the external assessment
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Copyright 2005 Prentice Hall Ch 3 -1
Chapter 3 The External Assessment
Strategic Management: Concepts & Cases
10th EditionFred David
PowerPoint Slides by
Anthony F. Chelte
Western New England College
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Copyright 2005 Prentice Hall Ch 3 -2
Chapter Outline
The Nature of the External Audit
The Industrial Organization (I/O) View
Social, Cultural, Demographic & Environmental Forces
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Copyright 2005 Prentice Hall Ch 3 -3
Chapter Outline (cont’d)
Political, Governmental, and Legal Forces
Technological Forces
Competitive Forces
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Copyright 2005 Prentice Hall Ch 3 -4
Chapter Outline (cont’d)
Porter’s Five-Forces Model
Sources of External Information
Forecasting Tools & Techniques
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Copyright 2005 Prentice Hall Ch 3 -5
Chapter Outline (cont’d)
Global Challenge
The External Factor Evaluation (EFE) Matrix
Competitive Profile Matrix (CPM)
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Copyright 2005 Prentice Hall Ch 3 -6
It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. –Charles Darwin
External Assessment
Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map. – Wayne Calloway, Former CEO, PepsiCo
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Copyright 2005 Prentice Hall Ch 3 -7
External Strategic Management Audit
-- Environmental Scanning
-- Industry Analysis
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Copyright 2005 Prentice Hall Ch 3 -8
Identify & Evaluate factors beyond the control of a single firm Increased foreign competition Population shifts Information technology
External Strategic Management Audit
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Copyright 2005 Prentice Hall Ch 3 -9
Purpose of External Audit Identify
Opportunities Threats
External Strategic Management Audit
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Copyright 2005 Prentice Hall Ch 3 -10
Key External Forces
•Economic forces
•Social, cultural, demographic & environmental forces
•Political, governmental & legal forces
•Technological forces
•Competitive forces
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Copyright 2005 Prentice Hall Ch 3 -11
CompetitorsSuppliers
DistributorsCreditors
CustomersEmployees
CommunitiesManagers
StockholdersLabor Unions
Special Interest GroupsProductsServices
Key External Forces
Opportunities&
Threats
Key External Forces & the Organization
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Copyright 2005 Prentice Hall Ch 3 -12
Gather competitive intelligence –
Social Cultural Demographic Environmental Economic Political, legal governmental Technological
External Audit
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Copyright 2005 Prentice Hall Ch 3 -13
External Audit – Sources of Information
•Internet
•Libraries
•Suppliers
•Distributors
•Customers
•Competition
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Copyright 2005 Prentice Hall Ch 3 -14
Performing External Audit
-- Key Factors Vary over time Vary by industry
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Copyright 2005 Prentice Hall Ch 3 -15
Performing External Audit -- Variables
•Market share
•Breadth of competing products
•World economies
•Foreign affiliates
•Proprietary account advantages
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Copyright 2005 Prentice Hall Ch 3 -16
Performing External Audit -- Variables
•Price competitiveness
•Technological advancements
•Interest rates
•Pollution abatement
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Copyright 2005 Prentice Hall Ch 3 -17
Performing External Audit
External Factors
Measurable
Long-term orientation
Applicable to competing firms
Hierarchical
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Copyright 2005 Prentice Hall Ch 3 -18
Industrial Organization (I/O) View
-- Industry factors more important than internal factors
Performance determined by industry forces
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Copyright 2005 Prentice Hall Ch 3 -19
Economies of Scale
Industry Properties
Barriers to market entry
Product differentiation
Level of competitiveness
I/O Perspective Firm Performance
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Copyright 2005 Prentice Hall Ch 3 -20
Economic Forces
•Availability of credit
•Level of disposable income
•Interest rtes
•Inflation rates
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Copyright 2005 Prentice Hall Ch 3 -21
Economic Forces
•Money market rates
•Fed Gov’t deficits
•GDP trend
•Consumption patterns
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Copyright 2005 Prentice Hall Ch 3 -22
Key Economic Variables
Value of the dollar in world markets
Worker productivity levels
Stock market trends
Foreign economic conditions
Unemployment trends
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Copyright 2005 Prentice Hall Ch 3 -23
Key Economic Variables
Income differences by region/customer
Demand shifts for goods/services
Price fluctuations
Exportation of labor and capital
Import/Export factors
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Copyright 2005 Prentice Hall Ch 3 -24
Key Economic Variables
Tax rates
Fiscal policies
OPEC policies
ECC policies
Monetary policies
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Copyright 2005 Prentice Hall Ch 3 -25
Social, Cultural, Demographic & Environmental Forces
Major Impact –
•Products
•Services
•Markets
•Customers
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Copyright 2005 Prentice Hall Ch 3 -26
Social, Cultural, Demographic & Environmental Forces
U.S. Facts
•Aging population
•Less Caucasian
•Widening gap between rich & poor
•2025 = 18.5% population >65 years
•2075 = no ethnic or racial majority
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Copyright 2005 Prentice Hall Ch 3 -27
Social, Cultural, Demographic & Environmental Forces
Facts
•World population > 6 billion
•U.S. population < 300 million
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Copyright 2005 Prentice Hall Ch 3 -28
Social, Cultural, Demographic & Environmental Forces
Population characteristics require global strategies
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Copyright 2005 Prentice Hall Ch 3 -29
Social, Cultural, Demographic & Environmental Forces
Global trends
•2003 – China largest exporter to U.S.
•2003 Asia receives highest foreign direct investment
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Copyright 2005 Prentice Hall Ch 3 -30
Global trends
•China’s labor rates less than Mexico
•China provides more site location incentives than Mexico
Social, Cultural, Demographic & Environmental Forces
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Copyright 2005 Prentice Hall Ch 3 -31
Export Trends
•Mexico-exports to U.S. 1.2% growth (2002)
•China-exports to U.S. 19% growth (2002)
Social, Cultural, Demographic & Environmental Forces
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Export Trends
•Mexico-corporate income tax rate 34%
•China-corporate income tax rate 17%
Social, Cultural, Demographic & Environmental Forces
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Copyright 2005 Prentice Hall Ch 3 -33
Social, Cultural, Demographic & Environmental Forces
•More educated consumers
•Aging population
•Minorities more influential
•Local rather than federal solutions
21st Century Trends
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Copyright 2005 Prentice Hall Ch 3 -34
Social, Cultural, Demographic & Environmental Forces (cont’d)
•Fixation with youth decreasing
•Hispanics increase to 15% by 2021
•African American increase to 14% by 2021
21st Century Trends
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Copyright 2005 Prentice Hall Ch 3 -35
Key Social, Cultural, Demographic & Environmental Variables
Number of marriages & divorces
Number of special interest groups
Number of births & deaths
Immigration & emigration rates
Childbearing rates
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Copyright 2005 Prentice Hall Ch 3 -36
Actuarial rates
Monitor KeyVariables
Per capita income
Attitudes toward business
Avg. disposable income
Social, Cultural, Demographic & Environmental Forces
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Copyright 2005 Prentice Hall Ch 3 -37
Consumer behavior
Monitor KeyVariables
Ethical concerns
Attitudes toward saving
Racial equality
Social, Cultural, Demographic & Environmental Forces
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Copyright 2005 Prentice Hall Ch 3 -38
Avg. educational level
Monitor KeyVariables
Governmental regulation
Attitudes toward customer service
Attitudes toward quality
Social, Cultural, Demographic & Environmental Forces
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Copyright 2005 Prentice Hall Ch 3 -39
Energy conservation
Monitor KeyVariables
Social responsibility
Leisure time values
Recycling
Social, Cultural, Demographic & Environmental Forces
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Copyright 2005 Prentice Hall Ch 3 -40
Waste management
Monitor KeyVariables
Air & water pollution
Ozone depletion
Endangered species
Social, Cultural, Demographic & Environmental Forces
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Copyright 2005 Prentice Hall Ch 3 -41
Political, Government & Legal Forces
Key opportunities & threats Antitrust legislation Tax rates Lobbying efforts Patent laws
Government Regulation
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Copyright 2005 Prentice Hall Ch 3 -42
Political, Government & Legal Forces
Political variables impact – Formulation of strategies Implementation of strategies
Increasing Global Interdependence
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Copyright 2005 Prentice Hall Ch 3 -43
Political, Government & Legal Forces
Strategists in a global economy -- Forecast political climates Legalistic skills Diverse world cultures
Increasing Global Interdependence
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Copyright 2005 Prentice Hall Ch 3 -44
Political, Government & Legal Forces
Worldwide trend toward similar consumption patterns
Global buyers and sellers E-commerce Technology for instant currency transfers
Globalization of Industry
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Copyright 2005 Prentice Hall Ch 3 -45
Key Political, Governmental, & Legal Variables
Special tariffs
Tax law changes
PAC’s
Voter participation rates
Regulation/deregulation
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Copyright 2005 Prentice Hall Ch 3 -46
Key Political, Governmental, & Legal Variables (cont’d)
Environmental protection laws
Changes in patent laws
Equal employment legislation
Government subsidies
Number of patents
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Copyright 2005 Prentice Hall Ch 3 -47
Key Political, Governmental, & Legal Variables (cont’d)
Import/export regulations
Global relationships
Political conditions
Location and severity of terrorist activity
Anti-trust enforcement
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Copyright 2005 Prentice Hall Ch 3 -48
Technological Forces
Major Impact –
•Internet
•Communications
•Semiconductors
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Copyright 2005 Prentice Hall Ch 3 -49
Technological Forces
Significance of IT
•Chief Information Officer (CIO)
•Chief Technology Officer (CTO)
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Copyright 2005 Prentice Hall Ch 3 -50
Technological Forces
Essential for nearly every strategic decision
Technology-based issues
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Copyright 2005 Prentice Hall Ch 3 -51
Competitive Forces
Collection & evaluation of data on competitors is essential for successful strategy formulation
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Copyright 2005 Prentice Hall Ch 3 -52
Competitive Forces
Competition on virtually all industries can be described as intense.
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Copyright 2005 Prentice Hall Ch 3 -53
Competitive Forces
Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies
Identifying Rival Firms
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Copyright 2005 Prentice Hall Ch 3 -54
Key Questions Concerning Competitors
Their objectives and strategies
Their weaknesses
Their responses to external variables
Their vulnerability to our alternative strategies
Their strengths
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Copyright 2005 Prentice Hall Ch 3 -55
Key Questions Concerning Competitors (cont’d)
Entry and exit of firms in the industry
Our product/service positioning
Key factors for our current position in industry
Sales/profit rankings of competitors over time
Our vulnerability to strategic counterattack
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Copyright 2005 Prentice Hall Ch 3 -56
Key Questions Concerning Competitors (cont’d)
The threat of substitute products/services
Nature of supplier & distributor relationships
Should we keep our strategies secret from employees and stakeholders?
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Copyright 2005 Prentice Hall Ch 3 -57
Competitive Forces
•Moody’s Manuals
•Standard Corporation Descriptions
•Value Line Investment Surveys
•Dun’s Business Rankings
•Standard & Poor’s Industry Surveys
•Industry Week
•Forbes, Fortune, Business Week
Sources of Corporate Information
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Copyright 2005 Prentice Hall Ch 3 -58
Competitive Forces
1. Market share matters
2. Understand what business you are in
3. Broke or not, fix it
4. Innovate or evaporate
7 Characteristics of most Competitive U.S. Firms:
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Copyright 2005 Prentice Hall Ch 3 -59
Competitive Forces
5. Acquisition is essential to growth
6. People make a difference
7. No substitute for quality
7 Characteristics of most Competitive U.S. Firms:
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Copyright 2005 Prentice Hall Ch 3 -60
The Five-Forces Model of Competition
Potential development of substitute products
Rivalry among competing firms
Bargaining power of suppliers
Potential entry of new competitors
Bargaining power of consumers
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Copyright 2005 Prentice Hall Ch 3 -61
The Five-Forces Model
Most powerful of the five forces Focus on competitive advantage of
strategies
Rivalry Among Competing Firms
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Copyright 2005 Prentice Hall Ch 3 -62
The Five-Forces Model
Barriers to entry are important Quality, pricing, and marketing can
overcome barriers
Potential Entry of New Competitors
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Copyright 2005 Prentice Hall Ch 3 -63
The Five-Forces Model
Pressures increase when consumer’s switching costs decrease
Firm’s plans for increased capacity & market penetration
Potential Development of Substitute Products
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Copyright 2005 Prentice Hall Ch 3 -64
The Five-Forces Model
Large number of suppliers & few substitutes affects intensity of competition
Backward integration can gain control or ownership of suppliers
Bargaining Power of Suppliers
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Copyright 2005 Prentice Hall Ch 3 -65
The Five-Forces Model
Customers concentrated or buy in volume affects intensity of competition
Consumer power is higher where products are standard or undifferentiated
Bargaining Power of Consumers
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Copyright 2005 Prentice Hall Ch 3 -66
The Global Challenge
Faced by U.S. Firms --
•Gain & maintain exports to other nations
•Defend domestic markets against imported goods
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Copyright 2005 Prentice Hall Ch 3 -67
The Global Challenge
Simultaneously globally competitive & nationally responsive
Multinational Corporations (MNC’s)
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Copyright 2005 Prentice Hall Ch 3 -68
The Global Challenge
Worldwide integration of:
Strategy formulation
Strategy implementation
Strategy evaluation
Globalization
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Copyright 2005 Prentice Hall Ch 3 -69
The Global Challenge
Similar consumption patterns
Global buyers and sellers
E-commerce
Instant transmission of money & information
Globalization of Industries
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Copyright 2005 Prentice Hall Ch 3 -70
Industry Analysis: The External Factor Evaluation (EFE) Matrix
CompetitivePoliticalCultural
Technological
EnvironmentalSocial
Governmental
DemographicEconomic
Summarize & Evaluate
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Copyright 2005 Prentice Hall Ch 3 -71
EFE – Gateway Computers (2003)
Key External Factors Weight RatingWtd
Score
Opportunities1. Global PC market expected to grow 20% in 2004
0.10 3 0.30
2. Cost of PC component parts expected to decrease 10% - 2004
0.10 3 0.30
3. Internet use growing rapidly 0.05 2 0.10
4. China entered WTO; lowered taxes for importing PC’s
0.10 1 0.10
5. The average income for PC worker has declined from $40K/yr to $30k/yr
0.05 3 0.15
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Copyright 2005 Prentice Hall Ch 3 -72
EFE – Gateway Computers (2003) (cont’d)
Key External Factors Weight RatingWtd
Score
Opportunities (cont’d)6. Modernization of business firms and government agencies
0.05 2 0.10
7. U.S. (& world) economies recovering 0.05 3 0.15
8. 30% of Chinese population can afford a PC; only 10% of homes have a PC
0.05 1 0.05
Threats 0.10 1 0.10
1. Intense rivalry in industry 0.10 1 0.05
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Copyright 2005 Prentice Hall Ch 3 -73
EFE – Gateway Computers (2003) (cont’d)
Key External Factors Weight RatingWtd
Score
Threats (cont’d)
2. Severe price cutting in PC industry 0.10 2 0.20
3. Different countries have different reg’s and infrastructure for PC’s
0.05 1 0.05
4. Palm & PDA becoming substitutes 0.05 3 0.15
5. Demand exceeds supply of experienced PC workers
0.05 4 0.20
6. Birth rate in U.S. declining annually 0.05 3 0.15
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EFE – Gateway Computers (2003) (cont’d)
Key External Factors Weight RatingWtd
Score
Threats (cont’d)7. U.s. consumers and businesses delaying purchase of PC’s
0.05 2 0.10
8. PC firms diversifying into consumer electronics
0.05 3 0.15
Total 1.00 2.40
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Total weighted score of 4.0 Organization response is outstanding to threats
and weaknesses
Industry Analysis EFE
Total weighted score of 1.0 Firm’s strategies not capitalizing on opportunities
or avoiding threats
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Industry Analysis EFE
Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.
Important --
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Industry Analysis: Competitive Profile Matrix (CPM)
Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions
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Gateway Apple Dell
CSF’s Wt Rating Wt’d Score
Rating Wt’d Score
Rating Wt’d Score
Market share 0.15 3 0.45 2 0.30 4 0.60
Inventory sys 0.08 2 0.16 2 0.16 4 0.32
Fin position 0.10 2 0.20 3 0.30 3 0.30
Prod. Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distr 0.10 3 0.30 2 0.20 3 0.30
Global Exp. 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15
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Gateway Apple Dell
CSF’s (cont’d) Wt Rating Wt’d Score
Rating Wt’d Score
Rating Wt’d Score
Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12
E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Serv 0.10 3 0.30 2 0.20 4 0.40
Price competitive
0.02 4 0.08 1 0.02 3 0.06
Mgt. experience 0.01 2 0.02 4 0.04 2 0.02
Total 1.00 2.83 2.47 3.49
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Industry Analysis CPM
Just because one firm receives a 3.2 rating and another receives a 2.8 rating, it does not follow that the first firm is 20 percent better than the second.
Important --
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Key Terms & Concepts
For Review (Chapter 3)
AOL Competitive Analysis
Chief Information Officer (CIO)
Competitive Intelligence(CI)
Chief Technology Officer(CTO)
Competitive ProfileMatrix (CPM)
Competitive Advantage Decruiting
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Key Terms & Concepts
For Review (Chapter 3)
Director of CompetitiveAnalysis
External Factor EvaluationMatrix (EFE)
Downsizing External Forces
Environmental Scanning Industry Analysis
External AuditIndustrial Organizational
(I/O)
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Key Terms & Concepts
For Review (Chapter 3)
Information Technology(IT)
Lifecare Facilities
InternetPorter’s Five-Forces
Model
Learning from the Partner
Rightsizing
Linear Regression World Wide Web
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Key Terms & Concepts
For Review (Chapter 3)
Tax Harmonization
Foreign Direct Investment