Chapter 3
The External Assessment
Strategic Management:
Concepts & Cases
17th Edition
Global Edition
Fred David
Ch 3 -1
Ch 3 -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
Purpose of an External Audit
Develop a finite list of
opportunities that could benefit a firm
threats that should be avoided Ch 3 -5
Ch 3 -6
External Audit
Gather competitive intelligence
Assimilate information
Evaluate
Resulting in a list of the most
important key external factors
Ch 3 -7
Performing External Audit
Long-term Orientation
Measurable
External
Factors Applicable to
Competing Firms
Hierarchical
Ch 3 -8
Industrial Organization
(I/O) View
Industry factors are more important
than internal factors
Performance determined by industry
forces
Ch 3 -9
I/O Perspective Firm Performance
Industry Properties
Economies of Scale
Barriers to Market Entry
Product Differentiation
The Economy
Level of Competitiveness
Ch 3 -10
Political, Governmental, and
Legal Forces
Government Regulation
Key opportunities & threats
Antitrust legislation
Tax rates
Lobbying activities
Patent laws
Protectionist Policies
Governments taking equity stakes
in companies
Ch 3 -11
Economic Forces
GDP
Trends in the peso’s value
Unemployment rates
Ch 3 -12
Ch 3 -13
Social, Cultural, Demographic, and
Natural Environmental Forces
Major Impact –
• Products
• Services
• Markets
• Customers
Ch 3 -14
Social, Cultural, Demographic, and
Natural Environmental Forces
Facts
World population 7.8 billion
World population = 10 billion by 2028
World population = 12 billion by 2054
Philippine population > 109.8 million
Ch 3 -15
As of Aug 29, 2020; 09:04 AM
Ch 3 -16
Ch 3 -17
Ch 3 -18
Technological Forces
Major Impact –
• Internet
• Artificial Intelligence
Significance of IT
• Chief Information Officer (CIO)
• Chief Technology Officer (CTO)
Essential for nearly every
strategic decision
Ch 3 -19
Competitive Forces
Collection & evaluation of data on
competitors is essential for successful
strategy formulation
Competition in virtually all industries
can be described as intense
Ch 3 -20
Competitive Forces
Identify Rival Firms’
• Strengths
• Weaknesses
• Objectives and Strategies
• Capabilities
• Opportunities
• Threats
• Their responses to external variables
• Their vulnerability to strategic counterattack
Ch 3 -21
Key Questions Concerning
Competitors
Our product/service positioning
Entry and exit of firms in the industry
Key factors for our current position in industry
Sales/profit ranking of competitors over time
Nature of supplier and distributor
relationships
The threat of substitute products/services
Ch 3 -22
Competitive Forces
7 characteristics of most competitive firms
Market share matters
Understanding what business you are in
Broke or not, fix it
Innovate or evaporate
Acquisition is essential to growth
People make a difference
No substitute for quality
Ch 3 -23
Competitive Intelligence
A systematic and ethical process for
gathering and analyzing information
about the competition’s activities and
general business trends to further a
business’s own goals
Ch 3 -24
Sources of Competitive Intelligence
Internet Consultants
Employees Trade journals
Managers Want ads
Suppliers Newspaper articles
Distributors Government filings
Customers Competitors
Creditors
Ch 3 -25
Objectives of Competitive
Intelligence
Provide a general understanding of industry
and competitors
Identify areas where competitors are
vulnerable and assess impact of actions on
competitors
Identify potential moves that a competitor
might make
Ch 3 -26
The Five-Forces Model of Competition
Ch 3 -27
The Five-Forces Model
Rivalry among competing firms
Most powerful of the five forces
Focus on competitive advantage of
strategies over other firms
Ch 3 -28
Conditions that Cause High Rivalry
Among Competing Firms
High number of competing firms Consumers can switch
Similar size of firms competing brands easily
Similar capability of firms Fixed costs are high among
competing firms competing
Falling demand for the industry’s The product is perishable
products Rivals have excess capacity
Falling product/service prices in Consumer demand is falling
the industry Rivals have excess inventory
Barriers to leaving the market are Rivals sell similar
high products/services
Barriers to entering the market Mergers are common in the
are low industry
Ch 3 -29
The Five-Forces Model
Potential Entry of New Competitors
Barriers to entry are important
Quality, pricing, and marketing can
overcome barriers
Ch 3 -30
The Five-Forces Model
Potential development of
substitute products
Pressure increases when:
Prices of substitutes decrease
Consumers’ switching costs
decrease
Ch 3 -31
The Five-Forces Model
Bargaining Power of Suppliers is
increased when there are:
Few numbers of suppliers
Few substitutes
Costs of switching raw materials is high
Forward integration is gaining control or
ownership of buyers
Ch 3 -32
The Five-Forces Model
Bargaining power of consumers
Customers being concentrated or
buying in volume affects intensity of
competition
Consumer power is higher where
products are standard or
undifferentiated
Ch 3 -33
Conditions Where Consumers Gain
Bargaining Power
If buyers can inexpensively switch
If buyers are particularly important
If sellers are struggling in the face of falling
consumer demand
If buyers are informed about sellers’
products, prices, and costs
If buyers have discretion in whether and
when they purchase the product
Ch 3 -34
Sources of External Information:
Unpublished Sources
Customer surveys
Market research
Databases (Online and Offline)
Internet
Professional Associations
Academic and Professional Journals
Financial Institutions
Interviews and conversations with
stakeholders (manufacturers and suppliers)
Ch 3 -35
Sources of External Information:
Published Sources
Periodicals
Reports
Government documents
Abstracts
Books
Business Directories
Manuals
Expert Opinion
Ch 3 -36
Sources of External Information:
Web Sites
http://marketwatch.multexinvestor.com
http://moneycentral.msn.com
http://finance.yahoo.com
www.clearstation.com
https://us.etrade.com/e/t/invest/markets
www.hoovers.com
Ch 3 -37
