Introduction

As we start studying this course, we will deal first with identifying the different needs of businesses, with a
thorough analysis of its internal and external environments. This is done with the hope of developing
innovative solutions that are aligned to the enterprise strategy, expectations, and needs of the business.

Thus, an audit of management performance with regard to external strategies will help you identify problem
areas and lets you correct strategic approaches that are not effective. An assessment of the external
environment will show you where the change occurred and where your strategic management no longer
matches the demands of the marketplace. Improvement of business performance can be done by periodically
conducting such an audit.

Learning Objectives:

o Define business strategic management

o Understand the benefits of business strategic management.
o Understand the basic model of business strategic management and its components.

STRATEGIC MANAGEMENT defined

The analyses, decisions, and actions an organization undertakes in order to create and sustain competitive
advantage (Dess, et.al)

The full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and
earn above-average returns. (Ireland, et.al)

A set of managerial decisions and actions that determines the long-run performance of a corporation (Hunger &
Wheelen)

Highly Rated BENEFITS

• A clearer sense of strategic vision for the firm

• A sharper focus on what is strategically important
• Improved understanding of a rapidly changing environment

BASIC MODEL OF STRATEGIC MANAGEMENT

FOUR BASIC ELEMENTS

Environmental Scanning

• Is the monitoring, evaluating, and disseminating of information from the external and internal
environments to key people within the organization.
• The purpose is to identify strategic factors that will determine the future of the organization.
• The simplest way to conduct environmental scanning is the SWOT ANALYSIS

Strategy Formulation

• Is the development of long-range plans for the effective management of environmental

opportunities and threats, in the light of the corporate strengths and weaknesses.

Strategy Implementation

• Is a process by which strategies and policies are put into action through the development of
programs, budgets, and procedures.
 • This might involve changes within the overall culture, structure, and or management system of the
entire organization.
• Is typically concluded by middle level and lower-level managers with a review of top management
• Sometimes referred to as operational planning

Evaluation & Control

• Is a process in which corporate activities and performance results are monitored so that actual
performance can be compared with desired performance.
• PERFORMANCE is the end result of activities. Actual outcomes of the strategic management
process.
• FEEDBACK/LEARNING PROCESS is a way to revise, correct decisions made earlier in the process

According to Joel Ross and Michael Kami Without a strategy, the organization is like a ship without a rudder.

Environmental Scanning -- External Assessment

Environmental Scanning or an External Assessment is done through an External Strategic Management Audit,
which identifies & evaluates factors beyond the control of a single firm.

Learning Objectives:

• Recognize aspects of an organization’s environment that can influence its long term decisions.
• Identify the aspects of an organization’s environment that are most strategically important.
• Understand different models of scanning the environment.

ENVIRONMENTAL SCANNING

• Is the (A) monitoring, (B) evaluating, and (C) disseminating of information from the
external and internal environments to key people within the organization.
• The purpose is to identify strategic factors that will determine the future of the
organization.
• According to David (2020), 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.

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; and (5)
competitive forces.

Economic

An audit of external management strategies checks your company's underlying economic assumptions and
compares them to actual values. The variables you verify include interest rates, unemployment levels, inflation,
tax rates and worker productivity. If a deviation is attributed to management error in forecasting, you should
improve forecasting methods to avoid similar errors. If the deviation is due to unexpected changes in economic
conditions, look for the causes so you can predict such changes in the future.

Socio-cultural
Lifestyle changes, Career expectations, Consumer activism, Rate of family formation; the Growth rate of
population', Age distribution of population, Regional shifts in population, Life expectancies, Birth rates, Pension
plans, Health care, Level of education, Living wage, Unionization

Demographics
 The demographics of your markets influence your promotion and pricing. They include characteristics such as
age, income, gender, family situation, attitudes and social concerns. While the inherent characteristics such as
age and gender vary slowly, psychological factors such as social attitudes can change quickly. Your audit verifies
your strategic projections and examines trends to determine if they are still valid. Any changes in the market
demographics have to be reflected in your strategic approach.

Regulatory

Legislation and government regulations ranging from product safety to consumer privacy impact the operation
of your business. Your audit has to verify if your company should make strategic adjustments in response to any
changes in government requirements. Typical areas that often need adaptation are legislation in the
environmental, employment, and copyright domains. The external audit ensures that you are in compliance with
applicable laws to avoid future problems.

Technological

The audit looks for unexpected technological change and pinpoints where management strategy is inadequate
to address the new challenges. Some technological changes are predictable, such as speedier mobile networks,
but management could not have foreseen other changes, such as the introduction of the iPhone. Your audit
examines the unexpected changes in technology and identifies those that impact your market position,
requiring a strategic response from management.

Competitive

The actions of your competitors are largely unpredictable, but your audit can verify if your strategic orientation
takes into account any measures they have taken. You can check price changes, added features or different
promotions that competitors have initiated, and you have to verify if these actions have had any effect on
market share, sales volumes or profitability. You can often get this information from your competitors' annual
reports.

TOOLS IN ANALYZING ENVIRONMENTS

o SWOT Analysis
o TOWS Analysis
o STEEP (PESTEL, PEST) Analysis. It may be also be called PESTEL ( Political, Economic, Sociocultural,
Technological, Ecological, and Legal Forces) analysis or PEST analysis. Important variables in the societal
environment are
o ( a) S – socio-cultural (b) T – technological (c) E – economic (d) E – ecological (d) P – political-legal.

Tools for External Assessment

THE TOWS MATRIX

The TOWS Matrix or TOWS Analysis is a variation of the SWOT Analysis. You still have to identify your
strengths, weaknesses, opportunities and threats as what you do with SWOT, but instead of filling up four cells
in the matrix, there are nine cells. Nonetheless, this tool is used to identify your strategic options based on how
the four factors may be combined. The TOW Matrix looks like this:

The table above shows the SWOT factors listed at the outermost cells. Opportunities and threats are listed
horizontally while strengths and weaknesses are placed vertically. The first cell on the upper left is used as a
separator for the environments. The remaining four cells are labeled S-O, S-T, W-O, and W-T
strategies. These are devoted to the strategic options that may be formulated from the combination of the
factors.
Strategic Options Using TOWS

Four sets of strategic options may be generated from the matrix. The brief definitions of these options are
found below:

1. S-O Strategies

• These are called "maxi-maxi" strategies because they maximize strengths by maximizing
opportunities.
• They are considered offensive strategies as they are used to pursue competitive advantages in the
market.
• An example of this would be when a company possesses exceptional skills in online
advertising (strength) and an observed opportunity is that a large portion of the market responds to
online advertising (opportunity). Combining these factors, the company may develop an online
advertising campaign to maximize sales of products online. With reference to the types of
strategies, this strategic option may fall under market penetration if the company already sells online,
or may be market development if the company has not started selling on this platform.

2. S-T Strategies

• The combination of strengths and threats, which are also known as "maxi-mini" strategies.
• "Maxi-mini" stands for maximizing strengths by minimizing threats.
• These are also considered offensive strategies because of the use of strengths in pursuing
competitive advantages over rivals.
• To use this, let's say, with the expertise in online advertising (strength), a company may be able to
address the threat of pandemic to selling in physical stores (threat). This strategy may be classified
as market development under types of strategies.

3. W-O Strategies

• Otherwise known as "mini-maxi" strategies, these are defensive strategies designed to minimize
weaknesses by maximizing opportunities.
• An example would be when the company has declining sales in physical stores (weakness) and there
is the presence of an online market (opportunity). Here the strategic option would be to shift to the
online market or to offer the products online. This strategy is considered a market
development approach as there is a change in the market explored.

4. W-T Strategies

• These strategies are considered to be the most defensive of all set of strategic options since the goal
in using them is to minimize weaknesses and minimize threats, thus the name "mini-mini" strategies.
• Specifically, to accomplish this, the weakness should be converted into a strength to be able to
minimize the impact of the threat.
• These strategies are resorted to when the company is suffering from a weak competitive position or
bad performance.
• An example would be when a company is losing profits due to poor distribution (weakness) and then
there are stronger competitors with established distribution networks (threat). To address this
situation, the losing company may consider entering into a joint venture with a strong distribution
company to bring its products to the market.

Sample TOWS Matrix

Let me share with you a sample TOWS matrix which I prepared as a student for my strategic management class
in a doctorate program. The matrix is prepared for a school. The TOWS matrix is as follows:
The table shows the SWOT factors listed on the outermost cells. Three for each set were identified. On the
cells for strategies, two were identified for each of the S-O, S-T, W-O and one for the W-T strategies. After
each strategy, the factors combined were identified (ex. S1, S2, O1). This is to emphasize the particular factors
utilized in creating the strategic options. The name of the particular type of strategy is not specified in the
matrix, but this could be included for increased clarity in designing the plan of the company. To illustrate, the
first S-O strategy is a market penetration strategy while the W-T strategy is conglomerate diversification.

Steps in preparing a TOWS Matrix

Let us draw our process from what we have just done for the TOWS analysis:

• First, list opportunities and threats. This should be lifted from the SWOT, STEEP and Five-Forces
Framework analyses done under external scanning.
• Second, list strengths and weaknesses. This is from our internal SWOT analysis and the 7S
Framework of internal scanning.
• Third, identify possible combinations from the list of factors.
• Fourth, write down the strategic options based on their categories in the four cells of the TOWS
matrix.
• Lastly, identify the type of strategy you have created in the matrix.

External Factor Evaluation (EFE) Matrix

INTRO TO TOPIC
External Factor Evaluation (EFE) Matrix is a strategy tool used to examine the company’s external environment and
to identify the available opportunities and threats. It likewise will reveal the company's strengths as well as
weaknesses. Fred R, David introduced both external and internal analysis in his book, Strategic Management.
According to David, both tools are used to summarize the information gained from the company’s external and
internal environment analyses.
Key External Factors

When using the EFE matrix, we identify the key external opportunities and threats that are affecting or might
affect a company. By analyzing the external environment with tools like PESTEL analysis and Porter's Five
Forces, the key external factors can be identified.

An External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate economic, social,
cultural, demographic, environmental, political, governmental, legal, technological, and competitive information.
The EFE Matrix can
be developed in five steps:

1. List key external factors as identified in the external-audit process. Include a total of15 to 20 factors,
including both opportunities and threats, that affect the firm and its industry. List the opportunities first and
then the threats. Be as specific as possible, using percentages, ratios, and comparative numbers whenever
possible. Recall that Edward Deming said, “In God we trust. Everyone else bring data.”

2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The number
indicates how important the factor is if a company wants to succeed in an industry. If there were no weights
assigned, all the factors would be equally important, which is an impossible scenario in the real world.
Opportunities often receive higher weights than threats, but threats can receive high weights if they are
especially severe or threatening. Appropriate weights can be determined by comparing successful with
unsuccessful competitors or by discussing the factor and reaching a group consensus. The sum of all weights
assigned to the factors must equal 1.0.

3. Assign a rating between 1 and 4 to each key external factor to indicate how effectively the firm’s current
strategies respond to the factor. Ratings are based on effectiveness of the firm’s strategies. The numbers range
from 4 to 1, where 4 means a superior response, 3 – above average response, 2 – average response, and 1 –
poor response. Ratings, as well as weights, are assigned subjectively to each factor. For example, we can see
that the company’s response to the opportunities is rather poor because only one opportunity has received a
rating of 3, while the rest have received a rating of 1.

Ratings are thus company-based, whereas the weights in Step 2 are industry-based. It is important to note that
both threats and opportunities can receive a 1, 2, 3, or 4.

4. Multiply each factor’s weight by its rating to determine a weighted score. The weighted score is the result of
weight multiplied by rating. Each key factor must receive a score.

5. Sum the weighted scores for each variable to determine the total weighted score forvthe organization.

The total weighted score is simply the sum of all individual weighted scores. The firm can receive the same total
score from 1 to 4 in both matrices. The total score of 2.5 is an average score. In external evaluation, a low total
score indicates that the company’s strategies aren’t well designed to meet the opportunities and defend against
threats. In internal evaluation, a low score indicates that the company is weak against its competitors.

Note that EFE analyses only help identify and evaluate the factors, but do not directly help formulate a strategy
or the next best strategic move.

External Opportunities and Threats

INTRO TO TOPIC
For this portion of Analyzing the External Opportunities and Threats, we will focus on the Porter's five forces model
which will be explained in detail below.

PORTER’S five FORCES MODEL

Michael Porter contends that a corporation is most concerned with the intensity of competition within the
industry. Level of intensity is determined by the following competitive forces: ( Forces driving industry
competition)
1)The threat of new entrants

2)Rivalry among existing firms

3)The threat of substitute products or services

4)Bargaining power of suppliers

5)Bargaining power of buyers

6)The relative power of other stakeholders

THE THREAT OF NEW ENTRANTS

• The entry barrier is an obstruction that makes it difficult for a company to enter an industry.
• Some possible barriers to entry are:

a)Economies of scale

b)Capital requirements

c)Switching costs

d)Access to distribution channels

e)Cost disadvantages independent of size

f)Government policies

RIVALRY AMONG EXISTING FIRMS

• According to Porter, intense rivalry is related to the presence of several factors, including:

a)Number of competitors

b)Rate of industry growth

c)Product or service characteristics

d)Amount of fixed costs

e)Height of exit barriers

f)Diversity of rivals

THE THREAT OF SUBSTITUTE PRODUCTS OR SERVICES

SUBSTITUTE products is a product that appears to be different but can satisfy the same need as another
product.

• For example, email is a substitute for the fax, Nutra sweet for sugar, internet for video
stores, bottled water for the cola

• According to Porter, “ substitutes limit the potential returns of an industry by placing a ceiling on the
prices firms in the industry can profitably charge.”

BARGAINING POWER OF BUYERS

• Buyers affect an industry through their ability to fore down prices, bargain for higher quality or more
services, and play competitors against each other.
 • A buyer or group of buyers is powerful if some of the following factors hold true:

a)A buyer purchases a large portion of the seller’s product or service ( ex. Oil filters purchased by a major
automaker)

b)A buyer has the potential to integrate backward by producing the product itself ( ex: a newspaper chain could
make its own paper)

c)Alternative suppliers are plentiful because the product is standard or undifferentiated ( ex: motorists can
choose among many gas stations)

d) Changing suppliers cost very little ( ex: office supplies are easy to find)

e) The purchased product represents a high percentage of a buyer’s cost, thus providing an incentive to shop
around for a lower price ( ex; gasoline purchased for resale by convenience stores makes up half their total cost)

f) A buyer earns low profits and is thus very sensitive to costs and service differences (ex. Grocery stores have a
very small margin)

g) The purchased product is unimportant to the final quality or price of a buyer’s products or services and thus
can be easily substituted w/o affecting the final product adversely ( ex. Electric wire bought for use in lamps)

BARGAINING POWER OF SUPPLIERS

• Suppliers can affect an industry through their ability to raised prices or reduce the quality of
purchased goods and services.

a)The supplier industry is dominated by a few companies, but it sells to many ( ex. The petroleum industry)

b)Its product or service is unique and/or it has built up switching costs (ex. Word processing software)

c)Substitutes are not readily available ( ex. Electricity)

d)Suppliers are able to integrate forward and compete directly with their present customers ( ex. A
microprocessor producer such as Intel can make PCs)

e)A purchasing industry buys only a small portion of the supplier group’s goods and services and is thus
unimportant to the supplier ( ex. Sale of lawn mower tires are less important to the tire industry than are sales
of auto tires.)

THE RELATIVE POWER OF OTHER STAKEHOLDERS

Variety of stakeholder groups from the task environment are:

• Governments
• Local communities
• Creditors
• Trade associations
• Special interest groups
• Unions
• Shareholders
• Complementor