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Strama Chapter 3

The document discusses how to conduct an external assessment of an organization. It describes analyzing key external forces including economic, social, technological, political/legal, and competitive factors. Ten major external forces are identified. Forecasting tools and frameworks for external assessment are explained, including developing an EFE matrix and competitive profile matrix. The five forces model of competition is also covered.

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CIARA MAE ORTIZ
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75 views14 pages

Strama Chapter 3

The document discusses how to conduct an external assessment of an organization. It describes analyzing key external forces including economic, social, technological, political/legal, and competitive factors. Ten major external forces are identified. Forecasting tools and frameworks for external assessment are explained, including developing an EFE matrix and competitive profile matrix. The five forces model of competition is also covered.

Uploaded by

CIARA MAE ORTIZ
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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THE EXTERNAL ASSESSMENT

OBJECTIVES:
1. Describe how to conduct an external strategic management audit
2. Discuss 10 major external forces that affect organizations.
3. Discuss important forecasting tools used in strategic management
4. Explain how to develop an EFE matrix
5. Explain how to develop a Competitive Profile Matrix
KEY EXTERNAL FORCES
■ External forces can be divided into 5 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
RELATIONSHIPS AMONG EXTERNAL FORCES AND AN
ORGANIZATION
Competitors
Economic forces Suppliers
Distributors
Social, cultural, demographic and Creditors
natural environment Customers
Employees
Political, legal and governmental Communities An Organization’s
Managers Opportunities and Threats
Technological Stockholders
Labor unions
Competitive Governments
Trade associations
Special interest groups
Products
Services
Markets
Natural environment
THE PROCESS OF PERFORMING AN EXTERNAL AUDIT
■ 1. Gather competitive intelligence and information about economic, social, cultural,
demographic, environmental, political, governmental, legal, and technological trends.

■ 2. Once an information is gathered, it should be assimilated and evaluated.


■ These key external factors can vary over time and by industry. Relationships with
suppliers or distributors are often a critical success factor.

■ Freud emphasized that these key external factors should be:


 Important to achieving long-term and annual objectives
 Measurable
 Applicable to all competing firms
 Hierarchical in the sense that some will pertain to the overall company and others will be
more narrowly focused on functional or divisional areas.
Economic Forces

■ Economic factors have a direct impact on the potential attractiveness of various strategies. For example,
when interest rates rise, funds needed for capital expansion become more costly or unavailable.
■ Key economic variables to be monitored:
 Availability of credit
 Level of disposable income
 Interest rates
 Inflation rates
 Stock market trends
 Consumption patterns
 Unemployment trends
 Tax rates
 Monetary policies
■ Social, cultural, demographic, and natural environment factors
■ Industries are being challenged by the opportunities and threats arising from changes in social, cultural, demographic and
environmental variables.
■ Trends are shaping the way people live, work, produce and consume. They are creating a different type of consumers and consequently
a need for different products, services and strategies.

■ Key Social, cultural, demographic, and natural environment variables:


 Childbearing rates
 Number of marriages, divorces
 Number of births and deaths
 Racial equality
 Use of birth control
 Number of churches and members
 Waste management
 Ozone depletion
 Endangered species
Political, government and legal forces
■ Local and foreign governments are major regulators, deregulators subsidizers,
employers, and customers of organizations. Political, governmental and legal factors,
therefore, can represent key opportunities and threats for both small and large
organizations.
Examples:
Government regulations
Changes in tax laws,
Legislations on equal employment
Level of government subsidies
Fiscal and
Russian-American relationships
Import-export regulations
Technological Forces
■ Technological forces represent major opportunities and threats that must be considered
in formulating strategies.
■ Technological advancements can dramatically affect organizations’ products, services,
markets, suppliers, distributors , competitors, customers, manufacturing processes,
marketing practices and competitive position.

Competitive Forces
■ An important part of external audit is identifying rival firms and determining their
strengths, weaknesses, capabilities, opportunities, threats, and objectives and strategies.
■ Collecting and evaluating information on competitors is essential for successful strategy
formulation.
Competitive Analysis: Porter’s Five-Forces Model
■ Porter’s Five-Forces Model of competitive analysis is a widely used approach for
developing strategies in many industries. The intensity of competition among firms
varies widely among industries.
■ According to Porter, the nature of competitiveness in a given industry can be viewed as
a composite of 5 forces:
■ 1. rivalry among competing firms
■ 2. Potential entry of new competitors
■ 3. Potential development of substitute products
■ 4. Bargaining power of suppliers
■ 5. Bargaining power of consumers
The Five Forces Model of Competition
■
potential development of
substitute products

Bargaining power of Bargaining power of


Rivalry among competing firms
suppliers consumers

Potential entry of new competitors


■ Bargaining power of suppliers
■ Sellers are forging strategic partnerships with select suppliers in efforts to :
■ 1. reduce inventory and logistics cost
■ 2. speed the availability of next-generation components
■ 3. enhance the quality of the parts
■ 4. squeeze out important cost savings
■ Bargaining power of consumers
■ The bargaining power of consumers can be the most important force affecting
competitive advantage. Consumers gain increasing bargaining power under the
following circumstances:
■ 1. if they can inexpensively switch to competing brands or substitutes
■ 2. if they are particularly important to the seller
■ 3. If sellers are struggling in the face of falling consumer demand
■ 4. If they are informed about sellers’ products, prices and costs
■ 5. If they have discretion in whether and when they purchase the product.
Industry analysis: The External Factor Evaluation (EFE) Matrix

■ Allows strategists to summarize and evaluate economic, social, cultural, demographic,


environmental, political, governmental, legal, technological and competitive information.
■ 5 Steps:
■ 1. List key external factors.
■ 2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very
important).
■ 3. Assign a rating between 1 and 4 to each key external factor (eg. 4=the response is
superior, 3=the response is above average, 2 = the response is average, and 1 = the
response is poor).
■ 4. Multiply each factors’ weight by its rating to determine a weighted score.
■ 5. Sum the weighted scores for each variable to determine the total weighted score for the
organization.
The Competitive Profile Matrix (CPM)
■ This identifies s a firm’s major competitors and its particular strengths and weaknesses
in relation to a sample firms’ strategic position.

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