth
5. People make a difference
6. No substitute for quality
Political, Government & Legal
Forces
Government Regulation
Key opportunities & threats
•
•
•
•
Antitrust legislation
Tax rates
Lobbying efforts
Patent laws
Technological Forces
Leads to Globalization of Industry
• Worldwide trend toward similar
consumption patterns
• Global buyers and sellers
• E-commerce
• Technology for instant currency transfers
The External factor evaluation

Understanding the factors used in the EFE Matrix is
more important than the actual weights and ratings
assigned.

Constructing an external evaluation (factor) matrix:





Assign a weight to each factor (opportunity/threat) increase in
relation to importance.
Assign a rating to each factor: 1 (little response); 2 response
below average; 3 response above average; very good response.
Multiply the weight by the rating and add all the weighed scores
Note the different rating procedure between the internal
and external factor matrices.
Ryanair external opportunities
1.
2.
3.
4.
5.
6.
7.
8.
Weight Rating Weighted Score
Opportunities
Local competitors’ going bankrupt allows Ryanair to capture
0.08
3
0.24
their customers and possibly buy equipment they are forced to
sell.
Lower interest rate on borrowing money.
0.05
3
0.15
Down cycle of economy has increased potential profit because
0.06
3
0.18
people are most cost sensitive.
Potential increase in investors due to high dividend payout 0.05
3
0.15
$500 million dividend.
The economy is recovering.
0.05
3
0.15
Cheaper vacation prices are being offered by resorts.
0.05
3
0.15
European countries lowering or doing away with tourist taxes
0.07
3
0.21
will attract more vacationers.
Passengers expected to grow to 73.5 million by the beginning of
0.09
4
0.36
2012.
Ryanair external threats
1.
Threats
Regulatory rules in Europe can change that would restrain the
way Ryanair does business.
Increase in competitor customer service could attract customers
to their airlines.
Cost increase at Dublin airport will lower passenger traffic
through Dublin airport.
Weather threats operating in Europe during winter.
Weight Rating Weighted Score
0.08
2
0.16
0.05
3
0.15
0.03
2
0.06
0.04
2
0.08
5. Fluctuations of foreign currency and longevity of the Euro.
6. Heavily unionized labor force.
0.06
2
0.12
0.07
2
0.14
7. Risk of oil rising back over $100 a barrel.
8. Weaking of the global economy.
9. Internet has led to more competitive pricing and more price
sensitivity to industry.
10. Continued threat to industry’s human relations concerning
displeasure over carbon dioxide emissions.
TOTALS
0.07
0.04
3
3
0.21
0.12
0.04
2
0.08
0.02
2
0.04
2.
3.
4.
1.00
2.75
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
Align IT with business objectives
•
75 percent of businesses fail to align their IT with
their business objectives, leading to lower
profitability
 To align IT:
• Identify business goals and strategies
• Break strategic goals into concrete activities
and processes
• Identify metrics for measuring progress
• Determine how IT can help achieve business
goals; supplier chain management system.
• Measure actual performance
Question
• Briefly describe any three of the inputs used in
the derivation of the external evaluation matrix.
(6 marks)
• Given a set of strengths and weakness, obtained
in part 1. Explain, using suitable examples, how
you would derive and interpret an external
evaluation matrix.
(12 marks)
• Explain, using suitable examples, how 3 of the 5
elements may impact on an organisations
strategic decision making.
(12 marks)