Chapter 3

The External Assessment

Strategic Management:
Concepts & Cases
11th Edition
Fred David

  Ch.3-1
 Activities
 Discuss 10 major external forces that affect
organizations: economic, social, cultural,
demographic, environmental, political,
governmental, legal, technological, and
competitive.
 Describe how to conduct an external
strategic-management audit.
 Describe key sources of external information
 The Industrial Organization (I/O) View Vs
Resource based view
 Fred R. David
 Prentice Hall  Ch.3-2
The nature of external audit
An external audit sometimes called environmental scanning or industry

analysis
It focuses on identifying and evaluating trends and events beyond the

control of a single firm

To cope with what are often ambiguous and incomplete environmental

data and to increase their understanding of the general environment,

firms engage in a process called external environmental analysis.
The purpose of an external audit is to develop a finite list of

opportunities that could benefit a firm and threats that should be

minimized.
 Purpose: Development of Finite List:
 Opportunities
 Threats to be minimized.

 Prior to the developing its strategy, a company must perform

a survey or audit of its external environment in order to
identify potential external opportunities and threats to the
company.
 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
 Prentice Hall  Ch.3-4
 Relationships Between Key External
Forces and an Organization

Competitors
Suppliers
Distributors
Creditors
Key Customers Opportunities
External Employees &
Forces Communities Threats
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services

 Fred R. David
 Prentice Hall  Ch.3-5
 The Process of Performing an External
Audit
1) Gather competitive intelligence and information:
 Must involve as many managers and employees
as possible. Company first must gather:
 Competitive intelligence
 a systematic and ethical process for gathering
and analyzing information about the
competition’s activities and general business
trends to further a business’ own goals
 And information about social, cultural, demographic,
environmental, economic, political, legal, and
technological trends.

 Fred R. David
 Prentice Hall  Ch.3-6
2) 2. Assimilation and evaluation: Once information is
gathered, it should be assimilated, evaluated.
 A meeting or series of meetings of managers is
needed to collectively identify the most important
opportunities and threats facing the firm.
3) 3. Communicate and distribute key external factors: A final list of
important key external factors should be
communicated and distributed widely in the
organization.

 Fred R. David
 Prentice Hall  Ch.3-7
Performing an External Audit

Sources of information include:

 Internet
 Libraries (corporate, university, public)
 Suppliers
 Distributors
 Customers
 Competition

 Fred R. David
 Prentice Hall  Ch.3-8
 Approaches to competitive advantage

1
Resource-Based
Model

2

Industrial Organization
Model
1.Resource-Based Model
 The Resource-Based Model suggests
that above-average returns for any firm
are largely determined by
characteristics
According to this inside the firm.
approach the source of
competitive advantage lies in the Organization’s
resources.
 The Resource-Based view focuses on developing or
obtaining valuable resources and capabilities which
are difficult or impossible for rivals to imitate.
 Internal resources are more important for a firm than
external factors in achieving and sustaining
competitive advantage.
  Proponents contend that organizational performance will
primarily be determined by internal resource that can be
grouped in to three all en-compassing categories:

 physical resources: include plant and equipment, location,

technology, raw materials, machines

 human resources: include employees, training,

experience, intelligence, knowledge, skills, abilities

 organizational resources: include firm structure, planning

processes, information systems, patents, trademarks,
copyrights, databases, and so on

 11
 I/O Model of Superior Returns
 TheIndustrial Organization Model suggests that
above-average returns for any firm are largely
determined by characteristics outside the firm.
 The I/O model largely focuses on industry
structure or attractiveness of the external
environment rather than internal characteristics
of the firm.

 Firmperformance, is primarily based more on industry

properties, such as
 Economies of scale,
 Barriers to market entry,
 Product differentiation, and level of competitiveness
 Than on internal resources
 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
 Prentice Hall  Ch.3-13
 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
 Prentice Hall  Ch.3-14
 Monitor Key Economic Variables:

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

 Fred R. David
 Prentice Hall  Ch.3-15
 Social, Cultural, Demographic &
Environmental Forces
Major impact on:

 Products
 Services
 Markets
 customers

 Fred R. David
 Prentice Hall  Ch.3-16
 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

 Fred R. David
 Prentice Hall  Ch.3-17
 Monitor Key Variables

 Life expectancy rates

 Per capita income
 Attitudes toward business
 Average disposable income
 Buying habits
 Ethical concerns
 Attitudes toward saving

 Fred R. David
 Prentice Hall  Ch.3-18
 Monitor Key Variables

 Racial equality
 Average level of education
 Government regulation
 Attitudes toward customer service
 Attitudes toward product quality
 Energy conservation
 Social responsibility

 Fred R. David
 Prentice Hall  Ch.3-19
 Monitor Key Variables

 Value placed on leisure time

 Recycling
 Waste management
 Air & water pollution
 Ozone depletion
 Endangered species

 Fred R. David
 Prentice Hall  Ch.3-20
 Political, Govt., & Legal Forces

Government Regulation

 Key opportunities & key threats

 Antitrust legislation (Microsoft)
 Tax rates
 Lobbying efforts
 Patent laws

 Fred R. David
 Prentice Hall  Ch.3-21
 Political, Govt., & Legal Forces

Increasing Global Interdependence

 Impact of political variables
 Formulation of Strategies
 Implementation of Strategies

 Fred R. David
 Prentice Hall  Ch.3-22
 Political, Govt., & Legal Forces

Increasing Global Interdependence

 Strategists in a global economy
 Forecast political climates
 Legalistic skills
 Diverse world cultures

 Fred R. David
 Prentice Hall  Ch.3-23
 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
 Prentice Hall  Ch.3-24
 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
 Prentice Hall  Ch.3-25
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
 Prentice Hall  Ch.3-26
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.3-27
 Technological Forces

Revolutionary technological forces:

 Profound impact on organizations

 Internet
 Semiconductors
 XML technologies
 UWB communications

 Fred R. David
 Prentice Hall  Ch.3-28
 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

 Fred R. David
 Prentice Hall  Ch.3-29
 Technological Forces

Capitalizing on Information Technology (IT)

 Chief Information Officer (CIO)

 Chief Technology Officer (CTO)

 Fred R. David
 Prentice Hall  Ch.3-30
 Technological Forces

Technology-based issues

 Underlie nearly every strategic decision

 Fred R. David
 Prentice Hall  Ch.3-31
 Competitive Forces

Collection and evaluation of information on

competitors is essential for successful
strategy formulation

 Fred R. David
 Prentice Hall  Ch.3-32
 Competitive Forces

Identifying rival firms

 Strengths
 Weaknesses
 Capabilities
 Opportunities
 Threats
 Objectives
 Strategies

 Fred R. David
 Prentice Hall  Ch.3-33
 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
 Prentice Hall  Ch.3-34
 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.3-35
 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.3-36
 Competitive Forces

Competitive Intelligence Programs:

 Systematic and ethical process for

gathering and analyzing information
about the competition’s activities
and general business trends to
further a business’ own goals.
 Fred R. David
 Prentice Hall  Ch.3-37
 Competitive Analysis: Porter’s Five-Forces
Model

Potential development
of substitute products

Bargaining power Rivalry among Bargaining power

of suppliers competing firms of consumers

Potential entry of new

competitors

 Fred R. David
 Prentice Hall  Ch.3-38
 Industry Analysis (EFE)

External Factor Evaluation Matrix

Summarize & evaluate:

Economic Demographic Governmental

Social Environmental Technological

Cultural Political Competitive

 Fred R. David
 Prentice Hall  Ch.3-39
 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
 Prentice Hall  Ch.3-40
 Industry Analysis (EFE)
 Five-step process:
 Assign 1-4 rating to each factor
 Firm’s current strategies response to the factor

 Multiply each factor’s weight by its rating

 Produces a weighted score

 Fred R. David
 Prentice Hall  Ch.3-41
 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.3-42
 UST—Key External Factors Weighted
Weight Rating
Opportunities score

Global markets untapped .15 1 .15

Increased demand .05 3 .15
Astronomical Internet growth .05 1 .05
Pinkerton leader in discount market .15 4 .60
More social pressure to quit smoking .10 3 .30
Threats
Legislation against the tobacco industry .10 2 .20
Production limits on tobacco .05 3 .15
Smokeless market SE region U.S. .05 2 .10
Bad media exposure from FDA .10 2 .20
Clinton Administration .20 1 .20
TOTAL 1.00 2.10
 Fred R. David
 Prentice Hall  Ch.3-43
 Industry Analysis (EFE)

Total weighted score of 4.0 =

Organization response is outstanding to
threats & weaknesses

Total weighted score of 1.0 =

Firm’s strategies not capitalizing on
opportunities or avoiding threats

 Fred R. David
 Prentice Hall  Ch.3-44
 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.3-45
 Industry Analysis (EFE)

Important

 Understanding of the factors used in the EFE

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

 Fred R. David
 Prentice Hall  Ch.3-46
 Industry Analysis (CPM)
Competitive Profile Matrix

 Identifies firm’s major competitors

and their strengths & weaknesses
in relation to a sample firm’s
strategic position

 Fred R. David
 Prentice Hall  Ch.3-47
 (CPM) Procter
Avon L’Oreal & Gamble
Critical Success Weight Rating Score Rating Score Rating Score
Factor
Advertising 0.20 0.20 0.80 3 0.60
1 4
Product Quality 0.10 0.40 0.40 3 0.30
4 4
Price Competition 0.10 0.30 0.30 4 0.40
3 3
Management 0.10 0.40 0.30 3 0.30
4 3
Financial Position 0.15 0.60 0.45 3 0.45
4 3
Customer Loyalty 0.10 0.40 0.40 2 0.20
4 4
Global Expansion 0.20 0.80 0.40 2 0.40
4 2
Market Share 0.05 0.05 0.20 3 0.15
1 4
Total 1.00 3.15 3.25 2.80
 Fred R. David
 Prentice Hall  Ch.3-48