The External Assessment: Strategic Management: Concepts & Cases 11 Edition Fred David

Chapter 3
The External Assessment
Strategic Management:
Concepts & Cases
11th Edition
Fred David
Ch 3 -1
Copyright 2007 Prentice Hall
Chapter Outline
The Nature of the External Audit
The Industrial Organization (I/O) View
Social, Cultural, Demographic &

Environmental Forces
Ch 3 -2
Chapter Outline (cont’d)
Political, Governmental, and Legal Forces
Technological Forces
Competitive Forces
Ch 3 -3
Porter’s Five-Forces Model
Sources of External Information
Forecasting Tools & Techniques
Ch 3 -4
Global Challenge
The External Factor Evaluation (EFE) Matrix
Competitive Profile Matrix (CPM)
Ch 3 -5
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
Ch 3 -6
External Strategic
Management Audit
-- Environmental Scanning
-- Industry Analysis
Ch 3 -7
External Strategic
Management Audit
Identify & Evaluate factors beyond the

control of a single firm
 Increased foreign competition
 Population shifts
 Aging society
 Fear of traveling
 Stock market volatility
Ch 3 -8
External Strategic
Management Audit
Purpose of External Audit

 Identify
 Opportunities
 Threats
Ch 3 -9
Key External Forces
•Economic forces
•Social, cultural, demographic &
environmental forces
•Political, governmental & legal forces
•Technological forces
•Competitive forces
Ch 3 -10
Key External Forces & the Organization
Competitors
Suppliers
Distributors
Creditors
Customers
Key Employees Opportunities
External
Communities &
Forces
Managers Threats
Stockholders
Labor Unions
Special Interest Groups
Products
Services
Markets
Natural Environment
Ch 3 -11
External Audit
Gather competitive
intelligence –
 Social
 Cultural
 Demographic
 Environmental
 Governmental
 Legal
 Technological
Ch 3 -12
External Audit – Sources of
Information
•Internet
•Libraries
•Suppliers
•Distributors
•Salespersons
•Customers
•Competition
Ch 3 -13
Performing External Audit
-- Key Factors
 Vary over time
 Vary by industry
Ch 3 -14
Performing External Audit --
Variables
•Market share
•Breadth of competing products
•World economies
•Foreign affiliates
•Proprietary account advantages
Ch 3 -15
Performing External Audit --
Variables
•Price competitiveness
•Technological advancements
•Interest rates
•Pollution abatement
Ch 3 -16
Performing External Audit
Long-term orientation
Measurable
External
Factors Applicable to
competing firms
Hierarchical
Ch 3 -17
Industrial Organization (I/O)
View
-- Industry factors more important than

internal factors
 Performance determined by industry forces
Ch 3 -18
I/O Perspective Firm Performance
Industry Properties
Economies of Scale
Barriers to market entry
Product differentiation
Level of competitiveness
Ch 3 -19
Research Findings
“Approximately 20% of a firm’s profitability can

be explained by the industry, whereas 36% of
the variance in profitability is attributed to the
firm’s internal factors”
Ch 3 -20
Economic Forces
Ch 3 -21
Economic Forces
 Trends in the dollar’s value

 European Union
 Layoffs
 Economic standard of living
Ch 3 -22
Economic Standard of Living
Ch 3 -23
Russia’s Economy
 Political bureaucracy
 Illegal actions by officials
and policemen
 State-run gas; monopoly
purchase of newspaper
 Foreign direct investment
Ch 3 -24
Economic Forces
•Availability of credit
•Level of disposable income
•Interest rates
•Inflation rates
Ch 3 -25
Social, Cultural, Demographic
& Environmental Forces
Major Impact –
•Products
•Services
•Markets
•Customers
Ch 3 -26
U.S. Facts
•Aging population
•Less Caucasian
•Widening gap between rich & poor
•2025 = 18.5% population >65 years
•2075 = no ethnic or racial majority
Ch 3 -27
Facts
•World population approaching 7
billion
•World population = 8 billion by 2028
•World population = 9 billion by 2054
•U.S. population < 300 million
Ch 3 -28
 Trends
 More American households with people living
alone
 By 2021 Hispanics will be largest minority group
 Aging Americans – affects all organizations
 Population shift to the south and west
 Less interested in fitness and exercise
 Decimation and degradation of the natural
environment
Ch 3 -29
U.S. – Mexico Border
 North America’s fastest

growing region
 1,500 maquiladoras
 No longer largest
exporter to U.S.
Ch 3 -30
Global trends
•2003 – China largest exporter to U.S.
•2003 –– Asia receives highest foreign
direct investment
•Cheaper labor and utilities than Mexico
•China joined WTO
Ch 3 -31
Global trends
•China’s labor rates less than Mexico
•China provides more site location
incentives than Mexico
Ch 3 -32
21st Century Trends
•More educated consumers

•Aging population
•Minorities more influential
•Local rather than federal solutions
Ch 3 -33
(cont’d)
21st Century Trends
•Fixation with youth decreasing

•Hispanics increase to 15% by 2021
•African American increase to 14% by 2021
Ch 3 -34
Key Social, Cultural, Demographic &
Environmental Variables
Childbearing rates
Number of special interest groups
Number of marriages & divorces
Number of births & deaths
Immigration & emigration rates
Ch 3 -35
Actuarial rates
Monitor Key Per capita income
Variables Attitudes toward business
Avg. disposable income
Ch 3 -36
Consumer behavior
Monitor Key Ethical concerns
Variables Attitudes toward saving
Racial equality
Ch 3 -37
Avg. educational level
Monitor Key Governmental regulation
Variables Attitudes toward customer service
Attitudes toward quality
Ch 3 -38
Energy conservation
Monitor Key Social responsibility
Variables Leisure time values
Recycling
Ch 3 -39
Waste management
Monitor Key Air & water pollution
Variables Ozone depletion
Endangered species
Ch 3 -40
Political, Government & Legal
Forces
Government Regulation
Key opportunities & threats

 Antitrust legislation
 Tax rates
 Lobbying efforts
 Patent laws
Ch 3 -41
Forces
Increasing Global Interdependence
Political variables impact –

 Formulation of strategies
 Implementation of strategies
Ch 3 -42
Forces
Increasing Global Interdependence
Strategists in a global economy –

 Forecast political climates
 Legalistic skills
 Diverse world cultures
Ch 3 -43
Forces
Globalization of Industry
 Worldwide trend toward similar
consumption patterns
 Global buyers and sellers
 E-commerce
 Technology for instant currency transfers
Ch 3 -44
Key Political, Governmental, & Legal Variables
Regulation/deregulation
Tax law changes
Special tariffs
PAC’s
Voter participation rates
Ch 3 -45
(cont’d)
Number of patents
Changes in patent laws
Environmental protection laws
Equal employment legislation
Government subsidies
Ch 3 -46
(cont’d)
Anti-trust enforcement
Global relationships
Import/export regulations
Political conditions
Location and severity of terrorist activity
Ch 3 -47
Major Impact –
•Internet
•Communications
•Semiconductors
Ch 3 -48
Significance of IT
•Chief Information Officer (CIO)
•Chief Technology Officer (CTO)
Ch 3 -49
Technology-based issues
Essential for nearly every strategic decision
Ch 3 -50
Competitive Forces
Collection & evaluation of data on

competitors is essential for successful
strategy formulation
Ch 3 -51
Competitive Forces
Competition on virtually all industries can be

described as intense.
Ch 3 -52
Competitive Forces
Identifying Rival Firms
Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies
Ch 3 -53
Key Questions Concerning Competitors
Their strengths
Their weaknesses
Their objectives and strategies
Their responses to external variables
Their vulnerability to our alternative strategies
Ch 3 -54
Key Questions Concerning Competitors (cont’d)
Our vulnerability to strategic counterattack
Our product/service positioning
Entry and exit of firms in the industry
Key factors for our current position in industry
Sales/profit rankings of competitors over time
Ch 3 -55
Key Questions Concerning Competitors (cont’d)
Nature of supplier & distributor relationships
The threat of substitute products/services
Should we keep our strategies secret from

employees and stakeholders?
Ch 3 -56
Competitive Forces
Sources of Corporate Information
•Moody’s Manuals
•Standard Corporation Descriptions
•Value Line Investment Surveys
•Dun’s Business Rankings
•Standard & Poor’s Industry Surveys
•Industry Week
•Forbes, Fortune, Business Week
Ch 3 -57
Competitive Forces
7 Characteristics of most
Competitive U.S. Firms:
1. Market share matters

2. Understand what business you are in
3. Broke or not, fix it
4. Innovate or evaporate
Ch 3 -58
Competitive Forces
7 Characteristics of most
Competitive U.S. Firms:
5. Acquisition is essential to growth

6. People make a difference
7. No substitute for quality
Ch 3 -59
The Five-Forces Model of Competition
Potential development
of substitute products
Bargaining power Rivalry among Bargaining power

of suppliers competing firms of consumers
Potential entry of new

competitors
Ch 3 -60
Steps to Determine if an Acceptable
Profit Can be Earned
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
Ch 3 -61
The Five-Forces Model
Rivalry Among Competing Firms
 Most powerful of the five forces

 Focus on competitive advantage of
strategies
Ch 3 -62
Potential Entry of New Competitors
 Barriers to entry are important

 Quality, pricing, and marketing can
overcome barriers
Ch 3 -63
Potential Development of Substitute

Products
 Pressures increase when consumer’s

switching costs decrease
 Firm’s plans for increased capacity &
market penetration
Ch 3 -64
Bargaining Power of Suppliers
 Large number of suppliers & few

substitutes affects intensity of competition
 Backward integration can gain control or
ownership of suppliers
Ch 3 -65
Bargaining Power of Consumers
 Customers concentrated or buying in

volume affects intensity of competition
 Consumer power is higher where products
are standard or undifferentiated
Ch 3 -66
Conditions where Consumers Gain
Bargaining Power
 If they can inexpensively switch
 If they are particularly important
 If sellers are struggling in the face of falling
consumer demand
 If they are informed about seller’s products,
prices and costs.
 If they have discretion in whether and when
they purchase the product.
Ch 3 -67
Forecasting Tools and Techniques
 Forecasts are educated assumptions about

future trends and events
 Quantitative techniques – Most appropriate when
historical data is available and there is a constant
relationship
 Qualitative techniques
Ch 3 -68
The Global Challenge
Faced by U.S. Firms --

•Gain & maintain exports to other
nations
•Defend domestic markets against
imported goods
Ch 3 -69
Multinational Corporations (MNC’s)
Simultaneously globally competitive &

nationally responsive
Ch 3 -70
Globalization
Worldwide integration of:
Strategy formulation
Strategy implementation
Strategy evaluation
Ch 3 -71
Globalization of Industries
Similar consumption patterns

Global buyers and sellers
E-commerce
Instant transmission of money &
information
Ch 3 -72
Industry Analysis: The External Factor
Evaluation (EFE) Matrix
Summarize & Evaluate
Economic Demographic Governmental
Social Environmental Technological
Cultural Political Competitive
Ch 3 -73
Ch 3 -74
Ch 3 -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
Ch 3 -76
Industry Analysis EFE
Important --
Understanding the factors used in the EFE

Matrix is more important than the actual weights
and ratings assigned.
Ch 3 -77
Industry Analysis: Competitive Profile
Matrix (CPM)
Identifies firm’s major competitors and

their strengths & weaknesses in
relation to a sample firm’s strategic
positions
Ch 3 -78
Gateway Apple Dell
Wt Rating Wt’d Rating Wt’d Rating Wt’d
CSF’s Score Score Score
Market share 0.15 3 0.45 2 0.30 4 0.60

Inventory sys 0.08 2 0.16 2 0.16 4 0.32
Fin position 0.10 2 0.20 3 0.30 3 0.30
Prod. Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distr 0.10 3 0.30 2 0.20 3 0.30
Global Exp. 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15
Ch 3 -79
Gateway Apple Dell
Wt Rating Wt’d Rating Wt’d Rating Wt’d
CSF’s (cont’d) Score Score Score
Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12

E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Serv 0.10 3 0.30 2 0.20 4 0.40
Price
0.02 4 0.08 1 0.02 3 0.06
competitive
Mgt. experience 0.01 2 0.02 4 0.04 2 0.02
Total 1.00 2.83 2.47 3.49
Ch 3 -80
Industry Analysis CPM
Important --
Just because one firm receives a 3.2 rating

and another receives a 2.8 rating, it does not
follow that the first firm is 20 percent better
than the second.
Ch 3 -81
For Review (Chapter 3)
Key Terms & Concepts
AOL Competitive Analysis
Chief Information Officer Competitive Intelligence

(CIO) (CI)
Chief Technology Officer Competitive Profile

(CTO) Matrix (CPM)
Competitive Advantage Decruiting
Ch 3 -82
Director of Competitive External Factor Evaluation

Analysis Matrix (EFE)
Downsizing External Forces
Environmental Scanning Industry Analysis
Industrial Organizational
External Audit
(I/O)
Ch 3 -83
Information Technology
Lifecare Facilities
(IT)
Porter’s Five-Forces
Internet
Model
Learning from the

Rightsizing
Partner
Linear Regression World Wide Web
Ch 3 -84
Tax Harmonization
Foreign Direct Investment
Ch 3 -85

The External Assessment: Strategic Management: Concepts & Cases 11 Edition Fred David

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Chapter 3

The External Assessment

The Nature of the External Audit

The Industrial Organization (I/O) View

Social, Cultural, Demographic &

Political, Governmental, and Legal Forces

Porter’s Five-Forces Model

Sources of External Information

Forecasting Tools & Techniques

The External Factor Evaluation (EFE) Matrix

Competitive Profile Matrix (CPM)

It is not the strongest of the species that

Nothing focuses the mind better than the

Identify & Evaluate factors beyond the

Purpose of External Audit

-- Industry factors more important than

 Performance determined by industry forces

Barriers to market entry

“Approximately 20% of a firm’s profitability can

 Trends in the dollar’s value

 North America’s fastest

•More educated consumers

•Fixation with youth decreasing

Number of special interest groups

Number of marriages & divorces

Number of births & deaths

Immigration & emigration rates

Monitor Key Per capita income

Variables Attitudes toward business

Avg. disposable income

Monitor Key Ethical concerns

Variables Attitudes toward saving

Avg. educational level

Monitor Key Governmental regulation

Variables Attitudes toward customer service

Attitudes toward quality

Monitor Key Social responsibility

Variables Leisure time values

Monitor Key Air & water pollution

Variables Ozone depletion

Key opportunities & threats

Increasing Global Interdependence

Political variables impact –

Increasing Global Interdependence

Strategists in a global economy –

Tax law changes

Voter participation rates

Changes in patent laws

Environmental protection laws

Equal employment legislation

Location and severity of terrorist activity

Essential for nearly every strategic decision

Collection & evaluation of data on

Competition on virtually all industries can be

Their objectives and strategies

Their responses to external variables

Their vulnerability to our alternative strategies

Our vulnerability to strategic counterattack

Our product/service positioning

Entry and exit of firms in the industry

Key factors for our current position in industry

Sales/profit rankings of competitors over time

Nature of supplier & distributor relationships