Summary Outline

1. The Nature of an External Audit

• Purpose of an external audit
• Developing a finite list of opportunities and threats
• Identifying key variables that offer actionable responses
• Framework for gathering, assimilating, and analyzing external information
• Introduction to the Industrial Organization (I/O) view of strategic management

2. Key External Forces

• Five broad categories of external forces: economic, social, cultural, demographic, environmental, political, governmental, legal,
technological, and competitive
• Impact of external trends and events on products, services, markets, and organizations
• Increasing complexity of business and competition in global markets

3. The Process of Performing an External Audit

• Involving as many managers and employees as possible
• Gathering competitive intelligence and information about external trends
• Assimilating and evaluating information
• Identifying the most important opportunities and threats
• Communicating and distributing key external factors in the organization

4. The Industrial Organization (I/O) View

• External factors are more important than internal factors in achieving competitive advantage
• Porter's Five-Forces Model as an example of the I/O perspective
• Importance of understanding both external and internal factors for competitive advantage

5. Economic Forces
• Impact of economic factors on strategies
• Importance of gross domestic product (GDP) and currency exchange rates
• Rising unemployment rates and its effects on businesses and migration pattern

6. Cultural, Demographic, and Natural Environment Forces

• Impact of social, cultural, demographic, and environmental changes on products, services, markets, and customers
• Aging population and changing racial/ethnic demographics
• Global population growth and its implications for businesses

7. Political, Governmental, and Legal Forces

• Impact of political, governmental, and legal factors on strategies
• Increasing protectionism and government intervention in industries
• Government bailouts and nationalization of companies

8. Technological Forces
• Impact of technological changes and discoveries on organizations
• Importance of information technology and competitive intelligence
• Need for firms to pursue strategies that take advantage of technological opportunities

9. Competitive Forces
• Importance of understanding and analyzing competition in an industry
• Identifying major competitors and their strengths and weaknesses
• Importance of competitive intelligence programs

10. Market Commonality and Resource Similarity

• Importance of market commonality and resource similarity in studying rivalry among competitors
• Analyzing competitiveness and potential competitive advantage
 11. Competitive Analysis: Porter's Five-Forces Model
• Nature of competitiveness in an industry
• Five competitive forces: rivalry among competing firms, potential entry of new competitors, potential development of substitute
products, bargaining power of suppliers, bargaining power of consumers
• Using Porter's Five-Forces Model to assess competition and profitability in an industry

12. Sources of External Information

• Importance of gathering and evaluating external information
• Unpublished and published sources of strategic information
• Use of the Internet for gathering strategic information

13. Forecasting Tools and Techniques

• Importance of forecasts in strategic management
• Quantitative and qualitative forecasting techniques
• Use of published forecasts and development of internal projection

14. Making Assumptions

• Importance of assumptions in planning and strategy formulation
• Making reasonable assumptions based on available information
• Assumptions as checkpoints for strategy validity

15. Industry Analysis: The External Factor Evaluation (EFE) Matrix

• Using the EFE Matrix to summarize and evaluate external factors
• Steps for developing an EFE Matrix
• Importance of quantifying factors and assigning weights and ratings

16. The Competitive Profile Matrix (CPM)

• Using the CPM to identify major competitors and their strengths and weaknesses
• Comparison of ratings and total weighted scores for rival firms
• Importance of critical success factors in a CPM

17. Conclusion
• Importance of the external audit in strategic management
• Need for a systematic and effective external-audit system
• Use of tools and frameworks to evaluate external forces and competition
Summary

• The Nature of an External Audit: An external audit is conducted to identify opportunities

and threats that could benefit or harm a firm. It is not aimed at developing an exhaustive
list of every possible factor, but rather focuses on key variables that offer actionable
responses. The external audit is an important part of the strategic management process.

• Key External Forces: External forces can be categorized into five broad categories:
economic forces, social, cultural, demographic, and natural environment forces, political,
governmental, and legal forces, technological forces, and competitive forces. These forces
have a significant impact on organizations and their strategies.

• The Process of Performing an External Audit: The process of performing an external

audit involves gathering competitive intelligence and information about economic, social,
cultural, demographic, environmental, political, governmental, legal, and technological
trends. This information is assimilated and evaluated, and key external factors are
identified. These factors are then prioritized and communicated throughout the
organization.

• Economic Forces: Economic factors have a direct impact on the potential attractiveness
of various strategies. Factors such as interest rates, stock prices, and unemployment rates
can affect a firm's ability to expand, the demand for its products, and its competitiveness
in the market.

• Social, Cultural, Demographic, and Natural Environment Forces: Social, cultural,

demographic, and environmental changes have a major impact on products, services,
markets, and customers. These changes create new opportunities and threats for
organizations and require them to adapt their strategies accordingly.

• Political, Governmental, and Legal Forces: Political, governmental, and legal factors
can have a significant impact on organizations. Changes in regulations, government
policies, and political relationships can create opportunities or threats for firms. It is
important for organizations to monitor and respond to these factors effectively.

• Technological Forces: Technological advancements can dramatically affect

organizations' products, services, markets, and competitive position. It is important for
organizations to stay updated with technological developments and capitalize on
technological opportunities to gain a competitive advantage.

• Competitive Forces: Competition among firms is a powerful force that affects the
intensity of rivalry in an industry. Factors such as the number of competitors, ease of entry,
availability of substitute products, bargaining power of suppliers, and bargaining power of
consumers can influence the level of competition in an industry.
• Competitive Intelligence Programs: Competitive intelligence involves gathering and
analyzing information about competitors' activities and general business trends. It is
important for organizations to have an effective competitive intelligence program to stay
informed about their competitors and make informed strategic decisions.

• Market Commonality and Resource Similarity: Market commonality refers to the

number and significance of markets that a firm competes in with rivals, while resource
similarity refers to the extent to which a firm's internal resources are comparable to a rival.
These factors influence the level of rivalry among competitors and can be analyzed using
tools such as the Competitive Profile Matrix.

• Competitive Analysis: Porter's Five-Forces Model: Porter's Five-Forces Model is a widely

used approach for analyzing the competitive forces in an industry. It considers factors such
as rivalry among competing firms, potential entry of new competitors, potential
development of substitute products, bargaining power of suppliers, and bargaining power
of consumers. This model helps strategists evaluate the intensity of competition in an
industry and make informed strategic decisions.

Porters 5-Forces Model

1. Rivalry among competing firms: This refers to the intensity of competition between firms
in the industry. Factors that influence rivalry include the number and size of competitors,
industry growth rate, and product differentiation.
2. Potential entry of new competitors: This refers to the threat of new firms entering the
industry. Barriers to entry, such as economies of scale, capital requirements, and
government regulations, can determine the ease or difficulty of new firms entering the
market.
3. Potential development of substitute products: This refers to the threat of substitute products
or services that can fulfil the same customer needs. The availability of substitutes can limit
the pricing power and profitability of firms in the industry.
4. Bargaining power of suppliers: This refers to the power of suppliers to influence the terms
and conditions of supply. Suppliers with strong bargaining power can demand higher prices
or better terms, reducing the profitability of firms in the industry.
5. Bargaining power of customers: This refers to the power of customers to influence the
terms and conditions of purchase. Customers with strong bargaining power can demand
lower prices or better quality, reducing the profitability of firms in the industry.

• Sources of External Information: There are various sources of external information that
organizations can use to gather strategic information. These sources include published
sources such as periodicals, journals, reports, and government documents, as well as
unpublished sources such as customer surveys, market research, and interviews. The
Internet has also become a valuable source of strategic information.
 • Forecasting Tools and Techniques: Forecasting is an important activity in strategic
management. There are various quantitative and qualitative techniques that can be used for
forecasting. These techniques help organizations make educated assumptions about future
trends and events, which are essential for effective strategic planning.
• Making Assumptions: Assumptions are necessary in strategic planning as they provide
estimates of the impact of major external factors on a firm's performance. Assumptions are
based on the best available information at the time and serve as checkpoints for the validity
of strategies.

• Industry Analysis: The External Factor Evaluation (EFE) Matrix: The EFE Matrix is a
tool that allows strategists to summarize and evaluate economic, social, cultural,
demographic, environmental, political, governmental, legal, technological, and
competitive information. It helps identify key external opportunities and threats and
provides a weighted score to assess the firm's strategic position.

Steps Of Making EFE Matrix

• Identify key external factors: Make a list of 15 to 20 key external factors that affect the
firm and its industry. These factors can include both opportunities and threats. Be specific
and use quantitative terms whenever possible.
• Assign weights to each factor: Assign a weight to each factor to indicate its relative
importance to the firm's success in the industry. The weights should range from 0.0 (not
important) to 1.0 (very important). The sum of all weights should equal 1.0.
• Rate the firm's response to each factor: Rate the firm's current strategies in response to
each factor on a scale of 1 to 4, where 4 indicates a superior response, 3 indicates an
above-average response, 2 indicates an average response, and 1 indicates a poor response.
• Multiply the weight by the rating: Multiply each factor's weight by its rating to
determine a weighted score for each factor.
• Sum the weighted scores: Sum the weighted scores for each factor to determine the total
weighted score for the organization.

• The Competitive Profile Matrix (CPM): The CPM is another tool that helps identify a
firm's major competitors and evaluate its strengths and weaknesses in relation to its
competitors. It includes both internal and external factors and provides a comparative
analysis of the firm's strategic position.

Steps in making a Competitive Profile Matrix (CPM) are as follows:

1. Identify the critical success factors (CSFs) that are important in the industry. These factors can
include product quality, market share, advertising, management experience, etc.
2. Assign a weight to each CSF to indicate its relative importance. The weights should add up to 1.0. The
weight reflects the impact of each CSF on the overall success of the firm.
3. Rate each firm (including the sample firm) on each CSF. The rating should be based on the firm's
strength or weakness in relation to the CSF. Use a scale of 1 to 4, where 4 indicates a major strength, 3
indicates a minor strength, 2 indicates a minor weakness, and 1 indicates a major weakness.
4. Multiply each rating by its corresponding weight to calculate the weighted score for each firm on each
CSF.
 5. Sum the weighted scores for each firm to calculate the total weighted score. This score represents the
overall competitive position of each firm.
6. Compare the total weighted scores of the firms to determine their relative strengths and weaknesses. The
firm with the highest total weighted score is considered to have the strongest competitive position.

Key Terms

1. External strategic-management audit: The process of identifying and evaluating

trends and events beyond the control of a single firm that can impact the
organization's opportunities and threats.

2. External forces: Factors that affect organizations from outside, including economic,
social, cultural, demographic, environmental, political, governmental, legal,
technological, and competitive forces.

3. Forecasting tools: Techniques used to make educated assumptions about future

trends and events, such as quantitative techniques (based on historical data) and
qualitative techniques (based on expert opinions and judgment).

4. Competitive intelligence: The process of gathering and analyzing information about

competitors' activities and general business trends to further a business's own goals.

5. Market commonality: The number and significance of markets that a firm competes
in with rivals.

6. Resource similarity: The extent to which a firm's internal resources are comparable
to those of its rivals.

7. External Factor Evaluation (EFE) Matrix: A tool used to summarize and evaluate
economic, social, cultural, demographic, environmental, political, governmental,
legal, technological, and competitive information.

8. Competitive Profile Matrix (CPM): A tool used to identify a firm's major competitors
and evaluate their strengths and weaknesses in relation to the sample firm's strategic
position.