Chap 03

Chapter 3
The External Assessment
Strategic Management:
Concepts & Cases
12th Edition
Fred David
Copyright 2009 Pearson Education, Inc. Ch 3 -1

Publishing as Prentice Hall
The strategic plan- project
Naming the company and the team.

Preparing the plan step by step as the
progress in the course.
Make presentations.
Final hard copy submission.

Environmental scanning:
The monitoring, evaluating, and

disseminating of information from the
external and internal environments to
key people within the corporation to
avoid strategic surprise and ensure the
long-term health of the firm.

External Strategic
Management Audit
Environmental Scanning
Industry Analysis

External Strategic
Management Audit
Purpose of External Audit

Identify
Opportunities
Threats

External Environment
External Environmental Variables:
Societal\community environment:
General forces that do not directly
touch on the short-run activities but
often influence its long-run decisions.

Task environment:
Those elements or groups that
directly affect the corporation and, in
turn, are affected by it. The task
environment is the industry within
which that firm operates.

Industry Analysis
Industry
A group of firms producing a similar
product or service, such as soft drinks,
health services or financial services.

Industry analysis:
An in-depth examination of key
factors within a corporations task
environment

The process of performing an external audit
The process of performing an external audit must involve

as many managers and employees as possible to
grantee commitment and understanding from
organizational members. Individuals appreciate having
the opportunity to contribute ideas and to gain a better
understanding of the firms industry competitors and
markets. To perform an external audit, a company first
must gather competitive intelligence and information
about economic, social, cultural, demographic,
environmental, political, governmental, legal, and
technological trends.

Individuals can be asked to mentor various sources of information
such as key magazines, trade journals, and newspapers.
These persons can submit periodic scanning reports to a committee
of managers charged with performing the external audit.
This approach provides a continues stream of timely strategic
information and involves in the external audit process.
The internet provide another source for gathering strategic
information, as do corporate, university and public libraries.
Suppliers, distributers, salespersons, customers and competitors
represent other sources of vital information.
Once information is gathered, it should be assimilated and
evaluated. A meeting or series of meeting of managers is needed to
collectively identify the most important opportunities and threats
facing the firm.
Publis Pne Hall
These key external factors should be listed on flipcharts

or chalkboard. A prioritized list of these factors could be
obtained by requesting that all managers rank the factors
identified, from one for the most important
opportunity/threat to twenty for the least important
opportunity/threat

External Audit
Gather competitive
intelligence
Social
Cultural
Demographic
Environmental
Governmental
Legal
Technological

Economic forces
Regulate the exchange of materials, money, energy, and
information
Technological forces
Generate problem-solving inventions
Political-legal forces
Allocate power, provide laws and regulations
Socio-cultural forces
Regulate values, mores\traditions, and customs

Competitive Forces: An important part of an

external audit is identifying rival firms and
determining their strengths, weaknesses,
capabilities, opportunities, threats, objectives,
and strategies. Collecting and evaluating
information on competitors is essential for
strategy formulation

External Audit Sources of
Information
Internet
Libraries
Suppliers
Distributors
Salespersons
Customers
Competition
Performing External Audit
Key Factors
Vary over time
Vary by industry

Variables
Market share
Breadth of competing products
World economies
Foreign affiliates
Proprietary account advantages

Variables
Price competitiveness
Technological advancements
Interest rates
Pollution abatement

Freund emphasized that the key external factors should
be:
Important to achieving long-term and annual objectives
Measurable
Applicable to all competing firms
Hierarchical in the sense that some will pertain to the
overall company and others will be more narrowly
focused on functional or divisional areas.

Industrial Organization (I/O)
View
The Industrial Organization (I/O) approach to competitive
advantages that external (industry) factors in a firm
achieving competitive advantage. Proponents of the I/O
view such as Michael Porter, contended that
organizational performance will be primarily determined
by industry forces. Porters Five Forces Model, is an
example of the I/O perspective, which focuses upon
analyzing external forces and industry and industry
variables as a basis for getting and keeping completive
advantage.

Industrial Organization (I/O) View
Competitive advantages is determined largely by

competitive positioning within an industry, according to
I/O advocates. Managing strategically from the I/O
perspective entails firms striving to compete in attractive
industries, avoiding weak or faltering industries , and
gaining a full understanding I/O of key external factors
relationships within that attractive industry. I/O research
was mainly conducted from1960s to the 1980s and
provided an important contributions to our understanding
of how to gain competitive advantage.

I/O theorists contend that the industry in which a firm

chooses to compete has stronger influence on the firms
performance than do the internal functional decisions
managers make in marketing, finance, and the like. They
contend, that firm performance is primarily based more
on industry properties, such as economies of scale,
barriers to market entry, product differentiation, and level
of competitiveness than internal resources, capabilities,
structure, and operations.

The I/O view has enhanced our

understanding of strategic management .
However, it is not a question of whether
external or internal factors are more important.
Rather, effective integration and
understanding of both external and internal
factors is the key to securing and keeping a
competitive advantage.

Research Findings
Approximately 20% of a firms profitability

can be explained by the industry, whereas
36% of the variance in profitability is
attributed to the firms internal factors

Identify opportunities & threats
To conduct such analysis we will explain in

details the different aspects of external
environment forces\variables such as
economic, social, cultural and technology..

Societal Environment
Important Variables
Economic Technological Political-Legal Sociocultural
GDP trends Total government Antitrust regulations Lifestyle changes
spending for R&D
Interest rates Environmental protection Career expectations
Total industry spending laws
Money supply Consumer activism
for R&D
Tax laws
Inflation rates Rate of family formation
Focus of technological
Special incentives
Unemployment levels efforts Growth rate of population
Foreign trade regulations
Wage/price controls Patent protection Age distribution of
Attitudes toward foreign population
Devaluation/revaluation New products
companies
Regional shifts in
Energy availability and New developments in
Laws on hiring and population
cost technology transfer from
promotion
lab to marketplace Life expectancies
Disposable and
Stability of government
discretionary income Productivity Birth rates
improvements through
automation

Definitions
Gross domestic product (GDP) is the market

value of all officially recognized final goods and
services produced within a country in a given
period.
In economics, the money supply or money
stock, is the total amount of money available in
an economy at a specific time
In economics , inflation is a rise in the general
level of price of goods and services in an
economy over a period of time
Definitions
Devaluation is a reduction in the value of a

currency with respect to those goods, services
or other monetary units with which that currency
can be exchanged
Price controls are governmental restrictions on
the prices that can be charged for goods and
services in a market
Disposable income is total personal income
minus personal current taxes

The Five-Forces Model of Competition

Industry Analysis
Porters approach:
Assess the six forces --

Threat of new entrants
Rivalry among existing firms
Threat of substitute products
Bargaining power of buyers
Bargaining power of suppliers

Industry Analysis
Threat of New Entrants --

Barriers to entry:
Previous experience with retaliation to new entry.
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs to another suppler
Access to Distribution Channels
Cost Disadvantages Independent of Size: established

firms may have, proprietary product technology, favorable
access to raw material, learning curve.
Government Policy

The threat of new entry (competitors).
New entries expand industrys productive

capacity.
Unless the market grows, a new entries
intensifies the fight for market share.
The result is prices go down which, lowering
industry profitability.

Industry Analysis
Rivalry Among Existing Firms --
Intense rivalry related to:

Number of competitors
Rate of Industry Growth
Produce or Service Characteristics
Amount of Fixed Costs
Capacity
Height of Exit Barriers
Diversity of Rivals
Industry Analysis
Threat of Substitute Products/Services
Substitute Products:
Those products that appear to be different
but can satisfy the same need as another
product. To the extent that switching costs
are low, substitutes can have a strong effect
on an industry.

Industry Analysis
Bargaining Power of Buyers --
Buyer is powerful when:

Buyer purchases large proportion of sellers products
Buyer has the potential to integrate backward
Alternative suppliers are plentiful
Changing suppliers costs very little
Purchased product represents a high percentage of a

buyers costs
Buyer earns low profits
Purchased product is unimportant to the final quality

or price of a buyers products

Industry Analysis
Bargaining Power of Suppliers --
Supplier is powerful when:

Supplier industry is dominated by a few companies but
sells to many
Its product is unique and/or has high switching costs
Substitutes are not readily available
Suppliers are able to integrate forward and compete
directly with present customers
Purchasing industry buys only a small portion of the
suppliers goods.

Teamwork
Identify the OT to the business you wrote vision &
mission.
Key variables:
1. Economic: $ value, per capita income, available of credit at
banks.
2. Social, Cultural, Demographic, and Environmental Forces:
population age and size, level of education to consumer.
3. Political, Governmental, and Legal Forces: Tax rates,
political stability, law and order.
4. Technological Forces: internet, communication development.

There are five steps in developing The External
Factor Evaluation (EFE) Matrix
1. List key external factors as identified in the external-audit
process. Include a total of 10-20 factors from both the
opportunities and threats.
2. Assign to each factor a weight from .0 (not important) to 1.0
(very important). These weights show the relative importance.
The total of all the weights should equal 1.0.
3. Assign a 1-4 rating to each factor to indicate how effectively the
firms current response strategy: 1= the response is poor, 2 = the
response is average, 3 = the response is above average, and 4
= the response is superior.
4. Multiply each factors weight by its rating to get a weighted score.
5. Sum the weighted scores for each variable to determine the total
weighted score for the organization.

Industry Analysis: The External Factor
Evaluation (EFE) Matrix
Summarize & Evaluate
Economic Demographic Governmental
Social Environmental Technological
Cultural Political Competitive

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

Industry Analysis EFE
Important
Understanding the factors used in the EFE

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

Industry Analysis: The External Factor
Evaluation (EFE) Matrix: teamwork.
Apply the EFE to the previous case.

Industry Analysis: Competitive Profile
Matrix (CPM)
Identifies firms major competitors and

their strengths & weaknesses in
relation to a sample firms strategic
positions

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.

Review
Explain how to conduct an external

strategic-management audit.
An effective approach for conducting an
external strategic-management audit
consists of four basic steps: (1) select key
variables, (2) select key sources of
information, (3) use forecasting tools and
techniques, and (4) construct an EFE Matrix.

Review
Identify a recent economic, social, political, or

technological trend that significantly affects
financial institutions.
EconomicInterest rates remain low.
SocialMany states are passing no smoking
ordinances.
PoliticalEastern European countries are
experiencing political instability.
TechnologicalUse of the Internet is doubling
every 100 days.
Review
Discuss the following statement: Major

opportunities and threats usually result
from an interaction among key
environmental trends rather than from a
single external event or factor.
This statement is accurate. It reveals how
complex the external audit part of strategy
formulation can be. There are an infinite
number of interactions among key external
factors.
Review
Use Porters five-forces model to evaluate

competitiveness within the Gaza banking
industry.
Porter identifies five competitive forces that
determine the intensity of competition in an
industry and the total value of profits created in a
particular industry. The five forces are 1) new
entrants, 2) substitute products or services, 3)
bargaining power of suppliers, 4) bargaining power
of buyers, and 5) rivalry among existing firms. A
key to selecting appropriate generic strategies is to
analyze these competitive forces in terms of trends,
opportunities, and threats facing the firm.
Review
What major forecasting techniques would you

use to identify (1) economic opportunities and
threats and (2) demographic opportunities and
threats? Why are these techniques most
appropriate?
With the advent of sophisticated computers,
simultaneous systems of regression equations
have become the most widely used approach for
forecasting economic variables. Scenario
development is the most popular of all techniques
for social and demographic forecasting, although
surveys and market research are also widely used.
Review
Give some advantages and disadvantages of

cooperative versus competitive strategies.
Cooperative strategies are generally less costly
than competitive strategies. Cooperative strategies
between domestic and foreign companies can
facilitate entry into world markets. However,
competitive strategies recognize that survival of
the fittest is an underlying philosophy of business
not only in the United States, but also in most of
the world. Identifying competitors strengths and
weaknesses is, thus, an integral and vital part of
the external audit.
Review
Lets say your boss develops an EFE Matrix

that includes 62 factors. How would you
suggest reducing the number of factors to 20?
Answer: Let a group of knowledgeable individuals
in the organization evaluate the relative
importance of each factor by assigning a 1 = not
important, 2 = somewhat important, and 3 = very
important. Then add the ratings each factor
receives. The 20 factors with the highest sum
score should be included in the EFE Matrix.

Review
Do you agree with I/O theorists that external factors are
more important than internal factors in a firm achieving
competitive advantage? Explain both your and their
position.
While I/O theorists claim that industry factors are more
important than internal factors, research findings suggest that
only 20% of a firms profitability can be explained by industry
factors and 36% explained by internal factors. Regardless, it is
not a question of whether external or internal factors are more
important. Rather, effective integration and understanding of
both external and internal factors is the key to securing and
keeping a competitive advantage.

Review
List the 9 external areas that give rise to

opportunities and threats.
Answer: The ten external areas are
economic, social, cultural, demographic,
environmental, political, government, legal,
and technological.


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Chapter 3

The External Assessment

Copyright 2009 Pearson Education, Inc. Ch 3 -1

Naming the company and the team.

Copyright 2009 Pearson Education, Inc. Ch 3 -2

The monitoring, evaluating, and

Copyright 2009 Pearson Education, Inc. Ch 3 -3

Copyright 2009 Pearson Education, Inc. Ch 3 -4

Purpose of External Audit

Copyright 2009 Pearson Education, Inc. Ch 3 -5

External Environmental Variables:

Copyright 2009 Pearson Education, Inc. Ch 3 -6

External Environmental Variables:

Copyright 2009 Pearson Education, Inc. Ch 3 -7

Copyright 2009 Pearson Education, Inc. Ch 3 -8

External Environmental Variables:

Copyright 2009 Pearson Education, Inc. Ch 3 -9

The process of performing an external audit must involve

Copyright 2009 Pearson Education, Inc. Ch 3 -11

These key external factors should be listed on flipcharts

Copyright 2009 Pearson Education, Inc. Ch 3 -13

Copyright 2009 Pearson Education, Inc. Ch 3 -14

Copyright 2009 Pearson Education, Inc. Ch 3 -15

Competitive Forces: An important part of an

Copyright 2009 Pearson Education, Inc. Ch 3 -16

Copyright 2009 Pearson Education, Inc. Ch 3 -18

Copyright 2009 Pearson Education, Inc. Ch 3 -19

Copyright 2009 Pearson Education, Inc. Ch 3 -20

Copyright 2009 Pearson Education, Inc. Ch 3 -21

Copyright 2009 Pearson Education, Inc. Ch 3 -22

Competitive advantages is determined largely by

Copyright 2009 Pearson Education, Inc. Ch 3 -23

I/O theorists contend that the industry in which a firm

Copyright 2009 Pearson Education, Inc. Ch 3 -24

The I/O view has enhanced our

Copyright 2009 Pearson Education, Inc. Ch 3 -25

Approximately 20% of a firms profitability

Copyright 2009 Pearson Education, Inc. Ch 3 -26

To conduct such analysis we will explain in

Copyright 2009 Pearson Education, Inc. Ch 3 -27

Copyright 2009 Pearson Education, Inc. Ch 3 -28

Gross domestic product (GDP) is the market

Devaluation is a reduction in the value of a

Copyright 2009 Pearson Education, Inc. Ch 3 -30

Copyright 2009 Pearson Education, Inc. Ch 3 -31

Assess the six forces --

Copyright 2009 Pearson Education, Inc. Ch 3 -32

Threat of New Entrants --

Switching Costs to another suppler

Access to Distribution Channels

Cost Disadvantages Independent of Size: established

Copyright 2009 Pearson Education, Inc. Ch 3 -33

New entries expand industrys productive

Copyright 2009 Pearson Education, Inc. Ch 3 -34

Rivalry Among Existing Firms --

Intense rivalry related to:

Threat of Substitute Products/Services

Copyright 2009 Pearson Education, Inc. Ch 3 -36

Bargaining Power of Buyers --

Buyer is powerful when:

Buyer has the potential to integrate backward

Alternative suppliers are plentiful

Changing suppliers costs very little