Questions
1. In what three ways is Ford’s proposed vision statement better than the firm’s actual vision statement? Does the current or proposed statement meet the 5-out-of-5 test? If not, prepare a new statement.
2. Evaluate the extent that the proposed mission statement for Ford meets the 10 characteristics and includes the 9 components presented in the chapter.
Source: Based on information at http://corporate.ford.com/company.html?gnav=footer-aboutford, coupled with a variety of other sources.
1. Customers 2. Product or services 3. Markets
4. Technology
5. Survival, growth, and profitability
6. Philosophy
7. Distinctive Competence 8. Public image
9. Employees
Endnotes
1. Brian Dumaine, “What the Leaders of Tomorrow See,”
Fortune (July 3, 1989): 50.
2. Peter Drucker, Management: Tasks, Responsibilities, and Practices (New York: Harper & Row, 1974), 61.
3. John Pearce II, “The Company Mission as a Strategic Tool,”
Sloan Management Review 23, no. 3 (Spring 1982): 74.
4. George Steiner, Strategic Planning: What Every Manager Must Know (New York: The Free Press, 1979): 160.
5. Raj Devasagayam, Nicholas R. Stark, and Laura Spitz Val- estin, “Examining the Linearity of Customer Satisfaction:
Return on Satisfaction as an Alternative,” Business Perspec- tives and Research 1, no. 2 (January 2013): 1. Xueming Luo, Jan Wieseke, and Christian Homburg, “Incentivizing CEOs to Build Customer- and Employee-Firm Relations for Higher Customer Satisfaction and Firm Value,” Journal of the Academy of Marketing Science 40, no. 6 (2012): 745.
6. Meredith E. David, Forest R. David, and Fred R. David,
“Mission Statement Theory and Practice: A Content
Analysis and New Direction,” International Journal of Business, Marketing, and Decision Sciences 7, no. 1 (Sum- mer 2014): 95–109.
7. Sebastian Desmidt, Anita Prinzie, and Adelien Decramer, A. “Looking for the Value of Mission Statements: A Meta- Analysis of 20 Years of Research,” Management Decision 49, no. 3 (2011): 468.
8. W. R. King and D. I. Cleland, Strategic Planning and Policy (New York: Van Nostrand Reinhold, 1979): 124.
9. “How W. T. Grant Lost $175 Million Last Year,” Busi- ness Week (February 25, 1975): 75. Drucker, Manage- ment, 88.
10. Drucker, Management: Tasks, Responsibilities, and Practices, 88.
11. http://ezinearticles.com/?Elements-of-a-Mission- Statement&id=3846671
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Strategy Formulation
Feedback Loop
Strategy Implementation
Strategy Evaluation Chapter 10: Business Ethics, Environmental Sustainability, and Social Responsibility
Chapter 11: Global and International Issues
Strategy Evaluation
and Governance
Chapter 9 Implementing
Strategies:
Finance and Accounting
Issues Chapter 8 Implementing
Strategies:
Management and Marketing
Issues Chapter 7 Business
Vision and Mission Chapter 2
Strategies in Action Chapter 5
Strategy Analysis and
Choice Chapter 6
The Internal Assessment
Chapter 4 The External
Assessment Chapter 3
FIGURE 3- 1
The Comprehensive, Integrative Strategic-Management Model
Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1 (February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics and Technology , no. 4 (October 2010): 20.
3
93
LEARNING OBJECTIVES
After studying this chapter, you should be able to do the following:
3- 1. Describe the nature and purpose of an external assessment in formulating strategies.
3- 2. Identify and discuss 10 external forces that impact organizations.
3- 3. Explain Porter’s Five-Forces Model and its relevance in formulating strategies.
3- 4. Describe key sources of information for identifying opportunities and threats.
3- 5. Discuss forecasting tools and techniques.
3- 6. Explain how to develop and use an External Factor Evaluation (EFE) Matrix.
3- 7. Explain how to develop and use a Competitive Profile Matrix (CPM).
The External Assessment
ASSURANCE-OF-LEARNING EXERCISES
The following exercises are found at the end of this chapter:
SET 1 : Strategic Planning for Coca-Cola
EXERCISE 3A : Develop an EFE Matrix for Coca-Cola
EXERCISE 3B : Develop a Competitive Profile Matrix for Coca-Cola
SET 2 : Strategic Planning for My University
EXERCISE 3C : Develop an EFE Matrix for Your College or University
EXERCISE 3D : Develop a Competitive Profile Matrix for Your College or University
SET 3 : Strategic Planning to Enhance My Employability
EXERCISE 3E : How Competitive Is Your State among All States for Finding a Job?
EXERCISE 3F : Compare and Contrast CareerBuilder, Glassdoor, Monster Jobs, and ZipRecruiter
EXERCISE 3G : A Template Competency Test
SET 4 : Individual versus Group Strategic Planning
EXERCISE 3H : What External Forces Are Most Important in Strategic Planning?
MyLab Management
Improve Your Grade!
If your instructor is using MyLab Management, visit www.pearson.com/mylab/management for videos, simulations, and writing exercises.
C
ompanies and organizations continually deal with external uncertainties and must quickly adapt to change to survive, as indicated in the following story:Once there were two company presidents who competed in the same industry.
These two presidents decided to go on a camping trip to discuss a possible merger. They hiked deep into the woods. Suddenly, they came upon a grizzly bear that rose up on its hind legs and snarled. Instantly, the first president took off his knapsack and got out a pair of jogging shoes. The second president said, “Hey, you can’t outrun that bear.” The first president responded, “Maybe I can’t outrun that bear, but I surely can outrun you!”
As illustrated in Figure 3-1, this chapter focuses on the concepts and tools needed to manage external uncertainties by conducting an external audit (sometimes called industry analysis).
An external audit focuses on identifying and evaluating trends and events beyond the control of a single firm, such as increased foreign competition, population shifts to coastal areas, an aging society, and a social-media revolution. An external audit reveals key opportunities and threats confronting an organization; an external audit guides managers in formulating strategies that take advantage of the opportunities and avoid or reduce the impact of threats.
This chapter presents a practical framework for gathering, assimilating, analyzing, and prioritizing external information that provides a foundation for formulating strate- gies effectively. Specifically, the first two-thirds of this chapter address external oppor- tunity/threat areas in terms of what, where, how, and why to obtain this information;
the latter one-third of this chapter explains how to develop and use an External Factor Evaluation (EFE) Matrix and Competitive Profile Matrix (CPM) to assimilate all the op- portunity/threat factors/information.
The exemplary strategist showcased in this chapter is Ben Silbermann, CEO and co- founder of Pinterest, the popular social-media company. Silbermann is outstanding at rec- ognizing external opportunities and threats and formulating effective strategies accordingly.
EXEMPLARY STRATEGIST SHOWCASED
Ben Silbermann, CEO and Cofounder of Pinterest
It is 2018 and Pinterest has grown to a valuation of more than $13 billion and a customer base of about 200 million users who have
“pinned” more than 110 billion ideas on Pinterest boards. Led by CEO and strategist Ben Silbermann, Pinterest is one of the fastest- growing companies in the world. The Pinterest website (www. pinterest .com) is free to use and available in nearly 30 foreign languages.
Headquartered in San Francisco, Pinterest has about 900 employees.
Hundreds of companies advertise on Pinterest with display ads and
“pin” their products and services on boards. The Pinterest website is a visual discovery, collection, and storage tool used by customers in the United States (60 percent) and abroad (40 percent). Thousands of busi- nesses and marketers use Pinterest to access data collected on Pinterest customers, who interestingly are about 80 percent women, typically age 35 to 44. Silbermann has turned Pinterest into a global gold mine of data for advertisers and retailers. He says Pinterest is “only beginning to understand” how social media impacts consumers’ lives, and he is blaz- ing a new trail with an innovative, entrepreneurial company. Pinterest
takes no commission or cut on transactions it processes and has no plans to go public to raise capital. A key advantage of staying private is to keep the ins and outs of business including the finance and market- ing operations of the company, secret from rival companies, who may want to imitate and replicate Pinterest strategies and offerings.
Source: Erin Griffith, “Ben Silbermann,” Fortune, (September 1–17, 2017): 69.
Also, http://fortune.com/2015/07/13/pinterest-ceo-ben-silbermann/
Pixellover RM 2/Alamy Stock Photo
The External Assessment Phase of Strategy Formulation
The purpose of an external audit is to develop a finite list of both opportunities that could benefit a firm and threats that should be avoided or mitigated. As the term finite suggests, the external audit is not aimed at developing an exhaustive list of every possible factor that could influence the busi- ness; rather, it is aimed at identifying key variables that offer actionable responses. Firms should be able to respond either offensively or defensively to the factors by formulating strategies that capitalize on external opportunities or that minimize the impact of potential threats. Figure 3-1 illustrates with white shading how the external audit fits into the strategic-management process.
Key External Forces
There are 10 external forces that can be divided into 5 broad categories: (1) economic forces;
(2) social, cultural, demographic, and environment (SCDE) forces; (3) political, governmen- tal, and legal forces; (4) technological forces; and (5) competitive forces. Relationships among these forces and an organization are depicted in Figure 3-2. External trends and events, such as increasing security concerns surrounding big data, changing consumer demand surrounding authenticity and personalization, and people in developing countries learning about online ser- vices, significantly affect products, services, markets, and organizations worldwide.
The Actionable-Quantitative-Comparative-Divisional (AQCD) Test
When identifying and prioritizing key external factors in strategic planning, make sure the fac- tors selected meet the following four criteria to the extent possible:
1. Actionable (i.e., meaningful and helpful in ultimately deciding what actions or strategies a firm should consider pursuing);
2. Quantitative (i.e., include percentages, ratios, dollars, and numbers to the extent possible);
3. Comparative (i.e., reveals changes over time), and
4. Divisional (relates to the firm’s products and/or regions (rather than consolidated) so infer- ences can be drawn regarding what products and regions are doing well or not).
Factors that meet the four criteria described above pass what can be called the “Actionable- Quantitative-Comparative-Divisional (AQCD) Test,” which is a measure of the quality of an external factor. In addition to passing the AQCD Test, make sure that external factors are indeed external (not internal), and make sure that external factors, particularly opportunities, are stated as external trends, events, or facts, rather than being stated as strategies the firm could pursue. Also, make sure the external
LO 3.1
Competitors Suppliers Distributors
Creditors Customers Employees Communities
Managers Stockholders Labor unions Governments Trade associations Special interest groups
Products Services Markets Natural environment
AN ORGANIZATION’S OPPORTUNITIES AND
THREATS Economic forces
Social, cultural, demographic, and natural environment forces Political, legal, and governmental forces
Technological forces Competitive forces
FIGURE 3-2
Relationships Between Key External Forces and an Organization
factors relate closely to the firm achieving its mission (opportunities) or hindering its mission (threats).
Factors selected for inclusion in an external assessment should be mission-driven.
Regarding the AQCD criteria, strive to include all high quality factors in an external assess- ment for a firm. A high quality factor will meet three or four of the AQCD criteria; a low quality factor will meet two or fewer of the AQCD criteria. When performing an external assessment, engage in an engineering hunt for facts to make sure as many factors as possible pass the AQCD Test. It is important to state external factors to the extent possible in actionable, quantitative, comparative, and divisional terms.
High quality and low quality external factors for Walmart are given below to further exem- plify this important concept:
ASK YOuRSELF IS THE FACTOR
Actionable Quantitative Comparative Divisional A High Quality
External Factor Online retail grocery shopping grew from 12% to 16% in 2018.
yes yes yes yes
A Low Quality External Factor Consumers’
average disposable income increased greatly in 2018.
no no no no
Changes in external forces translate into changes in demand for both industrial and con- sumer goods and services. External forces affect the types of products developed, the nature of market segmentation and positioning strategies, the range of services offered, and the choice of businesses to acquire or sell. External forces have a direct impact on both suppliers and distribu- tors. Identifying and evaluating external opportunities and threats enables organizations to revise their vision and mission if needed, to design strategies to achieve long-term objectives, and to develop policies to achieve annual objectives.
10 External Forces that Impact Organizations
Economic Forces
Economic factors have a direct impact on the potential attractiveness of various strategies. An example of an economic variable is “value of the dollar,” which can have a significant effect on financial results of companies with global operations. Domestic firms with significant overseas sales, such as McDonald’s, are hurt by a strong dollar. If the dollar appreciates 10 percent relative to the local currency of a particular country in which a U.S. company has $100 million in revenues, that company’s revenues would decrease by $10 million as they are translated into U.S. dollars. For foreign firms with relatively large U.S. sales, however, a strong dollar provides a boost. A strong dollar enables U.S. firms to purchase raw materials more cheaply from other countries. However, in early 2018, the value of the dollar was near a 3-year low versus foreign currencies.
Favorable economic conditions recently bode well for many firms because economic growth typically reduces unemployment, boosts consumer confidence, and increases disposable income.
The World Economic Outlook report, published by the International Monetary Fund, predicts a broad-based global acceleration in the world economy; small, but wide-spanning growth (around 3.6 percent) is expected among most major economies in 2018–2021.1
A few categories of economic variables that often yield AQCD opportunities and threats for organizations are provided in Table 3-1. In doing strategic planning or case analysis, economic factors must be stated in AQCD terms to the extent possible to be useful in strategic planning.
LO 3.2
Social, Cultural, Demographic, and Environment (SCDE) Forces
SCDE forces impact strategic decisions on virtually all products, services, markets, and custom- ers. Small, large, for-profit, and nonprofit organizations in all industries are being staggered and challenged by the opportunities and threats arising from changes in SCDE variables. These forces are shaping the way people live, work, produce, and consume. New trends are creating a shift in consumer demands and, consequently, a need for different products, new services, and updated strategies. For example, consumers in the United States now desire automobiles with greater space and utility, in lieu of sedans. In response to this external trend, Ford Motor recently invested $7 billion in higher-margin trucks and SUVs and announced plans to reintroduce the Ranger Trust and the Bronco SUV in North America.2
In the U.S. food industry, demand for processed packaged foods is declining because con- sumers are showing increased preferences for freshly prepared food options. Packaged food companies such as Kellogg are trying to quickly adapt to mitigate this external threat; Kellogg recently hired a new CEO, Steven Cahillane, who comes with extensive experience leading the health and wellness company, Nature’s Bounty.
Consumer tastes and trends constantly change; people wander through stores less, opt- ing increasingly to use their mobile phones and computers to research prices and cherry-pick promotions. Brick-and-mortar retail department stores consequently are struggling as consum- ers increasingly turn to online retailers and smaller specialty stores. These external trends have prompted many retail chains to slow or cease store openings.3
The United States (and the world) is also becoming older. Individuals age 65 and older in the United States, as a percentage of the population, will rise to 19 percent by 2030. The trend toward an older society is good news for restaurants, hotels, airlines, cruise lines, tours, travel services, pharmaceutical firms, automakers, and funeral homes. Older people are especially interested in health care, financial services, travel, crime prevention, and leisure. The aging population affects the strategic orientation of nearly all organizations.
Example categories of SCDE variables that often yield AQCD opportunities and threats for organizations are given in Table 3-2. In performing strategic planning and case analysis, rele- vant SCDE factors must be stated in AQCD terms to the extent possible to be useful in strategic planning.
Political, Governmental, and Legal Forces
Politics, governments, and legislators can and often do impact strategic decisions. Federal, state, local, and foreign governments are major regulators, deregulators, subsidizers, employers, and customers of organizations. Political, governmental, and legal factors, therefore, can represent major opportunities or threats for both small and large organizations. For industries and firms that depend heavily on government contracts or subsidies, political forecasts can be the most important part of an external audit. State and local income taxes and property taxes, for example, TABLE 3-1 Example Economic Categories To Be Monitored
Shift to a service economy Demand shifts for different goods and services Availability of credit Income differences by region and consumer groups Level of disposable income Price fluctuations
Propensity of people to spend Foreign countries’ economic conditions
Interest rates Monetary and fiscal policies
Inflation rates Stock market trends
Gross domestic product (GDP) trends Tax rate variation by country and state
Consumption patterns European Economic Community (EEC) policies Unemployment trends
Value of the dollar in world markets Import/export factors
Organization of Petroleum Exporting Countries (OPEC) policies
impact where companies locate facilities and where people desire to live. Nine U.S. states, for example, have zero state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire, and Tennessee.
Governmental legislation can significantly impact where businesses sell their products. For example, rapidly developing shifts in legislation surrounding the legality of marijuana are open- ing new markets for investors. Nearly a decade ago, Colorado passed the world’s first legislation that would treat marijuana like alcohol, taxing and regulating its sales. U.S. consumers spent
$6.7 billion on legal marijuana in 2016; this number is expected to reach $208 billion in 2021.
Example categories of political, governmental, and legal variables that often yield AQCD opportunities and threats to organizations are provided in Table 3-3. Political, governmental, and legal factors must be stated in AQCD terms to the extent possible to be useful in strate- gic planning. Local, state, and federal laws, as well as regulatory agencies and special-interest groups, can have a major impact on the strategies of small, large, for-profit, and nonprofit orga- nizations. Many companies have altered or abandoned strategies in the past because of politi- cal or governmental actions. As indicated in Ethics Capsule 3, new pending federal legislation regarding Alaska oil drilling could create business opportunities and threats and present ethical dilemma issues.
TABLE 3-2 Key SCDE Variables
Population changes by race, age, and geographic area Attitudes toward retirement Regional changes in tastes and preferences Energy conservation
Number of marriages Attitudes toward product quality
Number of divorces Attitudes toward customer service
Number of births Pollution control
Number of deaths Attitudes toward foreign peoples
Immigration and emigration rates Energy conservation
Social Security programs Social programs
Life expectancy rates Number of places of worship
Per-capita income Number of religious members
Social-media pervasiveness Social responsibility issues