The External Assessment: Strategic Management: Concepts & Cases 10 Edition Fred David

Chapter 3
The External Assessment

Strategic Management:
Concepts & Cases
10th Edition
Fred David
PowerPoint Slides by
Anthony F. Chelte
Western New England College
Copyright 2005 Prentice Hall
Ch 3 -1
Chapter Outline
The Nature of the External Audit
The Industrial Organization (I/O) View

Social, Cultural, Demographic &
Environmental Forces
Ch 3 -2
Chapter Outline (contd)

Political, Governmental, and Legal Forces
Technological Forces
Competitive Forces
Ch 3 -3

Porters 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
Key
External
Forces
Competitors
Suppliers
Distributors
Creditors
Customers
Employees
Communities
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
Opportunities
&
Threats
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
External
Factors
Measurable
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 rtes
Inflation rates
Ch 3 -20
Economic Forces
Money market rates

Fed Govt 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
Chinas 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 (contd)
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
Variables
Per capita income

Attitudes toward business
Avg. disposable income
Ch 3 -36

Consumer behavior
Monitor Key
Variables
Ethical concerns
Attitudes toward saving
Racial equality
Ch 3 -37

Avg. educational level
Monitor Key
Variables
Governmental regulation
Attitudes toward customer service
Attitudes toward quality
Ch 3 -38

Energy conservation
Monitor Key
Variables
Social responsibility
Leisure time values
Recycling
Ch 3 -39

Waste management
Monitor Key
Variables
Air & water pollution

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
PACs
Voter participation rates
Ch 3 -45

(contd)
Number of patents
Changes in patent laws
Environmental protection laws
Equal employment legislation
Government subsidies
Ch 3 -46

(contd)
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 (contd)
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 (contd)
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
Moodys Manuals
Standard Corporation Descriptions
Value Line Investment Surveys
Duns Business Rankings
Standard & Poors 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
of suppliers
Rivalry among
competing firms
Bargaining power
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 consumers

switching costs decrease
Firms 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 (MNCs)
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
Social
Cultural
Government
Demographic
al
Technologica
Environmental
l
Political
Competitive
Ch 3 -70
EFE Gateway Computers (2003)

Weight
Rating
Wtd
Score
1. Global PC market expected to grow 20%

in 2004
0.10
0.30
2. Cost of PC component parts expected to

decrease 10% - 2004
0.10
0.30
3. Internet use growing rapidly
0.05
0.10
4. China entered WTO; lowered taxes for

importing PCs
0.10
0.10
5. The average income for PC worker has

declined from $40K/yr to $30k/yr
0.05
0.15
Key External Factors
Opportunities
Ch 3 -71
EFE Gateway Computers (2003) (contd)

Weight
Rating
Wtd
Score
6. Modernization of business firms and

government agencies
0.05
0.10
7. U.S. (& world) economies recovering
0.05
0.15
8. 30% of Chinese population can afford a

PC; only 10% of homes have a PC
0.05
0.05
Threats
0.10
0.10
1. Intense rivalry in industry
0.10
0.05
Opportunities (contd)
Ch 3 -72

Weight
Rating
Wtd
Score
2. Severe price cutting in PC industry
0.10
0.20
3. Different countries have different regs

and infrastructure for PCs
0.05
0.05
4. Palm & PDA becoming substitutes
0.05
0.15
5. Demand exceeds supply of experienced

PC workers
0.05
0.20
6. Birth rate in U.S. declining annually
0.05
0.15
Threats (contd)
Ch 3 -73

Weight
Rating
Wtd
Score
7. U.s. consumers and businesses delaying

purchase of PCs
0.05
0.10
8. PC firms diversifying into consumer

electronics
0.05
0.15
Total
1.00
Threats (contd)
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
Firms 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 firms major competitors and

their strengths & weaknesses in
relation to a sample firms strategic
positions
Ch 3 -77
Gateway
Apple
Dell
Wt
Rating
Wtd
Score
Rating
Wtd
Score
Rating
Wtd
Score
Market share
0.15
0.45
0.30
0.60
Inventory sys
0.08
0.16
0.16
0.32
Fin position
0.10
0.20
0.30
0.30
Prod. Quality
0.08
0.24
0.32
0.24
Cons. Loyalty
0.02
0.06
0.06
0.08
Sales Distr
0.10
0.30
0.20
0.30
Global Exp.
0.15
0.45
0.30
0.60
Org. Structure
0.05
0.15
0.15
0.15
CSFs
Ch 3 -78
Gateway
Apple
Dell
CSFs (contd)
Wt
Rating
Wtd
Score
Rating
Wtd
Score
Rating
Wtd
Score
Prod. Capacity
0.04
0.12
0.12
0.12
E-commerce
0.10
0.30
0.30
0.30
Customer Serv
0.10
0.30
0.20
0.40
Price
competitive
0.02
0.08
0.02
0.06
Mgt. experience
0.01
0.02
0.04
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

(CIO)
Competitive Intelligence
(CI)
Chief Technology Officer

(CTO)
Competitive Profile
Matrix (CPM)
Competitive Advantage
Decruiting
Ch 3 -81

Director of Competitive
Analysis
External Factor Evaluation

Matrix (EFE)
Downsizing
External Forces
Environmental Scanning
Industry Analysis
External Audit
Industrial Organizational
(I/O)
Ch 3 -82

Information Technology
(IT)
Lifecare Facilities
Internet
Porters Five-Forces
Model
Learning from the

Partner
Rightsizing
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

Copyright 2005 Prentice Hall

The Industrial Organization (I/O) View

Chapter Outline (contd)

Copyright 2005 Prentice Hall

Chapter Outline (contd)

Sources of External Information

Forecasting Tools & Techniques

Copyright 2005 Prentice Hall

Chapter Outline (contd)

The External Factor Evaluation (EFE) Matrix

Competitive Profile Matrix (CPM)

Copyright 2005 Prentice Hall

Nothing focuses the mind better than the

Copyright 2005 Prentice Hall

Identify & Evaluate factors beyond the

Increased foreign competition

Copyright 2005 Prentice Hall

Purpose of External Audit

Copyright 2005 Prentice Hall

Key External Forces

Key External Forces & the Organization

Copyright 2005 Prentice Hall

Copyright 2005 Prentice Hall

External Audit Sources of

Performing External Audit

Vary over time

Copyright 2005 Prentice Hall

Performing External Audit -Variables

Performing External Audit -Variables

Copyright 2005 Prentice Hall

Performing External Audit

Copyright 2005 Prentice Hall

Industrial Organization (I/O)

-- Industry factors more important than

Performance determined by industry forces

Copyright 2005 Prentice Hall

I/O Perspective Firm Performance

Copyright 2005 Prentice Hall

Copyright 2005 Prentice Hall

Money market rates

Copyright 2005 Prentice Hall

Key Economic Variables

Key Economic Variables

Key Economic Variables

Social, Cultural, Demographic

Social, Cultural, Demographic

Social, Cultural, Demographic

World population > 6 billion

Copyright 2005 Prentice Hall

Social, Cultural, Demographic

Copyright 2005 Prentice Hall

Social, Cultural, Demographic

2003 China largest exporter to U.S.

Copyright 2005 Prentice Hall

Social, Cultural, Demographic

Chinas labor rates less than Mexico

Copyright 2005 Prentice Hall

Social, Cultural, Demographic

Mexico-exports to U.S. 1.2% growth (2002)

Copyright 2005 Prentice Hall

Social, Cultural, Demographic