The External

Assessment

Chapter Three
 Chapter Objectives

1. Describe how to conduct an external strategic-

management audit.
2. Discuss 10 major external forces that affect organizations:
economic, social, cultural, demographic, environmental,
political, governmental, legal, technological, and
competitive.
3. Describe key sources of external information, including the
Internet.
4. Discuss important forecasting tools used in strategic
management.
5. Discuss the importance of monitoring external trends and
events.
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 Chapter Objectives (cont.)

6. Explain how to develop an EFE Matrix.

7. Explain how to develop a Competitive Profile
Matrix.
8. Discuss the importance of gathering
competitive intelligence.
9. Describe the trend toward cooperation among
competitors.
10.Discuss market commonality and resource
similarity in relation to competitive analysis.

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External Strategic Management Audit

– Environmental Scanning

– Industry Analysis
 External Audit

 External audit
 focuses on identifying and evaluating trends
and events beyond the control of a single
firm (foreign competition, aging society)

 reveals key opportunities and threats

confronting an organization so that managers
can formulate strategies to take advantage of
the opportunities and avoid or reduce the
impact of threats
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 The Nature of an External Audit

 The external audit is aimed at identifying

key variables that offer actionable
responses

 Firms should be able to respond either

offensively or defensively to the factors by
formulating strategies that take advantage of
external opportunities or that minimize the
impact of potential threats.
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 A Comprehensive Strategic-
Management Model

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 Key External Forces

External forces can be divided into five

broad categories:
1. economic forces
2.social, cultural, demographic, and natural
environment forces
3.political, governmental, and legal forces
4.technological forces
5.competitive forces

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 Changes in external forces

 Significantly affect products, services,

markets and organization worldwide
(rising food prices, online transaction)

 These changes translate into changes in

consumer demand for both industrial and
consumer product and services.
 Changes in external forces

 External forces directly affect both

suppliers and distributors

 Identify and evaluate external

opportunities and threat
 enables firms to develop a clear mission,
 to design strategies to achieve long-term
objective
 To develop policies to achieve annual
objectives
 Relationships Between Key External
Forces and an Organization

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 The Process of Performing an
External Audit
 First, gather competitive intelligence and
information about economic, social, cultural,
demographic, environmental, political,
governmental, legal, and technological trends.
 From various sources – magazines, trade
journals, newspapers, internet, corporate
website, and public library
 Vital info – suppliers, distributors, salesperson,
customer and competitors

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 The Process of Performing an
External Audit
 Second, information should be assimilated and
evaluated
 A final list of the most important key external
factors should be communicated
 This key external factors can vary over time
and by industry
 Other variables – mkt share, world economies,
price competitiveness, tech. advancement,
population shift, interest rate

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 The Process of Performing an
External Audit
Key external factors should be:
1.important to achieving 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 will be more
narrowly focused on functional or divisional areas

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 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 for achieving competitive
advantage.
 Performance determined by industry
forces

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 The Industrial Organization
(I/O) View
 Firm performance
is based more on
industry properties

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 Economic Forces

 Have a direct impact on the potential

attractiveness of various strategies
 Impact on
 GDP
 Trends in dollar value (have a significant and
unequal effect on companies in different industries and
in different location)
• If a low value of dollar – lower import and higher
export,
• A strong/high dollar value makes US goods more
expensive in the overseas market
 Economic Forces

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 Advantages and Disadvantages
of a Weak Dollar

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 Social, Cultural, Demographic, and
Natural Environmental Forces

 Small, large, for-profit and nonprofit firms

in all industries are being staggered and
challenged by the opportunities and
threats arising from this factor/variables.
 Changes in this factors nowadays
shaping the way Americans live, work,
produce and consume

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 Social, Cultural, Demographic, and
Natural Environmental Forces
 U.S. Facts
 Aging population
 Less white
 Widening gap between rich & poor
 2025 = 18.5% population > 65 years
 2075 = no ethnic or racial majority
 Facts
 World population 7 billion
 World population = 8 billion by 2028
 World population = 9 billion by 2054
 U.S. population > 310 million
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 Key Social, Cultural, Demographic, and
Natural Environment Variables

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 Political, Governmental, and
Legal Forces
 Government Regulation Key
 opportunities & threats
• Antitrust legislation
• Tax rates
• Lobbying activities
• Patent laws
 Political, Governmental, and
Legal Forces
 The increasing global interdependence
among economies, markets,
governments, and organizations makes it
imperative that firms consider the
possible impact of political variables on
the formulation and implementation of
competitive strategies.

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 Political, Government, and
Legal Variables

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 American Labor Unions

 The extent that a state is unionized can be a

significant political factor in strategic planning
decisions as related to manufacturing plant
location and other operational matters
 The size of American labor unions has fallen
sharply in the last decade due in large part to
erosion of the U.S. manufacturing base

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 Technological Forces

The Internet has changed the very nature of

opportunities and threats by:
altering the life cycles of products,
increasing the speed of distribution,
creating new products and services,
erasing limitations of traditional geographic
markets,
changing the historical trade-off between
production standardization and flexibility.
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 Technological Forces

 The Internet is altering economies of

scale, changing entry barriers, and
redefining the relationship between
industries and various suppliers,
creditors, customers, and competitors

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 Technological Forces

 Many firms now have a Chief

Information Officer (CIO) and a Chief
Technology Officer (CTO) who work
together to ensure that information
needed to formulate, implement, and
evaluate strategies is available where
and when it is needed

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 Technological Forces

Technological advancements can:

Create new markets,
Result in a proliferation of new and improved
products,
Change the relative competitive cost positions in
an industry,
Render existing products and services obsolete.

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 Competitive Forces

 An important part of an external audit is

identifying rival firms and determining
their strengths, weaknesses, capabilities,
opportunities, threats, objectives, and
strategies

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 Competitive Forces

Characteristics describe the most competitive

companies:
1.Market share matters
2.Understand and remember precisely what business you
are in
3.Whether it’s broke or not, fix it–make it better
4.Innovate or evaporate
5.Acquisition is essential to growth
6.People make a difference
7.There is no substitute for quality
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 Key Questions About Competitors

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 Competitive Intelligence
Programs
 Competitive intelligence (CI)
 a systematic and ethical process for
gathering and analyzing information about
the competition’s activities and general
business trends to further a business’s own
goals

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 Sources of Competitive Intelligence

 Internet  Consultants
 Employees  Trade journals
 Managers  Want ads
 Suppliers  Newspaper articles
 Distributors  Government filings
 Customers  Competitors
 Creditors
 Competitive Intelligence
Programs
The three basic objectives of a CI program
are:
1. to provide a general understanding of an industry
and its competitors
2. to identify areas in which competitors are
vulnerable and to assess the impact strategic
actions would have on competitors
3. to identify potential moves that a competitor might
make that would endanger a firm’s position in the
market
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 Market Commonality and
Resource Similarity
 Market  Resource
commonality similarity
 the number and  the extent to which
significance of the type and
markets that a firm amount of a firm’s
competes in with internal resources
rivals are comparable to
a rival

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 The Five-Forces Model of
Competition

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 The Five-Forces Model of
Competition
The following steps can indicate whether competition
in a given industry is such that the firm can make
an acceptable profit

v Identify key aspects or elements of each competitive

force that impact the firm.
v Evaluate how strong and important each element is for
the firm.
v Decide whether the collective strength of the elements
is worth the firm entering or staying in the industry.

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 The Five-Forces Model

 Rivalry among competing firms

 Most powerful of the five forces
 Focus on competitive advantage of strategies
over other firms
 Changes in strategy – lowering prices,
enhancing quality, adding features, providing
services, extending warranties, and
increasing advertising

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 The Five-Forces Model

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 The Five-Forces Model

 Potential Entry of New Competitors

 New firms easily enter a particular industry will
increase the intensity of competitiveness among
competing firms
 Quality, pricing, and marketing can overcome
barriers
 Therefore, there are the need to identify potential
new firm, to monitor the new rival firms’
strategies, to counterattack as needed and to
capitalize on existing strength and opportunities
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 Barriers to Entry
 Need to gain economies of  Government regulatory
scale quickly policies
 Need to gain technology  Tariffs
and specialized know-how  Lack of access to raw
 Lack of experience materials
 Strong customer loyalty  Possession of patents
 Strong brand preferences  Undesirable locations
 Large capital requirements  Counterattack by
 Lack of adequate entrenched firms
distribution channels  Potential saturation of the
market

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 The Five-Forces Model

 Potential development of substitute

products
 Pressure increases when:
• Prices of substitutes decrease
• Consumers’ switching costs decrease

 E.g : the growing of popularity of free news on the

web and more timely news online are the two key
factors negatively impacting traditional papers such
as the New York Times, Los Angeles Times
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 The Five-Forces Model

 Bargaining Power of Suppliers is

increased when there are:
 Large numbers of suppliers
 Few substitutes
 Costs of switching raw materials is high
 Backward integration is gaining control or
ownership of suppliers

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 The Five-Forces Model

 Bargaining power of consumers

 Customers being concentrated or buying in
volume affects intensity of competition
 Consumer power is higher where products
are standard or undifferentiated
 Can negotiate selling price, warranty coverage,
and accessory package to a greater extent

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 Conditions Where Consumers Gain
Bargaining Power
1. If buyers can inexpensively switch
2. If buyers are particularly important
3. If sellers are struggling in the face of falling
consumer demand
4. If buyers are informed about sellers’ products,
prices, and costs
5. If buyers have discretion in whether and when
they purchase the product

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 Sources of External Information

 Unpublished sources include customer

surveys, market research, speeches at
professional and shareholders’ meetings,
television programs, interviews, and
conversations with stakeholders.
 Published sources of strategic information
include periodicals, journals, reports,
government documents, abstracts, books,
directories, newspapers, and manuals.

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 Sources of External Information

 marketwatch.multexinvestor.com
 moneycentral.msn.com
 finance.yahoo.com
 www.clearstation.com
 us.etrade.com/e/t/invest/markets
 www.hoovers.com
 globaledge.msu.edu/industries/
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 Forecasting Tools and
Techniques
 Forecasts - educated assumptions about
future trends and events
 Quantitative - most appropriate when
historical data is available and there is a
constant relationship
 qualitative techniques

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 Making Assumptions

 Assumptions
 Best present estimates of the impact of major
external factors, over which the manager has
little if any control, but which may exert a
significant impact on performance or the
ability to achieve desired results.

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 Industry Analysis: The External
Factor Evaluation (EFE) Matrix
 Economic  Political
 Social  Governmental
 Cultural  Technological
 Demographic  Competitive
 Environmental  Legal

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 EFE Matrix Steps

1. List key external factors

2. Weight from 0 to 1
3. Rate effectiveness of current strategies
4. Multiply weight * rating
5. Sum weighted scores

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 EFE Matrix for a Local Ten-
Theater Cinema Complex

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Industry Analysis EFE

Total weighted score of 4.0

• Organization response is outstanding to threats
and weaknesses

Total weighted score of 1.0

• Firm’s strategies not capitalizing on opportunities
or avoiding threats
 Industry Analysis: Competitive
Profile Matrix (CPM)
 Identifies firm’s major competitors and
their strengths & weaknesses in relation
to a sample firm’s strategic positions
 Critical success factors include internal
and external issues

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 An Example Competitive
Profile Matrix

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