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Week 5: External Analysis

Team teaching

This slide is to complement the textbook slide DD Chapter 3, not a replacement. Students should also learn the textbook’s slides.

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Where to get data for external analysis

Type of Objective Evidence	Where It Comes From	How It’s Used
Industry & Market Reports	IBISWorld, Statista, Euromonitor, S&P Capital IQ, Gartner, Forrester	Quantify market growth rates, technological adoption, consumer trends.
Competitive Analysis	SEC filings, annual reports, investor presentations, Crunchbase, PitchBook	Show where competitors are investing, margin pressures, regulatory risks.
Macroeconomic & Regulatory Data	World Bank, IMF, OECD, government portals (e.g., U.S. Census, EU Eurostat), WTO	Highlight GDP trends, trade barriers, regulatory deadlines.
Customer/Consumer Research	Nielsen, Kantar, company-commissioned surveys	Reveal shifting preferences that create opportunities or threats.

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Subjective Expertise

Who provides judgment

Top management team (CEO, CFO, heads of strategy or operations).
Functional leaders (marketing, R&D, supply chain).
External advisors (consultants, industry experts, board members).

Typical process

Workshops or strategy off-sites where managers debate impact:

“If market growth slows by 5%, what happens to EBITDA?”
“How fast can we adapt to a new regulation compared to competitors?”

Consensus or voting assigns higher weight to factors judged most critical.

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Structured Decision Framework

Tool	How It Works	Real-World Use
Analytic Hierarchy Process (AHP)	Decision makers perform pairwise comparisons (e.g., “Is market growth more important than regulation, and by how much?”). A mathematical algorithm converts these comparisons into consistent weights.	Common in large corporations and government agencies for capital budgeting and risk prioritization.
Delphi Method	Experts anonymously give weight estimates in multiple rounds. A facilitator shares aggregated results after each round until opinions converge.	Used when managers want independent expert input without group pressure.
Scenario Planning & Sensitivity Analysis	Teams test how weights would change under different futures (e.g., recession, new technology breakthrough).	Helps ensure weights remain valid across uncertain environments.

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How Management Team assign weight (importance)

In practice, analyst reports, market databases, regulatory bulletins, and competitive filings provide the objective base.�Managers and domain experts interpret the impact on their specific business model.�Decision tools like AHP or Delphi formalize these judgments to create defensible, consensus-based weights that sum to 1.0.

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How Management Team assign Rating

Source	What It Shows	Example for EFE Rating
Market Share & Growth	How effectively the firm captures market growth.	If industry grows 12% but the firm grows 15%, that suggests a strong response → rating 4.
Financial Metrics	Margins, ROI, cost reductions related to external changes.	Strong profit despite new tariffs → rating 3–4.
Regulatory Compliance & Risk Reports	Evidence of how well the firm adapts to new rules.	Frequent violations → rating 1.
Customer Satisfaction / NPS	Indicates success in meeting new consumer demands.	Rising NPS in a changing market → rating 3–4.
Benchmarking vs. Competitors	Relative performance to industry leaders.	Lagging adoption of new technology → rating 2.

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Structured Decision Framework

Tool	How It Helps in Rating
Balanced Scorecard / KPIs	Links external factors to measurable strategic objectives, ensuring ratings reflect real outcomes.
Benchmarking Matrices	Places company vs. key competitors on a 1–4 scale for each factor.
Risk Assessment Models	Rates preparedness for threats on probability–impact grids, which can be mapped to 1–4 ratings.
Delphi Panels or AHP	Experts independently assign ratings, then reconcile differences through structured discussion.

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Conclusion

Weights measure importance to the industry → based on external impact.
Ratings measure internal performance → based on company response.
To assign ratings credibly, managers combine:

Quantitative performance data (market share, financials, compliance records),
Qualitative judgment from executives and domain experts,
Decision tools like Balanced Scorecard, benchmarking, risk matrices, or AHP/Delphi to standardize scoring.

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Example: Tesla’s EFE for 2025

Type	Factor
Opportunity	Global EV market growth
Opportunity	Advances in battery technology
Threat	New U.S./EU safety regulations
Threat	Rising price of lithium
Threat	Aggressive competition from BYD, Hyundai, GM

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Determine Weights (Importance to Industry Success)

Objective Evidence
Industry reports: BloombergNEF, IEA, and McKinsey forecast global EV market growth of 20% CAGR.
Raw material trends: S&P Global reports lithium price volatility affecting all EV makers.
Regulatory outlook: EU Fit-for-55 policy mandating EV adoption creates high compliance pressure.
Managerial Judgment
Tesla’s strategy team debates which factors most threaten industry profitability.
They might conclude:

EV market growth is the single biggest driver of long-term revenue → high weight (e.g., 0.20).
New safety regulations are important but mostly manageable → moderate weight (e.g., 0.12).
Lithium prices pose serious margin risk → high weight (e.g., 0.18).

Here, the weights capture industry impact, not Tesla’s performance.

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Assign Ratings (Tesla’s Response Strength)

Factor	Internal Data & Metrics	Benchmarking/External Data
Global EV Market Growth	Market share in key regions (China, U.S., Europe), sales growth vs. industry CAGR, order backlog, production capacity expansion rates.	Competitor delivery numbers (BYD, VW), independent EV adoption forecasts.
Battery Technology	Cost per kWh, energy density (Wh/kg), patent portfolio, pace of 4680 cell ramp-up.	Industry average battery cost (BloombergNEF), competitor breakthroughs.
New Safety Regulations	Number of regulatory citations, recall rates, software update compliance time.	NHTSA/EU data on competitor compliance.
Lithium Price Volatility	% of supply under long-term contracts, hedging effectiveness, gross margin sensitivity analysis.	Commodity market price trends.
Aggressive Competition	Relative pricing power, brand equity (YouGov scores), Supercharger network size.	Competitor product launches and price cuts.

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Translating to Ratings (1–4 Scale)

Factor	Evidence of Tesla’s Position	Possible Rating
Global EV Market Growth	Tesla grows deliveries ~25% YoY vs. industry 20%; strong production scaling	→ 4 (Superior response)
Battery Technology	Cost/kWh declining faster than industry, but 4680 cell ramp-up slower than plan	→ 3 (Above average)
New Safety Regulations	Software updates reduce recalls but occasional high-profile accidents	→ 2 (Average response)
Lithium Price Volatility	Secured long-term contracts, vertical integration in refining	→ 4 (Superior defense)
Aggressive Competition	Market share declining in China despite price cuts	→ 2 (Average response)

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Calculated Weighted Scores

Factor	Weight	Rating	Weighted Score
Global EV Market Growth	0.20	4	0.80
Battery Technology	0.18	3	0.54
New Safety Regulations	0.12	2	0.24
Lithium Price Volatility	0.18	4	0.72
Aggressive Competition	0.17	2	0.34
Other factors…	…	…	…
Total	1.00		≈2.64

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Can rating scale be different?

Scale	Typical Meaning	Notes
1–4 (Most common)	1 = Major weakness, 2 = Minor weakness, 3 = Minor strength, 4 = Major strength	Standard in textbooks (David & David Strategic Management).
1–5	1 = Poor, 5 = Excellent	Sometimes used for finer distinctions (e.g., café comparison).
1–10	Rare	Only for very large datasets needing high sensitivity.

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So, what is the differences between weight and rating?

Critical question!!

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The answer

Importance (Weight) comes from industry-level impact

Data: analyst reports, market growth forecasts, commodity trends.
Process: cross-functional debate, sometimes using AHP or Delphi.

Rating comes from company-specific performance

Data: Tesla’s own KPIs (market share, cost/kWh, compliance records) benchmarked against competitors.
Process: balanced scorecards, risk assessments, internal strategy reviews.

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CPM

For EVs/automotive, Tesla might include:

Battery technology & cost per kWh
Brand reputation & innovation image
Autonomous driving capability
Manufacturing scale and efficiency
Charging infrastructure coverage
Global distribution & after-sales service
Financial strength

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Assign Weights

Weights (0.0–1.0) reflect the importance of each factor to industry success (similar to EFE weights).
Managers use objective evidence (analyst reports, market share data) and expert judgment to decide.
Example:

Battery technology (0.20) – critical driver of cost and range.
Brand reputation (0.15) – key for consumer adoption.
Charging network (0.15) – important for user convenience.

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Rate Each Company

Ratings (1–4) measure how strongly each company performs relative to the industry average:
4 = major strength
3 = minor strength
2 = minor weakness
1 = major weakness
Evidence:
Benchmarking (market share, cost/kWh, patents, NPS).
Customer surveys (brand perception).
Technical data (charging station density).

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Tesla’s CPM

Critical Success Factor	Weight	Tesla Rating	Tesla W. Score	BYD Rating	BYD W. Score	GM Rating	GM W. Score
Battery technology/cost	0.20	4	0.80	3	0.60	2	0.40
Brand reputation	0.15	4	0.60	3	0.45	3	0.45
Autonomous driving tech	0.15	3	0.45	2	0.30	2	0.30
Manufacturing scale	0.15	3	0.45	4	0.60	3	0.45
Charging infrastructure	0.15	4	0.60	2	0.30	2	0.30
Global distribution	0.10	3	0.30	3	0.30	4	0.40
Financial strength	0.10	3	0.30	3	0.30	3	0.30
Total	1.00		3.50		2.85		2.60

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How CPM complements the EFE matrix

EFE Matrix	Competitive Profile Matrix
Evaluates external opportunities and threats (industry-level factors).	Benchmarks company-specific competitive strengths and weaknesses against rivals.
Weights = importance of external factors to the industry.	Weights = importance of internal success factors to industry competition.
Ratings = company’s response quality to each external factor.	Ratings = company’s relative strength/weakness versus competitors.