Chapter 3

The External Assessment
Chapter three
External Audit
 External audit
 focuses on identifying and evaluating trends and events
beyond the control of a single firm
 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
The Nature of an External Audit
 The external audit is aimed at identifying key
variables that offer actionable responses
 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.
Key External Forces
External forces: divided into five broad categories
vEconomic forces
vSocial, cultural, demographic, and natural environment
forces
vPolitical, governmental, and legal forces
vTechnological forces
vCompetitive forces
Relationships Between Key External Forces and an Organization
The Process of Performing an External Audit
 First, gather competitive intelligence and information

about economic, social, cultural, demographic,
environmental, political, governmental, legal, and
technological trends.
 Information should be assimilated and evaluated

 A final list of the most important key external factors
should be communicated
The Process of Performing an External Audit
Key external factors should be:
1.important to achieving long-term and annual
objectives
2.measurable
3.applicable to all competing firms, and
4.hierarchical in the sense that some will pertain to the
overall company and others will be more narrowly
focused on functional or divisional areas
The Industrial Organization (I/O) View
 The Industrial Organization (I/O) approach to

competitive advantage advocates that external
(industry) factors are more important than internal
factors in a firm for achieving competitive advantage.
The Industrial Organization (I/O) View
 Firm performance is
based more on
industry properties
Economic Forces
Advantages and Disadvantages of a Weak Dollar
Social, Cultural, Demographic, and Natural Environmental Forces
 U.S. Facts
 Aging population
 Less white
 Widening gap between rich & poor
 2025 = 18.5% population > 65 years
 2075 = no ethnic or racial majority

Social, Cultural, Demographic, and Natural Environmental Forces
 Facts
 World population 7 billion
 World population = 8 billion by 2028
 World population = 9 billion by 2054
 U.S. population > 310 million

Key Social, Cultural, Demographic, and Natural Environment Variables
Political, Governmental, & Legal Forces
 The increasing global interdependence among

economies, markets, governments, and
organizations makes it imperative that firms consider
the possible impact of political variables on the
formulation and implementation of competitive
strategies.
Political, Government & Legal Variables
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
standardization 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
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
Seven Characteristics of the most competitive
companies:
1. Market share matters
2. Understand and remember precisely what business you
are in
3. Whether it’s broke or not, fix it–make it better
4. Innovate or evaporate particularly in technology-driven
businesses
5. Acquisition is essential to growth
6. People make a difference
7.There is no substitute for quality
Key Questions About Competitors
Competitive Intelligence 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
Competitive Intelligence Programs
The three basic objectives of a CI program are:
vTo provide a general understanding of an industry and
its competitors
vTo identify areas in which competitors are vulnerable
and to assess the impact strategic actions would have
on competitors
vTo identify potential moves that a competitor might
make that would endanger a firm’s position in the market
Market Commonality and Resource Similarity
 Market commonality
 the number and significance of markets that a firm
competes in with rivals
 Resource similarity
 the extent to which the type and amount of a firm’s internal
resources are comparable to a rivals
The Five-Forces Model of Competition
The Five-Forces Model of Competition
1. Identify key aspects or elements of each competitive

force that impact the firm.
2. Evaluate how strong and important each element is

for the firm.
3. Decide whether the collective strength of the

elements is worth the firm entering or staying in the
industry.
The Five-Forces Model
 Rivalry among competing firms

 Most powerful of the five forces
 Focus on competitive advantage of strategies over

other firms
 Potential Entry of New Competitors

 Barriers to entry are important
 Quality, pricing, and marketing can overcome barriers

Factors to Entry
 Need to gain economies of scale quickly
 Need to gain technology and specialized know-how
 Lack of experience
 Strong customer loyalty
 Strong brand preferences
 Large capital requirements
 Lack of adequate distribution channels
Barriers to Entry
 Government regulatory policies
 Tariffs
 Lack of access to raw materials
 Possession of patents
 Undesirable locations
 Counter-attack by entrenched /deep rooted firms
 Potential saturation of the market
 Potential development of substitute products

 Pressure increases when:
• Prices of substitutes decrease
• Consumers’ switching costs decrease
 Bargaining Power of Suppliers(BPS)
BPS increased when there are:
 Large numbers of suppliers
 Few substitutes
 Costs of switching raw materials is high
 Backward integration is gaining control or ownership

of suppliers
 Bargaining power of consumers
 Customers being concentrated or buying in volume
affects intensity of competition
 Consumer power is higher where products are
standard or undifferentiated
Conditions Where Consumers Gain Bargaining Power
1. If buyers can inexpensively switch

2. If buyers are particularly important
3. If sellers are struggling in the face of falling consumer
demand
4. If buyers are informed about sellers’ products, prices,
and costs
5. If buyers have discretion in whether and when they
purchase the product
Sources of External Information
Unpublished sources include:
 Customer surveys,
 Market research,
 Speeches at professional & shareholders’ meetings
 Television programs, interviews, and
 Conversations with stakeholders.
Published sources include:
 periodicals, journals, reports, government
documents, abstracts, books, directories,
newspapers, and manuals.
Industry Analysis: The External Factor Evaluation (EFE) Matrix
 Economic  Political
 Social  Governmental
 Cultural  Technological
 Demographic  Competitive
 Environmental  Legal
EFE Matrix Steps
1. List key external factors
2. Weight from 0 to 1
3. Rate effectiveness of current strategies
4. Multiply weight * rating
5. Sum weighted scores
EFE Matrix for a Local Ten-Theater Cinema Complex
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
An Example Competitive Profile Matrix
Questions?
Next class: Internal Assessment

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The External Assessment

 Firms should be able to respond either offensively

 First, gather competitive intelligence and information

 Information should be assimilated and evaluated

 The Industrial Organization (I/O) approach to

 Widening gap between rich & poor

 2025 = 18.5% population > 65 years

 2075 = no ethnic or racial majority

 World population = 8 billion by 2028

 World population = 9 billion by 2054

 U.S. population > 310 million

 The increasing global interdependence among

The Internet has changed the very nature of

 An important part of an external audit is identifying

 Competitive intelligence (CI)

1. Identify key aspects or elements of each competitive

2. Evaluate how strong and important each element is

3. Decide whether the collective strength of the

 Rivalry among competing firms

 Focus on competitive advantage of strategies over

 Potential Entry of New Competitors

 Quality, pricing, and marketing can overcome barriers

 Potential development of substitute products

 Backward integration is gaining control or ownership

1. If buyers can inexpensively switch

 Identifies firm’s major competitors and their strengths

 Critical success factors include internal and external

Next class: Internal Assessment

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