DavidStudentPPT_ch3

Chapter 3
The External Assessment
Strategic Management:
Concepts & Cases
10th Edition
Fred David
PowerPoint Slides by
Anthony F. Chelte
Western New England College
Ch 3 -1
Copyright 2005 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
 Information technology
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
Key Customers Opportunities
External Employees &
Forces
Communities Threats
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
Ch 3 -11
External Audit
Gather competitive
intelligence –
 Social
 Cultural
 Demographic
 Environmental
 Economic
 Political, legal governmental
 Technological
Ch 3 -12
External Audit – Sources of
Information
•Internet
•Libraries
•Suppliers
•Distributors
•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
Economic Forces
•Availability of credit
•Level of disposable income
•Interest rates
•Inflation rates
Ch 3 -20
Economic Forces
•Money market rates

•Fed Gov’t deficits
•GDP trend
•Consumption patterns
Ch 3 -21
Key Economic Variables
Unemployment trends
Worker productivity levels
Value of the dollar in world markets
Stock market trends
Foreign economic conditions
Ch 3 -22
Import/Export factors
Demand shifts for goods/services
Income differences by region/customer
Price fluctuations
Exportation of labor and capital
Ch 3 -23
Monetary policies
Fiscal policies
Tax rates
OPEC policies
ECC policies
Ch 3 -24
Social, Cultural, Demographic
& Environmental Forces
Major Impact –
•Products
•Services
•Markets
•Customers
Ch 3 -25
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 -26
Facts
•World population > 6 billion
•U.S. population < 300 million
Ch 3 -27
Population characteristics require

global strategies
Ch 3 -28
Global trends
•2003 – China largest exporter to U.S.
•2003 Asia receives highest foreign
direct investment
Ch 3 -29
Global trends
•China’s labor rates less than Mexico
•China provides more site location
incentives than Mexico
Ch 3 -30
Export Trends
•Mexico-exports to U.S. 1.2% growth (2002)
•China-exports to U.S. 19% growth (2002)
Ch 3 -31
Export Trends
•Mexico-corporate income tax rate 34%
•China-corporate income tax rate 17%
Ch 3 -32
21st Century Trends
•More educated consumers

•Aging population
•Minorities more influential
•Local rather than federal solutions
Ch 3 -33
Environmental Forces (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
Per capita income

Monitor Key
Variables Attitudes toward business
Avg. disposable income
Ch 3 -36
Consumer behavior
Ethical concerns
Monitor Key
Variables Attitudes toward saving
Racial equality
Ch 3 -37
Avg. educational level
Governmental regulation
Monitor Key
Variables Attitudes toward customer service
Attitudes toward quality
Ch 3 -38
Energy conservation
Social responsibility
Monitor Key
Variables Leisure time values
Recycling
Ch 3 -39
Waste management
Air & water pollution

Monitor Key
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
The Five-Forces Model
Rivalry Among Competing Firms
 Most powerful of the five forces

 Focus on competitive advantage of
strategies
Ch 3 -61
Potential Entry of New Competitors
 Barriers to entry are important

 Quality, pricing, and marketing can
overcome barriers
Ch 3 -62
Potential Development of Substitute

Products
 Pressures increase when consumer’s

switching costs decrease
 Firm’s plans for increased capacity &
market penetration
Ch 3 -63
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 -64
Bargaining Power of Consumers
 Customers concentrated or buy in volume

affects intensity of competition
 Consumer power is higher where products
are standard or undifferentiated
Ch 3 -65
The Global Challenge
Faced by U.S. Firms --

•Gain & maintain exports to other
nations
•Defend domestic markets against
imported goods
Ch 3 -66
Multinational Corporations (MNC’s)
Simultaneously globally competitive &

nationally responsive
Ch 3 -67
Globalization
Worldwide integration of:
Strategy formulation
Strategy implementation
Strategy evaluation
Ch 3 -68
Globalization of Industries
Similar consumption patterns

Global buyers and sellers
E-commerce
Instant transmission of money &
information
Ch 3 -69
Industry Analysis: The External Factor
Evaluation (EFE) Matrix
Summarize & Evaluate
Economic Demographic Governmental
Social Environmental Technological
Cultural Political Competitive
Ch 3 -70
EFE – Gateway Computers (2003)
Wtd
Key External Factors Weight Rating
Score
Opportunities
1. Global PC market expected to grow 20%
0.10 3 0.30
in 2004
2. Cost of PC component parts expected to
0.10 3 0.30
decrease 10% - 2004
3. Internet use growing rapidly 0.05 2 0.10
4. China entered WTO; lowered taxes for
0.10 1 0.10
importing PC’s
5. The average income for PC worker has
0.05 3 0.15
declined from $40K/yr to $30k/yr
Ch 3 -71
EFE – Gateway Computers (2003) (cont’d)
Wtd
Score
Opportunities (cont’d)
6. Modernization of business firms and
0.05 2 0.10
government agencies
7. U.S. (& world) economies recovering 0.05 3 0.15
8. 30% of Chinese population can afford a
0.05 1 0.05
PC; only 10% of homes have a PC
Threats 0.10 1 0.10
1. Intense rivalry in industry 0.10 1 0.05
Ch 3 -72
Wtd
Score
Threats (cont’d)
2. Severe price cutting in PC industry 0.10 2 0.20
3. Different countries have different reg’s
0.05 1 0.05
and infrastructure for PC’s
4. Palm & PDA becoming substitutes 0.05 3 0.15
5. Demand exceeds supply of experienced
0.05 4 0.20
PC workers
6. Birth rate in U.S. declining annually 0.05 3 0.15
Ch 3 -73
Wtd
Score
Threats (cont’d)
7. U.s. consumers and businesses delaying
0.05 2 0.10
purchase of PC’s
8. PC firms diversifying into consumer
0.05 3 0.15
electronics
Total 1.00 2.40
Ch 3 -74
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 -75
Industry Analysis EFE
Important --
Understanding the factors used in the EFE

Matrix is more important than the actual
weights and ratings assigned.
Ch 3 -76
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 -77
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 -78
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 -79
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 -80
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 -81
Director of Competitive External Factor Evaluation

Analysis Matrix (EFE)
Downsizing External Forces
Environmental Scanning Industry Analysis
Industrial Organizational
External Audit
(I/O)
Ch 3 -82
Information Technology
Lifecare Facilities
(IT)
Porter’s Five-Forces
Internet
Model
Learning from the

Rightsizing
Partner
Linear Regression World Wide Web
Ch 3 -83
Tax Harmonization
Foreign Direct Investment
Ch 3 -84

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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

•Money market rates

Worker productivity levels

Value of the dollar in world markets

Stock market trends

Foreign economic conditions

Demand shifts for goods/services

Income differences by region/customer

Exportation of labor and capital

Population characteristics require

21st Century Trends

•More educated consumers

21st Century Trends

•Fixation with youth decreasing

Number of special interest groups

Number of marriages & divorces

Number of births & deaths

Immigration & emigration rates

Per capita income

Avg. disposable income

Avg. educational level

Attitudes toward quality

Air & water pollution

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

The threat of substitute products/services