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
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Fred R. David
Prentice Hall
 Chapter Outline

• The Nature of an External Audit

• The Industrial Organization View
• Economic Forces
• Social, Cultural, Demographic, and
Environmental Forces

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 Chapter Outline

• Political, Governmental, and Legal

Forces

• Technological Forces

• Competitive Forces
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 The External Assessment

Prediction is very difficult, especially

about the future.
-- Neils Bohr

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 External Strategic Management Audit

Also called:
– Environmental scanning
– Industry analysis

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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

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 The Industrial Organization
(I/O) View

• The Industrial Organization (I/O)

approach to competitive advantage
advocates that external (industry)
factors are more important than internal
factors in a firm achieving competitive
advantage.

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 Nature of External Audit

Purpose:

– Development of Finite List:

• Opportunities
• Threats to be avoided

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 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
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 Relationships Between Key External Forces
and an Organization

Competitors
Suppliers
Distributors
Creditors
Key Customers Opportunities
External Employees &
Forces Communities Threats
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services

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 Performing an External Audit
Gather competitive intelligence on factors:
– Social
– Cultural
– Demographic
– Environmental
– Economic
– Political, legal, governmental
– technological

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 Performing an External Audit

Key factors:
– Vary over time
– Vary by industry

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 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

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 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

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 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
•
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 Monitor Key Economic Variables:

• Price fluctuations
• Exportation of labor & capital
• Monetary policies
• Fiscal policies
• Tax rates
• ECC policies
• OPEC policies
• LDC policies

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 Social, Cultural, Demographic &
Environmental Forces
Major impact on:

– Products
– Services
– Markets
– customers

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 Social, Cultural, Demographic &
Environmental Forces
• World population > 6 billion

• U.S. population < 300 million

• Great potential for domestic production
expansion to other markets

• Domestic only is a risky strategy

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 Social, Cultural, Demographic &
Environmental Forces
Trends for the 2000’s –

– More educated consumers

– Population aging
– Minorities more influential
– Local rather than federal solutions
– Fixation with youth decreasing
– Hispanics increase to 15% by 2021
– African Americans increase to 14% by 2021
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 Social, Cultural, Demographic &
Environmental Forces
Key variables –
• Childbearing rates
• Number of special-interest groups
• Number of marriages
• Number of divorces
• Number of births
• Number of deaths
• Immigration & emigration rates
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 Monitor Key Variables

• Life expectancy rates

• Per capita income
• Attitudes toward business
• Average disposable income
• Buying habits
• Ethical concerns
• Attitudes toward saving

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 Monitor Key Variables

• Racial equality
• Average level of education
• Government regulation
• Attitudes toward customer service
• Attitudes toward product quality
• Energy conservation
• Social responsibility

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 Monitor Key Variables

• Value placed on leisure time

• Recycling
• Waste management
• Air & water pollution
• Ozone depletion
• Endangered species

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 Political, Govt., & Legal Forces

Government Regulation

• Key opportunities & key threats

• Antitrust legislation (Microsoft)
• Tax rates
• Lobbying efforts
• Patent laws
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 Political, Govt., & Legal Forces

Increasing Global Interdependence

• Impact of political variables

– Formulation of Strategies
– Implementation of Strategies

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 Political, Govt., & Legal Forces

Increasing Global Interdependence

• Strategists in a global economy

• Forecast political climates
• Legalistic skills
• Diverse world cultures

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 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
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 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

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 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

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 Technological Forces

Capitalizing on Information Technology (IT)

• Chief Information Officer (CIO)

• Chief Technology Officer (CTO)

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 Technological Forces

Technology-based issues

– Underlie nearly every strategic decision

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Strategy and Future Forecast

• Linear regression is based on the

assumption that the future will be just
like the past.

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 Competitive Forces

Collection and evaluation of information on

competitors is essential for successful
strategy formulation

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 Competitive Forces

Competition in virtually all industries can be

described as intense.

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 Competitive Forces

Identifying rival firms

• Strengths
• Weaknesses
• Capabilities
• Opportunities
• Threats
• Objectives
• Strategies

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 Competitive Forces

Key Questions About Competitors:

• Their strengths
• Their weaknesses
• Their objectives and strategies
• Their responses to all external variables
(e.g. social, political, demographic, etc.)
• Their vulnerability to our alternative
strategies
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 Competitive Forces

Key Questions About Competitors:

• Our vulnerability to successful strategic
counterattack
• Our product and service positioning relative
to competitors
• Entry and exit of firms in the industry
• Key factors for our current position in
industry
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 Competitive Forces

Key Questions About Competitors:

• Sales and profit rankings of competitors
over time
• Nature of supplier and distributor
relationships
• The threat of substitute products or
services

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 Competitive Forces

Sources of Corporate Information:

• Moody’s Manuals
• Standard Corporation Descriptions
• Value Line Investment Surveys
• Dun’s Business Rankings
• Standard & Poor’s Industry Surveys
• Industry Week
• Forbes, Fortune, Business Week

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 Competitive Forces

Competitive Intelligence Programs:

• Systematic and ethical process for

gathering and analyzing information
about the competition’s activities
and general business trends to
further a business’ own goals.
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 Competitive Analysis: Porter’s Five-
Forces Model
Potential development
of substitute products

Bargaining power Rivalry among Bargaining power

of suppliers competing firms of consumers

Potential entry of new

competitors

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