External Assessment

• Chapter 3

1
 Comprehensive Strategic Management Model

External
Audit

Chapter 3

Vision Long-Term Generate, Implement Implement Measure &

& Objectives Evaluate, Strategies: Strategies: Evaluate
Mission Select Mgmt Issues Marketing, Performance
Statements Strategies Fin/Acct,
R&D, CIS
Chapter 2 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9

Internal
Audit

Chapter 4

2
External Assessment

“If you're not faster than your competitor,

you’re in a tenuous position, and if
you’re only half as fast, you’re terminal.”

—George Salk—

3
External Assessment (Cont’d)

“The idea is to concentrate our strength

against our competitor’s relative
weakness.”

—Bruce Henderson—

4
External Assessment (Cont’d)

External Strategic-Management Audit

• Industry analysis
• Environmental scanning

5
External Assessment (Cont’d)

External audit:

Focuses on identifying &

evaluating events beyond the
immediate control of the firm
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External Assessment (Cont’d)

External audit focuses on:

9 Increased foreign competition

9 Population shifts
9 Demographics (e.g., aging population)
9 Information technology

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External Assessment (Cont’d)

External audit reveals:

reveals
• Key opportunities
• Key threats

Managers then formulate strategies:

• Take advantage of opportunities
• Avoid/reduce impact of threats

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External Assessment (Cont’d)

Key External Forces

Five (5) broad categories:

• Economic forces

• Social, cultural, demographic, &

environmental forces

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External Assessment (Cont’d)
External Force Categories (Cont’d)

• Political, governmental, & legal forces

• Technological forces

• Competitive forces
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 External Assessment (Cont’d)
Competitors
Suppliers
1. Economic
Distributors
2. Social, Creditors Opportunities
Cultural etc. Customers &
Employees Threats
3. Political, Legal
Communities
etc.
Managers
4. Technological Stockholders
Labor Unions
5. Competitive Special Interest Groups
Products
Services 11
 External Assessment (Cont’d)
Process of External Audit:

• Involve as many managers & employees as possible

• Gather competitive intelligence
• Information about social, demographic, cultural,
environmental, etc.
• Monitor sources of information (key magazines,
articles, etc.)
• Utilization of Internet
• Suppliers, distributors, customers as sources of
information
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External Assessment (Cont’d)

Examples of Key External Factors:

¾ Market share
¾ Breadth of competing products
¾ World economies
¾ Price competitiveness
¾ Technological advancements
¾ Interest rates

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Economic Forces

Monitor Key Economic Variables:

¾ Availability of credit
¾ Level of disposable income
¾ Interest rates
¾ Inflation rates
¾ Federal government budget deficits
¾ Consumption patterns
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Economic Forces (Cont’d)
Monitor Key Economic Variables: (Cont’d)
¾ Unemployment trends
¾ Worker productivity levels
¾ Stock market trends
¾ Foreign countries’ economic conditions
¾ Income differences by region/customer
¾ Tax rates
¾ ECC policies
¾ OPEC policies

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 Social & Environmental Forces
• Social, cultural, demographic, and
environmental changes:

Major impact on:

¾ Products
¾ Services
¾ Markets
¾ Customers

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Social & Environmental Forces
(Cont’d)
Country 1998 2050 % Increase

Asia 3.6 b 5.3 b 47.22

Africa 749 m 1.8 b 140.32
Latin America 504 m 809 m 60.52
Europe 628 m 729 m 16.08
North America 305 m 392 m 28.52
Oceania 30 m 46 m 53.33
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Social & Environmental Forces
(Cont’d)

Key social, cultural, demographic, &

environmental variables: (Cont’d)
¾ Life expectancy rates
¾ Per capita income
¾ Attitudes toward business
¾ Average disposable income
¾ Buying habits
¾ Ethical concerns
¾ Attitudes toward saving
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Social & Environmental Forces
(Cont’d)

Key social, cultural, demographic, &

environmental variables: (Cont’d)
¾ Racial equality
¾ Average level of education
¾ Government regulation
¾ Attitudes toward customer service
¾ Attitudes toward product quality
¾ Energy conservation
¾ Social responsibility
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Social & Environmental Forces
(Cont’d)

Key social, cultural, demographic, &

environmental variables: (Cont’d)
¾ Value placed on leisure time
¾ Recycling
¾ Waste management
¾ Air & water pollution
¾ Ozone depletion
¾ Endangered species
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 Political, Govt., & Legal Forces
(Cont’d)

Increasing Global Interdependence

• Impact of political variables

¾Formulationof strategies
¾Implementation of strategies

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Political, Govt., & Legal Forces
(Cont’d)

Globalization of Industry
• Worldwide trend toward similar
consumption patterns

• Global buyers & sellers

• E-commerce

• Instant transmission of money &

information across continents
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Political, Govt., & Legal Forces
(Cont’d)

• Key Political, govt., & legal variables:

¾ Government regulation/deregulation
¾ Tax law changes
¾ Special tariffs
¾ Political Action Committees (PACs)
¾ Voter participation rates
¾ Number of patents
¾ Changes in patent laws

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Political, Govt., & Legal Forces
(Cont’d)
• Key Political, govt.,
& legal variables: (Cont’d)

¾ Environmental protection laws

¾ Equal employment legislation
¾ Level of government subsidies
¾ Antitrust legislation/enforcement

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Technological Forces

Technological Change

• Dramatic effect on business

¾Fiberoptics
¾Computer engineering
¾Superconductivity advancements

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 Technological Forces (Cont’d)
Internet impact on opportunities & threats:

• Altering life cycles of products

• Increasing speed of distribution
• Creating new products & services
• Erasing limitations of traditional
geographic markets

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 Technological Forces (Cont’d)
Internet impact on opportunities & threats:
(Cont’d)

• Altering economies of scale

• Changing entry barriers
• Redefining relationships
¾ Industries& suppliers, creditors,
customers, and competitors

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 Technological Forces (Cont’d)

Capitalizing on Information Technology (IT)

• Chief Information Officer (CIO)

• Chief Technology Officer (CTO)

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Competitive Forces
External Audit & Competing Firms

• Identifying rival firms

¾ Strengths
¾ Weaknesses
¾ Capabilities
¾ Opportunities
¾ Threats
¾ Objectives
¾ Strategies
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Competitive Forces (Cont’d)
Competitor Information
• Sources:
¾ Moody’s Manuals
¾ Standard Corporation Descriptions
¾ Value Line Investment Surveys
¾ Dun’s Business Rankings
¾ Standard & Poor’s Industry Surveys
¾ Industry Week
¾ Forbes, Fortune, Business Week
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Competitive Forces (Cont’d)
Most competitive firms in America
• Seven Characteristics
¾ Market share matters
¾ Understand what business you are in
¾ Broke or not, fix it
¾ Innovate or evaporate
¾ Acquisition is essential to growth
¾ People make a difference
¾ No substitute for quality

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 Competitive Analysis: Porter’s Five-Forces Model

Potential development
of substitute products

Bargaining power Rivalry among Bargaining power

of suppliers competing firms of consumers

Potential entry of new

competitors

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 Global Challenge
Difficulties Facing MNCs

• Affect strategic management:

¾ Language
¾ Culture
¾ Politics
¾ Economy
¾ Government interference
¾ Labor relations
¾ Trade barriers

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Industry Analysis (EFE)

External Factor Evaluation Matrix

Summarize & evaluate:

Economic Demographic Governmental

Social Environmental Technological

Cultural Political Competitive

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 Industry Analysis (EFE) (Cont’d)

Five-Step process:
• List key external factors (10-20)
¾ Opportunities & threats

• Assign weight to each (0 to 1.0)

¾ Sum of all weights = 1.0

• Assign 1-4 rating to each factor

¾ Firm’s current strategies response to the factor

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 Industry Analysis (EFE) (Cont’d)

Five-step process:

• Multiply each factor’s weight by its rating

¾ Produces a weighted score
• Sum the weighted scores for each
¾ Determines the total weighted score for the
organization.
• Highest possible weighted score for the organization
is 4.0; the lowest, 1.0. Average = 2.5

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 UST—Key External Factors Weighted
Weight Rating
Opportunities score

Global markets untapped .15 1 .15

Increased demand .05 3 .15
Astronomical Internet growth .05 1 .05
Pinkerton leader in discount market .15 4 .60
More social pressure to quit smoking .10 3 .30
Threats
Legislation against the tobacco industry .10 2 .20
Production limits on tobacco .05 3 .15
Smokeless market SE region U.S. .05 2 .10
Bad media exposure from FDA .10 2 .20
Clinton Administration .20 1 .20
TOTAL 1.00 2.10
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Industry Analysis (EFE) (Cont’d)

Total weighted score of 4.0 =

Organization response is outstanding to
threats & weaknesses

Total weighted score of 1.0 =

Firm’s strategies not capitalizing on
opportunities or avoiding threats

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 Industry Analysis (EFE) (Cont’d)

UST (in the previous example), has a total weighted score of

2.10 indicating that the firm is below average in its effort to
pursue strategies that capitalize on external opportunities and
avoid threats.

Important

• Understanding of the factors used in the EFE Matrix is

more important than the actual weights and ratings
assigned.

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 Industry Analysis (CPM)
Competitive Profile Matrix

• Identifies firm’s major competitors and their

strengths & weaknesses in relation to a
sample firm’s strategic position

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 (CPM) Procter
Avon L’Oreal & Gamble
Critical Success Weight Rating Score Rating Score Rating Score
Factor
Advertising 0.20 1 0.20 4 0.80 3 0.60
Product Quality 0.10 4 0.40 4 0.40 3 0.30
Price Competition 0.10 3 0.30 3 0.30 4 0.40
Management 0.10 4 0.40 3 0.30 3 0.30
Financial Position 0.15 4 0.60 3 0.45 3 0.45
Customer Loyalty 0.10 4 0.40 4 0.40 2 0.20
Global Expansion 0.20 4 0.80 2 0.40 2 0.40
Market Share 0.05 1 0.05 4 0.20 3 0.15
Total 1.00 3.15 3.25 2.80
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