TOPIC 3

The External
Assessment
Learning Objective
Describe the nature and purpose of an external assessment in formulating
A strategies.

Identify and discuss 10 external forces that must be examined in

B formulating strategies

Explain Porter’s Five Forces Model and its relevance in formulating s

C trategies.

Describe key sources of information used for locating vital external

D information.

E Discuss forecasting tools and techniques

F Explain how to develop and use an External Factor Evaluation (EFE) Matrix &
Competitive Profile Matrix
A Comprehensive Strategic-Management Model
Purpose & Nature of
External Audit
 EXTERNAL AUDIT
Firms should be
reveals key
able to respond
focuses on opportunities &
offensively or
threats so that The external
identifying and defensively to the
managers can audit is aimed
evaluating formulate
factors by
at identifying formulating
trends and strategies to key variables strategies that
events beyond take advantage
that offer take advantage of
the control of a of the
actionable external
single firm opportunities &
opportunities or
avoid/reduce the responses
that minimize
impact of
the impact of
threats
potential threats.
 EXTERNAL FORCES
Social, cultural,
demographic, and
Technological
natural environment
Forces
Forces

Political, Economic
governmental, and Forces Competitive
legal Forces Forces
Relationships Between Key External Forces
and an Organization
 The Process of Performing an External Audit

1 2 3

gather competitive Information should A final list of the

intelligence and be assimilated most important key
information about and evaluated external factors
all 5 External Forces should be
communicated
 The Industrial Organization
(I/O) View

I/O perspective advocates that external (industry)

factors are more important than internal factors
in a firm for gaining and sustaining competitive
advantage.
 The Industrial Organization
(I/O) View

Firm performance
is based more on
industry properties
Key External Forces
 EXTERNAL FORCES
Social, cultural,
demographic, and
Technological
natural environment
Forces
Forces

Political, Economic
governmental, and Forces Competitive
legal Forces Forces
 ECONOMIC FORCES
Key Economic Variables to
be Monitored  Demand shifts for different goods and
services
 Shift to service economy  Income differences by region and consumer
 Availability of credit group
 Level of disposable income  Price fluctuations
 Propensity of people to spend
 Foreign countries’ economic conditions
 Interest rates
 Monetary and Fiscal policy
 Inflation rates
  Stock market trends
GDP trends
 Consumption patterns  Tax rate variation by country and state
 Unemployment trends  European Economic Community (EEC)
 Value of the dollar policies
 Import/Export factors  Organization of Petroleum Exporting
Countries (OPEC) policies
ECONOMIC FORCES
Advantages and Disadvantages of a Weak Dollar
 SOCIAL, CULTURAL, DEMOGRAPHIC, & NATURAL
ENVIRONMENT FORCES
 Population changes by race, age, and  Attitudes toward retirement
geographic area  Energy conservation
 Regional changes in tastes and prefer  Attitudes toward product quality
ences  Attitudes toward customer service
 Number of marriages  Pollution control
 Number of divorces  Attitudes toward foreign peoples
 Number of births  Energy conservation
 Number of deaths  Social programs
 Immigration and emigration rates  Number of churches
 Social Security programs  Number of church members
 Life expectancy rates  Social responsibility issues
 Per capita income
 Social media pervasiveness
 POLITICAL, GOVERNMENTAL, AND
LEGAL FORCES
 Environmental regulations  USA vs. other country relationships
 Political conditions in foreign countr
 Number of patents ies
 Changes in patent laws  Global price of oil changes
 Equal employment laws  Local, state, and federal laws
 Level of defense expenditures  Import–export regulations
  Tariffs
Unionization trends
 Local, state, and national elections
 Antitrust legislation
 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 standardiz ation
and flexibility.
 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.
 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
 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.
 COMPETITIVE FORCES
 An important part of an external audit is identifying rival firms
and determining their strengths, weaknesses, capabilities,
opportunities, threats, objectives, and strategies
 COMPETITIVE FORCES
Characteristics of the most competitive companies:
1. Strive to continually increase market share
2. Use the vision/mission as a guide for all decisions
3. Whether it's broke or not, fix it–make it better
4. Continually adapt, innovate, improve
5. Acquisition is essential to growth
6. Hire and retain the best employees and managers possible
7. Strive to stay cost-competitive on a global basis
COMPETITIVE FORCES
Key Questions About Competitors
 COMPETITIVE FORCES
Competitive Intelligence (CI) 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

3 basic objective of CI Program

1. a 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
Porter’s Five-Forces
Model
Five-Forces Model of Competition
 Five-Forces Model of Competition

 Identify key aspects or elements of each competitive force that

impact the firm.
 Evaluate how strong and important each element is for the firm
 Decide whether the collective strength of the elements is worth
the firm entering or staying in the industry.
 Five-Forces Model of Competition
1. Rivalry among competing firms

 Most powerful of the five

forces
 Focus on competitive
advantage of strategies over
other firms
 Five-Forces Model of Competition
2. Potential Entry of New Competitors

1. Need to gain economies of scale quickly

2. Need to gain technology and specialized
know-how
 Barriers to entry are important 3. Lack of experience
 Quality, pricing, and marketing 4. Strong customer loyalty
5. Strong brand preferences
can overcome barriers 6. Large capital requirements
7. Lack of adequate distribution channels
8. Government regulatory policies
9. Tariffs
10. Lack of access to raw materials
11. Possession of patents
12. Undesirable locations
13. Counterattack by entrenched firms
14. Potential saturation of the market
Five-Forces Model of Competition
3. Potential development of substitute products

 Pressure increases when:

 Prices of substitutes decrease
 Consumers’ switching costs decrease
 Five-Forces Model of Competition
4. Bargaining Power of Suppliers

 Bargaining Power of Suppliers is increased when

(there are):
 Few suppliers
 Few substitutes
 Costs of switching raw materials is high
 Backward integration is gaining control or
ownership of suppliers
 Five-Forces Model of Competition
5. Bargaining Power of consumers

Conditions Where Consumers

 Customers being concentr Gain Bargaining Power
ated or buying in volume a 1. If buyers can inexpensively switch
ffects intensity of 2. If buyers are particularly important
3. If sellers are struggling in the face
competition
of falling consumer demand
 Consumer power is higher 4. If buyers are informed about sellers'
where products are standard products, prices, and costs
or undifferentiated 5. If buyers have discretion in whether
and when they purchase the product
Sources of External
Information
 Sources of External Information

 Unpublished sources include customer surveys, market

research, speeches at professional and shareh olders'
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.
 Sources of External Information

 http://finance.yahoo.com
 www.hoovers.com
 http://globaledge.msu.edu/industries/
Forecasting Tools &
Technique
 Forecasting Tools and Techniques
 Forecasts
 educated assumptions about future trends and
events
 no forecast is perfect
 Assumptions
 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
External Factor
Evaluation (EFE) Matrix
Industry Analysis: The External Factor Evaluation (EFE) Matrix

Summarize and evaluate these factors:

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

1. List 20 key external factors

2. Weight from 0.0 to 1.0
3. Rate the effectiveness of current strategies from 7-4
4. Multiply weight * rating
5. Sum weighted scores
Industry Analysis: The External Factor Evaluation (EFE) Matrix
EFE Matrix Steps
Competitive Profile
Matrix
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
Industry Analysis: Competitive Profile Matrix (CPM)