Strategic Management

Concepts & Cases

13th edition
Fred R. David
Chapter 3:
The External Assessment

Ch. 3-1

© 2001 Prentice Hall

 Comprehensive Strategic Management Model

External
Audit

Chapter 3

Vision Long-Term Generate, Implement Implement Measure &

& Objectives Evaluate, Strategies: Strategies: Evaluate
Mission Select Mgmt Issues Marketing, Performance
Statements Strategies Fin/Acct,
R&D, CIS
Chapter 2 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9

Internal
Audit

Chapter 4

Ch. 3-2

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 External Assessment (Cont’d)

“The idea is to concentrate our strength

against our competitor’s relative
weakness.”

—Bruce Henderson—

Ch. 3-3

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 External Assessment (Cont’d)

External audit:

Focuses on identifying &

evaluating events beyond the
immediate control of the firm
Ch. 3-4

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External Assessment (Cont’d)
External audit focuses on:

 Increased foreign competition

 Population shifts
 Demographics (e.g., aging population)
 Information technology

Ch. 3-5

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 External Assessment (Cont’d)

External audit reveals:

• Key opportunities
• Key threats

Managers then formulate strategies:

• Take advantage of opportunities
• Avoid/reduce impact of threats

Ch. 3-6

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External Assessment (Cont’d)

External Audit

Aimed at identifying key variables that

offer actionable responses

Ch. 3-7

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External Assessment (Cont’d)

External Strategic-Management Audit

• Industry analysis (I/O view)

• Environmental scanning

Ch. 3-8

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INDUSTRIAL ORGANIZATIONAL
(I/O) VIEW
The Industrial Organization (I/O)
approach to competitive advantage
advocates that external (industry)
factors are more important than internal
factors in a firm achieving competitive
advantage

Ch. 3-9

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 I/O PERSPECTIVE
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. 3-10

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 Conditions causing high rivalry
among competing firms
1. High number of competing firms
2. Similar size of firms competing
3. Similar capability of firms competing
4. Falling demand for the industry’s products
5. Falling product/service prices in the industry
6. When consumers can switch brands easily
7. When barriers to leaving the market are high
8. When barriers to entering the market are low
9. When fixed costs are high among firms competing
10. When the product is perishable
11. When rivals have excess inventory
12. When mergers are common in the industry

Ch. 3-11

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 Outcomes and Suggested
Action/strategy
As rivalry among competing firms intensifies, industry
profits decline, in some cases to the point where an industry
becomes inherently unattractive.

When rival firms sense weakness, typically they will

intensify both marketing and production efforts to capitalize
on the “opportunity.”

Ch. 3-12

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 Potential Entry of New
Competitors
Whenever new firms can easily enter a particular industry, the intensity
of competitiveness among firms increases.

Barriers to entry OR Achieving strategic fit

1. the need to gain economies of scale quickly,

2. the need to gain technology and specialized know-how,
3. strong customer loyalty,
4. strong brand preferences,
5. Specialized in distribution channels,
6. Building or possession of patents, and

Ch. 3-13

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 Potential Development of
Substitute Products
In many industries, firms are in close competition with producers
of substitute products in other industries. Examples are
1. Producers of eyeglasses and contact lenses, for example, face
increasing competitive pressures from laser eye surgery
2. Producers of sugar face similar pressures from artificial
sweeteners.
3. Newspapers and magazines face substitute-product competitive
pressures from the Internet and 24-hour cable television

The presence of substitute products puts a ceiling on the price that

can be charged before consumers will switch to the substitute
product. Price ceilings equate to profit ceilings and more intense
competition among rivals.
Ch. 3-14

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 Bargaining Power of Suppliers
The bargaining power of suppliers affects the intensity of
competition in an industry, especially when there are only a few
good substitute raw materials, or when the cost of switching raw
materials is especially costly.

In more and more industries, sellers are forging strategic

partnerships with select suppliers in efforts to (1) reduce inventory
and logistics costs (e.g., through just-in-time deliveries); (2) speed
the availability of next-generation components; (3) enhance the
quality of the parts and components being supplied and reduce
defect rates; and (4) squeeze out important cost savings for both
themselves and their suppliers
Ch. 3-15

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 Bargaining Power of Consumers
When customers are concentrated or large or buy in volume, their
bargaining power represents a major force affecting the intensity of
competition in an industry. Rival firms may offer extended
warranties or special services to gain customer loyalty whenever
the bargaining power of consumers is substantial.
Consumers gain increasing bargaining power under the following
circumstances:
1. If they can inexpensively switch to competing brands or
substitutes
2. If they are particularly important to the seller
3. If sellers are struggling in the face of falling consumer demand
4. If they are informed about sellers’ products, prices, and costs
5. If they have discretion in whether and when they purchase the
product Ch. 3-16

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 ENVIRONMENTAL SCANNING
Key External Forces

Five (5) broad categories:

• Economic forces
• Social & Environmental forces
• Political, governmental, & legal forces
• Technological forces
• Competitive forces
Ch. 3-17

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 Economic Forces
Monitor Key Economic Variables:

 Availability of credit
 Level of disposable income
 Interest rates
 Inflation rates
 Gross domestic product trend
 Consumption patterns

Ch. 3-18

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 Economic Forces (Cont’d)
Monitor Key Economic Variables: (Cont’d)

 Unemployment trends
 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. 3-19

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 Economic Forces (Cont’d)
Monitor Key Economic Variables: (Cont’d)

 Price fluctuations
 Exportation of labor & capital
 Monetary policies
 Fiscal policies
 Tax rates

Ch. 3-20

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 Social & Environmental Forces
• Social, cultural, demographic, and
environmental changes:

Major impact on:

 Products
 Services
 Markets
 Customers

Ch. 3-21

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 Social & Environmental Forces
(Cont’d)
• World population > 7 billion

• PAK population > 200 million

 Great
potential for domestic production
expansion to other markets

• Domestic only is a risky strategy

Ch. 3-22

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 Social & Environmental Forces
(Cont’d)
• Key social, cultural, demographic, &
environmental variables:

 Number of special-interest groups

 Number of marriages
 Number of divorces
 Number of births
 Number of deaths
 Immigration
Ch. 3-23

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Social & Environmental Forces
(Cont’d)
Key social, cultural, demographic, &
environmental variables: (Cont’d)
 Life expectancy rates
 Per capita income
 Attitudes toward business
 Average disposable income
 Buying habits
 Ethical concerns
 Attitudes toward saving
Ch. 3-24

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Social & Environmental Forces
(Cont’d)
Key social, cultural, demographic, &
environmental variables: (Cont’d)
 Racial equality
 Average level of education
 Government regulation
 Attitudes toward customer service
 Attitudes toward product quality
 Energy conservation
 Social responsibility
Ch. 3-25

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Social & Environmental Forces
(Cont’d)
Key social, cultural, demographic, &
environmental variables: (Cont’d)
 Value placed on leisure time
 Recycling
 Waste management
 Air & water pollution
 Ozone depletion
 Endangered species
Ch. 3-26

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Political, Govt., & Legal Forces
(Cont’d)
• 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. 3-27

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 Political, Govt., & Legal Forces
(Cont’d)
• Key Political, govt.,
& legal variables: (Cont’d)

 Environmental protection laws

 Equal employment legislation
 Level of government subsidies
 Antitrust legislation/enforcement
 SARC
 Russian-American relationships
 European-American relationships
Ch. 3-28

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 Technological Forces (Cont’d)
Internet impact on opportunities & threats:

• Altering life cycles of products

• Increasing speed of distribution
• Creating new products & services
• Erasing limitations of traditional
geographic markets

Ch. 3-29

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 Technological Forces (Cont’d)
Internet impact on opportunities & threats:
(Cont’d)

• Altering economies of scale

• Changing entry barriers
• Redefining relationships
 Industries
& suppliers, creditors,
customers, and competitors

Ch. 3-30

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 Competitive Forces
External Audit & Competing Firms

• Identifying rival firms

 Strengths
 Weaknesses
 Capabilities
 Opportunities
 Threats
 Strategies

Ch. 3-31

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 Industry Analysis (EFE)
External Factor Evaluation Matrix
Summarize & evaluate:

Economic Demographic Governmental

Social Environmental Technological

Cultural Political Competitive

Ch. 3-32

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 Assignment
Key Industries that Need
external Audit
• Automobile
• Textile, woolen / cotton
• IT
• Food http://www.pbs.gov.pk/content/industry

• Banking
• Cement
• Sugar
• Fertilizers Ch. 3-33

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 Industry Analysis (EFE)
(Cont’d)
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

Ch. 3-34

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 Industry Analysis (EFE)
(Cont’d)
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
Ch. 3-35

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 Industry Analysis (EFE)
(Cont’d)
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. 3-36

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 Key External Factors Weighted
Weight Rating
Opportunities score

Local markets untapped .15 1 .15

Increased demand of the product .05 3 .15
Internet growth .05 1 .05
change in the demographic features .15 4 .60
More social pressure for global warming .10 3 .30
Threats
Govt. legislation .10 2 .20
Production technology .05 3 .15
Global competition .05 2 .10
Media exposure for consumers .10 2 .20
Political unrest .20 1 .20
TOTAL 1.00 2.10
Ch. 3-37

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 Industry Analysis (EFE)
(Cont’d)
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
Ch. 3-38

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 Industry Analysis (EFE)
(Cont’d)

Important

• Understanding of the factors used in the

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

Ch. 3-39

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 Industry Analysis (CPM)
Competitive Profile Matrix

• Identifies firm’s major competitors

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

Ch. 3-40

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 (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. 3-41

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