THE EXTERNAL ASSESSMENT

Jeny Estopido | Lilibeth Sio | Mumtahina Muna |

Strategic Management 1 | PCU
Topics
 The Nature of External Audit
 The Industrial Organization (I/O) View
 PEST Forces:
 Political, Governmental, & Legal Forces
 Economic Forces
 Socio, Cultural, Demographic, & Natural Environment Forces
 Technological Forces
 Competitive Forces
 Competitive Analysis: Porter’s Five Forces Model
 Industry Analysis: The External Factor Evaluation
(EFE) Matrix
 The Competitive Profile Matrix (CPM)
THE NATURE OF AN EXTERNAL AUDIT

The purpose of an external audit is to develop a finite

list of opportunities that could benefit a firm and
threats that should be avoided.

As the term finite suggests, the external audit is

not aimed at developing an exhaustive list of
every possible factor that could influence the
business; rather, it is aimed at identifying key
variables that offer actionable responses.
THE PROCESS OF PERFORMING AN EXTERNAL AUDIT

 The process of performing an external audit

must involve as many managers and employees
as possible.

 Involvement in the strategic-management

process can lead to understanding and
commitment from organizational members.

 Individuals appreciate having the opportunity

to contribute ideas and to gain a better
understanding of their firms’ industry,
competitors, and markets.
THE PROCESS OF PERFORMING AN EXTERNAL AUDIT

 Must gather competitive intelligence and

information about economic, social, cultural,
demographic, environmental, political,
governmental, legal, and technological trends.

 Individuals can be asked to monitor various

sources of information, such as key magazines,
trade journals, and newspapers. These persons
can submit periodic scanning reports to a
committee of managers charged with
performing the external audit.
THE PROCESS OF PERFORMING AN EXTERNAL AUDIT

This approach provides a continuous stream of

timely strategic information and involves many
individuals in the external-audit process. The
Internet provides another source for gathering
strategic information, as do corporate, university,
and public libraries. Suppliers, distributors,
salespersons, customers, and competitors
represent other sources of vital information.
THE PROCESS OF PERFORMING AN EXTERNAL AUDIT

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.
THE PROCESS OF PERFORMING AN EXTERNAL AUDIT

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.
THE PROCESS OF PERFORMING AN EXTERNAL AUDIT

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,
technological advancements, population shifts,
interest rates, and pollution abatement.
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.
THE PROCESS OF PERFORMING AN EXTERNAL AUDIT

A final list of the most important key external

factors should be communicated and distributed
widely in the organization.

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.

Why?
THE INDUSTRIAL ORGANIZATION (I/O) VIEW

 It focuses on analyzing external forces and

industry variables as a basis for getting and
keeping competitive advantage.

 Competitive advantage is determined largely by

competitive positioning within an industry,
according to I/O advocates.
THE INDUSTRIAL ORGANIZATION (I/O) VIEW

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 relationships within that attractive
industry.
THE INDUSTRIAL ORGANIZATION (I/O) VIEW

The I/O view has enhanced our understanding of

strategic management. Effective integration and
understanding of both external and internal
factors is the key to securing and keeping a
competitive advantage.
 KEY EXTERNAL FORCES (PEST)

 Political, Governmental, and Legal Forces

 Economic Forces
 Social, Cultural, Demographic, & Natural Environment Forces

 Technological Forces
RELATIONSHIPS BETWEEN KEY EXTERNAL FORCES AND AN ORGANIZATION

Competitors
Suppliers
Distributors
Political, legal, and Creditors
governmental Customers
forces Employees
Communities
Economic forces Managers
Stockholders
Labor Unions AN ORGANIZATION’S
Social, cultural, OPPORTUNITIES
Governments
demographic, and Trade
AND THREATS
environment Associations
natural forces Special Interest
Groups Products
Technological Services Markets
forces Natural
Environment
Political,Governmental
And Legal Forces:
 Political,Governmental and legal forces are
external environmental variables that
represent key opportunities for organizations
and industries.

Political-legal
forces:
Political-legal forces include the outcomes of
elections,legislation and court judgements,as
well as the decisions rendered by various
commissions and agencies.The political sector
of the environment presents actual and
potential restriction on the way an
organization operate,political forecasts can be
the most important part of an external audit.
 Political activity have a significant impact
on three additional governmental functions
influencing a firm’s external environment.

Three 1. Supplier function

additional
government
functions 2. Customer function

3. Competitor function
 Political-Legal Forces

Allocate power and Provide constraining and

protecting laws and regulations
Example of
Examples include:
Political &
Legal Forces • 1. Antitrust regulations
• 2.Environmental protection laws
• 3.Tax laws
• 4.Foreign trade regulations
• 5.Laws on hiring and promotion
• 6.Stability of government
• 7.Intellectual property laws.
ECONOMIC FORCES

Economic factors have a direct impact on the

potential attractiveness of various strategies.
An economic variable of significant importance in
strategic planning is gross domestic product
(GDP), especially across countries.
SOCIAL, CULTURAL, DEMOGRAPHIC AND
NATURAL ENVIRONMENT FORCES

Social, cultural, demographic, and environmental

changes have a major impact on virtually all
products, services, markets, and customers.
Small, large, for profit, and nonprofit
organizations in all industries are being
staggered and challenged by the opportunities
and threats arising from changes in social,
cultural, demographic, and environmental
variables.
Social, cultural, demographic, and environmental
trends are shaping the way people live, work,
produce, and consume. New trends are creating a
different type of consumer and, consequently, a
need for different products, different services,
and different strategies.
 • Technological Forces:
• The Influences that development in
technology have on
consumers,business and society in
Technological general. Some positive technological
forces include increased leisure
forces time,improved communication and
better management information
systems,while some negatives might
include increased unemployment and
information abuse.
•General Examples of technological forces:
1. The existence of 3D technology
2. Computer calculation speed/power
3. The ability of computers to create truly randoms
numbers.
4. Engine efficiency
5. Internet connectivity
6. Wireless charging
7. Automation
8. Security in cryptography
9. Screenshots
 • Competitive Forces:
• Porter’s five forces
framework is a tool for
analyzing competition of
a business. It draws from
industrial organization
Competitive economics to derive five
Forces forces that determine
the competitive intensity
and therefore the
attractiveness of an
industry in term of its
profitability.
 • Competitive intelligence
is the action of defining,
gathering, analyzing, and
distributing intelligence
about products,
Competitive customers, competitors
Intelligence: and any aspect of the
environment needed to
support executives and
managers in strategic
decision making for an
organization
Competitive Analysis:
Porter’s Five-Forces Model
 Originally developed
by Harvard Business
School's Michael E.
Porter in 1979

"Understanding the competitive forces, and their

underlying causes, reveals the roots of an industry's
current profitability while providing a framework for
anticipating and influencing competition (and
profitability) over time"
1. COMPETITIVE RIVALRY

This force examines how intense the

competition currently is in the
marketplace, which is determined by the
number of existing competitors and what
each can do.
1. COMPETITIVE RIVALRY
Rivalry competition is HIGH when:
 there are just a few businesses equally
selling a product or service;
 the industry is growing;
 consumers can easily switch to a
competitor's offering for little cost.
2. BARGAINING POWER OF SUPPLIERS

This force analyzes how much power a

business's supplier has and how much
control it has over the potential to raise
its prices, which, in turn, would lower a
business's profitability.
 2. BARGAINING
POWER OF
SUPPLIERS

Suppliers have strong bargaining power when:

1. There are few suppliers but many buyers;

2. Suppliers are large and threaten to forward integrate;
3. Few substitute raw materials exist;
4. Suppliers hold scarce resources;
5. Cost of switching raw materials is especially high.
 2. BARGAINING
POWER OF
SUPPLIERS

Firms may pursue a backward integration

strategy to gain control or ownership of suppliers.
This strategy is especially effective when suppliers
are unreliable, too costly, or not capable of
meeting a firm’s needs on a consistent basis
3. BARGAINING POWER
OF CUSTOMERS

This force examines the power of the

consumer and their effect on pricing and
quality. Consumers have power when
there aren't many of them but there are
plentiful sellers, as well as when it is
easy for customers to switch from one
business's products or services to
another's.
3. BARGAINING POWER
OF CUSTOMERS

Buying power is LOW when consumers

purchase products in small amounts and
the seller's product is very different from
any of its competitors.
3. BARGAINING POWER
OF CUSTOMERS

To REDUCE Buyer Power:

 implementing loyalty programs (extended

warranties or special services);

 differentiating products and services

4. THREAT OF NEW
ENTRANTS
The seriousness of
the threat depends
on the barriers to
enter a certain
industry. The higher
these barriers to
entry, the smaller This force considers
the threat for how easy or difficult it
existing players. is for competitors to
join the marketplace
in the industry being
examined.
4. THREAT OF NEW ENTRANTS

Low amount
Products are of capital is
nearly identical required to
enter a market

Customer
switching costs
Threat of new entrants are low (it There is low
doesn’t cost a lot customer
is high when: of money for a
firm to switch to loyalty
other industries)

Existing firms do not

possess patents, There is no
trademarks or do government
not have established regulation
brand reputation
4. THREAT OF NEW ENTRANTS

Strategies:

 lowering prices,
 Extending warranties,
 adding features, or
 offering financing
specials.
5. THREAT OF SUBSTITUTE
PRODUCTS OR SERVICES
This force studies how easy
it is for consumers to switch
from a business's product
or service to that of a
competitor (alternatives in
response to price increases).

In order to discover these alternatives one should look

beyond similar products that are branded differently by
competitors. Instead, every product that serves a similar
need for customers should be taken into account.
 5. THREAT OF SUBSTITUTE
PRODUCTS OR SERVICES

 The presence of substitute products puts a

ceiling on the price that can be charged before
consumers will switch to the substitute product.
Examples:
1. Producers of eyeglasses and contact
lenses face increasing competitive
pressures from laser eye surgery;
2. Producers of sugar face similar
pressures from artificial sweeteners.
3. Newspapers and magazines face
substitute-product competitive
pressures from the Internet and 24-
hour cable television.
 Although, Porter originally introduced five forces
affecting an industry, scholars have suggested
including the sixth force: complements.
Complements increase the demand of the primary
product with which they are used, thus, increasing
firm’s and industry’s profit potential.

 For example, iTunes was created to complement iPod

and added value for both products. As a result, both
iTunes and iPod sales increased, increasing Apple’s
profits.
THREE GENERIC STRATEGIES
 Your goal is to increase profits by reducing costs while
charging industry-standard prices, or to increase market
share by reducing the sales price while retaining profits.
 DIFFERENTIATION
Make the company's products significantly different from the
competition, improving their competitiveness and value to
the public.
 FOCUS
A successful implementation means the company selects
niche markets in which to sell their goods. It requires an
intense understanding of the marketplace, its sellers, buyers
and competitors.
EXTERNAL FACTOR
EVALUATION (EFE) MATRIX
DEFINITION
 method isa strategic-management tool often used
for assessment of current business conditions. The
EFE matrix is a good tool to visualize and prioritize
the opportunities and threats that a business is
facing.
 External
factors assessed in the EFE matrix are the
ones that are subjected to the will of social,
economic, political, legal, and other external
forces.
How do I create the EFE
matrix
CREATING EFE MATRIX
 Listfactors: The first step is to gather a list of external
factors. Divide factors into two groups: opportunities
and threats

 Assign Weights: Assign a weight to each factor.

The value of each weight should be between 0 and 1 (or
alternatively between 10 and 100 if you use the 10 to 100
scale).
Zero means the factor is not important.
One or hundred means that the factor is the most
influential and critical one.
The total value of all weights together should equal 1 or
100.
CREATING EFE MATRIX
 Rate factors: Assign a rating to each factor.
Rating should be between 1 and 4.
Rating indicates how effective the firm’s current
strategies respond to the factor.
1 = the response is poor.
2 = the response is below average.
3 = above average.
4 = superior.
Weights are industry-specific. Ratings are company-
specific.
CREATING EFE MATRIX
 Multiply weights by ratings: Multiply each factor weight
with its rating. This will calculate the weighted score for
each factor.

 Total all weighted scores: Add all weighted scores for

each factor. This will calculate the total weighted score
for the company
COMPETITIVE PROFILE MATRIX
(CPM)
DEFINITION
a tool that compares the firm and its rivals and
reveals their relative strengths and weaknesses.
 The matrix identifies a firm’s key competitors and
compares them using industry’s critical success
factors.
 The analysis also reveals company’s relative
strengths and weaknesses against its competitors,
so a company would know, which areas it should
improve and, which areas to protect.
CREATING CPM
 The weights and total weighted
scores in both a CPM and an EFE
have the same meaning.
However, critical success factors
in a CPM include both internal
and external issues, therefore,
the ratings refer to strengths and
weaknesses, where
4 = major strength,
3 = minor strength,
2 = minor weakness, and
1 = major weakness.
CASE ANALYSIS:
DUNKIN’S Opportunities & Threats
OPPORTUNITIES THREATS REMARKS

Everyday
Challenges, e.g. SOCIAL
Work and Traffic
COMPETITIVE
Competitor’s Focus
RIVALRY
Expanding the Menu THREAT OF
Options SUBSTITUTE
Shelf-Life of COMPETITIVE
Products RIVALRY
Menu Choices from
different time of BUYER POWER
the day
Sources:
 Strategic Management Concepts and Cases 13th Ed. By Fred David
 http://www.maxi-pedia.com/EFE+matrix+external
 https://www.strategicmanagementinsight.com/tools/competitive-profile-matrix-cpm.html
 https://www.strategicmanagementinsight.com/tools/ife-efe-matrix.html
 https://www.businessnewsdaily.com/5446-porters-five-forces.html
 http://panmore.com/mcdonalds-five-forces-analysis-porters-model