Masters program

Advanced Strategic management

Lecture 3
The External Environment Analysis

Year 2023
 Lecture 3 Objectives

After this lecture you should be able to :

 Describe how to conduct an external strategic-
management audit.
 Discuss market commonality and resource
similarity in relation to competitive analysis.
 Comprehend the importance of gathering
competitive intelligence.
 Discuss 10 major external forces that affect
organizations
 Explain how to develop a Competitive Profile
Matrix.
Notable Quotes

"Organizations pursue strategies that will disrupt the

normal course of industry events and forge new
industry conditions to the disadvantage of competitors."
—Ian C. Macmillan

"Nothing focuses the mind better than the constant sight

of a competitor who wants to wipe you off the map."
—Wayne Calloway
External Strategic Management Audit

An external strategic management audit (sometimes

called Environmental Scanning or Industry Analysis)
An external audit reveals key opportunities and threats
confronting an organization so that managers can
formulate strategies to take advantage of the
opportunities and avoid or reduce the impact of threats.
Firms should be able to respond either offensively or
defensively to the factors by formulating strategies that
take advantage of external opportunities or that
minimize the impact of potential threats.

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Cont.

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.

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The Process of Performing an External Audit

To perform an external audit, a company first 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.

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Cont.

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. These
key external factors should be listed on flip charts or a
chalkboard.
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.

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Competitive intelligence (CI),

Competitive intelligence (CI), is defined as 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.
The more information and knowledge a firm can obtain
about its competitors, the more likely it is that it can
formulate and implement effective strategies.
 Major competitors’ weaknesses can represent external
opportunities; major competitors’ strengths may
represent key threats.

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Cont.

Firms need an effective competitive intelligence (CI)

program. The three basic objectives of a CI program are:
1. To 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, and
3. To identify potential moves that a competitor might
make that would endanger a firm’s position in the
market.

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Cont.

One way to analyze competitiveness between two or

among several firms is to investigate market commonality
& resource similarity issues while looking for areas of
potential competitive advantage along each firm’s value
chain.
Market commonality defined as the number &
significance of markets that a firm competes in with rivals.
Resource similarity is the extent to which the type and
amount of a firm’s internal resources are comparable to a
rival.

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Review question 1

1. To perform an external audit, a company first must

A. Get an approval from the securities and exchange
commission.
B. Gather competitive intelligence and information
about external trends.
C. Hire a consultant to develop a comprehensive
strategic plan.
D. All of the above

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The Five-Forces Model of Competition

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Cont.

Rivalry Among Competing Firms

 Rivalry among competing firms is usually the most
powerful of the five competitive forces. The strategies
pursued by one firm can be successful only to the
extent that they provide competitive advantage over
the strategies pursued by rival firms.
 Changes in strategy by one firm may be met with
retaliatory countermoves, such as lowering prices,
enhancing quality, adding features, providing services,
extending warranties, and increasing advertising.

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Conditions Cause High Rivalry Among Competing Firms

 High number of competing firms

 Similar size of firms competing
 Similar capability of firms competing
 Falling demand for the industry’s products
 Falling product/service prices in the industry
 Consumers can switch brands easily
 Barriers to leaving the market are high
 Barriers to entering the market are low
 Fixed costs are high among firms competing
 The product is perishable

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Cont.

 Rivals have excess capacity

 Consumer demand is falling
 Rivals have excess inventory
 Rivals sell similar products/services
 Mergers are common in the industry

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Potential Entry of New Competitors

Whenever new firms can easily enter a particular

industry, the intensity of competitiveness among firms
increases. Barriers to entry, however, can include the
need to gain economies of scale quickly, the need to gain
technology and specialized know-how, strong customer
loyalty, strong brand preferences, large capital
requirements, lack of adequate distribution channels,
government regulatory policies, tariffs, lack of access to
raw materials, possession of patents, counterattack by
entrenched firms, and potential saturation of the market.

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Potential Development of Substitute Products

In many industries, firms are in close competition with

producers of substitute products in other industries. E.g.
Plastic container producers competing with glass,
paperboard, and aluminum can producers.
Competitive pressures arising from substitute products
increase as the relative price of substitute products declines
& as consumers’ switching costs decrease. The competitive
strength of substitute products is measured by the inroads
into the market share those products obtain, & those firms’
plans for increased capacity & market penetration.

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Bargaining Power of Suppliers

Bargaining Power of Suppliers is increased when there are:

Large numbers of suppliers, Few substitutes, Costs of
switching raw materials is high.
In more industries, sellers are forging strategic partnerships
with select suppliers in efforts to (1) reduce inventory &
logistics costs (e.g., through just-in-time deliveries); (2) speed
the availability of next-generation components; (3) enhance
the quality of the parts & components being supplied &
reduce defect rates; & (4) squeeze out important cost savings
for both themselves & their suppliers.

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Bargaining Power of Consumers

When customers are concentrated or large or buy in

volume, their bargaining power represents a major force
affecting the intensity of competition in an industry.
 Rival firms may offer extended warranties or special
services to gain customer loyalty whenever the
bargaining power of consumers is substantial.
 Bargaining power of consumers also is higher when
the products being purchased are standard or
undifferentiated.

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Cont.

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, & costs
5.If they have discretion in whether and when they purchase
the product

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Review question 2

1. Whenever new firms can easily enter a particular

industry, the intensity of competitiveness among firms
tends to
A. Stay the same.
B. Increase.
C. Decrease.
D. Neutralize.

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The External Factor Evaluation (EFE) Matrix

1. Economic 6. Political
2. Social 7. Governmental
3. Cultural 8. Technological
4. Demographic 9. Competitive
5. Environmental 10.Legal

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EFE Matrix Steps

1. List key external factors

2. Weight from 0 to 1
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
4. Multiply weight * rating
5. Sum weighted scores

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EFE Matrix: Local Ten-Theatre Cinema Complex

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Cont.

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Cont.

Note that the most important factor to being successful in this

business is “Trend toward healthy eating eroding concession
sales” as indicated by the 0.12 weight. Also note that the local
cinema is doing excellent in regard to handling two factors,
“TDB University is expanding 6% annually” & “Trend toward
healthy eating eroding concession sales.” note that the total
weighted score of 2.58 is above the average of 2.5, so this
cinema business is doing pretty well, taking advantage of the
opportunities & avoiding the threats facing the firm. There is
definitely room for improvement, though, because the highest
total weighted score would be 4.0.

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Competitive Profile Matrix (CPM)

CPM identifies a firm’s major competitors and its

particular strengths and weaknesses in relation to a
sample firm’s strategic position.
 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.

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An Example Competitive Profile Matrix

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End of Lecture 3

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