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Strategic Management Concepts: A

Competitive Advantage Approach,

Concepts and Cases Seventeenth Edition

Chapter 3 The External Assessment

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Learning Objectives (1 of 2)

3.1 Describe the nature and purpose of an external

assessment in formulating strategies.

3.2 Identify and discuss 10 external forces that impact

organizations.

3.3 Explain Porter’s Five-Forces Model and its relevance in

formulating strategies.

After studying this chapter, you should be able to do the following:

3-1. Describe the nature and purpose of an external assessment in formulating

strategies.

3-2. Identify and discuss 10 external forces that impact organizations.

3-3. Explain Porter’s Five-Forces Model and its relevance in formulating

strategies.

Learning Objectives (2 of 2)

3.4 Describe key sources of information for identifying

opportunities and threats.

3.5 Discuss forecasting tools and techniques.

3.6 Explain how to develop and use an External Factor

Evaluation (E F E) Matrix.

3.7 Explain how to develop and use a Competitive Profile

Matrix (CPM).

After studying this chapter, you should be able to:

3-4. Describe key sources of information used for identifying opportunities and

threats.

3-5. Discuss forecasting tools and techniques.

3-6. Explain how to develop and use an External Factor Evaluation (EFE)

Matrix.

3-7. Explain how to develop and use a Competitive Profile Matrix (CPM).

Figure 3.1 A Comprehensive Strategic-

Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1 (February

1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance

Scorecard of David’s Strategic Modeling at Industrial Business for National Construction Contractor of

Indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010): 20.

This figure illustrates with white shading how the external audit fits into the

strategic-management process.

External Audit

• External audit

– focuses on identifying and evaluating trends and

events beyond the control of a single firm

– reveals key opportunities and threats confronting an

organization so that managers can formulate strategies

to take advantage of the opportunities and avoid or

reduce the impact of threats

This chapter examines the tools and concepts needed to conduct an external

strategic management audit (sometimes called environmental scanning or

industry analysis).

The Purpose of an External Audit

• The external audit is aimed at identifying key variables

that offer actionable responses

• Firms should be able to respond either offensively or

defensively to the factors by formulating strategies that

take advantage of external opportunities or that minimize

the impact of potential threats.

The purpose of an external audit is to develop a finite list of opportunities that

could benefit a firm as well as threats that should be avoided. As the term finite

suggests, the external audit is not aimed at developing an exhaustive list of

every possible factor that could influence the business; rather, it is aimed at

identifying key variables that offer actionable responses.

Key External Forces

External forces can be divided into five broad categories:

1. economic forces

2. social, cultural, demographic, and environmental (SCDE)

forces

3. political, governmental, and legal forces

4. technological forces

5. competitive forces

Important Note: When identifying and prioritizing key external factors in

strategic planning, make sure the factors selected are (1) specific (i.e.,

quantified to the extent possible); (2) actionable (i.e., meaningful in terms of

having strategic implications); and (3) stated as external trends, events, or

facts rather than as strategies the firm could pursue.

Figure 3.2 Relationships Between

Key External Forces and an

Organization

Identifying and evaluating external opportunities and threats enables

organizations to develop a clear mission, to design strategies to achieve long-

term objectives, and to develop policies to achieve annual objectives.

The AQCD Test

• When identifying and prioritizing key external factors in

strategic planning, the following 4 factors are important:

– Actionable

– Quantitative

– Comparative

– Divisional

• The AQCD is a measure of the quality of an external factor.

The “Actionable-Quantitative-Comparative-Divisional (AQCD) Test” is a

measure of the quality of an external factor.

Economic Forces (1 of 2)

• Shift to service economy

• Availability of credit

• Level of disposable income

• Propensity of people to spend

• Interest rates

• Inflation rates

• G D P trends

• Consumption patterns

• Unemployment trends

• Value of the dollar

Be mindful that in strategic planning and case analysis, relevant economic

variables such as those listed (from Table 3.1) must be quantified and

actionable to be useful.

Economic Forces (2 of 2)

• Import/Export factors

• Demand shifts for different goods and services

• Income differences by region and consumer group

• Price fluctuations

• Foreign countries’ economic conditions

• Monetary and Fiscal policy

• Stock market trends

• Tax rate variation by country and state

• European Economic Community (E E C) policies

• Organization of Petroleum Exporting Countries (O P E C) policies

Be mindful that in strategic planning and case analysis, relevant economic

variables such as those listed must be quantified and actionable to be useful.

Social, Cultural, Demographic, and

Environmental (SCDE) Forces

• SCDE forces impact strategic decisions on virtually all

products, services, markets, and customers.

• These forces are shaping the way people live, work,

produce, and consume.

Social, cultural, demographic, and environmental trends are shaping the way

Americans live, work, produce, and consume. New trends are creating a

different type of consumer and, consequently, a need for different products,

new services, and updated strategies.

Key SCDE Variables (1 of 3)

• Population changes by race, age, and geographic area

• Regional changes in tastes and preferences

• Number of marriages

• Number of divorces

• Number of births

• Number of deaths

• Immigration and emigration rates

• Social Security programs

Be mindful that in strategic planning and case analysis, relevant social,

cultural, demographic, and natural environment factors for a particular

business must be quantified and actionable to be useful. The list is from Table

3.2.

Key SCDE Variables (2 of 3)

• Life expectancy rates

• Per capita income

• Social media pervasiveness

• Attitudes toward retirement

• Energy conservation

• Attitudes toward product quality

• Attitudes toward customer service

• Pollution control

Be mindful that in strategic planning and case analysis, relevant social,

cultural, demographic, and natural environment factors for a particular

business must be quantified and actionable to be useful.

Key SCDE Variables (3 of 3)

• Attitudes toward foreign peoples

• Energy conservation

• Social programs

• Number of churches

• Number of church members

• Social responsibility issues

Be mindful that in strategic planning and case analysis, relevant social,

cultural, demographic, and natural environment factors for a particular

business must be quantified and actionable to be useful.

Political, Governmental, and Legal

Forces

• Local, state, and federal laws, as well as regulatory

agencies and special-interest groups, can have a major

impact on the strategies of small, large, for-profit, and

nonprofit organizations.

Federal, state, local, and foreign governments are major regulators,

deregulators, subsidizers, employers, and customers of organizations.

Political, governmental, and legal factors, therefore, can represent major

opportunities or threats for both small and large organizations.

Political, Government, and Legal

Variables (1 of 2)

• Natural environmental regulations

• Protectionist actions by countries

• Changes in patent laws

• Equal employment opportunity laws

• Level of defense expenditures

• Unionization trends

• Antitrust legislation

Some political, governmental, and legal variables that can represent key

opportunities or threats to organizations are provided on this slide, but in

stating these for a particular company, the factors should be both quantitative

and actionable.

Political, Government, and Legal

Variables (2 of 2)

• U S A versus other country relationships

• Political conditions in countries

• Global price of oil changes

• Local, state, and federal laws

• Import-export regulations

• Tariffs, particularly on steel and aluminum

• Local, state, and national elections

Some political, governmental, and legal variables that can represent key

opportunities or threats to organizations are provided on this slide, but in

stating these for a particular company, the factors should be both quantitative

and actionable.

Technological Forces (1 of 3)

New technologies such as:

• the Internet of Things

• 3D printing

• the cloud

• mobile devices

• biotech

• analytics

• autotech

No company or industry today is insulated against emerging technological

developments. In high-tech industries, identification and evaluation of key

technological opportunities and threats can be the most important part of the

external strategic-management audit.

Technological Forces (2 of 3)

• robotics and

• artificial intelligence

are fueling innovation in many industries, and impacting

strategic-planning decisions.

No company or industry today is insulated against emerging technological

developments. In high-tech industries, identification and evaluation of key

technological opportunities and threats can be the most important part of the

external strategic-management audit.

Technological Forces (3 of 3)

• Many firms now have a Chief Information Officer (C I O)

and a Chief Technology Officer (C T O) who work together

to ensure that information needed to formulate, implement,

and evaluate strategies is available where and when it is

needed

These individuals are responsible for developing, maintaining, and updating a

company’s information database. The CIO is more a manager, managing the

firm’s relationship with stakeholders; the CTO is more a technician, focusing

on technical issues such as data acquisition, data processing, decision-support

systems, and software and hardware acquisition.

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 successful

strategy formulation. Identifying major competitors is not always easy because

many firms have divisions that compete in different industries.

Obtaining Competitive Intelligence (1 of 2)

Legal and ethical ways to obtain competitive intelligence:

1. Reverse-engineer rival firms’ products.

2. Use surveys and interviews of customers, suppliers, and

distributors of rival firms.

3. Analyze rival firm’s Form 10-K.

4. Conduct fly-over and drive-by visits to rival firm

operations.

5. Search online databases.

6. Contact government agencies for public information

about rival firms.

The six ways can help one collect competitor intelligence both legally and

ethically.

Obtaining Competitive Intelligence (2 of 2)

7. Monitor relevant trade publications, magazines, and

newspapers.

8. Purchase social-media data about customers of all firms

in the industry.

9. Hire top executives from rival firms.

Key Questions About Competitors (1 of 3)

1. What are the strengths and weaknesses of our major

competitors?

2. What products and services do we offer that are unique in

the industry?

3. What are the objectives and strategies of our major

competitors?

4. How will our major competitors most likely respond to

current economic, SCDE, political, governmental, legal,

technological, and competitive trends affecting our

industry?

Addressing questions about competitors, such as those presented on this

slide, is important in performing an external audit.

Key Questions About Competitors (2 of 3)

5. How vulnerable are the major competitors to our new

strategies, products, and services?

6. How vulnerable is our firm to successful counterattack by

our major competitors?

7. How does our firm compare to rivals in mastering the

social-media conversation in this industry?

8. To what extent are new firms entering and old firms

leaving this industry?

9. What key factors have resulted in our present competitive

position in this industry?

Addressing questions about competitors, such as those presented on this

slide, is important in performing an external audit.

Key Questions About Competitors (3 of 3)

10. How are supplier and distributor relationships changing

in this industry?

Addressing questions about competitors, such as those presented on this

slide, is important in performing an external audit.

Competitive Intelligence Programs

Competitive intelligence (CI)

• 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

Competitive intelligence (CI) is formally defined by the Society of Competitive

Intelligence Professionals (SCIP). Competitive intelligence is not corporate

espionage; after all, 95 percent of the information a company needs to make

strategic decisions is available and accessible to the public.

Figure 3.3 The Five-Forces Model of

Competition (1 of 2)

Porter’s Five-Forces Model of competitive analysis is a widely used approach

for developing strategies in many industries.

The Five-Forces Model of

Competition (2 of 2)

1. Identify key aspects or elements of each competitive force

that impact the firm.

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.

The intensity of competition among firms varies widely across industries.

The Five-Forces Model (1 of 6)

• Rivalry among competing firms

– Most powerful of the five forces

– Focus on competitive advantage of strategies over

other firms

The intensity of rivalry among competing firms tends to increase as the

number of competitors increases, as competitors become more equal in size

and capability, as demand for the industry’s products declines, and as price

cutting becomes common.

Table 3.5 The Five-Forces Model

1. When the number of competing firms is high

2. When competing firms are of similar size

3. When competing firms have similar capabilities

4. When demand for the industry’s products is changing rapidly

5. When price cuts are common in the industry

6. When consumers can switch brands easily

7. When barriers to leaving the market are high

8. When barriers to entering the market are low

9. When fixed costs are high among competing firms

10. When products are perishable or have short product life cycles

Conditions That Cause High Rivalry Among Competing

Firms

This slide summarizes conditions that cause high rivalry among competing

firms.

The Five-Forces Model (3 of 6)

• Potential Entry of New Competitors

– Barriers to entry are important

– Quality, pricing, and marketing can overcome barriers

Whenever new firms can easily enter a particular industry, the intensity of

competitiveness among firms increases.

Barriers to Entry (1 of 2)

• Need to gain economies of scale quickly

• Need to gain technology and specialized know-how

• Lack of experience

• Strong customer loyalty

• Strong brand preferences

• Large capital requirements

• Lack of adequate distribution channels

Barriers to entry, however, can include the need to gain economies of scale

quickly, the need to gain technology and specialized know-how, the lack of

experience, strong customer loyalty, strong brand preferences, large capital

requirements, lack of adequate distribution channels, government regulatory

policies, tariffs, lack of access to raw materials, possession of patents,

undesirable locations, counterattack by entrenched firms, and potential

saturation of the market.

Barriers to Entry (2 of 2)

• Government regulatory policies

• Tariffs

• Lack of access to raw materials

• Possession of patents

• Undesirable locations

• Counterattack by entrenched firms

• Potential saturation of the market

Whenever new firms can easily enter a particular industry, the intensity of

competitiveness among firms increases.

The Five-Forces Model (4 of 6)

• Potential development of substitute products

– Pressure increases when:

▪ Prices of substitutes decrease

▪ Consumers' switching costs decrease

In many industries, firms are in close competition with producers of substitute

products in other industries. The presence of substitute products puts a ceiling

on the price that can be charged before consumers will switch to the substitute

product.

The Five-Forces Model (5 of 6)

• Bargaining Power of Suppliers is increased when (there

are):

– Few suppliers

– Few substitutes

– Costs of switching raw materials is high

• Backward integration is gaining control or ownership of

suppliers

It is often in the best interest of both suppliers and producers to assist each

other with reasonable prices, improved quality, development of new services,

just-in-time deliveries, and reduced inventory costs, thus enhancing long-term

profitability for all concerned.

The Five-Forces Model (6 of 6)

• 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

When customers are concentrated or large in number or buy in volume, their

bargaining power represents a major force affecting the intensity of

competition in an industry.

Conditions Where Consumers Gain

Bargaining Power

1. If buyers can inexpensively switch

2. If buyers are particularly important

3. If sellers are struggling in the face of falling consumer

demand

4. If buyers are informed about sellers' products, prices, and

costs

5. If buyers have discretion in whether and when they

purchase the product

The bargaining power of consumers can be the most important force affecting

competitive advantage.

Sources of External Information (1 of 2)

• Unpublished sources include customer surveys, market

research, speeches at professional and shareholders'

meetings, television programs, interviews, and

conversations with stakeholders.

• Published sources of strategic information include

periodicals, journals, reports, government documents,

abstracts, books, directories, newspapers, and manuals.

A wealth of strategic information is available to organizations from both

published and unpublished sources.

Sources of External Information (2 of 2) • IBISWorld

• Lexis-Nexis Academic

• Lexis-Nexis Company Dossier

• Mergent Online

• PrivCo

• Regional Business News

• S&P NetAdvantage

• Value Line Investment Survey

• U.S. Securities and Exchanges Commission

• Company Annual Reports On-Line (CAROL)

There are many excellent sources for gathering strategic information.

Forecasting Tools and Techniques

• Forecasts

– educated assumptions about future trends and events

– no forecast is perfect

Forecasting is complex because of factors such as technological innovation,

cultural changes, new products, improved services, stronger competitors,

shifts in government priorities, changing social values, unstable economic

conditions, and unforeseen events.

Making Assumptions

• Assumptions

– Best present estimates of the impact of major external

factors, over which the manager has little if any control,

but which may exert a significant impact on

performance or the ability to achieve desired results.

Planning would be impossible without assumptions. McConkey defines

assumptions as the “best present estimates of the impact of major external

factors, over which the manager has little if any control, but which may exert a

significant impact on performance or the ability to achieve desired results.”

Industry Analysis: The External

Factor Evaluation (E F E) Matrix

Summarize and evaluate these factors:

• Social

• Cultural

• Demographic

• Economic

• Environmental

• Political

• Governmental

• Legal

• Technological

• Competitive

An External Factor Evaluation (EFE) Matrix allows strategists to summarize

and evaluate economic, social, cultural, demographic, environmental, political,

governmental, legal, technological, and competitive information.

E F E Matrix Steps

1. List 20 key external factors

2. Weight from 0.0 to 1.0

3. Rate the effectiveness of current strategies from 1-4

4. Multiply weight * rating

5. Sum weighted scores

The EFE matrix can be developed in five steps.

Table 3.8 E F E Matrix for a Local 10-

Theater Cinema Complex (1 of 2)

Key External Factors Weight Rating Weighted Score

Opportunities

1. Two new neighborhoods

developing within 3 miles 0.09 1 0.09

2. TDB University is expanding

6% annually 0.08 4 0.32

3. Major competitor across town

recently closed 0.08 3 0.24

4. Demand for going to cinemas

growing 10% 0.07 2 0.14

5. Disposable income among

citizens up 5% in prior year 0.06 3 0.15

6. Rowan County is growing 8%

annually in population 0.05 3 0.15

7. Unemployment rate in county

declined to 3.1% 0.03 2 0.06

Table 3.8 E F E Matrix for a Local 10-

Theater Cinema Complex (2 of 2)

Key External Factors Weight Rating Weighted Score

Threats

8. Trend toward healthy eating

eroding concession sales 0.12 4 0.48

9. Demand for online movies and

DVDs growing 10% 0.06 2 0.12

10. Commercial property adjacent

to cinemas for sale 0.06 3 0.18

11. TDB University installing an on-

campus movie theater 0.04 3 0.12

12. County and city property taxes

increasing 25% 0.08 2 0.6

13. Local religious groups object to

R-rated movies 0.04 3 0.12

14. Movies rented at local Red

Box’s up 12% 0.08 2 0.16

15. Movies rented last quarter from

Time Warner up 15% 0.06 1 0.06

Total 1.00 2.58

The most important factor to being successful in this business is “Trend toward

healthy eating eroding concession sales,” as indicated by the 0.12 weight. Also

note that the local cinema is doing excellent in regard to handling two factors,

“TDB University is expanding 6 percent annually” and “Trend toward healthy

eating eroding concession sales.” Perhaps the cinema is placing flyers on

campus and also adding yogurt and healthy drinks to its concession menu.

Industry Analysis: Competitive

Profile Matrix (C P M)

• 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

The ratings refer to strengths and weaknesses, where 4 = major strength, 3 =

minor strength, 2 = minor weakness, and 1 = major weakness.

Table 3.10 An Example Competitive

Profile Matrix

• Note: The ratings values are as follows: 1 = response is poor, 2 = response is average, 3

= response is above average, 4 = response is superior. As indicated by the total weighted

score of 2.20, Company 3 is performing worst. Only 8 critical success factors are included

for simplicity; in actuality, however, this is too few. The template asks that 12 factors be

included and to tailor factors to a given industry.

Figure 3.4 How to Gain and Sustain

Competitive Advantages

Slide 1: Strategic Management Concepts: A Competitive Advantage Approach, Concepts and Cases
Slide 2: Learning Objectives (1 of 2)
Slide 3: Learning Objectives (2 of 2)
Slide 4: Figure 3.1 A Comprehensive Strategic-Management Model
Slide 5: External Audit
Slide 6: The Purpose of an External Audit
Slide 7: Key External Forces
Slide 8: Figure 3.2 Relationships Between Key External Forces and an Organization
Slide 9: The AQCD Test
Slide 10: Economic Forces (1 of 2)
Slide 11: Economic Forces (2 of 2)
Slide 12: Social, Cultural, Demographic, and Environmental (SCDE) Forces
Slide 13: Key SCDE Variables (1 of 3)
Slide 14: Key SCDE Variables (2 of 3)
Slide 15: Key SCDE Variables (3 of 3)
Slide 16: Political, Governmental, and Legal Forces
Slide 17: Political, Government, and Legal Variables (1 of 2)
Slide 18: Political, Government, and Legal Variables (2 of 2)
Slide 19: Technological Forces (1 of 3)
Slide 20: Technological Forces (2 of 3)
Slide 21: Technological Forces (3 of 3)
Slide 22: Competitive Forces
Slide 23: Obtaining Competitive Intelligence (1 of 2)
Slide 24: Obtaining Competitive Intelligence (2 of 2)
Slide 25: Key Questions About Competitors (1 of 3)
Slide 26: Key Questions About Competitors (2 of 3)
Slide 27: Key Questions About Competitors (3 of 3)
Slide 28: Competitive Intelligence Programs
Slide 29: Figure 3.3 The Five-Forces Model of Competition (1 of 2)
Slide 30: The Five-Forces Model of Competition (2 of 2)
Slide 31: The Five-Forces Model (1 of 6)
Slide 32: Table 3.5 The Five-Forces Model
Slide 33: The Five-Forces Model (3 of 6)
Slide 34: Barriers to Entry (1 of 2)
Slide 35: Barriers to Entry (2 of 2)
Slide 36: The Five-Forces Model (4 of 6)
Slide 37: The Five-Forces Model (5 of 6)
Slide 38: The Five-Forces Model (6 of 6)
Slide 39: Conditions Where Consumers Gain Bargaining Power
Slide 40: Sources of External Information (1 of 2)
Slide 41: Sources of External Information (2 of 2)
Slide 42: Forecasting Tools and Techniques
Slide 43: Making Assumptions
Slide 44: Industry Analysis: The External Factor Evaluation (E F E) Matrix
Slide 45: E F E Matrix Steps
Slide 46: Table 3.8 E F E Matrix for a Local 10-Theater Cinema Complex (1 of 2)
Slide 47: Table 3.8 E F E Matrix for a Local 10-Theater Cinema Complex (2 of 2)
Slide 48: Industry Analysis: Competitive Profile Matrix (C P M)
Slide 49: Table 3.10 An Example Competitive Profile Matrix
Slide 50: Figure 3.4 How to Gain and Sustain Competitive Advantages
Slide 51: Copyright