Chapter 3

The External Assessment

Strategic Management:
Concepts and Cases. 9th edition
Fred R. David
PowerPoint Slides by
Anthony F. Chelte
Western New England College
Fred R. David
Prentice Hall

Ch.3-1

Chapter Outline
The Nature of an External Audit
Economic Forces
Social, Cultural, Demographic, and
Environmental Forces
Fred R. David
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Ch.3-2

Chapter Outline
Political, Governmental, and Legal
Forces
Technological Forces
Competitive Forces
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Ch.3-3

Chapter Outline
Competitive Analysis:
Porters Five-Forces Model

Sources of External Information

Forecasting Tools and Techniques
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Ch.3-4

Chapter Outline
The Global Challenge
Industry Analysis:
The External Factor Evaluation Matrix

The Competitive Profile Matrix

Fred R. David
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Ch.3-5

The External Assessment

Prediction is very difficult, especially

about the future.
-- Neils Bohr

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Ch.3-6

External Strategic Management Audit

Also called:
Environmental scanning
Industry analysis

Fred R. David
Prentice Hall

Ch.3-7

External Strategic Management Audit

External Audit:
Identification and evaluation of trends and
events beyond control of single firm

Increased foreign competition

Populations shifts
Aging society
Information technology
Computer revolution
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Ch.3-8

Nature of External Audit

Purpose:

Development of Finite List:

Opportunities
Threats to be avoided

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Ch.3-9

Key External Forces

Five (5) broad categories:
1. Economic forces
2. Social, cultural, demographic, &
environmental forces
3. Political, governmental, and legal forces
4. Technological factors
5. Competitive forces
Fred R. David
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Ch.3-10

Relationships Between Key External

Forces and an Organization

Key
External
Forces

Competitors
Suppliers
Distributors
Creditors
Customers
Employees
Communities
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services

Fred R. David
Prentice Hall

Opportunities
&
Threats

Ch.3-11

Performing an External Audit

Gather competitive intelligence on
factors:
Social
Cultural
Demographic
Environmental
Economic
Political, legal, governmental
technological
Fred R. David
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Ch.3-12

Performing an External Audit

Sources of information include:
Internet
Libraries (corporate, university, public)
Suppliers
Distributors
Customers
Competition
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Ch.3-13

Performing an External Audit

Key factors:
Vary over time
Vary by industry

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Ch.3-14

Performing an External Audit

Variables include:

Market share
Breadth of competing products
World economies
Foreign affiliates
Proprietary account advantages
Price competitiveness
Technological advancements
Interest rates
Pollution abatement

Fred R. David
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Ch.3-15

Key External Factors

Key External Factors:
1.
2.
3.
4.

Oriented to long-term & annual objectives

Measurable
Applicable to all competing firms
Hierarchical

Overall company
Divisional or functional areas

Fred R. David
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Ch.3-16

Economic Forces
Monitor Key Economic Variables:

Availability of credit
Level of disposable income
Interest rates
Inflation rates
Money market rates
Federal government budget deficits
Gross domestic product trend
Consumption patterns
Fred R. David
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Ch.3-17

Monitor Key Economic Variables:

Unemployment trends
Worker productivity levels
Value of the dollar in world markets
Stock market trends
Foreign countries economic conditions
Import/export factors
Demand shifts for goods/services
Income differences by region/customer

Fred R. David
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Ch.3-18

Monitor Key Economic Variables:

Price fluctuations
Exportation of labor & capital
Monetary policies
Fiscal policies
Tax rates
ECC policies
OPEC policies
LDC policies

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Ch.3-19

Social, Cultural, Demographic &

Environmental Forces
Major impact on:
Products
Services
Markets
customers

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Ch.3-20

Social, Cultural, Demographic &

Environmental Forces
Consider:
United States
Population growing older
Less Caucasian
Gap between rich and poor widening
65 and older will rise to 18.5% of population
by 2025
By 2075, no racial or ethnic majority
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Ch.3-21

Social, Cultural, Demographic &

Environmental Forces

World population > 6 billion

U.S. population < 300 million

Great potential for domestic production

expansion to other markets

Domestic only is a risky strategy

Fred R. David
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Ch.3-22

Social, Cultural, Demographic &

Environmental Forces

NAFTA

U.S. exports to Mexico increased 170%

2000, U.S. trade deficits:

Mexico -- $25 billion

China -- $84 billion
Japan -- $81 billion

2001 Recession (U.S. and World)

> 60,000 laid off along Mexico Border with U.S.

Fred R. David
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Ch.3-23

Social, Cultural, Demographic &

Environmental Forces
Trends for the 2000s

More educated consumers

Population aging
Minorities more influential
Local rather than federal solutions
Fixation with youth decreasing
Hispanics increase to 15% by 2021
African Americans increase to 14% by 2021
Fred R. David
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Ch.3-24

Social, Cultural, Demographic &

Environmental Forces
Key variables

Childbearing rates
Number of special-interest groups
Number of marriages
Number of divorces
Number of births
Number of deaths
Immigration & emigration rates
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Ch.3-25

Monitor Key Variables

Life expectancy rates

Per capita income
Attitudes toward business
Average disposable income
Buying habits
Ethical concerns
Attitudes toward saving
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Ch.3-26

Monitor Key Variables

Racial equality
Average level of education
Government regulation
Attitudes toward customer service
Attitudes toward product quality
Energy conservation
Social responsibility
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Ch.3-27

Monitor Key Variables

Value placed on leisure time

Recycling
Waste management
Air & water pollution
Ozone depletion
Endangered species

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Ch.3-28

Political, Govt., & Legal Forces

Government Regulation
Key opportunities & key threats

Antitrust legislation (Microsoft)

Tax rates
Lobbying efforts
Patent laws
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Ch.3-29

Political, Govt., & Legal Forces

Increasing Global Interdependence

Impact of political variables

Formulation of Strategies
Implementation of Strategies

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Ch.3-30

Political, Govt., & Legal Forces

Increasing Global Interdependence

Strategists in a global economy

Forecast political climates

Legalistic skills
Diverse world cultures

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Ch.3-31

Political, Govt., & Legal Forces

Globalization of Industry
Worldwide trend toward similar
consumption patterns
Global buyers & sellers
E-commerce
Instant transmission of money &
information
across
continents
Fred R.
David
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Ch.3-32

Political, Govt., & Legal Forces

Key Political, govt., & legal variables:

Government regulation/deregulation
Tax law changes
Special tariffs
Political Action Committees (PACs)
Voter participation rates
Number of patents
Changes in patent laws

Fred R. David
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Ch.3-33

Key Political, Government &

Legal Variables

Environmental protection laws

Equal employment legislation
Level of government subsidies
Antitrust legislation/enforcement
Sino-American relationships
Russian-American relationships
European-American relationships
Fred R. David
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Ch.3-34

Key Political, Government &

Legal Variables

African-American relationships
Import-export regulations
Monetary policy
Political conditions in other countries
Government budgets
World oil, currency, & labor markets
Location and severity of terrorist activities

Fred R. David
Prentice Hall

Ch.3-35

Technological Forces
Revolutionary technological forces:

Profound impact on organizations

Internet
Semiconductors
XML technologies
UWB communications
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Ch.3-36

Technological Forces
Internet changes the nature of opportunities and
threats -

Alters life cycle of products

Increases speed of distribution
Creates new products and services
Eases limitations of geographic markets
Alters economies of scale
Changes entry barriers
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Ch.3-37

Technological Forces
Capitalizing on Information Technology (IT)

Chief Information Officer (CIO)

Chief Technology Officer (CTO)

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Ch.3-38

Technological Forces
Technology-based issues
Underlie nearly every strategic decision

Fred R. David
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Ch.3-39

Competitive Forces

Collection and evaluation of information on

competitors is essential for successful
strategy formulation

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Ch.3-40

Competitive Forces

Competition in virtually all industries can be

described as intense.

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Ch.3-41

Competitive Forces
Identifying rival firms

Strengths
Weaknesses
Capabilities
Opportunities
Threats
Objectives
Strategies
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Ch.3-42

Competitive Forces
Key Questions About Competitors:

Their strengths
Their weaknesses
Their objectives and strategies
Their responses to all external variables
(e.g. social, political, demographic, etc.)
Their vulnerability to our alternative
strategies
Fred R. David
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Ch.3-43

Competitive Forces
Key Questions About Competitors:

Our vulnerability to successful strategic

counterattack
Our product and service positioning relative
to competitors
Entry and exit of firms in the industry
Key factors for our current position in
industry
Fred R. David
Prentice Hall

Ch.3-44

Competitive Forces
Key Questions About Competitors:

Sales and profit rankings of competitors

over time
Nature of supplier and distributor
relationships
The threat of substitute products or
services

Fred R. David
Prentice Hall

Ch.3-45

Competitive Forces
Sources of Corporate Information:

Moodys Manuals
Standard Corporation Descriptions
Value Line Investment Surveys
Duns Business Rankings
Standard & Poors Industry Surveys
Industry Week
Forbes, Fortune, Business Week
Fred R. David
Prentice Hall

Ch.3-46

Competitive Forces
7 Characteristics of most competitive U.S.
firms:
Market share matters
2. Understand what business you are
in
3. Broke or not, fix it
4. Innovate or evaporate
1.

Fred R. David
Prentice Hall

Ch.3-47

Competitive Forces
7 Characteristics of most competitive
U.S. firms:
Acquisition is essential to growth
6. People make a difference
7. No substitute for quality
5.

Fred R. David
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Ch.3-48

Competitive Forces
Competitive Intelligence Programs:

Systematic and ethical process for

gathering and analyzing information
about the competitions activities
and general business trends to
further a business own goals.
Fred R. David
Prentice Hall

Ch.3-49

Competitive Analysis: Porters FiveForces Model

Potential development
of substitute products

Bargaining power
of suppliers

Rivalry among
competing firms

Bargaining power
of consumers

Potential entry of new

competitors

Fred R. David
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Ch.3-50

Global Challenge
International Challenge faced by U.S. firms:
How to gain and maintain exports to other
nations
How to defend domestic markets against
imported goods

Fred R. David
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Ch.3-51

Industry Analysis (EFE)

External Factor Evaluation Matrix
Summarize & evaluate:
Economic
Social
Cultural

Demographic

Government
al
Environmental Technologica
l
Political
Competitive

Fred R. David
Prentice Hall

Ch.3-52

Industry Analysis (EFE)

Five-Step process:

List key external factors (10-20)

Opportunities

& threats

Assign weight to each (0 to 1.0)

Sum

of all weights = 1.0

Fred R. David
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Ch.3-53

Industry Analysis (EFE)

Five-step process:

Assign 1-4 rating to each factor

Firms current strategies response to the
factor

Multiply each factors weight by its

rating
Produces a weighted score
Fred R. David
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Ch.3-54

Industry Analysis (EFE)

Five-step process:

Sum the weighted scores for each

Determines

the total weighted score

for the organization.

Highest possible weighted score for

the organization is 4.0; the lowest,
1.0. Average = 2.5
Fred R. David
Prentice Hall

Ch.3-55

USTKey External Factors

Weight

Rating

Weighte
d
score

Global markets untapped

.15

.15

Increased demand

.05

.15

Astronomical Internet growth

.05

.05

Pinkerton leader in discount market

.15

.60

More social pressure to quit smoking

.10

.30

.10

.20

.05

.15

Smokeless market SE region U.S.

.05

.10

Bad media exposure from FDA

.10

.20

Clinton Administration

.20

.20

Opportunities

Threats
Legislation against the tobacco
industry
Production limits on tobacco

TOTAL

1.00
Fred R. David
Prentice Hall

2.10
Ch.3-56

Industry Analysis (EFE)

Total weighted score of 4.0 =
Organization response is outstanding to
threats & weaknesses

Total weighted score of 1.0 =

Firms strategies not capitalizing on
opportunities or avoiding threats
Fred R. David
Prentice Hall

Ch.3-57

Industry Analysis (EFE)

UST (in the previous example), has
a total weighted score of 2.10
indicating that the firm is below
average in its effort to pursue
strategies that capitalize on
external opportunities and avoid
threats.
Fred R. David
Prentice Hall

Ch.3-58

Industry Analysis (EFE)

Important

Understanding of the factors used in the

EFE Matrix is more important than the
actual weights and ratings assigned.

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Ch.3-59

Industry Analysis (CPM)

Competitive Profile Matrix

Identifies firms major competitors

and their strengths & weaknesses
in relation to a sample firms
strategic position

Fred R. David
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Ch.3-60

(CPM)
Avon
Critical Success
Factor

Weigh Ratin
t
g

Advertising

0.20

Product Quality

0.10

Price Competition

0.10

Management

0.10

Financial Position

0.15

Customer Loyalty

0.10

Global Expansion

0.20

Market Share

0.05

Total

1.00

1
4
3
4
4
4
4
1

Fred R. David
Prentice Hall

Procter
& Gamble

LOreal
Scor
e

Ratin
g

Scor
e

Ratin
g

Score

0.2
0
0.4

4
4
3
3
3
4
2
4

0.8
0
0.4

0.60

0.30

0
0.3
0
0.3

0.40

0.30

0
0.4
5
0.4

0.45

0.20

0
0.4
0
0.2

0.40

0.15

0
0.3
0
0.4
0
0.6
0
0.4
0
0.8
0
0.0
5
3.1
5

0
3.2
5

2.80
Ch.3-61

Key Terms

America Online
Chief Information Officer (CIO)
Chief Technology Officer (CTO)
Competitive advantages
Competitive analysis
Competitive intelligence (CI)
Competitive Profile Matrix (CPM)
Fred R. David
Prentice Hall

Ch.3-62

Key Terms

Critical success factors

Cyberspace
Decruiting
Director of competitive analysis
Downsizing
Econometric models
Environmental scanning
External audit
External Factor Evaluation (EFE) Matrix
Fred R. David
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Ch.3-63

Key Terms

External forces
Industry analysis
Information Technology (IT)
Industrial policies
Internet learning from the partner
Linear regression

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Ch.3-64

Key Terms

Porters Five-Forces Model

Netscape
On-Line databases
Rightsizing
Trend extrapolation
World Wide Web (www)

Fred R. David
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Ch.3-65