E

N
V
I
R
OThe External Assessment
N
M
E
N
T
A
L
ANALYSIS
Ch 3
-1
External Assessment

Inventory of the political, economic, social and

technological forces that influence the mission and
goals of an organization and how it functions ~
reveals the opportunities and threats
@

Examining the industry environment… economic

indicators, global, political, demographic and
technological analysis (will drive profitability,
growth and volatility
Strategy Formulation Analytical Framework

Ch 3 -
3
External Strategic Management Audit

▶Environmental Scanning
▶Industry Analysis
External Strategic Management Audit

Identify & evaluate factors beyond the control of a

single firm
▶ Increased foreign competition
▶ Population shifts
▶ Aging society
▶ Fear of traveling
▶ Stock market volatility
External Strategic Management Audit

Purpose of an External Audit

▶ Develop a finite list of:
▶opportunities that could benefit a firm
▶threats that should be avoided

Ch 3
-6
Ch 3
-7
(According to previous page)

When identifying & prioritizing key external forces

in strategic planning, make sure the factors
selected are:

• Specific – quantified to the extent possible

• Actionable – meaningful in terms of having
strategic implications
• Stated as external trends or facts rather than as
strategies
The process of performing an External Audit

• 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

forces should be communicated
 Economic forces

• Have direct impact on the potential

attractiveness of various strategies.
• Include: (1) unemployment rates, (2) inflation
rates, (3) labor costs, (4) per capita income, (5)
market size.
Ch 3
-11
Social, Cultural, Demographic, and
Natural Environmental Forces

Ch 3
-12
Ch 3
-13
Political, Governmental, and 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, Governmental, and
Legal Forces

▶Protectionist policies

▶Governments taking equity stakes

in companies

Ch 3 -
15
Technological Forces

Ch 3
-16
Political, Governmental, and
Legal Forces

▶Protectionist policies

▶Governments taking equity stakes

in companies

Ch 3 -
17
 Competitive Forces
Identify rival firms and determine
their strengths, weaknesses,
capabilities, opportunities, threats,
objectives and strategies

7 characteristics - the most competitive companies:

• Strive to continually increase market share

• Use vision/ mission as a guide for all decisions
• “Whether it’s broke or not, fix it.”
• Adapt, innovate & improve
• Strive to grow through acquisition
• Hire and retain the best employees & managers
• Strive to stay cost-competitive – global basis
Industry Analysis: The External
Factor Evaluation (EFE) Matrix

▶Economic
▶Social
▶ Political
▶Cultural
▶Governmental
▶Demographic
▶ Technological
▶Environmental
▶Competitive
▶Legal
Ch 3 -
19
 THE EXTERNAL FACTOR EVALUATION
MATRIX (EFE)

Factors divided to 2 categories:

1. Opportunities – 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.
 THE EXTERNAL FACTOR EVALUATION
MATRIX (EFE)

Factors divided to 2 categories:

2. Threats – Always evil for the firm, minimum number 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.
THE EXTERNAL FACTOR EVALUATION
MATRIX (EFE) - STEPS
• List 20 key external factors as identified in the
external-audit process (including opportunities &
threats)

• Assign to each factor a weight that ranges from 0.0

(NOT IMPORTANT) to 1.0 (VERY IMPORTANT).

• Opportunities often receive higher weights but Threats

can receive higher weights if they are especially severe
or threatening. The sum of all weights assigned to the
factors must be equal to 1.0.
THE EXTERNAL FACTOR EVALUATION
MATRIX (EFE) – STEPS – Cont.

• 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 & 1 = the response is poor
THE EXTERNAL FACTOR EVALUATION
MATRIX (EFE) – STEPS – Cont.

• Multiply each factor’s weight by its rating to determine

a weighted score.

• Sum the weighted scores for each variable to

determine the total weighted score for the
organization.

• Highest possible TWS is 4.0 (responding an outstanding way)

• Lowest possible TWS is 1.0 (not capitalizing on Opportunities @
avoiding Threats)
• Average TWS is 2.5
Ch 3 -
5
Industry Analysis EFE
Total weighted score of 4.0
▶Organizationresponse is outstanding to threats
and weaknesses

Total weighted score of 1.0

n Firm’s strategies not capitalizing on opportunities
or avoiding threats
EFE MATRIX – KEY EXTERNAL FACTORS

1. General rules 10-20 factors

2. Opportunity and threats are used as the key
external factors
3. It can be studied by using PEST Analysis – it
analyses the influence of Social, Technological,
Economic and Political factors on macro level
 Ch 3 -
Copyright © 2011 Pearson Education
28
 Plumbing Company

Ch 3 -
Copyright © 2011 Pearson Education
29
Competitive Profile Matrix (CPM)

Identifies a firm’s major competitors and its

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

Describes the strategic analysis of comparing a

business to its competitors in such a way that it
reveals its relative strengths and weaknesses
CPM
• Business are rated according to critical
success factors with a numerical score

• The weights and total weighted scores in both

a CPM and an EFE have the same meaning

• Will be assessed against a few key

components like product range/ quality,
customer service, brand equity/ reputation,
marketing innovation, management and HR
competency.
Consist of FOUR (4) components:

I. Critical success factors

II. Weighting

III. Score

IV. Total score (highest is the strongest)

 4 = major strength
3 = minor strength
CPM 2 = major weakness
1 = minor weakness
• CSF include both internal and external issues

• The ratings refer to strengths and weaknesses

• To show importance : ranging from 0.0 (low

importance) to 1.0 (high importance)

• Tips! Avoid assigning a weight of 0.3 or more

(high value can decrease the number of
factors you are able to list in your matrix)

• Behind the curve, ahead the curve or on par

with the industry
Ch 3 -
5
THANK YOU…