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The External Assessment

“notable quotes”If you’re not faster than your competitor, you’re in a

tenuous position, and if you’re only half as fast,you’re terminal.

G EO R GE SA L K

The opportunities and threats existing in anysituation always exceed the resources needed to

exploit the opportunities or avoid the threats. Thus,strategy is essentially a problem of allocating

resources. If strategy is to be successful, it mustallocate superior resources against a decisive

opportunity.

WILL IA M C OH E N

Organizations pursue strategies that will disruptthe normal course of industry events and forge new

industry conditions to the disadvantage ofcompetitors.

I AN C . MA C MILL A N

The idea is to concentrate our strength against ourcompetitor’s relative weakness.

B RU C E H E ND E RS O N

If everyone is thinking alike, then somebody isn’tthinking.

G EO RG E PAT T O N

It is not the strongest of the species that survive, northe most intelligent, but the one most responsive to

change.

CH A RL ES D A RW I N

Nothing focuses the mind better than the constantsight of a competitor who wants to wipe you off the

map.

WAY NE C AL LO WAY

3

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[ Experiential Exercises ]Experiential Exercise 3A

Developing an EFE Matrix for Walt Disney Company

Experiential Exercise 3B

The External Assessment

Experiential Exercise 3C

Developing an EFE Matrix for My University

Experiential Exercise 3D

Developing a Competitive Profile Matrix for Walt DisneyCompany

Experiential Exercise 3E

Developing a Competitive Profile Matrix for My University

[ chapter objectives ]After studying thischapter, you should beable to do the following:

1. Describe how to conductan external strategic-management audit.

2. Discuss 10 major externalforces that affectorganizations: economic,social, cultural,demographic,environmental, political,governmental, legal,technological, andcompetitive.

3. Identify key sources ofexternal information,including the Internet.

4. Discuss importantforecasting tools used instrategic management.

5. Discuss the importance ofmonitoring externaltrends and events.

6. Explain how to developan EFE Matrix.

7 . Explain how to develop aCompetitive Profile Matrix.

8. Discuss the importance ofgathering competitiveintelligence.

9. Describe the trend towardcooperation amongcompetitors.

10. Discuss the economicenvironment in Russia.

11. Discuss the globalchallenge facing Americanfirms.

12. Discuss marketcommonality and resourcesimilarity in relation tocompetitive analysis.

A Retreat for Strategic Planning on the Adriatic Sea. Source: Forest David


72 PA RT 2 • S T R ATEGY FORMULATION

FIGURE 3-1

A Comprehensive Strategic-Management Model

This chapter examines the tools and concepts needed to conduct an external strategic man-agement audit (sometimes called e nv i ronmental scanning or industry analysis). Anexternal audit focuses on identifying and evaluating trends and events beyond the controlof a single firm, such as increased foreign competition, population shifts to the Sunbelt, anaging society, consumer fear of traveling, and stock market vo l a t i l i t y. An external auditreveals key opportunities and threats confronting an organization so that managers can for-mulate strategies to take advantage of the opportunities and avoid or reduce the impact ofthreats. This chapter presents a practical framework for gathering, assimilating, and ana-lyzing external information. The Industrial Organization (I/O) view of strategic manage-ment is introduced.

The Nature of an External AuditThe purpose of an external audit is to develop a finite list of opportunities that could ben-e fit a firm and threats that should be avoided. As the term fi n i t e suggests, the ex t e r n a laudit is not aimed at developing an ex h a u s t ive list of every possible factor that couldinfluence the business; rather, it is aimed at identifying key variables that offer actionableresponses. Firms should be able to respond either off e n s ively or defensively to the fa c t o r sby formulating strategies that take advantage of external opportunities or that minimizethe impact of potential threats. Figure 3 - 1 illustrates how the external audit fits into thes t r a t egic-management process.

Key External ForcesExternal forces can be divided into five broad categories: (1) economic forces; (2) social,cultural, demographic, and environmental forces; (3) political, governmental, and lega lforces; (4) technological forces; and (5) competitive forces. Relationships among these

VISIT THE NET

Reveals how strategic planningevolved from long-range planningand environmental scanning(external audit or assessment).(horizon.unc.edu/projects/seminars/futuresresearch/strategic.asp#planning)

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40.


CHAPTER 3 • THE EXTERNAL ASSESSMENT 73

FIGURE 3-2

Relationships Between Key External Forces and an Organization

forces and an organization are depicted in Figure 3-2. External trends and events signifi-cantly affect all products, services, markets, and organizations in the world.

Changes in external forces translate into changes in consumer demand for both indus-trial and consumer products and services. External forces affect the types of productsdeveloped, the nature of positioning and market segmentation strategies, the type of ser-vices offered, and the choice of businesses to acquire or sell. External forces directly affectboth suppliers and distributors. Identifying and evaluating external opportunities andthreats enables organizations to develop a clear mission, to design strategies to achievelong-term objectives, and to develop policies to achieve annual objectives.

The increasing complexity of business today is evidenced by more countries develop-ing the capacity and will to compete aggressively in world markets. Foreign businesses andcountries are willing to learn, adapt, innovate, and invent to compete successfully in themarketplace. There are more competitive new technologies in Europe and Asia today thanever before. U.S. businesses can no longer beat foreign competitors with ease.

The Process of Performing an External AuditThe process of performing an external audit must involve as many managers and employ-ees as possible. As emphasized in earlier chapters, invo l vement in the strateg i c - m a n a g ementprocess can lead to understanding and commitment from organizational members.I n d ividuals appreciate having the opportunity to contribute ideas and to gain a betterunderstanding of their firms’ industry, competitors, and markets.

To perform an external audit, a company first must gather competitive intelligence andinformation about economic, social, cultural, demographic, environmental, political, gov-ernmental, legal, and technological trends. Individuals can be asked to monitor va r i o u ssources of information, such as key magazines, trade journals, and newspapers. These per-sons can submit periodic scanning reports to a committee of managers charged with per-forming the external audit. This approach provides a continuous stream of timely strategicinformation and involves many individuals in the external-audit process. The Internet pro-vides another source for gathering strategic information, as do corporate, university, andpublic libraries. Suppliers, distributors, salespersons, customers, and competitors representother sources of vital information.

Once information is gathered, it should be assimilated and evaluated. A meeting orseries of meetings of managers is needed to collectively identify the most important oppor-tunities and threats facing the firm. These key external factors should be listed on flipcharts or a chalkboard. A prioritized list of these factors could be obtained by requesting



that all managers rank the factors identified, from 1 for the most important opportunity/threatto 20 for the least important opportunity/threat. These key external factors can vary overtime and by industry. Relationships with suppliers or distributors are often a critical suc-cess fa c t o r. Other variables commonly used include market share, breadth of competingproducts, world economies, foreign affiliates, proprietary and key account adva n t a g e s ,price competitiveness, technological advancements, population shifts, interest rates, andpollution abatement.

Freund emphasized that these key external factors should be (1) important to achiev-ing long-term and annual objectives, (2) measurable, (3) applicable to all competing firms,and (4) hierarchical in the sense that some will pertain to the overall company and otherswill be more narrowly focused on functional or divisional areas.1 A final list of the mostimportant key external factors should be communicated and distributed widely in the orga-nization. Both opportunities and threats can be key external factors.

The Industrial Organization (I/O) ViewThe Industrial Organization (I/O) approach to competitive advantage advocates that exter-nal (industry) factors are more important than internal factors in a firm achieving competi-t ive advantage. Proponents of the I/O view, such as Michael Porter, contend thatorganizational performance will be primarily determined by industry forces. Porter’s Five-Forces Model, presented later in this chapter, is an example of the I/O perspective, whichfocuses upon analyzing external forces and industry variables as a basis for getting andkeeping competitive advantage. Competitive advantage is determined largely by competi-t ive positioning within an industry, according to I/O advocates. Managing strateg i c a l l yfrom the I/O perspective entails firms striving to compete in attractive industries, avoidingweak or faltering industries, and gaining a full understanding of key external factor rela-tionships within that attractive industry. I/O research was mainly conducted from the1960s to the 1980s and provided important contributions to our understanding of how togain competitive advantage.

I/O theorists contend that the industry in which a firm chooses to compete has astronger influence on the fi r m ’s performance than do the internal functional decisionsmanagers make in marketing, finance, and the like. Firm performance, they contend, is pri-marily based more on industry properties, such as economies of scale, barriers to markete n t r y, product differentiation, and level of competitiveness than on internal resources,capabilities, structure, and operations. Research findings suggest that approximately 20percent of a firm’s profitability can be explained by the industry, whereas 36 percent of thevariance in profitability is attributed to the firm’s internal factors (see the RBV discussionin the next chapter).2

The I/O view has enhanced our understanding of strategic management. However, it isnot a question of whether external or internal factors are more important in gaining andmaintaining competitive advantage. Effective integration and understanding of both exter-nal and internal factors is the key to securing and keeping a competitive advantage. In fact,as will be discussed in Chapter 6, matching key external opportunities/threats with keyinternal strengths/weaknesses provides the basis for successful strategy formulation.

Economic ForcesIncreasing numbers of two-income households is an economic trend in the United States.Individuals place a premium on time. Improved customer service, immediate availability,trouble-free operation of products, and dependable maintenance and repair services arebecoming more important. People today are more willing than ever to pay for good serviceif it limits inconvenience.

Economic factors have a direct impact on the potential attractiveness of va r i o u ss t r a t egies. For example, when interest rates rise, funds needed for capital ex p a n s i o nbecome more costly or unavailable. Also, when interest rates rise, discretionary incomedeclines, and the demand for discretionary goods falls. When stock prices increase, the



TABLE 3-1 Key Economic Variables to Be Monitore d

Shift to a service economy in theUnited States

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

Value of the dollar in world markets

Stock market trends

Foreign countries’ economic conditions

Import/export factors

Demand shifts for different categoriesof goods and services

Income differences by region andconsumer groups

Price fluctuations

Export of labor and capital from theUnited States

Monetary policies

Fiscal policies

Tax rates

European Economic Community(EEC) policies

Organization of Petroleum ExportingCountries (OPEC) policies

Coalitions of Lesser DevelopedCountries (LDC) policies

desirability of equity as a source of capital for market development increases. Also,when the market rises, consumer and business wealth expands. A summary of eco-nomic variables that often represent opportunities and threats for organizations is pro-vided in Table 3 - 1.

Trends in the dollar’s value have significant and unequal effects on companies in dif-ferent industries and in different locations. For example, the pharmaceutical, tourism,entertainment, motor vehicle, aerospace, and forest products industries benefit greatlywhen the dollar falls against the yen and euro. Agricultural and petroleum industries arehurt by the dollar’s rise against the currencies of Mexico, Brazil, Venezuela, andAustralia. Generally, a strong or high dollar makes U.S. goods more ex p e n s ive in ove r-seas markets. This worsens the U.S. trade deficit. When the value of the dollar fa l l s ,tourism-oriented firms benefit because Americans do not travel abroad as much when thevalue of the dollar is low; rather, foreigners visit and vacation more in the United States.

A low value of the dollar means lower imports and higher exports; it helps U.S. com-panies’ competitiveness in world markets. The dollar has fallen to five-year lows againstthe euro and yen, which makes U.S. goods cheaper to foreign consumers and combatsdeflation by pushing up prices of imports. However, European firms such as VolkswagenAG, Nokia Corp., and Michelin complain that the strong euro hurts their financial perfor-mance. The low value of the dollar benefits the U.S. economy in many ways. First, it helpsto stave off the risks of deflation in the United States and also reduces the U.S. tradedeficit. In addition, the low value of the dollar raises the foreign sales and profits of domes-tic firms, thanks to dollar-induced gains, and encourages foreign countries to lower interestrates and loosen fiscal policy, which stimulates worldwide economic expansion. Some sec-tors, such as consumer staples, energy, materials, technology, and health care, especiallybenefit from a low value of the dollar. Manufacturers in many domestic industries in factbenefit because of a weak dollar, which forces foreign rivals to raise prices and extinguishdiscounts. Domestic firms with big overseas sales, such as McDonald’s, greatly benefi tfrom a weak dollar.

The country of Slovenia, just east of Italy, adopted the euro in 2007, in what PrimeMinister Janez Jansa called the “biggest national achievement” since the country joined theEuropean Union in 2004. Adoption of the common currency is expected to bring macro-economic stability to the country, increase its exports, and yield productivity gains. Adownside, however, is that adoption of the euro means a country such as Slovenia gives upits ability to fix its own interest rates, which could increase inflation and prices within thecountry.



TABLE 3-2 The Oldest and Youngest States by Average Age ofR e s i d e n t s

Five Oldest States Average Age Five Youngest States Average Age

Maine 41.1 Utah 28.3

Vermont 40.4 Texas 33.1

West Virginia 40.2 Alaska 33.4

Florida 39.6 Idaho 34.2

Pennsylvania 39.5 California 34.4

Source: Adapted from U.S. Census Bureau. Also, Ken Jackson, “State Population Changes by Race,Ethnicity,” USA Today (May 17, 2007): 2A.

Social, Cultural, Demographic,and Environmental ForcesSocial, cultural, demographic, and environmental changes have a major impact upon virtu-ally all products, services, markets, and customers. Small, large, for-profit and nonprofitorganizations in all industries are being staggered and challenged by the opportunities andthreats arising from changes in social, cultural, demographic, and environmental variables.In every way, the United States is much different today than it was yesterday, and tomor-row promises even greater changes.

The United States is getting older and less Caucasian. The oldest members ofA m e r i c a ’s 76 million baby boomers plan to retire in 2011, and this has law m a kers andyounger taxpayers deeply concerned about who will pay their Social Security, Medicare,and Medicaid. Individuals age 65 and older in the United States as a percent of the popula-tion will rise to 18.5 percent by 2025. The five “oldest” states and five “youngest” states in2007 are given in Table 3-2.

By the year 2075, the United States will have no racial or ethnic majority. This fore-cast is aggravating tensions over issues such as immigration and affi r m a t ive action.Hawaii, California, and New Mexico already have no majority race or ethnic group.

The seven states with the highest percentage of minorities (African -Americans, NativeAmericans, Asians, Hispanics, Native Hawaiians) are: Nevada (25 percent), Arizona (20 per-cent), Georgia (14 percent), Florida (13 percent), Idaho (13 percent), North Carolina (10 per-cent), and Colorado (10 percent).3

The population of the world surpassed 6.8 billion in 2008; the United States has justover 300 million people. That leaves billions of people outside the United States who maybe interested in the products and services produced through domestic firms. Remainingsolely domestic is an increasingly risky strategy, especially as the world population contin-ues to grow to an estimated 8 billion in 2028 and 9 billion in 2054.

Social, cultural, demographic, and environmental trends are shaping the wa yAmericans live, work, produce, and consume. New trends are creating a different type ofconsumer and, consequently, a need for different products, different services, and differents t r a t egies. There are now more American households with people living alone or withunrelated people than there are households consisting of married couples with children.American households are making more and more purchases online. Beer consumption inthe United States is growing at only 0.5 percent per year, whereas wine consumption isgrowing 3.5 percent and distilled spirits consumption is growing at 2.0 percent.4 Beer isstill the most popular alcoholic beverage in the United States, but its market share hasdropped from 59.5 percent in its peak year of 1995 to 56.7 percent today. For a wine com-pany such as Gallo, this trend is an opportunity whereas for a firm such as Adolph CoorsBrewing, this trend is an external threat.

The trend toward an older America is good news for restaurants, hotels, airlines, cruiselines, tours, resorts, theme parks, luxury products and services, recreational vehicles, homebuilders, furniture producers, computer manufacturers, travel services, pharmaceutical

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firms, automakers, and funeral homes. Older Americans are especially interested in healthcare, financial services, travel, crime prevention, and leisure. The wo r l d ’s longest-liv i n gpeople are the Japanese, with Japanese women living to 86.3 years and men living to 80.1years on average. By 2050, the Census Bureau projects that the number of Americans age100 and older will increase to over 834,000 from just under 100,000 centenarians in theUnited States in 2000. Americans age 65 and over will increase from 12.6 percent of theU.S. population in 2000 to 20.0 percent by the year 2050.

The aging American population affects the strategic orientation of nearly all organiza-tions. Apartment complexes for the elderly, with one meal a day, transportation, and utili-ties included in the rent, have increased nationwide. Called l i f e c a re facilities, t h e s ec o m p l exes now exceed 2 million. Some well-known companies building these fa c i l i t i e sinclude Avon, Marriott, and Hyatt. Individuals age 65 and older in the United States com-prise 13 percent of the total population; Japan’s elderly population ratio is 17 percent, andGermany’s is 19 percent.

Americans are on the move in a population shift to the South and West (Sunbelt) andaway from the Northeast and Midwest (Frostbelt). The Internal Revenue Service prov i d e sthe Census Bureau with massive computer files of demographic data. By comparingi n d ividual address changes from year to year, the Census Bureau publishes ex t e n s iveinformation about population shifts across the country. All of these facts represent majoropportunities and threats for some companies. For example, the four fastest grow i n gstates in rank order are Arizona, Nevada, Idaho, Georgia, and Texas, whereas four states(Louisiana, Rhode Island, New York, Michigan) and Washington, D.C. lost residents in2006. In the Northeast, New York, New Jersey, and Massachusetts continue to lose larg enumbers of people to other states. In the Midwest, the big losers of residents annuallyare Illinois, Michigan, and Ohio. The fastest growing large metropolitan areas in theUnited States are Dallas–Fort Worth, Houston, Atlanta, Phoenix, Las Vegas, andR iverside, California.5 Hard number data related to this information can represent keyopportunities for many firms and thus can be essential for successful strategy formula-tion, including where to locate new plants and distribution centers and where to focusm a r keting eff o r t s .

Except for terrorism, no greater threat to business and society exists than the vo r a-cious, continuous decimation and degradation of our natural environment. The U.S. CleanAir Act went into effect in 1994. The U.S. Clean Water Act went into effect in 1984. Asummary of important social, cultural, demographic, and environmental variables that rep-resent opportunities or threats for virtually all organizations is given in Table 3-3.

Political, Governmental, and Legal ForcesFederal, state, local, and foreign governments are major regulators, deregulators, subsidiz-ers, employers, and customers of organizations. Political, governmental, and legal factors,therefore, can represent key opportunities or threats for both small and large organizations.

For industries and firms that depend heavily on government contracts or subsidies,political forecasts can be the most important part of an external audit. Changes in patentlaws, antitrust legislation, tax rates, and lobbying activities can affect firms significantly.The U.S. Justice Department offers excellent information at its Web site (www.usdoj.gov)on such topics.

In the world of biopolitics, Americans are still deeply divided over issues such as assistedsuicide, genetic testing, genetic engineering, cloning, stem-cell research, and abortion.

As indicated in the Natural Environment Perspective, American business leaders arealso divided on their support for the Kyoto Protocol to cap emissions from industrializednations. The Kyoto Protocol expires in 2012.

The increasing global interdependence among economies, markets, governments, andorganizations makes it imperative that firms consider the possible impact of political vari-ables on the formulation and implementation of competitive strategies.

In Europe, many large multinational firms such as John Deere, Polo Ralph Lauren,Gillette, Cargill, and General Mills are moving their headquarters from France,



Netherlands, and Germany to Switzerland and Ireland to avoid costs associated with taxharmonization—a term that refers to the EU’s effort to end competitive tax breaks amongmember countries. Although the EU strives to standardize tax breaks, member countriesvigorously defend their right to politically and legally set their own tax rates. BehindSwitzerland as the most attractive European location for corporations, Ireland keeps itscorporate tax rates low, which is why Ingersoll-Rand recently moved much of its opera-tions there. About 650 U.S. companies already have operations in Switzerland.

The European Union celebrated its 51st anniversary in 2008, but the 27 member coun-tries have agreed not to allow any other countries to join until 2010. The Union desires toget all member countries on board with signing of its constitution and also desires moretrade between member countries. A recent report by Bruegel, a think tank in Brussels,reveals that member EU countries still spend 86 percent of their income on goods and ser-vices made at home and just 10 percent on those from other EU countries. France wantsEurope’s social welfare model included in the EU constitution, others do not. Poland wantsChristianity mentioned, others such as France do not. Britain says the word “constitution”cannot be used, others disagree. And Italy was voted into the EU with a public debt ofmore than 120 percent of gross domestic product, twice the ratio allowed under EU rules.Some countries that have petitioned to be admitted to the EU include Ukraine, Georg i a ,Croatia, Turkey, and Macedonia.

TABLE 3-3 Key Social, Cultural, Demographic, and Enviro n m e n t a lVa r i a b l e s

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 businesses

Attitudes toward business

Lifestyles

Traffic congestion

Inner-city environments

Average disposable income

Trust in government

Attitudes toward government

Attitudes toward work

Buying habits

Ethical concerns

Attitudes toward saving

Sex roles

Attitudes toward investing

Racial equality

Use of birth control

Average level of education

Government regulation

Attitudes toward retirement

Attitudes toward leisure time

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

Attitudes toward careers

Population changes by race, age, sex, and level of affluence

Attitudes toward authority

Population changes by city, county, state, region, and country

Value placed on leisure time

Regional changes in tastes and preferences

Number of women and minority workers

Number of high school and college graduates by geographic area

Recycling

Waste management

Air pollution

Water pollution

Ozone depletion

Endangered species



N ATURAL ENVIRONMENT PERSPECTIVEAmerican Business Leaders Pushing for Legislation on Climate Change

General Electric’s (GE) Jeffrey Immelt, Dupont’s ChadH o l l i d a y, and Duke Energy’s Jim Rogers are drivingforces in Washington, D.C. behind a group of ten CEOswho are pressuring Congress, the Business Roundtable,and the government to cap greenhouse-gas emissions.Emission caps are already in place in Europe andC a l i f o rnia. American business leaders have generallycome about-face and now support legislation to curbemissions and global warming, even though the coali n d u s t r y, oil industry, and a few politicians still opposesuch efforts. GE says it has a $20 billion backlog oforders for its “ecomagination” products, which includef u e l - e fficient jet engines and locomotives, wind tur-bines, and compact fluorescent light bulbs. Alcoa,C a t e r p i l l a r, and Toyota also are companies makingexcellent pro g ress on natural environment issues andlobbying other firms to do likewise.

Carbon dioxide, the main greenhouse gas, is pro-duced when fossil fuels such as coal, oil, and naturalgas are burned. However, even the Electric PowerSupply Association, which re p resents about one-thirdof U.S. power generation, now lobbies legislators toenact legislation to cap emissions. Business leadersd e s i re a single national emissions cap to take pre c e-dence over diff e rent state emission caps that areemerging. Even Exxon Mobil, a long-time opponent ofg o v e rnment curbs on global-warming emissions, hasceased verbal and monetary opposition and now is try-ing to influence the nature of such curbs. Still, bothExxon and the U.S. government oppose the KyotoP rotocol, the global-warming treaty that caps emissionsf rom industrialized nations.

Even the airline industry, including both airports andair carriers, is feeling pre s s u re to reduce pollution. Everyyear the industry discards more than 6,000 tons of alu-minum cans, 9,000 tons of plastic, and enough newspa-pers and magazines to fill a football field to a depth of230 feet. Airport and air carrier recycling programs aregenerally underdeveloped because both ports and carriersa re preoccupied with security and finances. Airliners emitcarbon dioxide and nitrogen oxides high in the atmos-p h e re and both gases contribute to global warming.

Among states, California leads the way in pushingfor high environmental standards. New California lawsmandate that 20 percent of the state’s energy supply isto come from renewable re s o u rces, such as wind andsolar power, by 2010. Unfortunately, however, Californ i a

state law still prohibits construction of more nuclearplants even though they emit no greenhouse gases.

Among companies, the top five buyers of gre e npower, purchased by total kilowatt hours and as a per-centage of their total purchased electricity use, arePepsiCo, Wells Fargo, Whole Foods, U.S. Air Force, andJohnson & Johnson. Both PepsiCo and organic gro c e rWhole Foods get 100 percent of their power from greensources such as wind, solar, hydroelectric, and nuclear.

S o u rc e s: Adapted from Alan Murray, “Why Key Exe c u t ives AreWarming to Legislation on Climate Change,” Wall Street Jo u r n a l(February 7, 2007): A10; Jeff r ey Ball, “Electric Industry to Call forCap on Emissions,” Wall Street Journal (February 7, 2007): A4; SusanC a r ey, “Airlines Feel Pressure as Pollution Fight Ta kes Off ,” Wa l lStreet Journal (December 12, 2006): A6; Rebecca Smith, “CaliforniaKindles Green Energy,” Wall Street Journal (December 26, 2006): A2;John Fialka and Kathryn Kranhold, “GE Fights EPA’s Tougher SmogP r o p o s a l s ,” Wall Street Jo u r n a l (February 13, 2007): A2; and BruceHorovitz, “PepsiCo Takes Top Spot in Global Warming Battle,” USAToday (April 30, 2007): B1.

The Purcell Mountains in Alberta, Canada.S o u r c e : Peter Wilson (c) Dorling Kindersley



TABLE 3-4 Some Political, Governmental, and Legal Va r i a b l e s

Government regulations or deregulations

Changes in tax laws

Special tariffs

Political action committees

Voter participation rates

Number, severity, and location of government protests

Number of patents

Changes in patent laws

Environmental protection laws

Level of defense expenditures

Legislation on equal employment

Level of government subsidies

Antitrust legislation

Sino-American relationships

Russian-American relationships

European-American relationships

African-American relationships

Import–export regulations

Government fiscal and monetary policychanges

Political conditions in foreign countries

Special local, state, and federal laws

Lobbying activities

Size of government budgets

World oil, currency, and labor markets

Location and severity of terrorist activities

Local, state, and national elections

Political relations between Japan and China have thawed considerably in recent years,which is good for the world economy because China’s low-cost manufactured goods havebecome essential for the functioning of most industrialized nations. China’s Premier WenJiabao addressed the Japanese parliament in April 2007, something no Chinese leader hasdone for more than twenty years, and Japanese Prime Minister Shinzo Abe has visitedBeijing. Japan’s largest trading partner is China, and China’s third-largest trading partneris Japan—after the European Union, number one, and the United States, number two.

A world market has emerged from what previously was a multitude of distinctnational markets, and the climate for international business today is much more favorablethan yesterday. Mass communication and high technology are creating similar patterns ofconsumption in diverse cultures worldwide. This means that many companies may find itdifficult to survive by relying solely on domestic markets.

It is no exaggeration that in an industry that is, or is rapidly becoming, global, theriskiest possible posture is to remain a domestic competitor. The domestic competi-tor will watch as more aggressive companies use this growth to capture economies ofscale and learning. The domestic competitor will then be faced with an attack ondomestic markets using different (and possibly superior) technology, product design,manufacturing, marketing approaches, and economies of scale. A few examples sug-gest how extensive the phenomenon of world markets has already become. Hewlett-Pa c k a r d ’s manufacturing chain reaches halfway around the globe, from well-paid,skilled engineers in California to low-wage assembly workers in Malaysia. GeneralElectric has survived as a manufacturer of inexpensive audio products by centraliz-ing its world production in Singapore.6

Local, state, and federal laws; regulatory agencies; and special-interest groups canh ave a major impact on the strategies of small, large, for- p r o fit, and nonprofit orga n i z a-tions. Many companies have altered or abandoned strategies in the past because of politi-cal or governmental actions. A summary of political, governmental, and legal va r i a b l e sthat can represent key opportunities or threats to organizations is provided in Table 3-4.

Technological ForcesR evolutionary technological changes and discoveries are having a dramatic impact onorganizations. Superconductivity advancements alone, which increase the power of electri-cal products by lowering resistance to current, are revolutionizing business operations,especially in the transportation, utility, health care, electrical, and computer industries.



The Internet is acting as a national and global economic engine that is spurring pro-ductivity, a critical factor in a country’s ability to improve living standards; and it is savingcompanies billions of dollars in distribution and transaction costs from direct sales to self-service systems.

The Internet is changing the very nature of opportunities and threats by altering thelife cycles of products, increasing the speed of distribution, creating new products and ser-vices, erasing limitations of traditional geographic markets, and changing the historicalt r a d e - o ff between production standardization and flex i b i l i t y. The Internet is alteringeconomies of scale, changing entry barriers, and redefining the relationship betweenindustries and various suppliers, creditors, customers, and competitors.

To effectively capitalize on e-commerce, a number of organizations are establishingt wo new positions in their firms: chief information officer (CIO) and chief tech n o l og yo fficer (CTO). This trend reflects the growing importance of information technology (IT)in strategic management. A CIO and CTO work together to ensure that information neededto formulate, implement, and evaluate strategies is available where and when it is needed.These individuals are responsible for developing, maintaining, and updating a company’sinformation database. The CIO is more a manager, managing the overall ex t e r n a l - a u d i tprocess; the CTO is more a technician, focusing on technical issues such as data acquisi-tion, data processing, decision-support systems, and software and hardware acquisition.

Technological forces represent major opportunities and threats that must be consid-ered in formulating strategies. Technological advancements can dramatically affect organi-zations’ products, services, markets, suppliers, distributors, competitors, customers,m a n ufacturing processes, marketing practices, and competitive position. Te c h n o l o g i c a ladvancements can create new markets, result in a proliferation of new and improved prod-ucts, change the relative competitive cost positions in an industry, and render ex i s t i n gproducts and services obsolete. Technological changes can reduce or eliminate cost barri-ers between businesses, create shorter production runs, create shortages in technical skills,and result in changing values and expectations of employees, managers, and customers.Technological advancements can create new competitive advantages that are more power-ful than existing advantages. No company or industry today is insulated against emergingtechnological developments. In high-tech industries, identification and evaluation of keytechnological opportunities and threats can be the most important part of the ex t e r n a lstrategic-management audit.

Organizations that traditionally have limited technology expenditures to what they canfund after meeting marketing and financial requirements urgently need a reversal in think-ing. The pace of technological change is increasing and literally wiping out bu s i n e s s e severy day. An emerging consensus holds that technology management is one of the keyresponsibilities of strategists. Firms should pursue strategies that take advantage of techno-logical opportunities to achieve sustainable, competitive advantages in the marketplace.

Technology-based issues will underlie nearly every important decision that strate-gists make. Crucial to those decisions will be the ability to approach technologyplanning analytically and strategically. . . . technology can be planned and managedusing formal techniques similar to those used in business and capital inve s t m e n tplanning. An effective technology strategy is built on a penetrating analysis of tech-nology opportunities and threats, and an assessment of the relative importance ofthese factors to overall corporate strategy.7

In practice, critical decisions about technology too often are delegated to lower orga-nizational levels or are made without an understanding of their strategic implications.Many strategists spend countless hours determining market share, positioning products interms of features and price, forecasting sales and market size, and monitoring distributors;yet too often, technology does not receive the same respect.

Not all sectors of the economy are affected equally by technological deve l o p m e n t s .The communications, electronics, aeronautics, and pharmaceutical industries are muchmore volatile than the textile, forestry, and metals industries. For strategists in industriesaffected by rapid technological change, identifying and evaluating technological opportu-nities and threats can represent the most important part of an external audit.



TABLE 3-5 The Top U.S. Five Competitors in Four Diff e rent Industries in 2006

2006 Sales (In Millions)

% Change from 2005

2006 Profits (In Millions)

% Change from 2005

BeveragesCoca-Cola 24,088 +4 5,080 +4Pepsi Bottling 12,730 +7 522 +12Coca-Cola Enterprises 19,804 +6 (1,143) –322Anheuser-Busch 15,717 +5 1,965 +7Molson Coors Brew i n g 5,903 +3 361 +168

PharmaceuticalsJohnson & Johnson 53,324 +6 11,053 +6Pfizer 52,415 +2 19,337 +139Merck 22,636 +3 4,434 –4Abbott Laboratories 22,476 +1 1,717 –49Wyeth 20,351 +9 4,197 +15

Industrial and Farm EquipmentCaterpillar 41,517 +14 3,537 +24Deere 22,769 +4 1,694 +17Illinois Tool Works 14,055 +9 1,718 +15Eaton 12,370 +11 950 +18Cummins 11,362 +15 715 +30

ComputersHewlett-Packard 91,658 +6 6,198 +158IBM 91,424 +0 9,492 +20Dell 57,095 +2 2,614 –27Xerox 15,895 +1 1,210 +24Apple Computer 19,315 +9 2,614 +50

Source: Adapted from Fortune, April 30, 2007, F50–F73.

For example, in the office supply industry, business customers find that purchasing sup-plies over the Internet is more convenient than shopping in a store. Office Depot was thefirst office supply company to establish a Web site for this purpose and remains the larg e s tInternet office supply retailer, with close to $1 billion in sales. Staples, Inc., has recentlyalso entered the Internet office supply business with its staples.com Web site, but it has yetto make a profit on these operations, although revenue from the site is growing dramatically.

Competitive ForcesThe top five U.S. competitors in four different industries are identified in Table 3 - 5. Animportant part of an external audit is identifying rival firms and determining theirstrengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies.

Collecting and evaluating information on competitors is essential for successful strat-egy formulation. Identifying major competitors is not always easy because many fi r m shave divisions that compete in different industries. Many multidivisional firms generallydo not provide sales and profit information on a divisional basis for competitive reasons.Also, privately held firms do not publish any financial or marketing information.Addressing questions about competitors such as those presented in Table 3-6 is importantin performing an external audit.

Competition in virtually all industries can be described as intense—and sometimes ascutthroat. For example, when Circuit City falters its major competitor, Best Buy, cutsprices, adds stores, and increases advertising aimed to further its rival’s demise. Best Buyis opening 130 new stores in 2007, many near Circuit City stores, while Circuit City isclosing underperforming stores, considering a sale of its 510-store chain in Canada, and

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laying off another 3,400 employees in fiscal 2007. Best Buy’s first-quarter 2007 profi t swere up 18 percent, while Circuit City again lost money.

As Dollar General, based in Goodlettsville, Tennessee, falters its major competitor,Family Dollar Stores, based in Matthews, North Carolina, intensifies its efforts to crippleDollar General. With 6,300 stores and $6.4 billion in annual sales, the smaller Fa m i l yDollar Stores is rapidly gaining on Dollar General, an 8,260-store chain with $9.2 billion inannual sales. Whereas Dollar General is closing stores, revamping inventory strateg y, andlaying off employees, Family Dollar is growing and practicing “zone pricing”—raising orl owering prices on given items at given stores to capitalize on competitive pressure. DollarGeneral uses “uniform pricing,” which refers to consistent prices from store to store.We a kened, Dollar General was bought out by Ko h l b e rg Kravis Roberts in 2007. If a fi r mdetects weakness in a competitor, no mercy at all is shown in capitalizing on its problems.

Seven characteristics describe the most competitive companies:

1. Market share matters; the 90th share point isn’t as important as the 91st, and noth-ing is more dangerous than falling to 89.

2. Understand and remember precisely what business you are in.3. Whether it’s broke or not, fix it—make it better; not just products, but the whole

company, if necessary.4. Innovate or evaporate; particularly in technology-driven businesses, nothing quite

recedes like success.5. Acquisition is essential to growth; the most successful purchases are in niches that

add a technology or a related market.6. People make a difference; tired of hearing it? Too bad.7 . There is no substitute for quality and no greater threat than failing to be cost-

c o m p e t i t ive on a global basis.

These are complementary concepts, not mutually exclusive ones.8

Competitive Intelligence ProgramsWhat is competitive intelligence? Competitive intelligence (CI), as formally defined by theSociety of Competitive Intelligence Professionals (SCIP), is a systematic and ethicalprocess for gathering and analyzing information about the competition’s activities andgeneral business trends to further a business’s own goals (SCIP Web site).

Good competitive intelligence in business, as in the military, is one of the keys to suc-cess. The more information and knowledge a firm can obtain about its competitors, themore likely it is that it can formulate and implement effective strategies. Major competi-tors’ weaknesses can represent external opportunities; major competitors’ strengths mayrepresent key threats.

TABLE 3-6 Key Questions About Competitors

1. What are the major competitors’ strengths?

2. What are the major competitors’ weaknesses?

3. What are the major competitors’ objectives and strategies?

4 . H ow will the major competitors most likely respond to current economic, social, cultural, demographic, env i r o n m e n-tal, 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 major competitors in the industry changed over recent years? Why havethese 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 competitors in this industry?



According to BusinessWeek, there are more than 5,000 corporate spies now activelyengaged in intelligence activities, and 9 out of 10 large companies have employees dedi-cated solely to gathering competitive intelligence.9 The article contends that many larg eU.S. companies spend more than $1 million annually tracking their competitors. Evidencesuggests that the benefits of corporate spying include increased revenues, lower costs, andbetter decision making.

Unfortunately, the majority of U.S. executives grew up in times when U.S. firms dom-inated foreign competitors so much that gathering competitive intelligence did not seemworth the effort. Too many of these executives still cling to these attitudes—to the detri-ment of their organizations today. Even most MBA programs do not offer a course in com-p e t i t ive and business intelligence, thus reinforcing this attitude. As a consequence, threestrong misperceptions about business intelligence prevail among U.S. executives today:

1. Running an intelligence program requires lots of people, computers, and otherresources.

2. Collecting intelligence about competitors violates antitrust laws; business intelli-gence equals espionage.

3. Intelligence gathering is an unethical business practice.10

All three of these perceptions are totally misguided. Any discussions with a competi-tor about price, market, or geography intentions could violate antitrust statutes, but thisfact must not lure a firm into underestimating the need for and benefits of systematicallycollecting information about competitors for the purpose of enhancing a firm’s effective-ness. The Internet has become an excellent medium for gathering competitive intelligence.Information gathering from employees, managers, suppliers, distributors, customers, cred-itors, and consultants also can make the difference between having superior or just averageintelligence and overall competitiveness.

Firms need an effective competitive intelligence (CI) program. The three basic mis-sions of a CI program are (1) to provide a general understanding of an industry and itscompetitors, (2) to identify areas in which competitors are vulnerable and to assess theimpact strategic actions would have on competitors, and (3) to identify potential move sthat a competitor might make that would endanger a fi r m ’s position in the marke t .1 1

C o m p e t i t ive information is equally applicable for strategy formulation, implementation,and evaluation decisions. An effective CI program allows all areas of a firm to access con-sistent and verifiable information in making decisions. All members of an organization—from the chief executive officer to custodians—are valuable intelligence agents and shouldfeel themselves to be a part of the CI process. Special characteristics of a successful CIprogram include flexibility, usefulness, timeliness, and cross-functional cooperation.

The increasing emphasis on competitive analysis in the United States is evidenced bycorporations putting this function on their organizational charts under job titles such asDirector of Competitive Analysis, Competitive Strategy Manager, Director of InformationServices, or Associate Director of Competitive Assessment. The responsibilities of adirector of competitive analysis include planning, collecting data, analyzing data, facilitat-ing the process of gathering and analyzing data, disseminating intelligence on a timelybasis, researching special issues, and recognizing what information is important and whoneeds to know. Competitive intelligence is not corporate espionage because 95 percent ofthe information a company needs to make strategic decisions is available and accessible tothe public. Sources of competitive information include trade journals, want ads, newspaperarticles, and government filings, as well as customers, suppliers, distributors, competitorsthemselves, and the Internet.

Unethical tactics such as bribery, wiretapping, and computer break-ins should neverbe used to obtain information. Marriott and Motorola—two U.S. companies that do a par-ticularly good job of gathering competitive intelligence—agree that all the informationyou could wish for can be collected without resorting to unethical tactics. They keep theirintelligence staffs small, usually under five people, and spend less than $200,000 per yearon gathering competitive intelligence.

U n i l ever recently sued Procter & Gamble (P&G) over that company ’s corporate-e s p ionage activities to obtain the secrets of its Unilever hair-care business. After spending

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$3 million to establish a team to find out about competitors in the domestic hair-care indus-t r y, P&G allegedly took roughly 80 documents from garbage bins outside Unileve r ’sChicago offices. P&G produces Pantene and Head & Shoulders shampoos, while Unilverhas hair-care brands such as ThermaSilk, Suave, Salon Selectives, and Finesse. Similarly,Oracle Corp. recently admitted that detectives it hired paid janitors to go throughMicrosoft Corp.’s garbage, looking for evidence to use in court.

An interesting aspect of any competitive analysis discussion is whether strateg i e sthemselves should be secret or open within firms. The Chinese warrior Sun Tzu and mili-tary leaders today strive to keep strategies secret, as war is based on deception. However,for a business organization, secrecy may not be best. Keeping strategies secret fromemployees and stakeholders at large could severely inhibit employee and stakeholder com-munication, understanding, and commitment and also forgo valuable input that these per-sons could have regarding formulation and/or implementation of that strateg y. Thusstrategists in a particular firm must decide for themselves whether the risk of rival firmseasily knowing and exploiting a fi r m ’s strategies is worth the benefit of improve demployee and stakeholder motivation and input. Most executives agree that some strategicinformation should remain confidential to top managers, and that steps should be taken toensure that such information is not disseminated beyond the inner circle. For a firm thatyou may own or manage, would you advocate openness or secrecy in regard to strategiesbeing formulated and implemented?

Cooperation Among CompetitorsS t r a t egies that stress cooperation among competitors are being used more. For ex a m p l e ,Lockheed teamed up with British Aerospace PLC to compete against Boeing Company todevelop the next-generation U.S. fighter jet. Lockheed’s cooperative strategy with a prof-itable partner in the Airbus Industrie consortium encourages broader Lockheed–Europeancollaboration as Europe’s defense industry consolidates. The British firm offers Lockheedspecial expertise in the areas of short take o ff and vertical landing technologies, systemsintegration, and low-cost design and manufacturing.

Cooperative agreements between competitors are even becoming popular. For collab-oration between competitors to succeed, both firms must contribute something distinctive,such as technology, distribution, basic research, or manufacturing capacity. But a majorrisk is that unintended transfers of important skills or technology may occur at organiza-tional levels below where the deal was signed.1 2 Information not covered in the formalagreement often gets traded in the day-to-day interactions and dealings of engineers, mar-keters, and product developers. Firms often give away too much information to rival firmswhen operating under cooperative agreements! Tighter formal agreements are needed.

Perhaps the best example of rival firms in an industry forming alliances to competeagainst each other is the airline industry. Today there are three major alliances. The StarAlliance has 16 airlines such as Air Canada, Mexicana, Spanair, United, and Varig; theOneWorld Alliance has 8 airlines such as American, British Air, and LanChile; and finally,SkyTeam Alliance has 6 airlines such as Air France, Delta, and Korean Air. KLM is set tojoin SkyTeam soon, Swiss International is scheduled to join OneWorld, and USAirways isscheduled to join Star Alliance. Firms are moving to compete as groups within alliancesmore and more as it becomes increasingly difficult to survive alone in some industries.

The idea of joining forces with a competitor is not easily accepted by Americans, whooften view cooperation and partnerships with skepticism and suspicion. Indeed, joint ven-tures and cooperative arrangements among competitors demand a certain amount of trust ifcompanies are to combat paranoia about whether one firm will injure the other. However,multinational firms are becoming more globally cooperative, and increasing numbers ofdomestic firms are joining forces with competitive foreign firms to reap mutual benefits.Kathryn Harrigan at Columbia University says, “Within a decade, most companies will bemembers of teams that compete against each other.” Northrop Grumman is planning topartner with Airbus parent EADS in Europe to battle Boeing for a Pentagon contract foraerial-refueling planes. These talks are ongoing at this time. EADS is a French/Germanc o m p a ny but is perceived widely as French because Airbus planes are assembled inFrance. Northrop is based in Los Angeles.

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FIGURE 3-3

The Five-Forces Model of Competition

U.S. companies often enter alliances primarily to avoid investments, being more inter-ested in reducing the costs and risks of entering new businesses or markets than in acquir-ing new skills. In contrast, learning from the partner is a major reason why Asian andEuropean firms enter into cooperative agreements. U.S. firms, too, should place learninghigh on the list of reasons to be cooperative with competitors. U.S. companies often formalliances with Asian firms to gain an understanding of their manufacturing excellence, butAsian competence in this area is not easily transferable. Manufacturing excellence is acomplex system that includes employee training and involvement, integration with suppli-ers, statistical process controls, value engineering, and design. In contrast, U.S. know-howin technology and related areas can be imitated more easily. U.S. firms thus need to becareful not to give away more intelligence than they receive in cooperative agreementswith rival Asian firms.

Market Commonality and Resource SimilarityBy definition, competitors are firms that offer similar products and services in the samem a r ket. Markets can be geographic or product areas or segments. For example, in theinsurance industry the markets are broken down into commercial/consumer, health/life,and Europe/Asia. Researchers use the terms market commonality and resource similarityto study rivalry among competitors. Market commonality can be defined as the number ands i g n i ficance of markets that a firm competes in with riva l s .1 3 R e s o u rce similarity is theextent to which the type and amount of a fi r m ’s internal resources are comparable to ar iva l .1 4 One way to analyze competitiveness between two or among several firms is toinvestigate market commonality and resource similarity issues while looking for areas ofpotential competitive advantage along each firm’s value chain.

Competitive Analysis: Porter’s Five-Forces ModelAs illustrated in Figure 3 - 3, Po r t e r ’s Fi v e - Fo rces Model of competitive analysis is awidely used approach for developing strategies in many industries. The intensity of com-petition among firms varies widely across industries. Table 3 - 7 r eveals the average profi tm a rgin and return on investment for firms in different industries. Note the substantialvariation among industries. For example, the range in profit margin goes from 0 to 18 forfood production to computer software, respective l y. Intensity of competition is highest inl ow e r-return industries. The collective impact of competitive forces is so brutal in someindustries that the market is clearly “unattractive” from a profit-making standpoint.R ivalry among existing firms is severe, new rivals can enter the industry with relative



TABLE 3-7 Intensity of Competition among Firms in Diff e re n tIndustries (A through H industries only)

Industry Profit Margin Return on Investment

Aerospace and Defense 6 6Airlines 2 2Apparel 5 8Automotive Retailing 1 3Beverages 7 4Building Materials, Glass 14 14Chemicals 5 5Commercial Banks 16 1.3Computer Peripherals 8 7Computer Software 18 8Computers, Office Equipment 6 7Diversified Financials 12 1Diversified Outsourcing Services 4 5Electronics, Electrical Equipment 7 8Energy 3 3Engineering, Construction 2 4Entertainment 10 4Financial Data Services 10 6Food and Drug Stores 2 5Food Consumer Products 5 6Food Production 0 1Food Services 4 7Forest and Paper Products 3 4Furniture 5 7General Merchandisers 3 5Health Care: Insurance 5 8Health Care: Medical Facilities 4 4Health Care: Pharmacy 3 9Home Equipment/Furnishings 4 6Homebuilders 6 6Hotels, Casinos, Resorts 7 3

Source: Adapted from John Moore, “Ranked Within Industries,” Fortune (April 30, 2007): F-50 to F-75.

ease, and both suppliers and customers can exercise considerable bargaining leve r a g e .According to Porter, the nature of competitiveness in a given industry can be viewed as acomposite of five forces:

1. Rivalry among competing firms2. Potential entry of new competitors3. Potential development of substitute products4. Bargaining power of suppliers5. Bargaining power of consumers

The following three steps for using Porter’s Five - Forces Model can reveal whethercompetition in a given industry is such that the firm can make an acceptable profit:

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.

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Rivalry Among Competing FirmsR ivalry among competing firms 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 prov i d ec o m p e t i t ive advantage over the strategies pursued by rival firms. Changes in strategy by onefirm may be met with retaliatory countermoves, such as lowering prices, enhancing quality,adding features, providing services, extending warranties, and increasing adve r t i s i n g .

Free-flowing information on the Internet is driving down prices and inflation world-wide. The Internet, coupled with the common currency in Europe, enables consumers tomake price comparisons easily across countries. Just for a moment, consider the implica-tions for car dealers who used to know everything about a new car’s pricing, while you, theconsumer, knew very little. You could bargain, but being in the dark, you rarely could win.Now you can go to Web sites such as CarPoint.com or Edmunds.com and learn more aboutnew car prices than the car salesperson, and you can even shop online in a few hours atevery dealership within 500 miles to find the best price and terms. So you, the consumer,can win. This is true in many, if not most, business-to-consumer and business-to-businesssales transactions today.

The intensity of rivalry among competing firms tends to increase as the number ofcompetitors increases, as competitors become more equal in size and capability, as demandfor the industry’s products declines, and as price cutting becomes common. Rivalry alsoincreases when consumers can switch brands easily; when barriers to leaving the marketare high; when fi xed costs are high; when the product is perishable; when consumerdemand is growing slowly or declines such that rivals have excess capacity and/or inven-tory; when the products being sold are commodities (not easily differentiated such as gaso-line); when rival firms are diverse in strategies, origins, and culture; and when mergers andacquisitions are common in the industry. As rivalry among competing firms intensifi e s ,industry profits decline, in some cases to the point where an industry becomes inherentlyunattractive.

R ivalry in the automobile industry is fierce. As Ford and General Motors’ marke tshares steadily decline, Toyota and Honda have stepped up their marketing and productionefforts in the United States. Toyota is currently building its eighth North American assem-bly plant, in the southeast United States. Toyota’s new plant starts production in 2009 andhas a capacity of 200,000 vehicles annually. Ford and GM are both losing money in theirNorth American auto operations. When rival firms sense weakness, typically they willintensify both marketing and production efforts to capitalize on the “opportunity.”

Potential Entry of New CompetitorsWhenever new firms can easily enter a particular industry, the intensity of competitivenessamong firms increases. Barriers to entry, however, can include the need to gain economiesof scale quickly, the need to gain technology and specialized know-how, the lack of expe-rience, strong customer loyalty, strong brand preferences, large capital requirements, lackof adequate distribution channels, government regulatory policies, tariffs, lack of access tor aw materials, possession of patents, undesirable locations, counterattack by entrenchedfirms, and potential saturation of the market.

Despite numerous barriers to entry, new firms sometimes enter industries with higher-quality products, lower prices, and substantial marketing resources. The strateg i s t ’s job,therefore, is to identify potential new firms entering the market, to monitor the new rivalfirms’ strategies, to counterattack as needed, and to capitalize on existing strengths andopportunities. When the threat of new firms entering the market is strong, incumbent firmsgenerally fortify their positions and take actions to deter new entrants, such as low e r i n gprices, extending warranties, adding features, or offering financing specials.

Potential Development of Substitute ProductsIn many industries, firms are in close competition with producers of substitute products inother industries. Examples are plastic container producers competing with glass, paper-board, and aluminum can producers, and acetaminophen manufacturers competing with



other manufacturers of pain and headache remedies. The presence of substitute productsputs a ceiling on the price that can be charged before consumers will switch to the substi-tute product. Price ceilings equate to profit ceilings and more intense competition amongrivals. Producers of eyeglasses and contact lenses, for example, face increasing competi-tive pressures from laser eye surgery. Producers of sugar face similar pressures from artifi-cial sweeteners. Newspapers and magazines face substitute-product competitive pressuresfrom the Internet and 24-hour cable television. The magnitude of competitive pressurederived from development of substitute products is generally evidenced by rivals’ plans forexpanding production capacity, as well as by their sales and profit growth numbers.

C o m p e t i t ive pressures arising from substitute products increase as the relative priceof substitute products declines and as consumers’ switching costs decrease. The compet-i t ive strength of substitute products is best measured by the inroads into the market sharethose products obtain, as well as those firms’ plans for increased capacity and marke tp e n e t r a t i o n .

Bargaining Power of SuppliersThe bargaining power of suppliers affects the intensity of competition in an industry, espe-cially when there is a large number of suppliers, when there are only a few good substituteraw materials, or when the cost of switching raw materials is especially costly. It is often inthe 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 inven-tory costs, thus enhancing long-term profitability for all concerned.

Firms may pursue a backward integration strategy to gain control or ownership of sup-pliers. This strategy is especially effective when suppliers are unreliable, too costly, or notcapable of meeting a fi r m ’s needs on a consistent basis. Firms generally can neg o t i a t emore favorable terms with suppliers when backward integration is a commonly used strat-egy among rival firms in an industry.

However, in many industries it is more economical to use outside suppliers of compo-nent parts than to self-manufacture the items. This is true, for example, in the outdoorp ower equipment industry where producers of lawn mowers, rotary tillers, leaf blow e r s ,and edgers such as Murray generally obtain their small engines from outside manufactur-ers such as Briggs & Stratton who specialize in such engines and have huge economies ofscale.

In more and more industries, sellers are forging strategic partnerships with select sup-pliers in efforts to (1) reduce inventory and logistics costs (e.g., through just-in-time deliv-eries); (2) speed the availability of next-generation components; (3) enhance the quality ofthe parts and components being supplied and reduce defect rates; and (4) squeeze outimportant cost savings for both themselves and their suppliers.15

Bargaining Power of ConsumersWhen customers are concentrated or large or buy in volume, their bargaining power repre-sents a major force affecting the intensity of competition in an industry. Rival firms mayo ffer extended warranties or special services to gain customer loyalty whenever the bar-gaining power of consumers is substantial. Bargaining power of consumers also is higherwhen the products being purchased are standard or undifferentiated. When this is the case,consumers often can negotiate selling price, warranty coverage, and accessory packages toa greater extent.

The bargaining power of consumers can be the most important force affecting com-p e t i t ive advantage. Consumers gain increasing bargaining power under the follow i n gc i r c u m s t a n c e s :

1. If they can inexpensively switch to competing brands or substitutes2. If they are particularly important to the seller3. If sellers are struggling in the face of falling consumer demand4. If they are informed about sellers’ products, prices, and costs5. If they have discretion in whether and when they purchase the product16



Sources of External InformationA wealth of strategic information is available to organizations from both published andunpublished sources. Unpublished sources include customer surveys, market research,speeches at professional and shareholders’ meetings, television programs, interviews, andconversations with stakeholders. Published sources of strategic information include peri-odicals, journals, reports, government documents, abstracts, books, directories, new s p a-pers, and manuals. The Internet has made it easier for firms to ga t h e r, assimilate, andevaluate information.

The Internet offers consumers and businesses a widening range of services and infor-mation resources from all over the world. Interactive services offer users not only access toinformation worldwide but also the ability to communicate with the person or companythat created the information. Historical barriers to personal and business success—timezones and diverse cultures—are being eliminated. The Internet has become as important toour society as television and newspapers.

Forecasting Tools and TechniquesForecasts are educated assumptions about future trends and events. Forecasting is a com-p l ex activity because of factors such as technological innovation, cultural changes, newproducts, improved services, stronger competitors, shifts in government priorities, chang-ing social values, unstable economic conditions, and unforeseen events. Managers oftenmust rely upon published forecasts to eff e c t ively identify key external opportunities andthreats.

A sense of the future permeates all action and underlies every decision a personm a kes. People eat expecting to be satisfied and nourished—in the future. People sleepassuming that in the future they will feel rested. They invest energ y, money, and timebecause they believe their efforts will be rewarded in the future. They build highwa y sassuming that automobiles and trucks will need them in the future. Parents educate chil-dren on the basis of forecasts that they will need certain skills, attitudes, and knowledgewhen they grow up. The truth is we all make implicit forecasts throughout our daily lives.The question, therefore, is not whether we should forecast but rather how we can best fore-cast to enable us to move beyond our ordinarily unarticulated assumptions about thefuture. Can we obtain information and then make educated assumptions (forecasts) to bet-ter guide our current decisions to achieve a more desirable future state of affairs? Weshould go into the future with our eyes and our minds open, rather than stumble into thefuture with our eyes closed.17

M a ny publications and sources on the Internet forecast external variables. Seve r a lpublished examples include Industry We e k’s “ Trends and Fo r e c a s t s ,” B u s i n e s s We e k’s“Investment Outlook,” and Standard & Poor’s Industry Survey. The reputation and contin-ued success of these publications depend partly on accurate forecasts, so published sourcesof information can offer excellent projections. An especially good Web site for industryforecasts is finance.yahoo.com. Just insert a firm’s stock symbol and go from there.

Sometimes organizations must develop their own projections. Most orga n i z a t i o n sforecast (project) their own revenues and profits annually. Organizations sometimes fore-cast market share or customer loyalty in local areas. Because forecasting is so important instrategic management and because the ability to forecast (in contrast to the ability to use aforecast) is essential, selected forecasting tools are examined further here.

Forecasting tools can be broadly categorized into two groups: quantitative techniquesand qualitative techniques. Quantitative forecasts are most appropriate when historicaldata are available and when the relationships among key variables are expected to remainthe same in the future. Linear regression, for example, is based on the assumption that thefuture will be just like the past—which, of course, it never is. As historical relationshipsbecome less stable, quantitative forecasts become less accurate.

No forecast is perfect, and some forecasts are even wildly inaccurate. This fact accentsthe need for strategists to devote sufficient time and effort to study the underlying bases forpublished forecasts and to develop internal forecasts of their own. Key external opportunities

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Gives an extensive slide showpresentation about strategicmanagement, from beginning tothe end of the process. (www.csuchico.edu/mgmt/strategy/)



and threats can be eff e c t ively identified only through good forecasts. Accurate forecasts canp r ovide major competitive advantages for organizations. Forecasts are vital to the strateg i c -management process and to the success of orga n i z a t i o n s .

Making AssumptionsPlanning would be impossible without assumptions. McConkey defines assumptions as the“best present estimates of the impact of major external factors, over which the manager haslittle if any control, but which may exert a significant impact on performance or the abilityto achieve desired results.”18 Strategists are faced with countless variables and imponder-ables that can be neither controlled nor predicted with 100 percent accuracy. Wild guessesshould never be made in formulating strategies, but reasonable assumptions based onavailable information must always be made.

By identifying future occurrences that could have a major effect on the firm and bymaking reasonable assumptions about those factors, strategists can carry the strateg i c -management process forward. Assumptions are needed only for future trends and eventsthat are most likely to have a significant effect on the company’s business. Based on thebest information at the time, assumptions serve as checkpoints on the validity of strategies.If future occurrences deviate significantly from assumptions, strategists know that correc-t ive actions may be needed. Without reasonable assumptions, the strateg y - f o r m u l a t i o nprocess could not proceed effectively. Firms that have the best information generally makethe most accurate assumptions, which can lead to major competitive advantages.

The Global ChallengeForeign competitors are battering U.S. firms in many industries. In its simplest sense, theinternational challenge faced by U.S. business is twofold: (1) how to gain and maintainexports to other nations and (2) how to defend domestic markets against imported goods.Few companies can afford to ignore the presence of international competition. Firms thatseem insulated and comfortable today may be vulnerable tomorrow; for example, foreignbanks do not yet compete or operate in most of the United States but this too is changing.

America’s economy is becoming much less American. A world economy and mone-tary system are emerging. Corporations in every corner of the globe are taking advantageof the opportunity to share in the benefits of worldwide economic development. Marketsare shifting rapidly and in many cases converging in tastes, trends, and prices. Innovativetransport systems are accelerating the transfer of technology. Shifts in the nature and loca-tion of production systems, especially to China and India, are reducing the response timeto changing market conditions.

More and more countries around the world are welcoming foreign investment andcapital. As a result, labor markets have steadily become more international. East Asiancountries have become market leaders in labor-intensive industries, Brazil offers abundantnatural resources and rapidly developing markets, and Germany offers skilled labor andtechnology. The drive to improve the efficiency of global business operations is leading togreater functional specialization. This is not limited to a search for the familiar low-costlabor in Latin America or Asia. Other considerations include the cost of energy, availabil-ity of resources, inflation rates, existing tax rates, and the nature of trade regulations.

When it joined the World Trade Organization in 2001, China agreed to respect copy-right protections and liberalize restrictions on the import and distribution of foreign-madegoods. However, in 2008 Chinese counterfeiters still can be criminally prosecuted for com-mercial piracy only when caught in possession of at least 500 counterfeit items.19 Piratedgoods such as Nike running shoes, new Hollywood movies on DVD, and Microsoft soft-ware can be purchased for a fraction of their actual prices on many streets in China. AndChina still has substantial barriers to sales of authentic U.S.-made copyrighted products.U.S. Trade Representative Susan Schwab says, “This is more than a handbag here or a logoitem there; it is often theft on a grand scale.” China’s counterfeit trade practices contributeto an annual bilateral trade deficit of about $250 billion with the United States. Chinesepirating of products is an external threat facing many firms.



Multinational CorporationsMultinational corporations (MNCs) face unique and diverse risks, such as ex p r o p r i a t i o nof assets, currency losses through exchange rate fluctuations, unfavorable foreign courtinterpretations of contracts and agreements, social/political disturbances, import/ex p o r trestrictions, tariffs, and trade barriers. Strategists in MNCs are often confronted with theneed to be globally competitive and nationally responsive at the same time. With the risein world commerce, government and regulatory bodies are more closely monitoring for-eign business practices. The United States Foreign Corrupt Practices Act, for ex a m p l e ,d e fines corrupt practices in many areas of business. A sensitive issue is that some MNCssometimes violate legal and ethical standards of the home country, but not of the hostc o u n t r y.

Before entering international markets, firms should scan relevant journals and patentreports, seek the advice of academic and research organizations, participate in interna-tional trade fairs, form partnerships, and conduct extensive research to broaden their con-tacts and diminish the risk of doing business in new markets. Firms can also reduce therisks of doing business internationally by obtaining insurance from the U.S. government’sOverseas Private Investment Corporation (OPIC). Note in the “Global Perspective” sectionthat General Motors and Ford, large American MNCs, are now being challenged not onlyby German and Japanese auto firms but also by Chinese auto firms.

Ch i n a ’s auto exports doubled in 2006 from the pre v i-ous year to a re c o rd 340,000 units. Vice Minister ofC o m m e rce Wei Jianguo says, “China is aiming to lift thevalue of its vehicle and auto parts exports to $120 billion,or 10 percent of the world’s total vehicle trading volumein the next ten years.” China’s seven million automobilesp roduced in 2006 catapulted the country ahead ofGermany to become the world’s number three automo-bile producer behind the United States and Japan.DaimlerChrysler AG’s Chrysler Group has recently agre e dto sell China’s Chery Automobile Company subcompactcars in the United States in 2008.

A Chinese automaker, Changfeng Group, displayedfive new vehicles at the 2007 Detroit Auto Show, marking

the first Chinese autos on show in the United States.China has more than 100 automakers and the govern-ment in Beijing desires to see these firms consolidate andexpand globally. The majority owner of Changfeng,Anhui Changfeng Yangzi Motor Manufacturing, is espe-cially interested in promoting its Liebao brand in NorthAmerica. Other Chinese automakers with plans to mar-ket cars in the United States for the first time next yearinclude Great Wall Motor Company and GeelyAutomobile Company.

S o u rc e: Adapted from “China Auto Exports Doubled During 2006,”Wall Street Jo u r n a l (January 2, 2007): A16; and Norihiko Shirouzu,“Obscure Chinese Car Maker Seeks U.S. Presence,” Wall Stre e tJo u r n a l (January 3, 2007): B1.

GLOBAL PERSPECTIVE

China’s Automobile Producers Heading to the United States in 2008

1971 Chevrolet Nova ss. Courtesy of Tallahassee Car Museum, MathewWard(c) Dorling Kindersley



GlobalizationGlobalization is a process of worldwide integration of strategy formulation, implementa-tion, and evaluation activities. Strategic decisions are made based on their impact uponglobal profitability of the firm, rather than on just domestic or other individual countryconsiderations. A global strategy seeks to meet the needs of customers worldwide, withthe highest value at the lowest cost. This may mean locating production in countries withthe lowest labor costs or abundant natural resources, locating research and complex engi-neering centers where skilled scientists and engineers can be found, and locating marke t-ing activities close to the markets to be served. A global strategy includes designing,producing, and marketing products with global needs in mind, instead of consideringi n d ividual countries alone. A global strategy integrates actions against competitors into aworldwide plan.

Globalization of industries is occurring for many reasons, including a wo r l d w i d etrend toward similar consumption patterns, the emergence of global buyers and sellers,and e-commerce and the instant transmission of money and information across conti-nents. The Olympics, the World Bank, world trade centers, the Red Cross, the Internet,e nvironmental conferences, telecommunications, and economic summits all contribute toglobal interdependencies and the emerging global marke t p l a c e .

It is clear that different industries become global for different reasons. The need toamortize massive R&D investments over many markets is a major reason why the aircraftm a n u facturing industry became global. Monitoring globalization in one’s industry is animportant strategic-management activity. Knowing how to use that information for one’sc o m p e t i t ive advantage is even more important. For example, firms may look around theworld for the best technology and select one that has the most promise for the largest num-ber of markets. When firms design a product, they design it to be marketable in as manycountries as possible. When firms manufacture a product, they select the low e s t - c o s tsource, which may be Japan for semiconductors, Sri Lanka for textiles, Malaysia for sim-ple electronics, and Europe for precision machinery. MNCs design manufacturing systemsto accommodate world markets. One of the riskiest strategies for a domestic firm is toremain solely a domestic firm in an industry that is rapidly becoming global.

Industry Analysis: The External Factor Evaluation(EFE) MatrixAn External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluateeconomic, social, cultural, demographic, environmental, political, governmental, lega l ,technological, and competitive information. Illustrated in Table 3-8, the EFE Matrix can bedeveloped in five steps:

1. List key external factors as identified in the external-audit process. Include a total of10 to 20 factors, including both opportunities and threats, that affect the firm and itsindustry. List the opportunities first and then the threats. Be as specific as possible,using percentages, ratios, and comparative numbers whenever possible.

2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (veryimportant). The weight indicates the relative importance of that factor to being suc-cessful in the firm’s industry. Opportunities often receive higher weights than threats,but threats can receive high weights if they are especially severe or threatening.Appropriate weights can be determined by comparing successful with unsuccessfulcompetitors or by discussing the factor and reaching a group consensus. The sum ofall weights assigned to the factors must equal 1.0.

3. Assign a rating between 1 and 4 to each key external factor to indicate how effec-tively the firm’s current strategies respond to the factor, where 4 = the response issuperior, 3 = the response is above average, 2 = the response is average, and 1 = theresponse is poor. Ratings are based on effectiveness of the firm’s strategies. Ratingsare thus company-based, whereas the weights in Step 2 are industry-based. It isimportant to note that both threats and opportunities can receive a 1, 2, 3, or 4.



TABLE 3-8 EFE Matrix for a Local Te n - T h e a t re Cinema Complex

Key External Factors Weight RatingWeighted

Score

Opportunities

1. Rowan County is growing 8% annually in population 0.05 3 0.15

2. TDB University is expanding 6% annually 0.08 4 0.32

3. Major competitor across town recently ceased operations 0.08 3 0.24

4. Demand for going to cinema growing 10% annually 0.07 2 0.14

5. Two new neighborhoods being developed within 3 miles 0.09 1 0.09

6. Disposable income among citizens grew 5% in prior year 0.06 3 0.18

7. Unemployment rate in county declined to 3.1% 0.03 2 0.06

Threats

8. Trend toward healthy eating eroding concession sales 0.12 4 0.48

9. Demand for online movies and DVDs growing 10% annually 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 theatre 0.04 3 0.12

12. County and city property taxes increasing 25% this year 0.08 2 0.16

13. Local religious groups object to R-rated movies being shown 0.04 3 0.12

14. Movies rented from local Blockbuster store 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

4. Multiply each factor’s weight by its rating to determine a weighted score.5. Sum the weighted scores for each variable to determine the total weighted score for

the organization.

Regardless of the number of key opportunities and threats included in an EFE Matrix,the highest possible total weighted score for an organization is 4.0 and the lowest possibletotal weighted score is 1.0. The average total weighted score is 2.5. A total weighted scoreof 4.0 indicates that an organization is responding in an outstanding way to existing oppor-tunities and threats in its industry. In other words, the fi r m ’s strategies eff e c t ively takeadvantage of existing opportunities and minimize the potential adverse effects of externalthreats. A total score of 1.0 indicates that the fi r m ’s strategies are not capitalizing onopportunities or avoiding external threats.

An example of an EFE Matrix is provided in Table 3-8 for a local ten-theatre cinemacomplex. Note that the most important factor to being successful in this business is “Trendtoward healthy eating eroding concession sales” as indicated by the 0.12 weight. Also notethat the local cinema is doing excellent in regard to handling two factors, “TDBU n iversity is expanding 6 percent annually” and “Trend toward healthy eating erodingconcession sales.” Perhaps the cinema is placing flyers on campus and also adding yogurtand healthy drinks to its concession menu. Note that you may have a 1, 2, 3, or 4 anywheredown the Rating column. Note also that the factors are stated in quantitative terms to theextent possible, rather than being stated in vague terms. Quantify the factors as much aspossible in constructing an EFE Matrix. Finally, note that the total weighted score of 2.58is above the average (midpoint) of 2.5, so this cinema business is doing pretty well, takingadvantage of the external opportunities and avoiding the threats facing the firm. There isdefinitely room for improvement, though, because the highest total weighted score wouldbe 4.0. As indicated by ratings of 1, this business needs to capitalize more on the “two newneighborhoods nearby” opportunity and the “movies rented from Time Warner” threat.



Note also that there are many percentage-based factors among the group. Be quantitative tothe extent possible! Note also that the ratings range from 1 to 4 on both the opportunitiesand threats.

The Competitive Profile Matrix (CPM)The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and its partic-ular strengths and weaknesses in relation to a sample firm’s strategic position. The weightsand total weighted scores in both a CPM and an EFE have the same meaning. However,critical success factors in a CPM include both internal and external issues; therefore, theratings refer to strengths and weaknesses, where 4 = major strength, 3 = minor strength, 2 =minor weakness, and 1 = major weakness. There are some important differences betweenthe EFE and CPM. First of all, the critical success factors in a CPM are broader, they donot include specific or factual data, and they even may focus on internal issues. The criti-cal success factors in a CPM also are not grouped into opportunities and threats as theyare in an EFE. In a CPM, the ratings and total weighted scores for rival firms can be com-pared to the sample firm. This comparative analysis provides important internal strateg i ci n f o r m a t i o n .

A sample Competitive Profile Matrix is provided in Table 3 - 9. In this example, thet wo most important factors to being successful in the industry are “advertising” and“global expansion,” as indicated by weights of 0.20. If there were no weight column in thisanalysis, note that each factor then would be equally important. Thus, having a weight col-umn makes for a more robust analysis, because it enables the analyst to assign higher andlower numbers to capture perceived or actual levels of importance. Note in Table 3-9 thatC o m p a ny 1 is strongest on “product quality,” as indicated by a rating of 4, whereasCompany 2 is strongest on “advertising.” Overall, Company 1 is strongest, as indicated bythe total weighted score of 3.15.

Other than the critical success factors listed in the example CPM, factors oftenincluded in this analysis include breadth of product line, effectiveness of sales distribution,proprietary or patent advantages, location of facilities, production capacity and efficiency,experience, union relations, technological advantages, and e-commerce expertise.

A word on interpretation: Just because one firm receives a 3.2 rating and anotherreceives a 2.80 rating in a Competitive Profile Matrix, it does not follow that the first firmis 20 percent better than the second. Numbers reveal the relative strengths of firms, bu ttheir implied precision is an illusion. Numbers are not magic. The aim is not to arrive at asingle number, but rather to assimilate and evaluate information in a meaningful way thataids in decision making.

TABLE 3-9 An Example Competitive Profile Matrix

Company 1 Company 2 Company 3

Critical Success Factors Weight Rating Score Rating Score Rating Score

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 Competitiveness 0.10 3 0.30 2 0.20 4 0.40

Management 0.10 4 0.40 3 0.20 3 0.30

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 3.15 2.50 2.70

Note: (1) The ratings values are as follows: 1 = major weakness, 2 = minor weakness, 3 = minor strength, 4 = major strength. (2) As indicated by the totalweighted score of 2.50, Competitor 2 is weakest. (3) Only eight critical success factors are included for simplicity; this is too few in actuality.



Another Competitive Profile Matrix is provided in Table 3-10. Note that Company 2has the best product quality and management experience; Company 3 has the best marketshare and inventory system; and Company 1 has the best price as indicated by the ratings.

TABLE 3-10 Another Example of a Competitive Profile Matrix

Company 1 Company 2 Company 3

Critical SuccessF a c t o r s Weight Rating

WeightedScore Rating

WeightedScore Rating

WeightedScore

Market share 0.15 3 0.45 2 0.30 4 0.60

Inventory system 0.08 2 0.16 2 0.16 4 0.32

Financial position 0.10 2 0.20 3 0.30 4 0.40

Product quality 0.08 3 0.24 4 0.32 3 0.24

Consumer loyalty 0.02 3 0.06 3 0.06 4 0.08

Sales distribution 0.10 3 0.30 2 0.20 3 0.30

Global expansion 0.15 3 0.45 2 0.30 4 0.60

Organization structure 0.05 3 0.15 4 0.20 2 0.10

Production capacity 0.04 3 0.12 2 0.08 4 0.16

E-commerce 0.10 3 0.30 1 0.10 4 0.40

Customer service 0.10 3 0.30 2 0.20 4 0.40

Price competitive 0.02 4 0.08 1 0.02 3 0.06

Management experience 0.01 2 0.02 4 0.04 2 0.02

Total 1.00 2.83 2.28 3.68

Chief Information Officer (CIO) (p.81)

Chief Technology Officer (CTO) (p.81)

Competitive Analysis (p. 84)Competitive Intelligence (CI) (p. 83)

Competitive Profile Matrix (CPM)(p. 95)

Director of Competitive Analysis (p.84)

Environmental Scanning (p. 72)External Audit (p. 72)External Forces (p. 72)

Industrial/Organization (I/O) (p. 74)Industry Analysis (p. 72)Information Technology (IT) (p. 81)Internet (p. 81)Lifecare Facilities (p. 77)Resource Similarity (p. 86)Tax Harmonization (p. 78)

Increasing turbulence in markets and industries around theworld means the external audit has become an explicit andvital part of the strategic-management process. This chapterp r ovides a framework for collecting and evaluating economic,social, cultural, demographic, environmental, political, gov-ernmental, legal, technological, and competitive information.Firms that do not mobilize and empower their managers ande m p l oyees to identify, monitor, forecast, and evaluate keyexternal forces may fail to anticipate emerging opportunitiesand threats and, consequently, may pursue ineff e c t ive strate-gies, miss opportunities, and invite organizational demise.Firms not taking advantage of the Internet are technologicallyfalling behind.

A major responsibility of strategists is to ensure devel-opment of an effective external-audit system. This includes

using information technology to devise a competitive intelli-gence system that works. The external-audit approachdescribed in this chapter can be used effectively by any sizeor type of organization. Typically, the external-audit processis more informal in small firms, but the need to understandkey trends and events is no less important for these fi r m s .The EFE Matrix and Porter’s Five - Forces Model can helpstrategists evaluate the market and industry, but these toolsmust be accompanied by good intuitive judgment.Multinational firms especially need a systematic and effec-t ive external-audit system because external forces amongforeign countries vary so greatly.

We invite you to visit the David page on the PrenticeHall Companion Web site at w w w. p r e n h a l l . c o m / d av i d f o rthis chapter’s review quiz.

Key Terms and Concepts

C o n c l u s i o n



1. Explain how to conduct an external strategic-managementaudit.

2. Identify a recent economic, social, political, or technologi-cal trend that significantly affects financial institutions.

3. Discuss the following statement: Major opportunities andthreats usually result from an interaction among key envi-ronmental trends rather than from a single external event orfactor.

4. Identify two industries experiencing rapid technologicalchanges and three industries that are experiencing littletechnological change. How does the need for technologicalforecasting differ in these industries? Why?

5. Use Porter’s Five - Forces Model to evaluate competitive n e s swithin the U.S. banking industry.

6. What major forecasting techniques would you use to iden-tify (1) economic opportunities and threats and (2) demo-graphic opportunities and threats? Why are thesetechniques most appropriate?

7. How does the external audit affect other components of thestrategic-management process?

8. As the owner of a small business, explain how you wouldorganize a strategic-information scanning system. Howwould you organize such a system in a large organization?

9. Construct an EFE Matrix for an organization of yourchoice.

10. Make an appointment with a librarian at your university tolearn how to use online databases. Report your findings inclass.

11. Give some advantages and disadvantages of cooperativeversus competitive strategies.

12. As strategist for a local bank, explain when you would usequalitative versus quantitative forecasts.

13. What is your forecast for interest rates and the stock marketin the next several months? As the stock market moves up,do interest rates always move down? Why? What are thestrategic implications of these trends?

14. Explain how information technology affects strategies ofthe organization where you worked most recently.

15. Let’s say your boss develops an EFE Matrix that includes62 factors. How would you suggest reducing the number offactors to 20?

16. Discuss the ethics of gathering competitive intelligence.17. Discuss the ethics of cooperating with rival firms.18. Visit the SEC Web site at w w w. s e c . g ov, and discuss the ben-

e fits of using information provided there.19. What are the major differences between U.S. and multina-

tional operations that affect strategic management?20. Why is globalization of industries a common factor today?21. Do you agree with I/O theorists that external factors are

more important than internal factors to a firm’s achievingcompetitive advantage? Explain both your and their posi-tion.

22. Define, compare, and contrast the weights versus ratings inan EFE versus IFE Matrix.

23. Develop a Competitive Profile Matrix for your university.Include six factors.

24. List the 10 external areas that give rise to opportunities andthreats.

Issues for Review and Discussion

1. York Freund, “Critical Success Factors,” Planning Review16, no. 4 (July–August 1988): 20.

2. A. M. McGahan, “Competition, Strategy and BusinessPerformance,” California Management Review 41, no. 3(1999): 74–101; A. McGahan and M. Porter, “How MuchDoes Industry Matter Really?,” Strategic ManagementJournal 18, no. 8 (1997): 15–30.

3. Ken Jackson, “State Population Changes by Race,E t h n i c i t y,” USA To d a y (May 17, 2007): 2A.

4. S&P Industry Surveys, Beverage Industry, 2005.5. Ken Thurston, “Population Change in States’ Top Urban

A r e a s ,” USA To d a y (April 5, 2007): 13A.6. Frederick Gluck, “Global Competition in the 1990s,”

Journal of Business Strategy (Spring 1983): 22–24.7. John Harris, Robert Shaw, Jr., and William Sommers, “The

Strategic Management of Technology,” Planning Review11, no. 11 (January–February 1983): 28, 35.

8. Bill Saporito, “Companies That Compete Best,” Fortune(May 22, 1989): 36.

9. Louis Lavelle, “The Case of the Corporate Spy,”BusinessWeek (November 26, 2001): 56–57.

10. Kenneth Sawka, “Demystifying Business Intelligence,”M a n agement Rev i ew (October 1996): 49.

11. John Prescott and Daniel Smith, “The Largest Survey of‘Leading-Edge’ Competitor Intelligence Managers,”Planning Review 17, no. 3 (May–June 1989): 6–13.

12. Gary Hamel, Yves Doz, and C. K. Prahalad, “Collaboratewith Your Competitors—and Win,” Harvard BusinessReview 67, no. 1 (January–February 1989): 133.

13. M.J. Chen. “Competitor Analysis and Interfirm Rivalry:Toward a Theoretical Integration,” Academy ofManagement Review 21 (1996): 106.

14. S. Jayachandran, J. Gimeno, and P. R. Varadarajan, “Theoryof Multimarket Competition: A Synthesis and Implicationsfor Marketing Strategy,” Journal of Marketing 63, 3 (1999):59; and M. J. Chen. “Competitor Analysis and InterfirmRivalry: Toward a Theoretical Integration,” Academy ofManagement Review 21 (1996): 107–108.

15. Arthur Thompson, Jr., A. J. Strickland III, and JohnGamble, Crafting and Executing Strategy: Text andReadings (New York: McGraw-Hill/Irwin, 2005): 63.

16. Michael E. Porter, Competitive Strategy: Techniques forAnalyzing Industries and Competitors (New York: FreePress, 1980): 24–27.

17. horizon.unc.edu/projects/seminars/futuresresearch/ratio-nale.asp.

N o t e s



Baron, Robert A. “Opportunity Recognition as PatternRecognition: How Entrepreneurs ‘Connect the Dots’ toIdentify New Business Opportunities.” The Academy ofManagement Perspectives 20, no. 1 (February 2006): 104.

Brews, Peter and Devararat Purohit. “Strategic Planning inUnstable Environments.” Long Range Planning 40, no. 1(February 2007): 64.

Gottschlag, Oliver and Maurizo Zollo. “Interest Alignment andCompetitive Advantage.” The Academy of ManagementReview 32, no. 2 (April 2007): 418.

Hambrick, Donald C. “Upper Echelons Theory: An Update” T h eAcademy of Management Rev i ew 32, no. 2 (April 2007): 334.

Hult, G. T. M., D. J. Ketchen Jr., and T. B. Palmer. “Firm,Strategic Group, and Industry Influences on Performance.”

Strategic Management Journal 28, no. 2 (February 2007):147.

King, Andrew. “Cooperation Between Corporations andE nvironmental Groups: A Transaction Cost Perspective .” T h eAcademy of Management Perspectives 32, no. 3 (July 2007):8 8 9 .

Rousseau, Denise M. and Rosemary Blatt. “Global Competition’sPerfect Storm: Why Business and Labor Cannot SolveTheir Problems Alone.” The Academy of ManagementPe rs p e c t i v e s 21, no. 2 (May 2007): 16.

Slone, Reuben E., John T. Mentzer, and Paul J. Dittmann “Are Yo uthe We a kest Link in Company ’s Supply Chain?” H a r v a rdBusiness Rev i ew (September): 116.

18. Dale McConkey, “Planning in a Changing Environment,”Business Horizons 31, no. 5 (September–October 1988): 67.

19. David Lynch, “U.S. Complains to WTO on China,” USAToday (April 10, 2007): B1.

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