Chapter 3:

The External Assessment

2
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 -3
External Strategic Management
Audit

- Environmental Scanning

- Industry Analysis

Ch 3 -4
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 -5
External Strategic Management
Audit

Purpose of External Audit

• Identify
• Opportunities
• Threats

Ch 3 -6
Key External Forces

•Economic forces
•Social, cultural, demographic & environmental
forces
•Political, governmental & legal forces
•Technological forces
•Competitive forces

Ch 3 -7
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 -8
External Audit

Gather competitive intelligence

• Social
• Cultural
• Demographic
• Environmental
• Governmental
• Legal
• Technological

Ch 3 -9
External Audit – Sources of
Information
•Internet
•Libraries
•Suppliers
•Distributors
•Salespersons
•Customers
•Competition
Ch 3 -10
Performing External Audit

-- Key Factors
• Vary over time
• Vary by industry
Performing External Audit --
Variables

•Market share
•Breadth of competing products
•World economies
•Foreign affiliates
•Proprietary account advantages

Ch 3 -12
Performing External Audit --
Variables

•Price competitiveness
•Technological advancements
•Interest rates
•Pollution abatement

Ch 3 -13
Performing External Audit

Long-term orientation

Measurable
External
Factors Applicable to
competing firms

Hierarchical

Ch 3 -14
Industrial Organization (I/O) View

-- Industry factors more important than

internal factors

 Performance determined by industry forces

Ch 3 -15
I/O Perspective Firm Performance

Industry Properties

Economies of Scale

Barriers to market entry

Product differentiation

Level of competitiveness

Ch 3 -16
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 -17
Economic Forces

Ch 3 -18
Economic Forces

• Trends in the dollar’s value

• European Union
• Layoffs
• Economic standard of living

Ch 3 -19
Economic Standard of Living

Ch 3 -20
Economic Forces

•Availability of credit
•Level of disposable income
•Interest rates
•Inflation rates

Ch 3 -21
Social, Cultural, Demographic &
Environmental Forces

Major Impact
• Products
• Services
• Markets
• Customers

Ch 3 -22
Social, Cultural, Demographic &
Environmental Forces

Facts
•World population approaching 7 billion
•World population = 8 billion by 2028
•World population = 9 billion by 2054

Ch 3 -23
Social, Cultural, Demographic &
Environmental Forces

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 -24
Social, Cultural, Demographic &
Environmental Forces
21st Century Trends

•More educated consumers

•Aging population
•Local rather than federal solutions

Ch 3 -25
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 -26
Social, Cultural, Demographic &
Environmental Forces

Actuarial rates

Monitor Key Per capita income

Variables Attitudes toward business

Avg. disposable income

Ch 3 -27
Social, Cultural, Demographic &
Environmental Forces

Consumer behavior

Monitor Key Ethical concerns

Variables Attitudes toward saving

Racial equality

Ch 3 -28
Social, Cultural, Demographic &
Environmental Forces

Avg. educational level

Monitor Key Governmental regulation

Variables Attitudes toward customer service

Attitudes toward quality

Ch 3 -29
Social, Cultural, Demographic &
Environmental Forces

Energy conservation

Monitor Key Social responsibility

Variables Leisure time values

Recycling

Ch 3 -30
Social, Cultural, Demographic &
Environmental Forces

Waste management

Monitor Key Air & water pollution

Variables Ozone depletion

Endangered species

Ch 3 -31
Political, Government & Legal
Forces

Government Regulation

Key opportunities & threats

 Antitrust legislation
 Tax rates

 Lobbying efforts

 Patent laws

Ch 3 -32
Political, Government & Legal
Forces

Increasing Global Interdependence

Political variables impact

Formulation of strategies
 Implementation of strategies

Ch 3 -33
Political, Government & Legal
Forces

Increasing Global Interdependence

Strategists in a global economy –

 Forecast political climates
 Legalistic skills
 Diverse world cultures

Ch 3 -34
Political, Government & Legal
Forces

Globalization of Industry
 Worldwide trend toward similar
consumption patterns
 Global buyers and sellers
 E-commerce
 Technology for instant currency transfers

Ch 3 -35
Key Political, Governmental, & Legal Variables

Regulation/deregulation

Tax law changes

Special tariffs

Voter participation rates

Ch 3 -36
Key Political, Governmental, & Legal Variables
(cont’d)

Number of patents

Changes in patent laws

Environmental protection laws

Equal employment legislation

Government subsidies

Ch 3 -37
Key Political, Governmental, & Legal Variables
(cont’d)

Anti-trust enforcement

Global relationships

Import/export regulations

Political conditions

Location and severity of terrorist activity

Ch 3 -38
Technological Forces

Major Impact –
•Internet
•Communications
•Semiconductors

Ch 3 -39
Technological Forces

Significance of IT
•Chief Information Officer (CIO)
•Chief Technology Officer (CTO)

Ch 3 -40
Technological Forces

Technology-based issues

Essential for nearly every strategic decision

Ch 3 -41
Competitive Forces

Collection & evaluation of data on competitors is

essential for successful strategy formulation

Ch 3 -42
Competitive Forces

Competition on virtually all industries can be

described as intense.

Ch 3 -43
Competitive Forces
Identifying Rival Firms

Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies

Ch 3 -44
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 -45
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 -46
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 -47
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 -48
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 -49
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 -50
 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 -51
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 -52
The Five-Forces Model

Rivalry Among Competing Firms

 Most powerful of the five forces

 Focus on competitive advantage of
strategies

Copyright 2007 Prentice Hall

Ch 3 -53
The Five-Forces Model

Potential Entry of New Competitors

 Barriers to entry are important

 Quality, pricing, and marketing can
overcome barriers

Ch 3 -54
The Five-Forces Model

Potential Development of Substitute

Products

 Pressures increase when consumer’s

switching costs decrease
 Firm’s plans for increased capacity &
market penetration

Ch 3 -55
The Five-Forces Model

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 -56
The Five-Forces Model

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 -57
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 -58
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 -59
The Global Challenge

Multinational Corporations (MNC’s)

Simultaneously globally competitive &

nationally responsive

Ch 3 -60
The Global Challenge

Globalization
Worldwide integration of:
Strategy formulation
Strategy implementation
Strategy evaluation

Ch 3 -61
The Global Challenge

Globalization of Industries

Similar consumption patterns

Global buyers and sellers
E-commerce
Instant transmission of money &
information

Ch 3 -62
Industry Analysis: The External Factor
Evaluation (EFE) Matrix

Summarize & Evaluate

Economic Demographic Governmental

Social Environmental Technological

Cultural Political Competitive

Ch 3 -63
Ch 3 -64
Ch 3 -65
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 -66
Industry Analysis EFE

Important

Understanding the factors used in the EFE

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

Ch 3 -67
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 -68
 Gateway Apple Dell
Wt’d Wt’d Wt’d
CSF’s Wt Rating
Score
Rating
Score
Rating
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 -69
 Gateway Apple Dell
CSF’s (cont’d) Wt Rating Wt’d Rating Wt’d Rating Wt’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 -70
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 -71