Chapter 3 The External Assessment
Chapter 3
The External Assessment
Strategic Management:
Concepts and Cases. 9th edition
Fred R. David
PowerPoint Slides by
Anthony F. Chelte
Western New England College
Ch.3-1
Fred R. David
Prentice Hall
External Strategic Management Audit
Also called:
– Environmental scanning
– Industry analysis
Ch.3-2
Fred R. David
Prentice Hall
External Strategic Management Audit
External Audit:
– Identification and evaluation of trends and
events beyond control of single firm
•
•
•
•
•
Increased foreign competition
Populations shifts
Aging society
Information technology
Computer revolution
Ch.3-3
Fred R. David
Prentice Hall
Nature of External Audit
Purpose:
– Development of Finite List:
• Opportunities
• Threats to be avoided
Ch.3-4
Fred R. David
Prentice Hall
Key External Forces
Five (5) broad categories:
1. Economic forces
2. Social, cultural, demographic, &
environmental forces
3. Political, governmental, and legal forces
4. Technological factors
5. Competitive forces
Ch.3-5
Fred R. David
Prentice Hall
Relationships Between Key External Forces
and an Organization
Key
External
Forces
Competitors
Suppliers
Distributors
Creditors
Customers
Employees
Communities
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
Opportunities
&
Threats
Ch.3-6
Fred R. David
Prentice Hall
Performing an External Audit
Gather competitive intelligence on factors:
– Social
– Cultural
– Demographic
– Environmental
– Economic
– Political, legal, governmental
– technological
Ch.3-7
Fred R. David
Prentice Hall
Performing an External Audit
Sources of information include:
– Internet
– Libraries (corporate, university, public)
– Suppliers
– Distributors
– Customers
– Competition
Ch.3-8
Fred R. David
Prentice Hall
Performing an External Audit
Key factors:
– Vary over time
– Vary by industry
Ch.3-9
Fred R. David
Prentice Hall
Performing an External Audit
Variables include:
–
–
–
–
–
–
–
–
–
Market share
Breadth of competing products
World economies
Foreign affiliates
Proprietary account advantages
Price competitiveness
Technological advancements
Interest rates
Pollution abatement
Ch.3-10
Fred R. David
Prentice Hall
Key External Factors
Key External Factors:
1.
2.
3.
4.
Oriented to long-term & annual objectives
Measurable
Applicable to all competing firms
Hierarchical
•
•
Overall company
Divisional or functional areas
Ch.3-11
Fred R. David
Prentice Hall
Economic Forces
Monitor Key Economic Variables:
Availability of credit
Level of disposable income
Interest rates
Inflation rates
Money market rates
Federal government budget deficits
Gross domestic product trend
Consumption patterns
Ch.3-12
Fred R. David
Prentice Hall
Monitor Key Economic Variables:
•
•
•
•
•
•
•
•
•
Unemployment trends
Worker productivity levels
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.3-13
Fred R. David
Prentice Hall
Monitor Key Economic Variables:
•
•
•
•
•
•
•
•
Price fluctuations
Exportation of labor & capital
Monetary policies
Fiscal policies
Tax rates
ECC policies
OPEC policies
LDC policies
Ch.3-14
Fred R. David
Prentice Hall
Social, Cultural, Demographic &
Environmental Forces
Major impact on:
– Products
– Services
– Markets
– customers
Ch.3-15
Fred R. David
Prentice Hall
Monitor Key Variables
•
•
•
•
•
•
•
Life expectancy rates
Per capita income
Attitudes toward business
Average disposable income
Buying habits
Ethical concerns
Attitudes toward saving
Ch.3-16
Fred R. David
Prentice Hall
Monitor Key Variables
•
•
•
•
•
•
•
Racial equality
Average level of education
Government regulation
Attitudes toward customer service
Attitudes toward product quality
Energy conservation
Social responsibility
Ch.3-17
Fred R. David
Prentice Hall
Monitor Key Variables
•
•
•
•
•
•
Value placed on leisure time
Recycling
Waste management
Air & water pollution
Ozone depletion
Endangered species
Ch.3-18
Fred R. David
Prentice Hall
Political, Govt., & Legal Forces
Government Regulation
• Key opportunities & key threats
•
•
•
•
Antitrust legislation (Microsoft)
Tax rates
Lobbying efforts
Patent laws
Ch.3-19
Fred R. David
Prentice Hall
Political, Govt., & Legal Forces
Increasing Global Interdependence
•
Impact of political variables
– Formulation of Strategies
– Implementation of Strategies
Ch.3-20
Fred R. David
Prentice Hall
Political, Govt., & Legal Forces
Increasing Global Interdependence
•
Strategists in a global economy
•
Forecast political climates
• Legalistic skills
• Diverse world cultures
Ch.3-21
Fred R. David
Prentice Hall
Political, Govt., & Legal Forces
Globalization of Industry
• Worldwide trend toward similar
consumption patterns
• Global buyers & sellers
• E-commerce
• Instant transmission of money &
information across continents
Ch.3-22
Fred R. David
Prentice Hall
Political, Govt., & Legal Forces
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.3-23
Fred R. David
Prentice Hall
Technological Forces
Revolutionary technological forces:
•
Profound impact on organizations
•
Internet
• Semiconductors
• XML technologies
• UWB communications
Ch.3-24
Fred R. David
Prentice Hall
Technological Forces
Internet changes the nature of opportunities and
threats -•
•
•
•
•
•
Alters life cycle of products
Increases speed of distribution
Creates new products and services
Eases limitations of geographic markets
Alters economies of scale
Changes entry barriers
Ch.3-25
Fred R. David
Prentice Hall
Competitive Forces
Collection and evaluation of information on
competitors is essential for successful
strategy formulation
Ch.3-26
Fred R. David
Prentice Hall
Competitive Forces
Competition in virtually all industries can be
described as intense.
Ch.3-27
Fred R. David
Prentice Hall
Competitive Forces
Identifying rival firms
•
•
•
•
•
•
•
Strengths
Weaknesses
Capabilities
Opportunities
Threats
Objectives
Strategies
Ch.3-28
Fred R. David
Prentice Hall
Competitive Analysis: Porter’s FiveForces Model
Potential development
of substitute products
Bargaining power
of suppliers
Rivalry among
competing firms
Bargaining power
of consumers
Potential entry of new
competitors
Ch.3-29
Fred R. David
Prentice Hall
Industry Analysis (EFE)
External Factor Evaluation Matrix
Summarize & evaluate:
Economic
Demographic
Governmental
Social
Environmental
Technological
Cultural
Political
Competitive
Ch.3-30
Fred R. David
Prentice Hall
Industry Analysis (EFE)
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
(not important to very important)
Ch.3-31
Fred R. David
Prentice Hall
Industry Analysis (EFE)
•
Five-step process:
•
Assign 1-4 rating to each factor
•
• Firm’s current strategies response to the
factor
• Response poor - superior
Multiply each factor’s weight by its rating
• Produces a weighted score
Ch.3-32
Fred R. David
Prentice Hall
Industry Analysis (EFE)
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.3-33
Fred R. David
Prentice Hall
Factor
Weight Rating Weighted
score
Opportunities
High-end in-home entertainment sales are growing nationally
0.15
4
0.60
Forecast for continued growth of expensive housing in Dade &
Broward counties
Wealthy foreigners buy expensive entertainment equipment for
their homes in South Florida
Current customers refer new prospects with little prompting
0.16
4
0.64
0.07
3
0.21
0.12
3
0.36
Direct mailing lists are available by household income
0.06
3
0.18
0.13
1
0.13
New technologies such as satellite broadcast compete with
current technologies
Declining incomes in South Florida versus the U.S.
0.10
1
0.10
0.08
2
0.16
South Florida highly dependent on trade with Latin America
0.07
1
0.07
Economy depends on air transport, a volatile industry
0.06
2
0.12
Threats
Large chains could expand upward into their niche
Total
1.00
2.57
Ch.3-34
Fred R. David
Prentice Hall
Industry Analysis (EFE)
Important
•
Understanding of the factors used in the
EFE Matrix is more important than the
actual weights and ratings assigned.
Ch.3-35
Fred R. David
Prentice Hall
Industry Analysis (CPM)
Competitive Profile Matrix
•
•
Identifies firm’s major competitors
and their strengths & weaknesses
in relation to a sample firm’s
strategic position
Major weakness – major strength
Ch.3-36
Fred R. David
Prentice Hall
(CPM)
Avon
Critical Success
Factor
L’Oreal
Procter
& Gamble
Weight Rating Score Rating Score Rating Score
Advertising
0.20
Product Quality
0.10
Price Competition
0.10
Management
0.10
Financial Position
0.15
Customer Loyalty
0.10
Global Expansion
0.20
Market Share
0.05
Total
1.00
1
4
3
4
4
4
4
1
0.20
0.40
0.30
0.40
0.60
0.40
0.80
0.05
3.15
4
4
3
3
3
4
2
4
0.80
3
0.60
0.40
3
0.30
0.30
4
0.40
0.30
3
0.30
0.45
3
0.45
0.40
2
0.20
0.40
2
0.40
0.20
3
0.15
3.25
2.80
Ch.3-37
Fred R. David
Prentice Hall
The External Assessment
Strategic Management:
Concepts and Cases. 9th edition
Fred R. David
PowerPoint Slides by
Anthony F. Chelte
Western New England College
Ch.3-1
Fred R. David
Prentice Hall
External Strategic Management Audit
Also called:
– Environmental scanning
– Industry analysis
Ch.3-2
Fred R. David
Prentice Hall
External Strategic Management Audit
External Audit:
– Identification and evaluation of trends and
events beyond control of single firm
•
•
•
•
•
Increased foreign competition
Populations shifts
Aging society
Information technology
Computer revolution
Ch.3-3
Fred R. David
Prentice Hall
Nature of External Audit
Purpose:
– Development of Finite List:
• Opportunities
• Threats to be avoided
Ch.3-4
Fred R. David
Prentice Hall
Key External Forces
Five (5) broad categories:
1. Economic forces
2. Social, cultural, demographic, &
environmental forces
3. Political, governmental, and legal forces
4. Technological factors
5. Competitive forces
Ch.3-5
Fred R. David
Prentice Hall
Relationships Between Key External Forces
and an Organization
Key
External
Forces
Competitors
Suppliers
Distributors
Creditors
Customers
Employees
Communities
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
Opportunities
&
Threats
Ch.3-6
Fred R. David
Prentice Hall
Performing an External Audit
Gather competitive intelligence on factors:
– Social
– Cultural
– Demographic
– Environmental
– Economic
– Political, legal, governmental
– technological
Ch.3-7
Fred R. David
Prentice Hall
Performing an External Audit
Sources of information include:
– Internet
– Libraries (corporate, university, public)
– Suppliers
– Distributors
– Customers
– Competition
Ch.3-8
Fred R. David
Prentice Hall
Performing an External Audit
Key factors:
– Vary over time
– Vary by industry
Ch.3-9
Fred R. David
Prentice Hall
Performing an External Audit
Variables include:
–
–
–
–
–
–
–
–
–
Market share
Breadth of competing products
World economies
Foreign affiliates
Proprietary account advantages
Price competitiveness
Technological advancements
Interest rates
Pollution abatement
Ch.3-10
Fred R. David
Prentice Hall
Key External Factors
Key External Factors:
1.
2.
3.
4.
Oriented to long-term & annual objectives
Measurable
Applicable to all competing firms
Hierarchical
•
•
Overall company
Divisional or functional areas
Ch.3-11
Fred R. David
Prentice Hall
Economic Forces
Monitor Key Economic Variables:
Availability of credit
Level of disposable income
Interest rates
Inflation rates
Money market rates
Federal government budget deficits
Gross domestic product trend
Consumption patterns
Ch.3-12
Fred R. David
Prentice Hall
Monitor Key Economic Variables:
•
•
•
•
•
•
•
•
•
Unemployment trends
Worker productivity levels
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.3-13
Fred R. David
Prentice Hall
Monitor Key Economic Variables:
•
•
•
•
•
•
•
•
Price fluctuations
Exportation of labor & capital
Monetary policies
Fiscal policies
Tax rates
ECC policies
OPEC policies
LDC policies
Ch.3-14
Fred R. David
Prentice Hall
Social, Cultural, Demographic &
Environmental Forces
Major impact on:
– Products
– Services
– Markets
– customers
Ch.3-15
Fred R. David
Prentice Hall
Monitor Key Variables
•
•
•
•
•
•
•
Life expectancy rates
Per capita income
Attitudes toward business
Average disposable income
Buying habits
Ethical concerns
Attitudes toward saving
Ch.3-16
Fred R. David
Prentice Hall
Monitor Key Variables
•
•
•
•
•
•
•
Racial equality
Average level of education
Government regulation
Attitudes toward customer service
Attitudes toward product quality
Energy conservation
Social responsibility
Ch.3-17
Fred R. David
Prentice Hall
Monitor Key Variables
•
•
•
•
•
•
Value placed on leisure time
Recycling
Waste management
Air & water pollution
Ozone depletion
Endangered species
Ch.3-18
Fred R. David
Prentice Hall
Political, Govt., & Legal Forces
Government Regulation
• Key opportunities & key threats
•
•
•
•
Antitrust legislation (Microsoft)
Tax rates
Lobbying efforts
Patent laws
Ch.3-19
Fred R. David
Prentice Hall
Political, Govt., & Legal Forces
Increasing Global Interdependence
•
Impact of political variables
– Formulation of Strategies
– Implementation of Strategies
Ch.3-20
Fred R. David
Prentice Hall
Political, Govt., & Legal Forces
Increasing Global Interdependence
•
Strategists in a global economy
•
Forecast political climates
• Legalistic skills
• Diverse world cultures
Ch.3-21
Fred R. David
Prentice Hall
Political, Govt., & Legal Forces
Globalization of Industry
• Worldwide trend toward similar
consumption patterns
• Global buyers & sellers
• E-commerce
• Instant transmission of money &
information across continents
Ch.3-22
Fred R. David
Prentice Hall
Political, Govt., & Legal Forces
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.3-23
Fred R. David
Prentice Hall
Technological Forces
Revolutionary technological forces:
•
Profound impact on organizations
•
Internet
• Semiconductors
• XML technologies
• UWB communications
Ch.3-24
Fred R. David
Prentice Hall
Technological Forces
Internet changes the nature of opportunities and
threats -•
•
•
•
•
•
Alters life cycle of products
Increases speed of distribution
Creates new products and services
Eases limitations of geographic markets
Alters economies of scale
Changes entry barriers
Ch.3-25
Fred R. David
Prentice Hall
Competitive Forces
Collection and evaluation of information on
competitors is essential for successful
strategy formulation
Ch.3-26
Fred R. David
Prentice Hall
Competitive Forces
Competition in virtually all industries can be
described as intense.
Ch.3-27
Fred R. David
Prentice Hall
Competitive Forces
Identifying rival firms
•
•
•
•
•
•
•
Strengths
Weaknesses
Capabilities
Opportunities
Threats
Objectives
Strategies
Ch.3-28
Fred R. David
Prentice Hall
Competitive Analysis: Porter’s FiveForces Model
Potential development
of substitute products
Bargaining power
of suppliers
Rivalry among
competing firms
Bargaining power
of consumers
Potential entry of new
competitors
Ch.3-29
Fred R. David
Prentice Hall
Industry Analysis (EFE)
External Factor Evaluation Matrix
Summarize & evaluate:
Economic
Demographic
Governmental
Social
Environmental
Technological
Cultural
Political
Competitive
Ch.3-30
Fred R. David
Prentice Hall
Industry Analysis (EFE)
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
(not important to very important)
Ch.3-31
Fred R. David
Prentice Hall
Industry Analysis (EFE)
•
Five-step process:
•
Assign 1-4 rating to each factor
•
• Firm’s current strategies response to the
factor
• Response poor - superior
Multiply each factor’s weight by its rating
• Produces a weighted score
Ch.3-32
Fred R. David
Prentice Hall
Industry Analysis (EFE)
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.3-33
Fred R. David
Prentice Hall
Factor
Weight Rating Weighted
score
Opportunities
High-end in-home entertainment sales are growing nationally
0.15
4
0.60
Forecast for continued growth of expensive housing in Dade &
Broward counties
Wealthy foreigners buy expensive entertainment equipment for
their homes in South Florida
Current customers refer new prospects with little prompting
0.16
4
0.64
0.07
3
0.21
0.12
3
0.36
Direct mailing lists are available by household income
0.06
3
0.18
0.13
1
0.13
New technologies such as satellite broadcast compete with
current technologies
Declining incomes in South Florida versus the U.S.
0.10
1
0.10
0.08
2
0.16
South Florida highly dependent on trade with Latin America
0.07
1
0.07
Economy depends on air transport, a volatile industry
0.06
2
0.12
Threats
Large chains could expand upward into their niche
Total
1.00
2.57
Ch.3-34
Fred R. David
Prentice Hall
Industry Analysis (EFE)
Important
•
Understanding of the factors used in the
EFE Matrix is more important than the
actual weights and ratings assigned.
Ch.3-35
Fred R. David
Prentice Hall
Industry Analysis (CPM)
Competitive Profile Matrix
•
•
Identifies firm’s major competitors
and their strengths & weaknesses
in relation to a sample firm’s
strategic position
Major weakness – major strength
Ch.3-36
Fred R. David
Prentice Hall
(CPM)
Avon
Critical Success
Factor
L’Oreal
Procter
& Gamble
Weight Rating Score Rating Score Rating Score
Advertising
0.20
Product Quality
0.10
Price Competition
0.10
Management
0.10
Financial Position
0.15
Customer Loyalty
0.10
Global Expansion
0.20
Market Share
0.05
Total
1.00
1
4
3
4
4
4
4
1
0.20
0.40
0.30
0.40
0.60
0.40
0.80
0.05
3.15
4
4
3
3
3
4
2
4
0.80
3
0.60
0.40
3
0.30
0.30
4
0.40
0.30
3
0.30
0.45
3
0.45
0.40
2
0.20
0.40
2
0.40
0.20
3
0.15
3.25
2.80
Ch.3-37
Fred R. David
Prentice Hall