There is a fairly easy way to install Windows 7 from an external hard drive, and it takes less then 10 minutes to set up. You also don't need to switch to FAT32 to use this method.
First, format your disk as NTFS (quick format is fine, default sector size). Then, extract your Windows 7 disc/ISO to the hard drive. There is a utility included on the Windows 7 disc which allows you to mark the drive as bootable, located in the
Once you're there, run
BOOTSECT /NT60 X:, where
X: is the letter of the external hard drive. Once that's done, you can just plug the drive into your computer, and you should be able to boot from it. Just FYI, the BOOTSECT tool updates the MBR for that drive's partition.
Alternatively, you could also just run the following command (from a command prompt or from the Run dialog, WinKey + R):
X:\boot\BOOTSECT /NT60 X:
X: is the drive letter of your external hard drive. Once this is done, the hard drive has been marked as bootable, and if you try to boot your computer from it, the Windows 7 installation will be launched.
The reason they use FAT32 in that Technet article you posted is because those instructions were for a USB key. You can follow the
DISKPART part of that guide to get your partitions prepared and setup, but do ensure that you format the drive using NTFS.