Chapter 3

The External Assessment

Strategic Management:
Concepts & Cases
13th Edition
Fred David

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External Strategic
Management Audit

– Environmental Scanning

– Industry Analysis

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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

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External Strategic
Management Audit

Purpose of an External Audit

 Develop a finite list of

 opportunities that could benefit a firm

 threats that should be avoided

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External Audit
 Gather competitive intelligence
 Assimilate information

 Evaluate

Resulting in a list of the most

important key external factors

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Performing External Audit

Long-term Orientation

Measurable
External
Factors Applicable to
Competing Firms

Hierarchical
(Divisional or Regional)

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 ASK YOURSELF: IS THE FACTOR
Actionable Quantitative Comparative Divisional
A High Quality External Factor:
Online retail grocery shopping
Yes yes yes yes
grew from 12% to 16% in 2018.
A Low Quality External Factor:
Consumers’ average disposable
No no no no
income increased greatly in 2018.

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Social, Cultural, Demographic, and
Natural Environmental Forces
 US Facts

 Aging population
 Less White
 Widening gap between rich & poor
 2025 = 18.5% population > 65 years
 2075 = no ethnic or racial majority

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Social, Cultural, Demographic, and
Natural Environmental Forces
 Trends
 More American households with
people living alone
 Aging Americans – affects all

organizations

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Political, Governmental, and
Legal Forces
Government Regulation

Key opportunities & threats

 Antitrust legislation
 Tax rates

 Lobbying activities

 Patent laws

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Political, Governmental, and
Legal Forces

 Protectionist policies

 Governments taking equity stakes

in companies

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Technological Forces
Major Impact
•AI
•Machine learning
•VR, AR
•IoT
•Cloud
•3D-Printing
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Average Return on Invested Capital in U.S.
Industries, 1992–2006
45
10th percentile 25th percentile Median 75th percentile 90th percentile
7.0% 10.9% 14.3% 18.6% 25.3%
40

35

30 Source: Porter, 1996)

25

20

15

10

0
0% 5% 10% 15% 20% 25% 30% 35% or higher 40%
or lower
ROIC
ROIC = EBIT/(Average invested capital – excess cash)
Source: “The Five Competitive Forces That Shape Strategy” Porter, Harvard Business Review, 2008
 Average ROIC, 1992–2006
Security Brokers and Dealers 40.9%
Prepackaged Software 37.6%
Soft Drinks Pharmaceuticals 37.6%
Perfums, Cosmetics, 31.7%
Toiletries 28.6%
Advertising Agencies 27.3%
Distilled Spirits 26.4%
Semiconductors 21.3%
Medical Instruments 21.0%
Tires Men's and Boys' 19.5%
Clothing Household 19.5%
Appliances
19.2%
Malt Beverages Child Day
19.0%
Care Services
17.6%
Household Furniture
17.0%
Drug Stores Grocery Stores
16.5%
Iron and Steel Foundaries
16.0%
Cookies and Crackers
15.6%
Mobile Homes
15.4%
15.0%
Wine and Brandy 13.9%
Bakery Products 13.8%
Engines and Turbines 13.7%
Laboratory Equipment 13.4%
Book Publishing 13.4%
Oil and Gas 12.6%
Machinery Soft Drink 11.7%
Bottling Knitting Mills 10.5%
Hotels Airlines 10.4%
Catalog, Mail- 5.9%
Order Houses 5.9%

Source: “The Five Competitive Forces That Shape Strategy” Porter, Harvard Business Review, 2008
The Five-Forces Model of Competition

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Steps to Determine if an Acceptable
Profit Can Be Earned
1. Identify key aspects or elements of each
competitive force
2. Evaluate how strong and important each
element is for the firm
3. Decide whether the collective strength of
the elements is worth the firm entering or
staying in the industry

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The Five-Forces Model

 Rivalry among competing firms

 Most powerful of the five forces
 Focus on competitive advantage of

strategies over other firms

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Conditions that Cause High Rivalry
Among Competing Firms
 High number of competing firms
 Similar size of firms competing
 Similar capability of firms competing
 Falling demand for the industry’s products
 Falling product/service prices in the
industry

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Conditions that Cause High Rivalry
Among Competing Firms

 Consumers can switch brands easily

 Barriers to leaving the market are high
 Barriers to entering the market are low
 Fixed costs are high among firms
competing
 The product is perishable

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Conditions that Cause High Rivalry
Among Competing Firms

 Rivals have excess capacity

 Consumer demand is falling
 Rivals have excess inventory
 Rivals sell similar products/services
 Mergers are common in the industry

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The Five-Forces Model

 Potential development of substitute

products
 Pressure increases when:

 Prices of substitutes decrease

 Consumers’ switching costs

decrease

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The Five-Forces Model

 Bargaining Power of Suppliers is

increased when there are:
 Large numbers of suppliers

 Few substitutes

 Costs of switching raw materials is high

 Backward integration is gaining control or

ownership of suppliers

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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
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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

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Sources of External Information:
Unpublished Sources
 Customer surveys
 Market research
 Speeches at professional or shareholder
meetings
 Television programs
 Interviews and conversations with
stakeholders

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Sources of External Information:
Published Sources
 Periodicals
 Journals
 Reports
 Government documents
 Abstracts
 Books
 Directories
 Newspapers
 Manuals
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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

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Analyze the Structure of Your
Industry Assignment
 Understanding the Industry
Make a mark in each row for “your industry” and for “evaluatiton.”

Industry Attractiveness
Your Industry Evaluation
Factors: High Medium Low Opportunities Threats

Power of Customers (make this

industry…)

Power of Suppliers

Rivalry among Competitors

Barriers to Entry

Availability of Substitutes
Understanding the Industry
The two most significant factors affecting industry attractiveness are:
1.
2.

The two factors most likely to change significantly are:

1.
2.

The factors for which our firm is much better/much worse positioned (if any):
1.
2.
Industry Analysis: The External
Factor Evaluation (EFE) Matrix

 Economic  Political
 Social  Governmental

 Cultural  Technological

 Demographic  Competitive

 Environmental  Legal

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EFE Matrix Steps

1. List key external factors

2. Weight from 0 to 1
3. Rate effectiveness of current strategies
1 = "company's response to the external factor is poor"
2 = "company's response to the external factor is average"
3 = "company's response to the external factor is above average"
4. Multiply weight * rating
4 = "company's response to the external factor is superior"

5. Sum weighted scores

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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

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Competitive Forces

Collection & evaluation of data on

competitors is essential for successful
strategy formulation

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Competitive Forces
Identify Rival Firms’
•Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies

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Key Questions Concerning
Competitors
 Their strengths
 Their weaknesses
 Their objectives and strategies
 Their responses to external variables
 Their vulnerability to our alternative
strategies
 Our vulnerability to strategic counterattack

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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

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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

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Sources of Competitive Intelligence

 Internet  Consultants
 Employees  Trade journals
 Managers  Want ads
 Suppliers  Newspaper articles
 Distributors  Government filings
 Customers  Competitors
 Creditors

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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

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Industry Analysis: Competitive Profile
Matrix (CPM)
 Identifies firm’s major competitors and
their strengths & weaknesses in
relation to a sample firm’s strategic
positions

 Critical success factors include

internal and external issues

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1 To perform the CPM, enter exactly 12 critical success factors, no more and
no less. You may use some of the ones listed below if you like but try to use
ones that are more pertinent to your company. For example, if your case is
Delta Airlines, perhaps include on time arrival, extra fees, and frequent flyer
points as factors, rather than the canned factors below. In a CPM, factors do
not need to be overly specific, but they should be divisional in nature to the
extent possible. If Pepsi Co. is your firm, your factors should be about the
firm's soda business, Frito Lay business, bottling business, etc. rather than
just general "advertising." advertising for what division (business) are you
referring to? Frito Lay's advertising, soda marketing, etc. All divisions do not
need to be treated equally; allow more coverage for divisions with more
revenue and those most pertinent to your strategic plan.

2 After entering in 12 critical success factors, enter in a weight for each factor;
weights are industry-based. Be sure to check the bottom of the "Enter
Weight Below" column, to make sure your sum weight is equal to 1.00. It is
okay for some factors to receive a low weight and a factor or two to receive a
high weight of say 0.20.

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3 After entering in your weights, type the name of your company and two
other competitors in the corresponding boxes.

4 After entering in the weights and identifying your company and

two rival firms, then enter in a Rating (company-based) in the
"Enter Rating Below" column for each organization. DO NOT
ASSIGN THE COMPANIES THE SAME RATING; TAKE A
STAND; MAKE A CHOICE. In a CPM, use the coding scheme
provided below for ratings.

1 = "major weaknesses"
2 = "minor weaknesses"
3 = "minor strength"
4 = "major strength"

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