Strategic MGMT Ch-3

Chapter 3
The External Assessment
Ch 3 -1
Ch 13 -2
External Strategic Management Audit
Identify & Evaluate factors beyond the control of a

single firm
– Increased foreign competition
– Population shifts
– Information technology
Ch 3 -3
Key External Forces & the Organization
Competitors
Suppliers
Distributors
Creditors
Key Customers
Communities Opportunities
External
Managers &
Forces
Stockholders Threats
Labor Unions
Special Interest Groups
Products
Services
Ch 3 -4
Performing External Audit
Long-term orientation
Measurable
External
Factors Applicable to
competing firms
Hierarchical
Ch 3 -5
I/O Perspective Firm Performance
Industry Properties
Economies of Scale
Barriers to market entry
Product differentiation
Level of competitiveness
Ch 3 -6
Economic forces
– shift to service economy,

– availability of credit,
– level of disposable income,
– propensity of people to spend,
– interest rates, inflation rates,
– money market rates,
– federal government budget deficits,
– gross domestic product trend,
– consumption patterns,
– unemployment trends,
– worker productivity levels, and
– value of the dollar in world markets.
Ch 3 -7
Social, Cultural, Demographic & Environmental
Forces
childbearing rates,
number of special-interest groups,
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,
location of retailing, manufacturing, and service
business.
Ch 3 -8
Political, Government & Legal Forces
•Government regulations or deregulations,

•Changes in tax laws,
•Environmental protection laws,
•Political conditions in foreign countries,
•Import export regulations,
•Level of government subsidies,
Ch 3 -9
Technological Forces
• Worldwide trend toward similar

consumption patterns
• Global buyers and sellers
• E-commerce
• Technology for instant currency transfers
Ch 3 -10
Competitive Forces
Identifying Rival Firms
•Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies
Ch 3 -11
Competitive Forces
7 Characteristics of most Competitive Firms:
1. Market share matters

2. Understand what business you are in
3. Broke or not, fix it
4. Innovate or evaporate
5. Acquisition is essential to growth
6. People make a difference
7. No substitute for quality
Ch 3 -12
The Five-Forces Model of Competition
Potential development
of substitute products
Bargaining power Rivalry among Bargaining power

of suppliers competing firms of consumers
Potential entry of new

competitors
Ch 3 -13
Rivalry Among Competing Firms
• It is usually the most powerful of the five

competitive forces.
• The strategies pursued by one firm can be successful
only to the extent that they provide competitive
advantage over the strategies pursued by rival firms.
• Changes in strategy by one firm may be met with
retaliatory countermoves, such as lowering prices,
enhancing quality, adding features, providing
services, extending warranties, and increasing
advertising.
Ch 3 -14
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,
– as price cutting becomes common.
– when consumers can switch brands easily;
– when barriers to leaving the market are high;
– when fixed costs are high;
– when the product is perishable;
– when consumer demand is growing slowly or declines such
that rivals have excess capacity and/or inventory;
– when the products being sold are commodities;
– when rival firms are diverse in strategies, origins, and
culture; and
– when mergers and acquisitions are common in the industry.
Ch 3 -15
Potential Entry of New Competitors
• Whenever new firms can easily enter a particular industry,

the intensity of competitiveness among firms increases.
• 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.
Ch 3 -16
Potential Development of Substitute Products
• In many industries, firms are in close competition

with producers of substitute products in other
industries.
• The magnitude of competitive pressure derived from
development of substitute products is generally
evidenced by rivals’ plans for expanding production
capacity, as well as by their sales and profit growth
numbers.
• Competitive pressures arising from substitute products
increase as the relative price of substitute products
declines and as consumers’ switching costs decreases.
Ch 3 -17
Bargaining Power of Suppliers
• The bargaining power of suppliers affects the

intensity of competition in an industry, especially
– when there is a large number of suppliers,
– when there are only a few good substitute raw
materials, or
– when the cost of switching raw materials is
especially costly.
Ch 3 -18
• 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.
Ch 3 -19
Bargaining Power of Consumers
• When customers are concentrated or large or buy in volume,

their bargaining power represents a major force affecting the
intensity of competition in an industry.
• Rival firms may offer extended warranties or special services
to gain customer loyalty whenever the bargaining power of
consumers is substantial.
• Bargaining power of consumers also is higher when the
products being purchased are standard or undifferentiated.
• When this is the case, consumers often can negotiate selling
price, warranty coverage, and accessory packages to a great
extent.
Ch 3 -20
Industry Analysis: The External Factor Evaluation
(EFE) Matrix
Summarize & Evaluate
Economic Demographic Governmental
Social Environmental Technological
Cultural Political Competitive
Ch 3 -21
EFE matrix can be developed in five steps:
• List key external factors. Include a total of 15 to 20

factors, including both opportunities and threats that affect
the firm and its industry. List the opportunities first and
then the threats. Be as specific as possible, using
percentages, ratios, and comparative numbers whenever
possible.
• Assign to each factor a weight that ranges from 0.0 (not
important) to 1.0 (very important). The weight indicates the
relative importance of that factor to being successful in the
firm’s industry. Opportunities often receive higher weights
than threats, but threats can receive high weights if they
are especially sever or threatening.
Ch 3 -22
• Assign a rating between 1 and 4 to each key external
factor to indicate how effectively the firm’s current
strategies respond to the factor, where 4=the response
is superior, 3=the response is above average, 2=the
response is average, and 1=the response is poor.
Ratings are based on effectiveness of the firm’s
strategies. Ratings are thus company-based, whereas
the weights in step 2 are industry based.
Ch 3 -23
• Multiply each factor’s weight by its rating to determine a
weighted score.
• Sum the weighted scores for each variable to determine the
total weighted score for the organization.
Ch 3 -24
Ch 3 -25
Ch 3 -26
Industry Analysis EFE
Total weighted score of 4.0

• Organization response is outstanding to threats
and opportunities
Total weighted score of 1.0

• Firm’s strategies not capitalizing on
opportunities or avoiding threats
Ch 3 -27
Industry Analysis: Competitive Profile Matrix (CPM)
Identifies firm’s major competitors and their

strengths & weaknesses in relation to a sample
firm’s strategic positions
Ch 3 -28
Gateway Apple Dell
CSF’s Wt Rating Wt’d Rating Wt’d Rating Wt’d

Score Score Score
Market share 0.15 3 0.45 2 0.30 4 0.60
Inventory sys 0.08 2 0.16 2 0.16 4 0.32
Fin. position 0.10 2 0.20 3 0.30 3 0.30
Prod. Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distr 0.10 3 0.30 2 0.20 3 0.30
Global Exp. 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15
Ch 3 -29
Gateway Apple Dell
CSF’s (cont’d) Wt Rating Wt’d Rating Wt’d Rating Wt’d

Score Score Score
Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12
E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Serv 0.10 3 0.30 2 0.20 4 0.40
Price competitive 0.02 4 0.08 1 0.02 3 0.06
Mgt. experience 0.01 2 0.02 4 0.04 2 0.02
Total 1.00 2.83 2.47 3.49
Ch 3 -30

Strategic MGMT Ch-3

Uploaded by

Copyright:

Available Formats

Strategic MGMT Ch-3

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Strategic MGMT Ch-3

Uploaded by

Copyright:

Available Formats

Chapter 3

The External Assessment

Identify & Evaluate factors beyond the control of a

Barriers to market entry

– shift to service economy,

•Government regulations or deregulations,

• Worldwide trend toward similar

Identifying Rival Firms

7 Characteristics of most Competitive Firms:

1. Market share matters

Bargaining power Rivalry among Bargaining power

Potential entry of new

• It is usually the most powerful of the five

– as the number of competitors increases,

• Whenever new firms can easily enter a particular industry,

• In many industries, firms are in close competition

• The bargaining power of suppliers affects the

• When customers are concentrated or large or buy in volume,

Summarize & Evaluate

Economic Demographic Governmental

Social Environmental Technological

Cultural Political Competitive

• List key external factors. Include a total of 15 to 20

Total weighted score of 4.0

Total weighted score of 1.0

Identifies firm’s major competitors and their

CSF’s Wt Rating Wt’d Rating Wt’d Rating Wt’d

Market share 0.15 3 0.45 2 0.30 4 0.60

Inventory sys 0.08 2 0.16 2 0.16 4 0.32

Fin. position 0.10 2 0.20 3 0.30 3 0.30

Prod. Quality 0.08 3 0.24 4 0.32 3 0.24

Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08

Sales Distr 0.10 3 0.30 2 0.20 3 0.30

Global Exp. 0.15 3 0.45 2 0.30 4 0.60

Org. Structure 0.05 3 0.15 3 0.15 3 0.15

CSF’s (cont’d) Wt Rating Wt’d Rating Wt’d Rating Wt’d

Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12

E-commerce 0.10 3 0.30 3 0.30 3 0.30

Customer Serv 0.10 3 0.30 2 0.20 4 0.40

Price competitive 0.02 4 0.08 1 0.02 3 0.06

Mgt. experience 0.01 2 0.02 4 0.04 2 0.02

Total 1.00 2.83 2.47 3.49

You might also like