Chapter 3

THE EXTERNAL ASSESSMENT

 If everyone is thinking alike
then somebody isn’t thinking
 Chapters Objectives
 Describe how to conduct an external strategic-
management audit
 Discuss 10 major external forces that affect
Organization
 Identify key sources of external information,
including the internet
 Discuss forecasting tools used in SM
 Explain how to develop an EFE Matrix
 Explain how to develop a Competitive Profile
Matrix
Key External Factors  Affect products,
services, markets &
Organizations in the
world (acquire & sell)
 Changes in consumer
demands
 Factors affect
suppliers &
distributors
 Foreign business &
countries learn, adapt,
innovate to compete
successfully in the
Marketplace
 Key External Forces & the Organization

Competitors
Suppliers
Distributors
Creditors
Key Customers Opportunities
External Employees &
Forces
Communities Threats
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
•Company must gather competitive intelligence & information about External forces
•Sources ( key magazines, trade journals & newspapers.. Internet, university- Suppliers,
distributors, salespersons, customers & competitors
 Performing External Audit

Long-term orientation

Measurable
External
Factors Applicable to
competing firms

Hierarchical

 Managers meet & identify most important opportunities & threats facing the
firm
Key external factors listed on flip charts/blackboard
Managers prioritized list by ranking the factors identified (1-20) imp- least O/T
COMPETING PRODUCTS/ WORLD ECONOMIES, FOREIGN AFFLIATES, PRICE
COMPETIVIENESS, TECHNOLOGICAL ADVANCEMENTS, POPULATION SHIFTS
 Assignment for discussion
Economic Forces
Social, Cultural, Demographic &
Environmental Forces
Political, Governmental & Legal Forces
Technological Forces
Competitive Forces
Competitive Intelligence Programs
 Economic Forces
• Economic forces produce many
opportunities and threats for mangers
– Interests rate
– Inflation
– Unemployment
– Economic growth

Volunteer
 Economic Forces
Representing the overall economic health
of the country or region in which the
Organization functions
(Consumer purchasing power, Unemployment rate, interest
rates, labor market,)
are all part of Org economic environment

One significant recent trend in the

economic environment is the frequency of
mergers & acquisitions
 Social, Cultural, Demographic &
Environmental Forces
• US getting older & Less Caucasian
• People/households making more purchases
on line
• Census data
– Aging population
– Trend towards older America is good news for
• Tours
• Restaurants
• Hotels
• Airlines
• pharma
 Sociocultural Forces
• Sociocultural Forces are pressures
emanating from the social structure of a
country or society or from the national
culture
– Social structure
– National Culture
Managers and Organizations also
must respond to social changes
within a society
Americans becoming more
personal fitness and health
conscious
 Demographic Forces
• Are the outcomes of changes in or
changing attitudes toward the
characteristics of a population such as
age, gender, ethnic origin, race, and social
class
– Women seeking employment
– Changes in the age distribution of a
population
Political and Legal Forces
Changes in laws and regulations
Laws constrain the operations of org &
managers thus create both opportunities &
threats
Deregulation & privatization(create challenges
for Org & managers
Environmental protection
Emphasis on safety in the workplace
Legal constraints against discrimination

Successful managers carefully monitor changes in laws and regulations in

order to take advantage of the Opp they create and counter threats they
pose
Technological Forces
– Combination of skills and equipments that
managers use in the design, production and
distribution of goods and services
– Technological forces are the outcomes of
changes in the technology that managers use
to design , produce or distribute goods and
services
– Tech change can make established products
obsolete overnight
• Telecommuting / Teleconferencing
• CIO/CTO new positions to effectively capitalize on
e-commerce
Competitive Forces
Identifying Rival Firms

Strengths
•Weaknesses
Identify major
•Capabilities competitors not
always easy
•Opportunities because many
firms have
•Threats divisions that
compete in different
•Objectives industries

•Strategies
 The Five-Forces Model of Competition
Potential development
of substitute products

Bargaining power Rivalry among Bargaining power

of suppliers competing firms of consumers

Potential entry of new

competitors
 The Five Forces Model
• Helps managers isolate particular forces in
the external environment that are potential
threats
• Porter argued that when managers analyze
O/T they should pay particular attention to
these five forces
• They affect how much a profit organizations
competing within the same industry can
expect to make
 Rivalry among competing firms
Powerful of the five competitive forces
The more the companies compete against
one another for customers– (by lowering
prices of the products/ increasing
advertising) – the lower is the level of
industry profits ( low prices mean less profits)
As rivalry among competing firms intensifies,
industry profits decline– industry becomes
unattractive
Coke & Pepsi ( price wars, comparative advertising, new
product introduction)
Potential Entry of New Competitors
Whenever new firms can easily enter a
particular industry, the intensity of
competitiveness among firms increases
Barriers to entry, such as economies of the
scale, strong customer loyalty, strong brand
preferences….. Are low the easier it is for
companies to enter an industry (industry
profits to be low)
Example: GM offering employee discounts-
to all customers purchasing new cars
Threat is high for local hamburger restaurant than Ford &
Toyota
When the threats of new firms entering the
market is strong, Firms generally fortify
their positions and take actions to deter
new entrants, such as lowering prices,
extending warranties and adding
features………
Potential Development of Substitute Products
 Often, the output of one industry is a substitute
for the output of another industry
 plastic may be a substitute for steel in some
applications
 eyeglasses / contact lenses laser eye surgery
Sugar Companies artificial sweetners

Competitive pressures arising from substitute

products increase as the relative price of
substitute products declines & as consumers’
switching costs decreases
 Bargaining Power of Suppliers

If there are only a few suppliers of an

important input, then suppliers can drive up
the price of that input & expensive inputs
result in lower profits for the producer
Firms may pursue a backward integration
strategy to gain control or ownership of
suppliers
Local electric co. is the only source of electricity in your community therefore it
can charge what it wants for its product
• Backward integration strategy to gain
control of ownership of suppliers. This
strategy is especially effective when
suppliers are unreliable, too costly or not
capable of meeting a firm’s needs on a
consistent basis.
Bargaining Power of Consumers
• If only a few large customers are available
to buy an industry’s output, they can
bargain to drive down the price of that
output. As a result producer make lower
profits
• Rival firms may offer extended warranties
or special services to gain customer loyalty
whenever the bargaining power of
consumers is substantial
Sources Of External Information
Published & Unpublished sources
Customer survey-Market research-
Speeches at meetings- TV programs-
Interviews
Journals-Government documents- books-
newspaper
Internet
Industry Analysis: The External Factor
Evaluation (EFE) Matrix
Summarize & Evaluate

Economic Demographic Governmental

Social Environmental Technological

Cultural Political Competitive

Developed in Five Steps: (Open Book)

 EFE – Poultry Firm
Wtd
Key External Factors Weight Rating
Score

Opportunities (cont’d)
1. Demand for chicken increasing 8 %
0.07 4 0.28
annually
2. Demand for prepared food incaresing
0.08 4 0.32
10% annually
3.Leading competitor could be acquired
0.02 1 0.02
for $1billion

Threats 0.10 1 0.10

1. Leading competitor increased its ad
0.06 1 0.06
expenses 30%
 EFE – Gateway Computers (2003) (cont’d)
Wtd
Key External Factors Weight Rating
Score

Threats (cont’d)
2. Illegal immigrant problem plagues
0.09 3 0.27
the firm
3. 0.05 1 0.05

4. 0.05 3 0.15

5. 0.05 4 0.20

6. 0.05 3 0.15
 EFE – Gateway Computers (2003) (cont’d)
Wtd
Key External Factors Weight Rating
Score

Threats (cont’d)
7. 0.05 2 0.10

8. 0.05 3 0.15

Total 1.00 2.56

Five steps in developing EFE Matrix(Step1)

 List key external factors as identified in

the External audit process
Include 10-20 factors including both
opportunities & threats that affect the firm
& its industry
List opportunities first & then the threats
Be specific as possible using percentages,
ratios and comparative numbers whenever
possible
EFE matrix (step 2) Continue…….
 Assign to each factor a weight that ranges from
0.0(not important) to 1.0(very important)
 The weight indicates the relative importance of that
factor to being successful in the firm’s industry.
 Opportunities often receive higher weights than
threats, but threats too can receive high weights if
they are especially severe or threatening
 Appropriate weights can be determined by
comparing successful with unsuccessful
competitors or discussing a factor (reaching a
consensus)
 The sum of all weights assigned to the factors must
equal 1.0
 EFE matrix step 3 continue….
 assign rating between 1&4 to each key
external factor indicate how effectively the firm’s
current strategies respond to the factor , where
4= the response is superior, 3= response is
above average, 2=average, 1=poor
Ratings are based on effectiveness of the firm’s
strategies
Ratings are company based, whereas the
weights in step 2 are industry based
Both threats & opp can receive a 1,2,3 or 4
 EFE Matrix step 4 & 5
Multiply each factor’s weight by its rating
to determine a weighted score
Sum the weighted score for each variable
to determine total weighted score for the
organization
Industry Analysis EFE
Total weighted score of 4.0
• Organization response is outstanding to threats
and weaknesses
• Firms strategy effectively taking advantage of
existing opportunities and minimizing the effects
of external threats

Total weighted score of 1.0

• Firm’s strategies not capitalizing on opportunities or
avoiding threats
Industry Analysis: Competitive Profile
Matrix (CPM)

Identifies firm’s major competitors

and their strengths & weaknesses
in relation to a sample firm’s
strategic positions
 CPM
4 ----- Major Strength Weights & total weights
3 ----- Minor Strength scores in both CPM &
EFE having the same
2 ----- Minor Weakness meaning
1 ----- Major Weakness Ratings refer to
strengths & weakness

 Critical success factors in a CPM are broader (do not

include factual or specific date)
 CSF in CPM not grouped into O/T as they are in
EFE
 Ratings & Total weighted scores for rival firms can
be compared to the sample firm
 Comparative analysis provides important internal
strategic information
 Gateway Apple Dell
Wt Rating Wt’d Rating Wt’d Rating Wt’d
CSF’s Score Score Score

Market share 0.15 3 0.45 2 0.30 4 0.60

Inventory sys 0.08 2 0.16 2 0.16 4 0.32
Fin position 0.10 2 0.20 3 0.30 3 0.30
Prod. Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distr 0.10 3 0.30 2 0.20 3 0.30
Global Exp. 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15

Apple has the best product quality and management experience ;

Dell has the best market share and inventory system; Gateway
has the best price as indicated by the ratings
 Gateway Apple Dell
Wt Rating Wt’d Ratin Wt’d Rating Wt’d
CSF’s (cont’d) Score g Score Score

Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12

E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Serv 0.10 3 0.30 2 0.20 4 0.40
Price
0.02 4 0.08 1 0.02 3 0.06
competitive
Mgt. 0.01 2 0.02 4 0.04 2 0.02
experience

Total 1.00 2.83 2.47 3.49