CHAPTER 3 – EXTERNAL ASSESSMENT 3.

3. The I/O view has enhanced our understanding of NATURAL ENVIRONMENT - earth’s wide variety of natural
Nature of External Audit - An external audit's objective is to strategic management resources such as forests, agricultural products, marine
develop a concise list of opportunities that could benefit a products, minerals, water resources, etc.
company and threats that should be prevented. Michael Porter’s Five Forces model - This framework assists
Companies should be prepared to respond to the variables either strategists in understanding what makes an industry profitable C. POLITICAL, GOVERNMENTAL, & LEGAL FORCES –
offensively or defensively by developing strategies that capitalize and offers the information required to make strategic decisions. outcomes of changes in laws and regulations.
on external possibilities or mitigate the impact of prospective ✓ result from political and legal developments within
threats. A. ECONOMIC FORCES –have a direct impact on how firms society and significantly affect managers and
KEY EXTERNAL FORCES manufacture and distribute their goods and services. companies
1. Economic Forces ✓ Monetary and fiscal policies ✓ Result from political and legal developments
2. Social, cultural, demographic, and natural environment ✓ Interest rates within society and significantly affect managers
forces ✓ Employment and companies.
3. Political, governmental, and legal forces ✓ Inflation rate D. TECHNOLOGICAL FORCES – it dramatically affects
4. Technological forces ✓ Demographic changes organization’s
5. Competitive forces ✓ Political change ✓ Products
ECONOMIC FORCES COMPANY’S OPP & THR ✓ Energy ✓ Services
Products Suppliers ✓ Security ✓ Markets
Services Managers ✓ Natural disasters ✓ Suppliers
Employees Stockholders ✓ Distributors
Distributors Governments Government influence – a significant economic factor in all ✓ Competitors
Customers Communities
commercial markets. ✓ Customers
Monetary Policy – to limit economic development, the ✓ Manufacturing processes
THE PROCESS OF PERFORMING AN EXTERNAL AUDIT
STEP 1: Gathering Information
government can raise or cut interest rates. ✓ Marketing practices
STEP 2: Assimilating and Evaluating Intelligence ✓ Competitive position
B. SOCIAL, CULTURAL, DEMOGRAPHIC, AND NATURAL
According to FREUD, the most important key external
ENVIRONMENT FORCES – have a major impact on • Represent major opportunities and threats
factors should:
virtually all products, services, markets, and customers. that must be considered in formulating
• Importance to achieving long-term and annual strategies.
✓ Small • Affects the height of barriers to entry and
objectives
✓ Large therefore radically reshape industry structure.
• Measurable
✓ For-profit
• Applicable to competing firms
✓ Non-profit The Internet, because it is so pervasive, has the potential for
• Hierarchical within the organization
✓ All industries changing the competitive structure of many industries. It often
STEP 3: Distributing and communicating
Are being staggered and challenged by the lowers barriers to entry and reduces customer switching costs,
opportunities and threats arising from changes in changes that tend to increase the intensity of rivalry in an industry
THE INDUSTRIAL ORGANIZATION
SCDNE variables. and lower both prices and profits.
According to the Industrial Organization approach to competitive
advantage, external (industry) variables are MORE essential than
SCDNE trends are shaping the way people live, work Impact of Wireless Technology
internal elements in gaining competitive advantage.
produce, and consume. 1. Airlines - many airlines now offer wireless technology
It provides: in flight.
SOCIAL - refers to the way in which changing social mores 2. Banking - Visa sends text message alerts after
and values affect an industry, creates opportunities and unusual transactions.
1. Contributes significantly to our understanding of how to
threats. 3. Energy - Smart meters now provide power on demand
achieve a competitive advantage
CULTURAL - factors that affect a society’s basic values, in your home or business.
2. Makes us realize that external forces in general, as well
perceptions, preferences, and behaviours 4. Health Care - Patients use mobile devices to monitor
as the industry in which a firm chooses to compete,
DEMOGRAPHIC - outcomes of changes in the their own health, such as calories consumed.
have a greater influence on a firm's performance than
characteristics of a population, such as age, gender, ethnic 5. Hotels - Days Inn sends daily specials and coupons to
internal functional considerations management makes
origin, race, sexual orientation, and social class. hotel guests via text messages.
in advertising, accounting, and other areas.
 6. Market Research – Cell phone respondents provide
more honest answers, perhaps because they are away
from eavesdropping ears.
7. Publishing - eBooks are increasingly available.
E. COMPETITIVE FORCES – factors and variables that
threaten a company’s profitability and prevent its growth
• Direct Forces - determine how low the floor can
go for price competition.
o Intensity of direct competition measured
by number of competitors
o Customer negotiating power
• Indirect Forces - it place a ceiling on a market’s
prices and profits.
o The threat of indirect competition
o The possibility of new entrants into the
marketplace
o Supplier pressure
o Regulatory pressure
Competitive Intelligence Program – it is a systematic
and ethical process for gathering and analysing
information about the competition’s activities and
general business trends to further a business’s own
goals.
(3) BASIC OBJECTIVES OF CI PROGRAM
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
3. To identify potential moves that a competitor
might make that would endanger a firm’s
position in the market.
(4) CHARACTERISTICS OF SUCCESSFUL CI
PROGRAM
1. Flexibility
2. Usefulness
3. Timeliness
4. Cross-functional Cooperation
MARKET COMMONALITY AND RESOURCE SIMILARITY -
Markets can be geographical, product-related, or segmented. To
examine competition among companies, researchers utilize the
phrases market commonality and resource similarity.
Market Commonality
✓ is the number and significance of markets that a firm
competes in with rivals
✓ the overlapping space of market competitors, which
serves as the primary driving factor of enterprise
competition
Resource Similarity
✓ is the extent to which the type and amount of a firm’s
internal resources are comparable to those of a rival
✓ it occurs when a firm's tangible and intangible
resources resemble those of a rival in both types and
amounts
COMPETITIVE ANALYSIS: PORTER’S FIVE FORCES MODEL
Michael E. Porter - created Porter's Five Forces of Competitive
Position Analysis in 1979
• as a basic framework for measuring and evaluating a
business organization's competitive strength and
position
• important for evaluating the strength of an
organization's existing competitive position as well as
the strength of a position that an organization may
seek to move into
PORTER’S FIVE MODEL FORCES MODEL
1. RIVALRY AMONG COMPETING FIRMS
• most powerful of the five competitive forces
• it investigates the level of competitiveness in
the marketplace
• as the number of rivals rises, the intensity of
competition among competing firms tends to
increase (direct relationship)
o companies become more equal in
size and capacity, demand for the
products drops, and price
reduction becomes frequent
o numerous competitors with similar
products and services will lower
market attractiveness
2. POTENTIAL ENTRY OF NEW COMPETITORS
• Profitable marketplaces attract more entrants
and reduces profitability
o the intensity of competition among
firms increases, whenever new
firms can easily enter a particular
industry
• Barriers are the variables that might hinder
new competitors from entering the market
that would limits competition.
• existing firms solidify their positions to
prevent new entrants by:
o decreasing prices
o extending warranties
o expanding features
o giving financing deals
3. POTENTIAL DEVELOPMENT OF SUBSTITUTE
PRODUCTS
• firms in various fields compete with
businesses for substitute products from other
industries
o the danger of substitutes is influenced
by switching costs, as well as the
willingness of customers to shift
• The presence of substitute products puts a
ceiling on the price that can be charged
before consumers will switch to the substitute
product
• The level of competitive pressure resulting
from substitute product development is
demonstrated by rivals’ intentions to expand
production capacity, sales and profit growth
figures.
4. BARGAINING POWER OF SUPPLIERS
• it affects the intensity of competition in an
industry
o when there is a large number of
suppliers
o when there are only a few good
substitute raw materials
o when the cost of switching raw
materials is especially costly
• firms pursue a backward integration strategy
to gain control over or ownership of suppliers
o works best when suppliers are
unreliable, expensive, or unable to
consistently fulfil a company's
demands
5. BARGAINING POWER OF CONSUMERS
• the bargaining power represents a major
force affecting the intensity of competition in
an industry
o when customers are concentrated or
large or buy in volume competitors
may offer extended warranties or
 special services to gain customer Step 2: Assign to each factor a weight that ranges from 0.0 to CHAPTER 1: NATURE OF STRAT MAN
loyalty whenever the bargaining power 1.0. The sum of all weights must equal to one (1.0).
of consumers is substantial
• buyers have greater negotiating power when Step 3: Assign a rating between 1 and 4 to each key external
STRATEGIC MANAGEMENT - art and science of
purchasing conventional or identical goods factor to indicate how the firms’ current strategies effectively formulating, implementing, and evaluating cross-
responded to the factor.
Factors influencing the Bargaining Power of
functional decisions that enable an organization to
Consumers Step 4: Multiply each factor’s weight by its rating to determine the achieve its objectives.
weighted score for each factor.
✓ market's size
➔ focuses on integrating management,
✓ value of each customer to the company Step 5: Sum the weighted score for each variable to determine
✓ expense to the customer of switching the total weighted score for the organization marketing, finance/accounting,
suppliers production/operations, research and
EFE INDUSTRY ANALYSIS - Understanding the factors used in
SOURCES OF EXTERNAL INFORMATION the EFE Matrix are more important than the actual weights and development, and information systems to
ratings assigned. achieve organizational success.
UNPUBLISHED SOURCES PUBLISHED SOURCES
✓ Customer surveys ✓ Periodicals INDUSTRY ANALYSIS: Competitive Profile Matrix (CPM) ➔ strategic management (academia) –
✓ Market research ✓ Journals MATRIX - Identifies firm’s major competitors and their strengths
✓ Speeches at professional ✓ Reports
strategic planning (business world)
& weaknesses in relation to a sample firm’s strategic positions
and shareholders’ ✓ Government documents ➔ STRATEGY FORMULATION,
meetings ✓ Abstracts
✓ Television programs ✓ Books IMPLEMENTATION, EVALUATION
Interviews ✓ Directories
✓ Conversations with ✓ Newspapers
stakeholders ✓ Manuals
PURPOSE – to exploit and create new and
different opportunities for tomorrow; long-range
FORECASTING TOOLS planning, in contrast, tries to optimize for
1. Quantitative Methods tomorrow the trends of today.
2. Qualitative Methods

External Factor Evaluation (EFE) Matrix

STRATEGIC PLAN – GAME PLAN
Summarizes and evaluates:
• Economic ➔ results from tough managerial choices
• Social among numerous good alternatives, and it
• Cultural
• Demographic signals commitment to specific markets,
• Environmental policies, procedures, and operations in lieu
• Political/Legal
of other, “less desirable” courses of action.
• Technological
• Competitive
STAGES OF STRAT MAN – F I E
External Factor Evaluation (EFE) Matrix - The main purpose of
this matrix is to allow the strategists to summarize and evaluate 1. FORMULATION - developing a vision and
the external variables in terms of threats & opportunity.
mission, identifying an organization’s
(5) STEPS IN EFE MATRIX external opportunities and threats,
Step 1: List key external factors as identified in the external –
analysis process
determining internal strengths and
 weaknesses, establishing long-term
objectives, generating alternative
strategies, and choosing particular
strategies to pursue.
➔ deciding what new businesses to enter,
what businesses to abandon, how to
allocate resources, whether to expand
operations or diversify, whether to enter
international markets, whether to merge or
form a joint venture, and how to avoid a
hostile takeover.
2. IMPLEMENTATION – “ACTION STAGE”
➔ Most difficult stage – personal discipline,
commitment and sacrifice.
➔ Successful – managers ability to motivate
employees
➔ requires a firm to establish annual
objectives, devise policies, motivate
employees, and allocate resources so that
formulated strategies can be executed.
➔ developing a strategy-supportive culture,
creating an effective organizational
structure, redirecting marketing efforts,
preparing budgets, developing and utilizing
information systems, and linking employee
compensation to organizational
performance.
➔ Interpersonal skills – critical/essential
3. EVALUATION – final stage
➔ primary means for obtaining information
about particular strategies that are not
working well.
➔ All strategies are subject to future
modification because external and internal
factors are constantly changing.
THREE FUNDAMENTAL STRATEGY-EVALUATION
ACTIVITIES - R M T
(1) reviewing external and internal factors that are
the bases for current strategies
(2) measuring performance, and
(3) taking corrective actions.
PETER DRUCKER – father of modern STRAT MAN
➔ Primary task of STRAT MAN – thinking
through the overall mission of a business
INTUITION - essential to making good strategic
decisions.
➔ particularly useful for making decisions in
situations of great uncertainty or little
precedent.
➔ highly interrelated variables exist or when it
is necessary to choose from several
plausible alternatives.
➔ Analytical thinking and intuitive thinking
complement each other.
➔ STRAT MAN process is an attempt both to
duplicate what goes on in the mind of a
brilliant, intuitive person who knows the
business and to couple it with analysis.
ADAPTING TO CHANGE
➔ STRAT MAN process is an attempt both to
duplicate what goes on in the mind of a
brilliant, intuitive person who knows the
business and to couple it with analysis.
➔ To survive, all organizations must astutely
identify and adapt to change.
➔ STRAT MAN process is aimed at allowing
organizations to adapt effectively to change
over the long run.
➔ E-commerce and globalization are external
changes that are transforming business and
society today.
KEY TERMS in STRAT MAN
COMPETUTUVE ADVANTAGE - CA
➔ “Anything that a firm does especially well
compared to rival firms.”
➔ When a firm can do something that rival
firms cannot do, or owns something that
rival firms desire.
ACHIEVE SUSTAINED CA by:
(1) continually adapting to changes in external
trends and events and internal capabilities,
competencies, and resources; and by
(2) effectively formulating, implementing, and
evaluating strategies that capitalize upon those
factors.
STRATEGISTS - individuals who are most
responsible for the success or failure of an
organization.
➔ CEO, president, owner, chair of the board,
executive director, chancellor, dean, or
entrepreneur.
➔ help an organization gather, analyze, and
organize information
➔ track industry and competitive trends,
develop forecasting models and scenario
analyses, evaluate corporate and divisional
performance, spot emerging market
opportunities, identify business threats,
and develop creative action plans.
➔ STAFF ROLE
➔ found in higher levels of management, they
typically have considerable authority for
decision making in the firm
➔ CEO - most visible and critical strategic
manager
➔ Any manager who has responsibility for a
unit or division, responsibility for profit and
loss outcomes, or direct authority over a
major piece of the business is a strategic
manager (strategist).
VISION AND MISSION STATEMENTS → ➔ ENVIRONMENTAL SCANNING “Industry
shaping organizational identity and direction. Analysis” - process of conducting research
and gathering and assimilating external
VISION - what the organization aims to become and information.
is usually developed before a mission statement. ➔ LOBBYING - one activity that some
organizations utilize to influence external
MISSION - enduring statements of purpose that
opportunities and threats.
differentiate one business from others.
INTERNAL STRENGTHS AND WEAKNESSES - one
➔ identifies the scope of a firm's operations in
activity that some organizations utilize to influence
terms of products and markets.
external opportunities and threats.
➔ emphasizes the significance of a clear
mission statement in describing the values LONG TERM OBJECTIVES
and priorities of an organization.
Objectives - specific results that an organization
➔ prompts strategists to assess current
seeks to achieve in pursuing its basic mission.
operations and future market potential.
Long-term - more than one year.
➔ guides the future direction of an
organization and serves as a constant
➔ Objectives should be challenging,
reminder to employees of the
measurable, consistent, reasonable, and
organization's purpose.
clear.
EXTERNAL OPPORTUNITIES AND THREATS
STRATEGIES – the means by which long-term
➔ economic, social, cultural, demo graphic, objectives will be achieved.
environmental, political, legal,
➔ include geographic expansion,
governmental, technological, and
diversification, acquisition, product
competitive trends and events that could
development, market penetration,
significantly benefit or harm an
retrenchment, divestiture, liquidation, and
organization in the future.
joint ventures.
➔ Largely beyond the control of a single
organization. ANNUAL OBJECTIVES - short-term milestones that
➔ identifying, monitoring, and evaluating organizations must achieve to reach long-term
external opportunities and threats are objectives.
essential for success.
POLICIES - means by which annual objectives will be
achieved.

➔ include guidelines, rules, and procedures

established to support efforts to achieve
stated objectives. Policies are guides to
decision making and address repetitive or
recurring situations.

BENEFITS OF STRAT MAN

FINANCIAL BENEFITS

NON-FINANCIAL BENEFITS

WHY SOME FIRMS DO NO STRATEGIC PLANNING?

PITFALLS IN STRATEGIC PLANNING

GUIDELINES FOR EFFECTIVE STRAT MAN