Strategic Management Concepts: A Competitive Advantage Approach

Strategic Management Concepts: A
Competitive Advantage Approach

Sixteenth 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 must be
examined in formulating strategies: economic, social,
cultural, demographic, environmental, political,
governmental, legal, technological, and competitive.
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 used for locating
vital external information.
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.
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
The Nature 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.
Figure 3-1 A Comprehensive Strategic-
Management Model
Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. 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.
Key External Forces
External forces can be divided into five broad categories:
1. economic forces
2. social, cultural, demographic, and natural environment
forces
3. political, governmental, and legal forces
4. technological forces
5. competitive forces
Figure 3-2 Relationships Between Key
External Forces and an Organization
The Process of Performing an External
Audit (1 of 2)
• First, gather competitive intelligence and information
about economic, social, cultural, demographic,
environmental, political, governmental, legal, and
technological trends.
The Process of Performing an External
Audit (2 of 2)
• Information should be assimilated and evaluated
• A final list of the most important key external factors should
be communicated
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 for gaining
and sustaining competitive advantage.
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
• GDP trends
• Consumption patterns
• Unemployment trends
• Value of the dollar
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 (EEC) policies
• Organization of Petroleum Exporting Countries (OPEC) policies
Advantages of a Strong Dollar (1 of 2)
1. Leads to lower exports
2. Leads to higher imports
3. Makes U.S. goods expensive for foreign consumers
4. Helps keep inflation low
5. Allows U.S. firms to purchase raw materials cheaply from other
countries
6. Allows U.S. to service its debt better
7. Spurs foreign investment
8. Encourages Americans to travel abroad
Advantages of a Strong Dollar (2 of 2)
1. Leads to lower oil prices because oil globally is priced in
U.S. dollars
2. Encourages Americans to spend money because they
can buy more for their money
Social, Cultural, Demographic, and Natural
Environmental Forces
• U.S. Facts
– Aging population
– Less white
– 2050 = 20% population > 65 years
– 2075 = no ethnic or racial majority
Key Social, Cultural, Demographic, and
Natural Environmental 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
• Life expectancy rates
• Per capita income
• Social media pervasiveness
• Attitudes toward retirement
• Energy conservation
• Attitudes toward product quality
• Attitudes toward customer service
• Pollution control
• Attitudes toward foreign peoples
• Energy conservation
• Social programs
• Number of churches
• Number of church members
• Social responsibility issues
Political, Governmental, and Legal Forces
• The increasing global interdependence among
economies, markets, governments, and organizations
makes it imperative that firms consider the possible impact
of political variables on the formulation and
implementation of competitive strategies.
Political, Government, and Legal Variables
(1 of 2)
• Environmental regulations
• Number of patents
• Changes in patent laws
• Equal employment laws
• Level of defense expenditures
• Unionization trends
• Antitrust legislation
Political, Government, and Legal Variables
(2 of 2)
• USA versuss. other country relationships

• Political conditions in foreign countries
• Global price of oil changes
• Local, state, and federal laws
• Import-export regulations
• Tariffs
• Local, state, and national elections
Technological Forces (1 of 3)
New technologies such as:
• the Internet of Things
• 3D printing
• the cloud
• mobile devices
• biotech
• analytics
• autotech
• robotics and
• artificial intelligence
are fueling innovation in many industries, and impacting
strategic-planning decisions.
• Many firms now have a Chief Information Officer (CIO)
and a Chief Technology Officer (CTO) who work together
to ensure that information needed to formulate, implement,
and evaluate strategies is available where and when it is
needed
Results of Technological Advances (1 of 2)
1. Major opportunities and threats that must be considered
in formulating strategies.
2. Can affect organizations’ products, services, markets,
suppliers, distributors, competitors, customers,
manufacturing processes, marketing practices, and
competitive position.
3. Can create new markets, result in new and improved
products, change the relative competitive cost positions,
and render existing products and services obsolete.
Results of Technological Advances (2 of 2)
4. Can reduce or eliminate cost barriers between
businesses, create shorter production runs, create
shortages in technical skills, and result in changing
values and expectations of employees, managers, and
customers.
5. Can create new competitive advantages that are more
powerful than existing advantages.
Competitive Forces (1 of 2)
• An important part of an external audit is identifying rival
firms and determining their strengths, weaknesses,
capabilities, opportunities, threats, objectives, and
strategies
Competitive Forces (2 of 2)
Characteristics of the most competitive companies:
1. Strive to continually increase market share
2. Use the vision/mission as a guide for all decisions
3. Whether it's broke or not, fix it-make it better
4. Continually adapt, innovate, improve
5. Acquisition is essential to growth
6. Hire and retain the best employees and managers possible
7. Strive to stay cost-competitive on a global basis
Key Questions About Competitors (1 of 3)
1. What are the strengths of our major competitors?
2. What are the weaknesses of our major competitors?
3. What are the objectives and strategies of our major
competitors?
4. How will our major competitors most likely respond to
current economic, social, cultural, demographic,
environmental, political, governmental, legal,
technological, and competitive trends affecting our
industry?
5. How vulnerable are the major competitors to our
alternative company strategies?
6. How vulnerable are our alternative strategies to
successful counterattack by our major competitors?
7. How are our products or services positioned relative to
major competitors?
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?
10.How have the sales and profit rankings of our major
competitors in the industry changed over recent years?
Why have these rankings changed that way?
11.What is the nature of supplier and distributor relationships
in this industry?
12.To what extent could substitute products or services be a
threat to our competitors?
Competitive Intelligence Programs (1 of 2)
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 Programs (2 of 2)
The three basic objectives of a CI program are:
1. To provide a general understanding of an industry and its
competitors
2. To identify areas in which competitors are vulnerable and
to assess the impact strategic actions would have on
competitors
3. To identify potential moves that a competitor might make
that would endanger a firm's position in the market
Figure 3-3 The Five-Forces Model of
Competition (1 of 2)
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 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
Table 3-7 The Five-Forces Model (2 of 6)
When the number of competing firms is high
When competing firms are of similar size
When competing firms have similar capabilities
When the demand for an industry’s products is falling
When the product or service prices in the industry are falling
When consumers can switch brands easily
When barriers to leaving the market are high
When barriers to entering the market are low
When fixed costs are high among competing firms
When the product is perishable
When rivals have excess capacity
When consumer demand is falling
When rivals have excess inventory
When rivals sell similar products/services
When mergers are common in the industry
Conditions That Cause High Rivalry Among Competing Firms

• Potential Entry of New Competitors
– Barriers to entry are important
– Quality, pricing, and marketing can overcome barriers
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 (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
• Potential development of substitute products
– Pressure increases when:
 Prices of substitutes decrease
 Consumers' switching costs decrease
• 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
• 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
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
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.
Sources of External Information (2 of 2)
• finance.yahoo.com
• hoovers.com
• globaledge.msu.edu/industries/
Forecasting Tools and Techniques
• Forecasts
– educated assumptions about future trends and events
– no forecast is perfect
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.
Business Analytics
• Using software to mine huge volumes of data
• Helps executives make decisions
Industry Analysis: The External Factor
Evaluation (EFE) Matrix
Summarize and evaluate these factors:
• Social • Political
• Cultural • Governmental
• Demographic • Legal
• Economic • Technological
• Environmental • Competitive
EFE Matrix Steps
1. List 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
Table 3-9 EFE Matrix for a Local 10-
Theater Cinema Complex (1 of 2)
Key External Factors Weight Rating Weighted Score
Opportunities Blank Blank Blank
1. Two new neighborhoods 0.09 1 0.09
developing within 3 miles
2. TDB University is expanding 0.08 4 0.32
6% annually
3. Major competitor across 0.08 3 0.24
town recently closed
4. Demand for going to 0.07 2 0.14
cinemas growing 10%
5. Disposable income among 0.06 3 0.18
citizens up 5% in prior year
6. Rowan County is growing 0.05 3 0.15
8% annually in population
7. Unemployment rate in 0.03 2 0.06
county declined to 3.1%
Table 3-9 EFE Matrix for a Local 10-Theater
Cinema Complex (2 of 2)
Weighted
Key External Factors Weight Rating Score
Threats Blank Blank Blank
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 0.16
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 Blank 2.58
Industry Analysis: Competitive Profile
Matrix (CPM)
• 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
Table 3-12 An Example Competitive Profile
Matrix
Blank Blank Company 1
Company 1
Company 2
Company 2
Company 3
Company 3
Critical Success Weight Rating Score Rating Score Rating Score

Factors
Advertising 0.20 1 0.20 4 0.80 3 0.60
Product Quality 0.10 4 0.40 3 0.30 2 0.20

Price 0.10 3 0.30 2 0.20 1 0.10
Competitiveness
Management 0.10 4 0.40 3 0.20 1 0.10
Financial Position 0.15 4 0.60 2 0.30 3 0.45
Customer Loyalty 0.10 4 0.40 3 0.30 2 0.20
Global Expansion 0.20 4 0.80 1 0.20 2 0.40
Market Share 0.05 1 0.05 4 0.20 3 0.15
Total 1.00 blank 3.15 blank 2.50 blank 2.20
Note: The ratings values are as follows: 1 = major weakness, 2 = minor weakness, 3 = minor strength, 4
= major strength. As indicated by the total weighted score of 2.50, Competitor 2 is weakest. Only eight
critical success factors are included for simplicity; this is too few in actuality.
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Strategic Management Concepts: A

Competitive Advantage Approach

Slide in this Presentation Contain

• Level of disposable income

• Propensity of people to spend

• Value of the dollar

• Demand shifts for different goods and services

• Income differences by region and consumer group

• Foreign countries’ economic conditions

• Monetary and Fiscal policy

• Stock market trends

• Tax rate variation by country and state

• European Economic Community (EEC) policies

• Organization of Petroleum Exporting Countries (OPEC) policies

• USA versuss. other country relationships

Conditions That Cause High Rivalry Among Competing Firms

Critical Success Weight Rating Score Rating Score Rating Score

Product Quality 0.10 4 0.40 3 0.30 2 0.20

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