• Chapter 3

The External Assessment

(environmental scanning/industry
analysis)

Ch 3 -1
 LEARNING OBJECTIVES
• The Nature of external • Forecasting tools and
audit process techniques
• Key external factors • External Factor
• Sources of external Evaluation Matrix (EFE)
information • Competitive Profile
• Porter’s 5 Forces Model Matrix (CPM)
of Competition

Ch 3 -2
A COMPREHENSIVE STRATEGIC-MANAGEMENT MODEL – AT WHAT
STAGE IS THE EXTERNAL ASSESSMENT IN THE STRATEGIC MODEL

3-3
EXTERNAL ASSESSMENT

“Nothing focuses the mind better than the

constant sight of a competitor who wants to
wipe you off the map.”
– Wayne Calloway, Former CEO, PepsiCo

Ch 3 -4
 THE NATURE OF EXTERNAL
ASSESSMENT/AUDIT/ANALYSIS
The • Allow companies to
primary purpose of external identify key variables that
analysis is to determine the offer actionable responses
opportunities and threats in that companies will take
an industry or any segment towards profitability, growth
that will drive profitability, and volatility
growth, and volatility. • Enable companies to
formulating strategies that
What companies do at this take advantage of external
stage is to conduct: opportunities or that
Environmental Scanning minimize the impact of
potential threats.
Industry Analysis
Ch 3 -5
 THE KEY EXTERNAL FACTORS - 5 BROAD CATEGORIES
SURROUNDING COMPANIES OR INDUSTRIES (the 10 key factors)

economic forces  political,

social, cultural, governmental, and
legal forces
demographic, and
 technological forces
natural
 competitive forces
environment forces

Ch 3 -6
SOME EXAMPLES OF THE KEY FORCES

Identify & evaluate factors beyond the control of

a single firm
 Increased foreign competition
 Population shifts – baby boom, the X and Y
generation, the Z generation
 Aging society – world population getting older
 Fear of traveling – population of the world fear
travelling due to pandemic
 Stock market volatility – economic forces and
political situation in a country sometimes affect
industries stock volatility
 Pandemic – causing many disruptions of many
industries specifically the hoteliers
Ch 3 -7
Ch 3 -8
THE PROCESS OF PERFORMING
AN EXTERNAL AUDIT • The sources of information can
be:
1. GATHER COMPETITIVE • Internet, Libraries, Suppliers,
INTELLIGENCE AND INFORMATION OF Distributors, Salespersons,
THE 5 EXTERNAL FORCES Customers, and
Companies need to gather competitors.
competitive intelligence (CI) and
information about economic, social, • More ethical and newer
cultural, demographic, methods are shown in the
environmental, political, next slide…
governmental, legal, and
technological trends*
2. INFORMATION SHOULD BE
The aim is the more information ASSIMILATED AND EVALUATED
and knowledge a firm can obtain
about its competitors, the more likely 3. A FINAL LIST OF THE MOST
the firm can formulate and IMPORTANT KEY EXTERNAL
implement effective strategies FACTORS SHOULD BE
Companies often hold COMMUNICATED THUS
programs of CI and the PRIORITIZING WILL TAKE PLACE
programs mainly are to serve 3  it varies over time and varies over
purpose… next slide industries
Ch 3 -9
Competitive Intelligence Programs
1. to provide a general 3. to identify potential
understanding of an moves that a
industry and its competitor might
competitors make that would
2. to identify areas in endanger a firm’s
which competitors are position in the
vulnerable and to
assess the impact market
strategic actions would
have on competitors
3-10
 METHODS FOR CI GATHERING

 Hire top executives from rival firms.

 • Reverse engineer (back engineering)
rival firms’ products.
 • Use surveys and interviews of
customers, suppliers, and distributors.
 • Conduct drive-by and on-site visits to
rival firm operations.
 • Search online databases.
 • Contact government agencies for
public information about rival firms.
 • Systematically monitor relevant trade
publications, magazines, and newspapers.
Ch 3 -11
PERFORMING EXTERNAL AUDIT –
VARIABLES*
 Price competitiveness  Price competitiveness
 Technological  Technological
advancements advancements
 Interest rates  Interest rates
 Pollution abatement  Pollution abatement
(lessening)

Ch 3 -12
 THE PROCESS OF PERFORMING AN
EXTERNAL AUDIT

Key external factors should be:

1.important to achieving long-term and annual objectives
(is long term oriented)
2.measurable
3.applicable to all competing firms, and
4.hierarchical in the sense that some will pertain to the
overall company and others will be more narrowly focused
on functional or divisional areas
 Corporate level, business level and the functional level

3-13
 INDUSTRIAL ORGANIZATION (I/O) VIEW
WHAT IS I/O?
• It is a practical framework for
gathering, assimilating, and
analyzing external
information.
• It advocates that external
(industry) factors are more
important than internal ones
for gaining and sustaining
competitive advantage.
• In short industries
performances are determined by
industry forces/properties
MICHAEL PORTER, THE
PROPENENT OF THIS VIEW
• Proponents of the I/O view,
such as Michael Porter,
contend that organizational
performance will be primarily
determined by industry
forces, such as falling gas
prices that no single firm can
control.
• Porter’s Five-Forces Model is
an example of the I/O
perspective, which focuses on
analyzing external forces and
industry variables as a basis
for getting and keeping
competitive advantage.
Ch 3 -14
 THE INDUSTRIAL ORGANIZATION
(I/O) VIEW

• Firm performance is
based more on
industry properties

3-15
 TRENDS

Economic Forces Social, Cultural, Demographic, and Natural Environmental Forces

• Trends in the dollar’s value • Products

• European Union
• Services
• Layoffs/unemployment
trends • Markets
• Economic standard of living
• Consumption patterns
• Customers
• Foreign countries economic • Next slide for more
conditions
• Demand shifts

Ch 3 -16
KEY SOCIAL, CULTURAL, DEMOGRAPHIC, AND
NATURAL ENVIRONMENT VARIABLES

3-17
 TRENDS TECHNOLOGICAL
The technology mainly the use of Internet
has changed the very nature of opportunities
Political, Governmental, and threats by:
and Legal Forces
altering the life cycles of products,
• The increasing global increasing the speed of distribution,
creating new products and services,
interdependence erasing limitations of traditional geographic
among economies, markets,
markets, governments, changing the historical trade-off between
and organizations production standardization and flexibility
makes it imperative that Create new markets, new improved
products, renders some products and
firms consider the services to be obsolete
possible impact of
political variables on COMPANIES CREATE NEW POSITIONS and the
the formulation and people hired are required to
implementation of Gather and obtain vital information and to
formulate, implement, and evaluate strategies is
competitive strategies available where and when it is needed
Ch 3 -18

COMPANIES NEED TO LOOK INTO
COMPETITIVE FORCES
• An important part of an
external audit is identifying
rival firms and determining
their strengths,
weaknesses, capabilities,
opportunities, threats,
objectives, and strategies.
• The CI programs is used to
accomplish this… refer to
slides 9,10,11.
COMPETITIVE FORCES
1.Market share matters
2.Understand and remember
precisely what business you
are in
3.Whether it’s broke or not, fix
it–make it better
4.Innovate or evaporate
5.Acquisition is essential to
growth
6.People make a difference
7.There is no substitute for
quality
See e text on key questions
on competitors table 3.7
Ch 3 -19
 MARKET COMMONALITY AND RESOURCE
SIMILARITY

• Market commonality • Resource similarity

– the number and – the extent to which the
significance of markets type and amount of a
that a firm competes in firm’s internal
with rivals resources are
comparable to a rival

3-20
PORTER’S THE FIVE- 1. Identify key aspects or
FORCES MODEL OF elements of each
COMPETITION
competitive force that
impact the firm.
2. Evaluate how strong
and important each
element is for the firm.
3. Decide whether the
collective strength of the
elements is worth the
firm entering or staying
in the industry.

3-21
 PORTER’S THE FIVE-FORCES MODEL OF COMPETITION

1. RIVALRY AMONG COMPETING 2. POTENTIAL ENTRY OF

FIRMS COMPETITORS

– Barriers to entry
– Most powerful of are important*
the five forces – Quality, pricing,
– Focus on and marketing can
competitive overcome barriers
advantage of
strategies over
other firms

Ch 3 -22
 BARRIERS TO ENTRY*

• Need to gain economies • Government regulatory

of scale quickly policies
• Need to gain technology • Tariffs
and specialized know- • Lack of access to raw
how materials
• Lack of experience • Possession of patents
• Strong customer loyalty • Undesirable locations
• Strong brand preferences • Counterattack by
• Large capital entrenched firms
requirements • Potential saturation of the
• Lack of adequate market
distribution channels

Ch 3 -23
 3. Potential development of substitute
products

Pressure increases when:

Prices of substitutes decrease
Consumers’ switching costs
decrease

4. Bargaining Power of Suppliers is

increased when there are
Large numbers of suppliers
Few substitutes
Costs of switching raw materials is
high

5. Bargaining power of consumers

Customers being concentrated or buying in volume
affects intensity of competition
Consumer power is higher where products are standard
or undifferentiated
Ch 3 -24
 5. Bargaining power of consumers

Consumers gain increasing bargaining power under the

following circumstances:
1. If they can inexpensively switch to competing brands or
substitutes
2. If they are particularly important to the seller
3. If sellers are struggling in the face of falling consumer
demand
4. If they are informed about sellers’ products, prices, and
costs
5. If they have discretion in whether and when they
purchase the product

Ch 3 -25
 FORECASTING TOOLS AND TECHNIQUES

 educated assumptions • Managing assumptions

about future trends and
events
• Defined as the best
 Quantitative and
qualitative techniques
present estimates of the
impact of major external
 Forecasting is complex because
factors, over which the
of factors such as:
manager has little if any
 technological innovation, control, but which may
cultural changes, new
products, improved services,
exert a significant impact
stronger competitors, shifts in on performance or the
government priorities, ability to achieve desired
changing social values, results.
unstable economic conditions, • Wild guesses should never be
and unforeseen events made in formulating strategies,

Ch 3 -26
 EXTERNAL FACTOR EVALUATION (EFE) MATRIX
• allows strategists to
summarize and evaluate 1. List key external
EXTERNAL FACTORS factors
SUCH AS 2. Weight from 0 to 1
• economic, social, cultural, 3. Rate effectiveness of
demographic, current strategies
environmental, political, 4. Multiply weight * rating
governmental, legal, 5. Sum weighted scores
technological, and
competitive information,
• Comprise of 5 steps Detailed can be found in
the next slide

Ch 3 -27
 External Factor THE STEPS(EFE) Matrix
Evaluation
1 List 20 key external factors as identified in the external-audit process,
including both
opportunities and threats that affect the firm and its industry. List the
opportunities first and then the threats. Be specific as possible, utilize
“actionable” factors
2 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 can receive high weights if they are
especially severe or threatening. Appropriate weights can be determined by
comparing successful with unsuccessful competitors or by discussing the
factor and reaching a group consensus. The sum of all weights assigned to
the factors must equal 1.0.
3 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, and 1 = the response is poor. Ratings are based on effectiveness of
the firm’s strategies. Ratings are thus company-based, whereas the weights
in Step 2 are industry-based. It is important to note that both threats and
opportunities can receive a 1, 2, 3, or 4. Ch 3 -28
External Factor Evaluation (EFE) Matrix

THE STEPS
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.

Ch 3 -29
 EFE INDICATORS
Total weighted score of 4.0
• Organization response
is outstanding to
threats and weaknesses IMPORTANT:
Understanding the
Total weighted score of factors used in the EFE
1.0 Matrix is more
 Firm’s strategies not important than the
capitalizing on
opportunities or
actual weights and
avoiding threats ratings assigned.

Ch 3 -30
 EFE Matrix for a Local Ten-Theater
Cinema Complex

external
only

3-31
 INDUSTRY ANALYSIS: COMPETITIVE PROFILE
MATRIX (CPM)
 Identifies firm’s major
competitors and their
strengths & weaknesses
in relation to a sample
firm’s strategic positions
 The critical success
factors in a CPM are not
grouped into
opportunities and
threats as they are in an
EFE
•Critical success factors
include INTERNAL
AND EXTERNAL
ISSUES
•This comparative analysis
provides important
internal strategic
information
Ch 3 -32
 An Example Competitive
Profile Matrix

internal and external

3-33
CHAPTER SUMMARY

Ch 3 -34