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
Ch.3-1
External Strategic Management Audit

Also called:
– Environmental scanning
– Industry analysis

Ch.3-2
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

Ch.3-3
 Nature of External Audit

Purpose:

– Development of Finite List:

• Opportunities
• Threats to be avoided

Ch.3-4
 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 Ch.3-5
 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

Ch.3-6
 Performing an External Audit
Gather competitive intelligence on factors:
– Social
– Cultural
– Demographic
– Environmental
– Economic
– Political, legal, governmental
– technological

Ch.3-7
 Performing an External Audit
Sources of information include:
– Internet
– Libraries (corporate, university, public)
– Suppliers
– Distributors
– Customers
– Competition

Ch.3-8
 Performing an External Audit

Key factors:
– Vary over time
– Vary by industry

Ch.3-9
 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

Ch.3-10
 Key External Factors

Key External Factors:

1. Oriented to long-term & annual objectives

2. Measurable
3. Applicable to all competing firms
4. Hierarchical
• Overall company
• Divisional or functional areas

Ch.3-11
 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

Ch.3-12
 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

Ch.3-13
 Monitor Key Economic Variables:

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

Ch.3-14
 Social, Cultural, Demographic &
Environmental Forces
Major impact on:

– Products
– Services
– Markets
– customers

Ch.3-15
 Monitor Key Variables

• Life expectancy rates

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

Ch.3-16
 Monitor Key Variables

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

Ch.3-17
 Monitor Key Variables

• Value placed on leisure time

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

Ch.3-18
 Political, Govt., & Legal Forces

Government Regulation

• Key opportunities & key threats

• Antitrust legislation (Microsoft)
• Tax rates
• Lobbying efforts
• Patent laws
Ch.3-19
 Political, Govt., & Legal Forces

Increasing Global Interdependence

• Impact of political variables
– Formulation of Strategies
– Implementation of Strategies

Ch.3-20
 Political, Govt., & Legal Forces

Increasing Global Interdependence

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

Ch.3-21
 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
Ch.3-22
 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

Ch.3-23
 Technological Forces

Revolutionary technological forces:

• Profound impact on organizations

• Internet
• Semiconductors
• XML technologies
• UWB communications
Ch.3-24
 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
Ch.3-25
 Competitive Forces

Collection and evaluation of information on

competitors is essential for successful
strategy formulation

Ch.3-26
 Competitive Forces

Competition in virtually all industries can be

described as intense.

Ch.3-27
 Competitive Forces

Identifying rival firms

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

Ch.3-28
 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

Ch.3-29
 Industry Analysis (EFE)
External Factor Evaluation Matrix
Summarize & evaluate:

Economic Demographic
Governmental
Social
Environmental Technological
Cultural
Political Competitive
Ch.3-30
 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
 (not important to very important)
Ch.3-31
 Industry Analysis (EFE)
• Five-step process:
• Assign 1-4 rating to each factor
• Firm’s current strategies response to the
factor
• Response poor - superior
• Multiply each factor’s weight by its rating
• Produces a weighted score

Ch.3-32
 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
Ch.3-33

Factor Weight Rating Weighted
score
Opportunities
High-end in-home entertainment sales are growing nationally 0.15 4 0.60

Forecast for continued growth of expensive housing in Dade & 0.16 4 0.64
Broward counties
Wealthy foreigners buy expensive entertainment equipment for 0.07 3 0.21
their homes in South Florida
Current customers refer new prospects with little prompting 0.12 3 0.36

Direct mailing lists are available by household income 0.06 3 0.18

Threats
Large chains could expand upward into their niche 0.13 1 0.13
New technologies such as satellite broadcast compete with 0.10 1 0.10
current technologies
Declining incomes in South Florida versus the U.S. 0.08 2 0.16
South Florida highly dependent on trade with Latin America 0.07 1 0.07

Economy depends on air transport, a volatile industry 0.06 2 0.12

Total 1.00 2.57

Ch.3-34
 Industry Analysis (EFE)

Important

• Understanding of the factors used in the

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

Ch.3-35
 Industry Analysis (CPM)
Competitive Profile Matrix

• Identifies firm’s major competitors

and their strengths &
weaknesses in relation to a
sample firm’s strategic position
• Major weakness – major strength

Ch.3-36
 (CPM) Procter
Avon L’Oreal & Gamble
Critical Success Weight Rating Score Rating Score Rating Score
Factor
Advertising 0.20 1 0.20 4 0.80 3 0.60
Product Quality 0.10 4 0.40 4 0.40 3 0.30
Price Competition 0.10 3 0.30 3 0.30 4 0.40
Management 0.10 4 0.40 3 0.30 3 0.30
Financial Position 0.15 4 0.60 3 0.45 3 0.45
Customer Loyalty 0.10 4 0.40 4 0.40 2 0.20
Global Expansion 0.20 4 0.80 2 0.40 2 0.40
Market Share 0.05 1 0.05 4 0.20 3 0.15
Total 1.00 3.15 3.25 2.80
Ch.3-37