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EXTERNAL

ENVIRONMENT
ANALYSIS

Presented By:
CATHERINE T. SANTOS
Business Policy & Strategic Managemen
29 October 2005
Objectives
 Learn how to conduct an external strategic-
management audit.
 To discuss the ten major external forces that affect
organizations: economic, social, cultural,
demographic, environmental, political,
governmental, legal, technological, and
competitive.
 To be able to conduct competitive analysis using
Porter’s Five-Forces Model.
 Explain how to develop EFE Matrix and
Competitive Profile Matrix.
Introduction
Many situational considerations enter into
crafting strategy. These factors & its
influence on the strategy-making process
differ for each situation.

What an organization can and cannot do


strategy-wise is always affected by major
forces in its external environment.
STRATEGY-SHAPING FACTORS
EXTERNAL TO THE COMPANY

Societal,
Political,
Competitive Company
Regulatory,
And Conditions and Opportunities
Community Over-All Industry And
Attractiveness
Citizenship Threats
Considerations
The External Assessment
 The Nature of an External Audit
 Economic Forces
 Social, Cultural, Demographic, and Environmental
Forces
 Political, Governmental, and Legal Forces
 Technological Forces
 Competitive Forces
 Competitive Analysis: Porter’s Five Forces Model
 Industry Analysis: The External Factor Evaluation
(EFE) Matrix
 Competitive Profile Matrix
The Nature of An External Audit
 External audit is sometimes called environmental scanning
or industry analysis.
 FOCUS: identify & evaluate trends and events beyond the
control of an organization.
 PURPOSE: develop a list of key variables that could
benefit the firm; and threats that should be avoided.
 KEY EXTERNAL FORCES INCLUDE:
1. Economic Forces
2. Social, Cultural, Demographic, and Environmental
Forces
3. Political, Governmental, and Legal Forces
4. Technological Forces
5. Competitive Forces
The Process of Performing an
External Audit
1. Gather competitive intelligence & information
on economic, social, cultural, demographic,
environmental, political, governmental, legal,
and technological trends.
2. Assimilate & evaluate the information gathered
by having a list of the opportunities & threats.
Rank it with 1 as the most important.
3. A final list of the most important key external
factors should be communicated & distributed
within the firm.
The Economic Forces
 Key Economic Variables to be Monitored:
 Availability of Credit
 Level of disposable income
 Propensity of people to spend
 Interest rates & inflation rates
 Money market rates
 Consumption patterns
 Unemployment trends
 Value of Dollar in the world market
 Stock market trends
 Foreign countries’ economic condition
 Price Fluctuations
The Social, Cultural, Demographic, and
Environmental Forces
 Society shapes one’s beliefs, values, and norms.
It defines:
1. Views of Themselves
2. Views of Others
3. Views of Organizations – refers to their
attitude toward corporations, government
agencies, trade unions, and other organizations.
4. Views of Society
5. Views of Nature
6. Views of the Universe
DEMOGRAPHIC ENVIRONMENT INCLUDE:
 Age
 Family Size – number of persons in the family
 Family Life Cycle – Young, single; young married
 Gender
 Income
 Occupation
 Education
 Religion
 Race
 Generation
 Nationality
 Social Class – lower, middle, upper
The Political, Governmental and
Legal Forces
 This environment is composed of laws, government agencies,
and pressure groups that influence & limit various organizations
& individuals.
 Key Variables:
1. Government regulations or deregulations
2. Changes in tax laws ; special tariffs
3. Political action committees
4. Number, severity, and location of government protests
5. Number of patents; changes in patent laws
6. Environmental protection laws
7. Size of government budgets
8. Political conditions of foreign countries.
Technological Forces
 In this environment, we should monitor the
following:
1. Accelerating Pace of Change – new ideas and
their successful implementation.
2. Opportunities for Innovation – revolutionizing
products and services.
3. Varying Research & Development Budgets –
researches toward breakthroughs.
4. Increased Regulation of Technological
Change – public needs assurance of their safety
as products become complex.
COMPETITIVE FORCES
 Collection and evaluation of information on
competitors is essential for a successful business
strategy formulation.
 Major information about competitors include
their:
1. Strengths & weaknesses
2. Objectives & strategies
3. Response to current key factors
4. Vulnerability to alternative company strategy
5. Product Positioning.
COMPETITIVE ANALYSIS
PORTER’S FIVE-FORCES
MODEL
PORTER’S FIVE-FORCES MODEL OF COMPETITION
FIRMS IN OTHER
INDUSTRIES
OFFERING
SUBSTITUTE
PRODUCTS

Competitive pressures coming from the market attempts of outsiders to win


buyers over their product
Competi
Competiti RIVALRY tive
ve AMONG pressure
SUPPLIERS
Pressures s
OF
Growing COMPETING
KEY Growing BUYERS
out SELLERS out of
INPUTS
Of Buyers
suppliers
Competitive pressures created by jockeyingability
Ability to For better market position To
Exercise And competitive advantage exercise
Bargainin Bargaini
g power ngof entry of
Competitive pressures coming from the threat
And new rivals power
leverage And
leverage
POTENTIAL
NEW
ENTRANTS
PORTER’S FIVE-FORCES MODEL OF COMPETITION
FIRMS IN OTHER
INDUSTRIES
OFFERING
SUBSTITUTE
PRODUCTS

Competitive pressures coming from the market attempts of outsiders to win


buyers over their product
Competi
Competiti RIVALRY tive
ve AMONG pressure
SUPPLIERS
Pressures s
OF
Growing COMPETING
KEY Growing BUYERS
out SELLERS out of
INPUTS
Of Buyers
suppliers
Competitive pressures created by jockeyingability
Ability to For better market position To
Exercise And competitive advantage exercise
Bargainin Bargaini
g power ngof entry of
Competitive pressures coming from the threat
And new rivals power
leverage And
leverage
POTENTIAL
NEW
ENTRANTS
INDUSTRY ANALYSIS
The EXTERNAL FACTOR
EVALUATION (EFE) MATRIX
External Factor Evaluation (EFE)
Matrix
 Itallows strategists to summarize & evaluate
economic, social, cultural, demographic,
environmental, political, governmental, legal,
technological, and competitive information.

 FIVE STEPS:
1. List key external factors as identified in the
external-audit process.

2. Assign to each factor a weight that ranges from


0.0 (not important) to 1.0 (very important).
3. Assign a 1-to- 4 rating to each key external
factor to indicate how effectively the firm’s
current strategies respond to the factor. Where:
4 = response is superior
3 = response is above average
2 = response is average
1 = response is poor
4. Multiply each factor’s weight by its rating to
determine a weighted score.
5. Sum the weighted scores for each variable to
determine the total weighted score for the
organization.
AN EXAMPLE EXTERNAL FACTOR EVALUATION MATRIX
FOR UST, INC.
KEY EXTERNAL FACTORS WEIGHT RATING WEIGHTED
SCORE
Opportunities
1. Global markets are practically .15 1 .15
untapped by smokeless tobacco
market
2. Increased demand caused by .05 3 .15
public banning of smoking
3. Astronomical internet .05 1 .05
advertising growth
4. Pinkerton is leader in discount .15 4 .60
tobacco market
5. More social pressure to quit .10 3 .30
smoking, thus leading users to
switch to alternatives
Threats
1. Legislation against the tobacco .10 2 .20
industry
2. Production limits on tobacco .05 3 .15
increases competition for
production
3. Smokeless tobacco market is .05 2 .10
concentrated in southeast region
of United States
4. Bad media exposure from the .10 2 .20
FDA
5. Clinton administration .20 1 .20
TOTAL 1.00 2.10

Strategic Management Concepts & Cases 9th Edition Fred R. David page
The COMPETITIVE PROFILE MATRIX
(CPM)
 Itidentifies a firm’s major competitors and its
particular strengths & weaknesses in relation to a
sample firm’s strategic position.
 Critical success factors in a CPM include both
internal & external issues. Rating:
4 = major strength
3 = minor strength
2 = minor weakness
1 = major weakness
AN EXAMPLE OF COMPETITIVE PROFILE
MATRIX
AVON L’OREAL PROCTER
&
GAMBLE
CRITICAL WEIGH RATING SCORE RATING SCORE RATING SCORE
SUCCESS T
FACTORS

ADVERTISING .20 1 .20 4 .80 3 .60

PRODUCT .10 4 .40 4 .40 3 .30


QUALITY
PRICE .10 3 .30 3 .30 4 .40
COMPETITIVEN
ESS
MANAGEMENT .10 4 .40 3 .30 3 .30

FINANCIAL .15 4 .60 3 .45 3 .45


POSITION
CUSTOMER .10 4 .40 4 .40 2 .20
LOYALTY
GLOBAL .20 4 .80 2 .40 2 .40
EXPANSION
MARKET SHARE .05 1 .05 4 .20 3 .15

TOTAL 1.00 3.15 3.25 2.80

Strategic Management Concepts & Cases 9th Edition Fred R. David page
References:

Strategic Management Concepts & Cases


9th Edition
Fred R. David

Strategic Management Concepts


11th Edition
By Thompson Strickland

Marketing Management
11th Edition
By Philip Kotler

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