Summary Chapter 3 - The External Assessment - University of Nevada, Las Vegas BUS 496

Chapter 3 - The External Assessment Overview Chapter 3 describes how to perform an external strategic-management audit, including what variables to access, where to find information, how to assimilate external information so that it may provide a foundation for formulating strategies. Chapter 3 describes how to develop a Competitive Profile Matrix and an External Factor Evaluation Matrix, two widely utilized strategic planning tools. Chapter 3 also reveals special, free sources of external strategic information on the Internet. It is vital for companies and organizations to identify and prioritize the relative importance of key external opportunities and threats facing the firm, so the firm can deploy assets/resources to exploit the opportunities and avoid or mitigate the threats. Survival of the firm can hinge on this part of strategic planning being done well, so Chapter 3 is very important. This part of strategic planning requires that an engineering hunt for the facts be conducted, to avoid a strategic plan being based on vague generalities, which is detrimental both to companies and students performing case analysis. Learning Objectives The Chapter 1 Learning Objectives presented in the textbook are reiterated below: 1. Describe the nature and purpose of an external assessment in formulating strategies. 2. Identify and discuss 10 external forces that must be examined in formulating strategies: economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive. 3. Explain Porter’s Five Forces Model and its relevance in formulating strategies. 4. Describe key sources of information used for locating vital external information. 5. Discuss forecasting tools and techniques. 6. Explain how to develop and use an External Factor Evaluation (EFE) Matrix. 7. Explain how to develop and use a Competitive Profile Matrix. Teaching Tips 1. Make certain that students realize that 1) external factors are EXTERNAL, meaning the firm has no control over the issue, and 2) external opportunities must not include STRATEGIES. Too often students will mix internal factors in with the external and/or will include strategies as opportunities. 2. In class (or as an assigned homework activity) make sure students watch the Chapter 3 author videos posted at the website. Also watch for Chapter 3 updates at that website. Also, download the free Excel student template and show students the external assessment part of that template, especially the EFE and CPM matrices. Most students are great working with Excel and will welcome this template for use in case analysis. 3. Remind students of the Edward Deming quote – “In God We Trust, All Others Bring the Data.” Reason: Many students will avoid the research and fact gathering work so essential in case analysis, and will include as external factors vague platitudes, which are useless for a firm in formulating strategies. Tell students that “Too much is at stake in strategic planning to give only vague statements such as “unemployment rates are low” or “the firm’s liquidity is high.” The firm’s survival may be at stake. Vague statements offer no insight for a firm in formulating strategies. Words such as increase/decrease/expand/high/low must be avoided; instead use specific #’s whenever possible; and make sure the factors selected are “actionable.” 4. Make sure students understand the difference between weights and ratings in an EFEM and CPM. Make sure they realize the weights and ratings are “not mere guesses,” but rather must be based on their understanding of the company and industry. Make sure students realize that NO FIRM CAN PURSUE EVERY STRATEGY THAT WILL BENEFIT THE FIRM, SO PRIORITIZATION (ASSIGNING WEIGHTS AND RATINGS) IS VERY IMPORTANT IN STRATEGIC PLANNING. Regarding weights, point out to students that 0.08 is mathematically 33% more important than 0.06, so even small differences can become very important due to the need to allocate scarce resources. Tell students never to use the word GUESS in this course, but rather use the term ESTIMATE based on their research. 5. Focus on the new Table 3-8 that gives “Sources of External Information.” Bring those sources up online in class. Put in the HSY stock symbol for Hershey, so students can see first hand the wealth of free external information available at those websites for a company such as Hershey or their assigned case company. 6. Also in that section titled “Sources of External Information,” contact the reference librarian at your college/university to determine which of those databases the library has a subscription to. The authors often invite a reference librarian to class and let them go over Table 3-8 in terms of how to use those materials from the library database. Librarians are anxious and happy to help in this regard. Strategic planning is all about gathering specific, number-based information from a variety of sources as a foundation for deciding what strategies are best for a firm to pursue. 7. The EFE Matrix in Table 3-9 for the “local ten-theater cinema complex” will serve as a running example in other chapters to come, so definitely go over that example. Point out the use of $’s, #’s, %’s in the factor list, as well as the Ratings which (remind students) can be 1, 2, 3, or 4 anywhere in that column – because a factor can be a threat, for example, and the firm may be doing a great job combatting that threat = rating of 4. This is going to be in contrast to the IFE Matrix in the next chapter where the ratings are