CHAPTER 7

for capital expansion are less deaths, immigration and

costly. As interest rates rise, emigration rates…
discretionary income declines,
and the demand for POLITICAL, LEGAL,
THE EXTERNAL AUDIT
discretionary goods falls. AND GOVERNMENTAL
EXTERNAL AUDIT When stock prices increase, FORCES - Political issues
the desirability of equity as a and stances do matter for
(sometimes called
source of capital for market business, especially in today’s
environmental scanning or
development increases. When world of instant tweeting and
industry analysis) - focuses e-mailing.
the market rises, consumer
on identifying and evaluating
and business wealth expands.
trends and events beyond the - Federal, state, local,
control of a single firm, such Key Economic and foreign
as increased foreign Variables to Be governments are
competition, population shifts Monitored: inflation major regulators,
to coastal areas of the USA, an rates, Unemployment deregulators,
aging society, and taxing trends, tax rates… subsidizers,
internet sales. employers, and
SOCIAL, CULTURAL, customers of
- The purpose of an DEMOGRAPHIC, AND organizations.
external audit is to NATURAL Political,
develop a finite list of ENVIRONMENT governmental, and
opportunities that FORCES - Social, cultural, legal factors,
could benefit a firm demographic, and therefore, can
and threats that environmental changes have a represent key
should be avoided. major impact on virtually all opportunities or
products, services, markets, threats for both small
THE INDUSTRIAL and customers. Small, large, and large
ORGANIZATION (I/O) for-profit, and nonprofit organizations.
VIEW - approach to organizations in all industries
LABOR UNIONS - the
competitive advantage are being staggered and
extent that a state is unionized
advocates that external challenged by the
can be a significant political
(industry) factors are more opportunities and threats
factor in strategic planning
important than internal arising from changes in social,
decisions as related to
factors in a firm for achieving cultural, demographic, and
manufacturing plant location
competitive advantage. environmental variables.
and other operational matters.
EXTERNAL Key Social, Cultural,
Some Political,
FORCES: Demographic, and
Governmental, and
Natural Environment
ECONOMIC FORCES - Legal Variables: number
Variables: number of
Economic factors have a direct of patents, changes in
marriages, number of
impact on the potential patent laws,
divorces, number of
attractiveness of various environmental protection
births, and number of
strategies. For example, with laws, Level of defense
interest rates, funds needed expenditures, Legislation
on equal employment, establishing TWO NEW Information Services, or
Level of government POSITIONS IN THEIR Associate Director of
subsidies.. FIRMS: Competitive Assessment.

TECHNOLOGICAL CHIEF DIRECTOR OF

FORCES - technological INFORMATION COMPETITIVE
forces represent major OFFICER (CIO) - is more a ANALYSIS - include
opportunities and threats that manager, managing the firm’s planning, collecting data,
must be considered in relationship with stakeholders; analyzing data, facilitating the
formulating strategies. process of gathering and
Technological advancements CHIEF analyzing data, disseminating
can dramatically affect TECHNOLOGY intelligence on a timely basis,
organizations’ products, OFFICER (CTO) - is more researching special issues, and
services, markets, suppliers, a technician, focusing on recognizing what information
distributors, competitors, technical issues such as data is important and who needs to
customers, manufacturing acquisition, data processing, know.
processes, marketing decision support systems, and
practices, and competitive software and hardware COMPETITIVE FORCES
position. acquisition. - an important part of an
external audit is identifying
INTERNET - changed This trend reflects the growing rival firms and determining
the nature of opportunities importance of their strengths, weaknesses,
and threats by altering the life INFORMATION capabilities, opportunities,
cycles of products, increasing TECHNOLOGY (IT) in threats, objectives, and
the speed of distribution, strategic management. strategies.
creating new products and
COMPETITIVE - Collecting and
services, erasing limitations of
INTELLIGENCE - is a evaluating information
traditional geographic
systematic and ethical process on competitors is
markets, and changing the
for gathering and analyzing essential for successful
historical trade-off between
information about the strategy formulation.
production standardization
competition’s activities and Identifying major
and flexibility.
general business trends to competitors is not
- The internet has further a business’s own goals. always easy because
lowered entry barriers many firms have
COMPETITIVE
and redefined the divisions that compete
ANALYSIS - the increasing
relationship between in different industries.
emphasis on competitive
industries and various
analysis in the USA is Key Questions About
suppliers, creditors,
evidenced by corporations Competitors: 1. What
customers, and
putting this function on their are the major
competitors.
organizational charts under competitors’ strengths?
To effectively capitalize job titles such as Director of
on e-commerce, a Competitive Analysis, 2. What are the major
number of Competitive Strategy competitors’
organizations are Manager, Director of weaknesses?
3. What are the major MARKET substitute products
competitors’ objectives COMMONALITY - can be declines and as
and strategies? defined as the number and consumers’ costs of
significance of markets that a switching decrease.
RIVALRY AMONG firm competes in with rivals. The competitive
COMPETING FIRMS - strength of substitute
Rivalry among competing RESOURCE products is best
firms is usually the most SIMILARITY - is the extent measured by the
powerful of the five to which the type and amount inroads into the
competitive forces. The of a firm’s internal resources market share those
strategies pursued by one firm are comparable to a rival. products obtain, as
can be successful only to the well as those firms’
extent that they provide COMPETITITVE plans for increased
competitive advantage over ANALYSIS: PORTER’S capacity and market
the strategies pursued by rival FIVE-FORCES MODEL: penetration
firms. Changes in strategy by 1. RIVALRY AMONG
one firm may be met with COMPETING FIRMS BARGAINING POWER
retaliatory countermoves, OF SUPPLIERS - The
2. POTENTIAL ENTRY OF
such as lowering prices, bargaining power of suppliers
NEW COMPETITORS
enhancing quality, adding affects the intensity of
features, providing services, 3. POTENTIAL competition in an industry,
extending warranties, and DEVELOPMENT OF especially when there are few
increasing advertising. SUBSTITUTE PRODUCTS suppliers, when there are few
good substitute raw materials,
POTENTIAL ENTRY 4. BARGAINING POWER
or when the cost of switching
OF NEW OF SUPPLIERS
raw materials is especially
COMPETITORS - 5. BARGAINING POWER high.
Whenever new firms can OF CONSUMERS
easily enter a particular BARGAINING POWER
industry, the intensity of POTENTIAL OF CONSUMERS - When
competitiveness among firm’s DEVELOPMENT OF customers are concentrated or
increases. SUBSTITUTE large in number or buy in
PRODUCTS - The presence volume, their bargaining
- Unethical tactics of substitute products puts a power represents a major
such as bribery, ceiling on the price that can be force affecting the intensity of
wiretapping, and charged before consumers will competition in an industry.
computer hacking switch to the substitute Rival firms may offer extended
product. Price ceilings equate warranties or special services
COMPETITORS - are
to profit ceilings and more to gain customer loyalty
firms that offer similar
intense competition among whenever the bargaining
products and services in the
rivals. power of consumers is
same market.
substantial.
MARKETS - s can be - Competitive pressures
arising from substitute
geographic or product areas or
products increase as
segments.
the relative price of
SOURCES OF stronger competitors, and control, but which may exert a
EXTERNAL shifts in government priorities, significant impact on
INFORMATION changing social values, performance or the ability to
unstable economic conditions, achieve desired results.”
UNPUBLISHED and unforeseen events.
SOURCES - Unpublished Managers often must rely on COMPETITIVE PROFILE
sources include customer published forecasts to MATRIX (CPM) - identifies
surveys, market research, effectively identify key a firm's major competitors and
speeches at professional and external opportunities and its particular strengths and
shareholders’ meetings, threats. weaknesses in relation to a
television programs, sample firm's strategic
interviews, and conversations Forecasting tools can position.
with stakeholders be broadly categorized
into two groups:
PUBLISHED SOURCES quantitative techniques
- Published sources of and qualitative
strategic information include techniques
periodicals, journals, reports,
government documents, QUANTITATIVE
abstracts, books, directories, FORECASTS - are most
newspapers, and manuals. appropriate when historical
data are available and when
INDUSTRY ANALYSIS: the relationships among key
THE EXTERNAL variables are expected to
FACTOR EVALUATION remain the same in the future.
MATRIX - an external factor
evaluation (EFE) matrix allows LINEAR
strategists to summarize and REGRESSION - for
evaluate economic, social, example, is based on the
cultural, demographic, assumption that the future
environmental, political, will be just like the past—
governmental, legal, which, of course, it never is. as
technological, and competitive historical relationships
information. become less stable,
quantitative forecasts become
FORECASTING TOOLS less accurate.
AND TECHNIQUES -
Forecasts are educated MAKING
assumptions about future ASSUMPTIONS - Planning
trends and events. Forecasting would be impossible without
is a complex activity because assumptions. Mcconkey
of factors such as defines assumptions as the
technological innovation, “best present estimates of the
cultural changes, new impact of major external
products, improved services, factors, over which the
manager has little if any