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CHAPTER 3 • THE EXTERNAL ASSESSMENT 63

Once information is gathered, it should be assimilated and evaluated. A meeting or series
of meetings of managers is needed to collectively identify the most important opportunities
and threats facing the firm. These key external factors should be listed on flip charts or a chalk-
board. 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/threat to 20 for the least
important opportunity/threat. These key external factors can vary over time and by industry.
Relationships with suppliers or distributors are often a critical success factor. Other variables
commonly used include market share, breadth of competing products, world economies,
foreign affiliates, proprietary and key account advantages, price competitiveness, technologi-
cal advancements, population shifts, interest rates, and pollution 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 others
1
will be more narrowly focused on functional or divisional areas. A final list of the most
important 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) View
The Industrial Organization (I/O) approach to competitive advantage advocates that
external (industry) factors are more important than internal factors in a firm achieving
competitive advantage. Proponents of the I/O view, such as Michael Porter, contend that
organizational 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, which
focuses on analyzing external forces and industry variables as a basis for getting and
keeping competitive advantage. Competitive advantage is determined largely by competi-
tive positioning within an industry, according to I/O advocates. Managing strategically
from the I/O perspective entails firms striving to compete in attractive industries, avoiding
weak or faltering industries, and gaining a full understanding of key external factor rela-
tionships within that attractive industry. I/O research provides important contributions to
our understanding of how to gain competitive advantage.
I/O theorists contend that external factors in general and the industry in which a firm
chooses to compete has a stronger influence on the firm’s performance than do the internal
functional decisions managers make in marketing, finance, and the like. Firm performance,
they contend, is primarily based more on industry properties, such as economies of scale,
barriers to market entry, product differentiation, the economy, and level of competitiveness
than on internal resources, capabilities, structure, and operations. The global economic
recession’s impact on both strong and weak firms has added credence of late to the notion
that external forces are more important than internal. Many thousands of internally strong
firms in 2006–2007 disappeared in 2008–2009.
The I/O view has enhanced our understanding of strategic management. However, it is
not a question of whether external or internal factors are more important in gaining and
maintaining 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 discussed in Chapter 6, matching key external opportunities/threats with key internal
strengths/weaknesses provides the basis for successful strategy formulation.

Economic Forces

Increasing 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 are
becoming more important. People today are more willing than ever to pay for good service
if it limits inconvenience.
Economic factors have a direct impact on the potential attractiveness of various strate-
gies. For example, when interest rates rise, funds needed for capital expansion become