Chapter 3

The External Assessment

Strategic Management:
by
Fred R. David
Forest David
Meredith David

Copyright © Pearson Education, Inc. Publishing Ch 3 -1

as Prentice Hall
Copyright © Pearson Education, Inc. Publishing Ch 3 -2
as Prentice Hall
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
Copyright © Pearson Education, Inc. Publishing Ch 3 -3
as Prentice Hall
External Strategic
Management Audit

– Environmental Scanning

– Industry Analysis

Copyright © Pearson Education, Inc. Publishing Ch 3 -4

as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -5

as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -6

as Prentice Hall
Copyright © Pearson Education, Inc. Publishing Ch 3 -7
as Prentice Hall
External Audit
 Gather competitive intelligence
 Assimilate information

 Evaluate

Resulting in a list of the most

important key external factors

Copyright © Pearson Education, Inc. Publishing Ch 3 -8

as Prentice Hall
Performing External Audit

Long-term Orientation

Measurable
External
Factors Applicable to
Competing Firms

Hierarchical

Copyright © Pearson Education, Inc. Publishing Ch 3 -9

as Prentice Hall
Industrial Organization
(I/O) View

Industry factors are more important

than internal factors

 Performance determined by industry

forces

Copyright © Pearson Education, Inc. Publishing Ch 3 -10

as Prentice Hall
I/O Perspective Firm Performance

Industry Properties

Economies of Scale

Barriers to Market Entry

Product Differentiation

The Economy

Level of Competitiveness

Copyright © Pearson Education, Inc. Publishing Ch 3 -11

as Prentice Hall
Economic Forces

 GDP

 Trends in the dollar’s value

 Unemployment rates

Copyright © Pearson Education, Inc. Publishing Ch 3 -12

as Prentice Hall
Copyright © Pearson Education, Inc. Publishing Ch 3 -13
as Prentice Hall
Social, Cultural, Demographic, and
Natural Environmental Forces

Major Impact –
•Products
•Services
•Markets
•Customers

Copyright © Pearson Education, Inc. Publishing Ch 3 -14

as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -15

as Prentice Hall
Social, Cultural, Demographic, and
Natural Environmental Forces

 Facts
 World population 8 billion
 World population = 9 billion by 2054
 Pakistan population > 24 million
 U.S. population > 310 million

Copyright © Pearson Education, Inc. Publishing Ch 3 -16

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

Copyright © Pearson Education, Inc. Publishing Ch 3 -17

as Prentice Hall
Political, Governmental, and
Legal Forces
Government Regulation
Key opportunities & threats
 Antitrust legislation
 Tax rates

 Lobbying activities

 Patent laws

Copyright © Pearson Education, Inc. Publishing Ch 3 -18

as Prentice Hall
Political, Governmental, and
Legal Forces

 Protectionist policies

 Governments taking equity stakes

in companies

Copyright © Pearson Education, Inc. Publishing Ch 3 -19

as Prentice Hall
Technological Forces

Major Impact –
•Internet

Copyright © Pearson Education, Inc. Publishing Ch 3 -20

as Prentice Hall
Technological Forces

Significance of IT
•Chief Information Officer (CIO)
•Chief Technology Officer (CTO)

Copyright © Pearson Education, Inc. Publishing Ch 3 -21

as Prentice Hall
Technological Forces

Essential for nearly every

strategic decision

Copyright © Pearson Education, Inc. Publishing Ch 3 -22

as Prentice Hall
Competitive Forces

Collection & evaluation of data on

competitors is essential for successful
strategy formulation

Copyright © Pearson Education, Inc. Publishing Ch 3 -23

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

Copyright © Pearson Education, Inc. Publishing Ch 3 -24

as Prentice Hall
Competitive Forces

Competition in virtually all

industries can be described as
intense

Copyright © Pearson Education, Inc. Publishing Ch 3 -25

as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -26

as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -27

as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -28

as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -29

as Prentice Hall
Sources of Competitive Intelligence

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

Copyright © Pearson Education, Inc. Publishing Ch 3 -30

as Prentice Hall
Objectives of Competitive
Intelligence
 Provide a general understanding of an
industry and competitors
 Identify areas where competitors are
vulnerable and assess the impact of actions
on competitors
 Identify potential moves that a competitor
might make

Copyright © Pearson Education, Inc. Publishing Ch 3 -31

as Prentice Hall
Market Commonality

 The number and significance of

markets that a firm competes in
with rivals

Copyright © Pearson Education, Inc. Publishing Ch 3 -32

as Prentice Hall
Resource Similarity

 Extentto which the type and

amount of a firm’s internal
resources are comparable to a
rival

Copyright © Pearson Education, Inc. Publishing Ch 3 -33

as Prentice Hall
The Five-Forces Model of Competition

Copyright © Pearson Education, Inc. Publishing Ch 3 -34

as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -35

as Prentice Hall
The Five-Forces Model

 Rivalry among competing firms

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

strategies over other firms

Copyright © Pearson Education, Inc. Publishing Ch 3 -36

as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -37

as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -38

as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -39

as Prentice Hall
The Five-Forces Model

 Potential Entry of New Competitors

 Barriers to entry are important
 Quality, pricing, and marketing can

overcome barriers

Copyright © Pearson Education, Inc. Publishing Ch 3 -40

as Prentice Hall
The Five-Forces Model

 Potential development of substitute

products
 Pressure increases when:

 Prices of substitutes decrease

 Consumers’ switching costs

decrease

Copyright © Pearson Education, Inc. Publishing Ch 3 -41

as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -42

as Prentice Hall
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
Copyright © Pearson Education, Inc. Publishing Ch 3 -43
as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -44

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

Copyright © Pearson Education, Inc. Publishing Ch 3 -45

as Prentice Hall
Sources of External Information:
Published Sources
 Periodicals
 Journals
 Reports
 Government documents
 Abstracts
 Books
 Directories
 Newspapers
 Manuals
Copyright © Pearson Education, Inc. Publishing Ch 3 -46
as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -47

as Prentice Hall
Forecasting Tools and Techniques

 Forecasts are educated assumptions

about future trends and events
 Quantitative techniques – most
appropriate when historical data is
available and there is a constant
relationship
 Qualitative techniques

Copyright © Pearson Education, Inc. Publishing Ch 3 -48

as Prentice Hall
Assumptions

Estimates of future events based

on the best available information
in the present

Copyright © Pearson Education, Inc. Publishing Ch 3 -49

as Prentice Hall
Assumptions
 Linear regression, for example, is based
on the assumption that the future will be
just like the past—which, of course, it
never is. As historical relationships
become less stable, quantitative forecasts
become less accurate.

Copyright © Pearson Education, Inc. Publishing Ch 3 -50

as Prentice Hall
Industry Analysis: The External
Factor Evaluation (EFE) Matrix

 Economic  Political
 Social  Governmental

 Cultural  Technological

 Demographic  Competitive

 Environmental  Legal

Copyright © Pearson Education, Inc. Publishing Ch 3 -51

as Prentice Hall
EFE Matrix Steps
1. List key external factors
2. Weight from 0 to 1
3. Rate the effectiveness of current
strategies
4. Multiply weight by rating
5. Sum weighted scores

Copyright © Pearson Education, Inc. Publishing Ch 3 -52

as Prentice Hall
Copyright © Pearson Education, Inc. Publishing Ch 3 -53
as Prentice Hall
Copyright © Pearson Education, Inc. Publishing Ch 3 -54
as Prentice Hall
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

Copyright © Pearson Education, Inc. Publishing Ch 3 -55

as Prentice Hall
Industry Analysis: Competitive Profile
Matrix (CPM)
 Identifies a firm’s major competitors
and their strengths & weaknesses in
relation to the sample firm’s strategic
positions
 Critical success factors include
internal and external issues

Copyright © Pearson Education, Inc. Publishing Ch 3 -56

as Prentice Hall
Copyright © Pearson Education, Inc. Publishing Ch 3 -57
as Prentice Hall
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.

Copyright © Pearson Education, Inc. Publishing Ch 3 -58

as Prentice Hall