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Strategic formualtion 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 Copyright © 2009 Pearson Education, Inc. Economic Forces Social, Cultural, Demographic & Environmental Forces Major Impact – •Products •Services •Markets •Customers Social, Cultural, Demographic & Environmental Forces Some Facts •Aging population •Widening gap between rich & poor •2025 = 18.5% population >65 years •World population approaching 7 billion •World population = 8 billion by 2028 •Decimation and degradation of the natural environment •More educated consumers Social, Cultural, Demographic & Environmental Forces Global trends •China largest exporter to U.S. •China and Asia provide cheaper labor and utilities than Mexico 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; 4 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 taking advantage of opportunities Total weighted score of 1.0 • Firm’s strategies not capitalizing on opportunities or avoiding threats A value of 2.65 or is an indicator that a firm response is acceptable The Five-Forces Model of Competition Potential development of substitute products Bargaining power of suppliers Rivalry among competing firms Potential entry of new competitors Bargaining power of consumers Essentials of Management Information Systems Chapter 3 Achieving Competitive Advantage with Information Systems Using Information Systems to Achieve Competitive Advantage Porter’s Competitive Forces Model In Porter’s competitive forces model, the strategic position of the firm and its strategies are determined not only by competition with its traditional direct competitors but also by four forces in the industry’s environment: new market entrants, substitute products, customers, and suppliers. Figure 3-1 Steps to Determine if an Acceptable Profit Can be Earned Purpose of the model: They look at the competitive situation in their industry, and then consider ways of coping and succeeding in that environment. 1. Identify key aspects or elements of each competitive force 2. Evaluate how strong and important each element is for the firm 3. Decide whether the collective strength of the elements is worth the firm entering or staying in the industry The Five-Forces Model Rivalry Among Competing Firms • Most powerful of the five forces • Focus on competitive advantage of strategies of rivals: • Competitors in market space continuously devise new products, new efficiencies… The Five-Forces Model New market entrants • Barriers to entry are important; • High barrier • planes required to enter airline industry • All major air routes are serviced. • • However, Quality, pricing, and marketing can overcome barriers; e.g. Ryanair’s entry into to European consumer flight’s industry: via pricing • Some industries have low barriers to entry: • E.g., consider retail food industry versus microchip industry The Five-Forces Model Substitute Products: potential development • Pressures increase when consumer’s switching costs decrease; customers can purchase substitutes if your prices too high • E.g., Internet music service versus CDs. • Firm’s plan for increased capacity & market penetration (refer to next lecture) The Five-Forces Model Bargaining Power of Suppliers • Large number of suppliers & few substitutes affects intensity of competition • Applying Backward integration (refer to next lecture) can gain control or ownership of suppliers: • The more suppliers a firm has, the greater control it can exercise over suppliers. The Five-Forces Model Consumers bargining power • Examples: – If they (consumer) can inexpensively [easily] switch – If they are particularly important – If sellers are struggling in the face of falling consumer demand – If Can customers force firm and competitors to compete on price alone • A firm could apply a forward integration (refer to next lecture) strategy on order to have greater control over this power than its competitors The Internet’s Impact on Competitive Advantage (porter’s model) • Lowers barrier to entry (internet music) • Transforms some industries; • retail industry: Tesco. Amazon; collection of market data: Google, facebook. • But not all industries are affected (too much): coke v pepsi • Creates new opportunities for creating new markets, increasing customer bases…. Align IT with business objectives • 75 percent of businesses fail to align their IT with their business objectives, leading to lower profitability • The first step in using information systems to serve your firm is to make sure the IS objectives are lined up with the business objectives. 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 Sample Exam Question • Describe, using suitable examples, how to apply the external factor evaluation matrix to analyse a firms external environment. (12 marks) • Describe, using suitable examples, how to use porter’s five force model to analyse a firms external environment. (12 marks) • Compare and contrast both models. (6 marks)