EXTERNAL ENVIRONMENT

CENTRAL LUZON STATE UNIVERSITY

College of Business Administration and Accountancy
Department of Business Administration
 Focuses on
identifying and
evaluating trends
and events
beyond the
control of a single
firm.
 OBJECTIVES

✓ Describe how to perform an External Assessment

✓ Discuss the Industrial Organization
✓ Explain the Forces present in a competitive
environment
✓ Identify the Key External Forces
✓ Develop an EFE Matrix and CPM
POLITICAL

External

FIRM

LEGAL
 Political factors result from the processes and actions of
government bodies that can influence the decisions and
behavior of firms.
Government Policies

Trading Policies
Monetary/Tax Policies

Political Factors Corruption

 Consumer Confidence

Inflation rate
Interest rate

Unemployment
Economic Factors

Economic factors in a firm’s external environment are largely

macroeconomic, affecting economy-wide phenomena.
 Sociocultural factors capture a society’s
cultures, norms, and values of the population
within which the organization operates

Ethnic/religious factors

Health and Lifestyle

Life Cycle

Socio-cultural Factors Population growth

Filipino: Close family ties

Virtual kumustahan

E-numan session
Health and Lifestyle
 Lifecycle

Bachelor Newly married couple Full Nest 1,2,3

Empty Nest 1 and 2 Solitary Survivor 1 and 2

Population Growth
 Technological factors pertain to innovation
in technology and the regulations
surrounding technology

Technological Development

Research Development
Information System

Technological Consumer access to technology

 It involves issues such as the natural environment,
global warming, and sustainable economic growth.

Weather

Climate change
Environmental regulations

Environmental Environmental issues

 Legal factors include the official outcomes of
political processes as manifested in laws,
mandates, regulations, and court decisions—all of
which can have a direct bearing on a firm’s profit
potential.

Environmental Law

Consumer protection

Legal Factors Data Privacy Act

Tariff laws
• Republic Act 8749 Philippine Clean Air Act Of
1999
• Ra 9275 Philippine Clear Water Act
• Republic Act 6969 Toxic Substances, Hazardous
And Nuclear Waste Control Act Of 1990. ...
• Presidential Decree 1586 Environmental
Impact Statement (Eis) Of 1978.
• Ra 9512 Environmental Education Act Of 2008
RA 7394 (Consumer Act of the
Philippines of 1991)
 THREAT OF
NEW
ENTRANT

COMPETITIVE BARGAINING
THREAT OF
POWER OF
SUBSTITUTE RIVALRY BUYER

BARGAINING
POWER OF
SUPPLIER
 Threat of New Entrant

The possibility that the profits of established firms in the

industry may be eroded by new competitors.
 Bargaining Power of Buyer

The threat that buyers may force down prices, bargain for
higher quality or more services, and play competitors against
each other.
 Bargaining Power of Supplier

The threat that suppliers may raise prices or reduce the

quality of purchased goods and services.
 Threat of Substitute

The threat of limiting the potential returns of an industry by

placing a ceiling on the prices that firms in that industry can
profitably charge without losing too many customers to
substitute products.
 Intensity of Rivalry among Competitors

The threat that customers will switch their business to

competitors within the industry.
 This strategy-
formulation tool
summarizes and
evaluates the
major
opportunities and
threats in the
functional areas
of a business
Key External Factors
Opportunities
• Opportunities are the chances exist in the external environment, it depends
firm whether the firm is willing to exploit the opportunities or may be they
ignore the opportunities due to lack of resources.

Threats
• Threats are always evil for the firm, minimum no of threats in the external
environment open many doors for the firm. Maximum number of threats for
the firm reduce their power in the industry.
Steps in Developing the EFE Matrix
1. List key external factors as identified in the external-audit process.
2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-
important) to each factor.
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, where
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 factor’s weight by its rating to determine a weighted score
for each variable.
5. Sum the weighted scores for each variable to determine the total
weighted score for the organization.
 Identifies a firm’s
major competitors
and its particular
strengths and
weaknesses in
relation to a sample
firm’s strategic
position.
Critical Success Factor
• Critical success factors are extracted after deep analysis of external
and internal environment of the firm.
• Obviously there are some good and some bad for the company in the
external environment and internal environment.
• The higher rating show that firm strategy is doing well to support this
critical success factors and lower rating means firm strategy is lacking
to support the factor.
EXTERNAL ENVIRONMENT

CENTRAL LUZON STATE UNIVERSITY

College of Business Administration and Accountancy
Department of Business Administration