Chapter 3: External Assessment

Outline
 The Nature of an External Audit: Five Keys Factors
 Economic Forces

 Social,Cultural,Demographic & Environmental

Forces
 Political, Governmental, and Legal Forces
 Technological Forces
 Competitive Forces

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Chapter Outline (con’d)
 Competitive Analysis:
 Porter’s Five-Forces Model

 Source of External Information

 The Global Challenge
 Industry Analysis:
 The External Factor Evaluation Matrix

 The Competitive Profile Matrix

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External Strategic Management Audit
Also called:
 Environmental scanning

 Industry analysis

Purpose:
 Opportunities to be explored

 Threats to be avoided

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 Relationships Between Key External Forces
and an Organization

Competitors
Suppliers
Distributors
Key Forces Creditors
-Economic forces Customers Opportunities
-Social, cultural, Employees &
demographic & Communities
environment forces Threats
Managers
-Political, legal forces
Stockholders
government
-Technological force Labor Unions
-Competitive forces Special Interest Groups
Products
Services

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 Key External Forces
Five (5) Key Forces affecting the Opportunities
and Threats:

1. Economic forces
2. Social, cultural, demographic, &
environmental forces
3. Political, governmental, and legal forces
4. Technological factors
5. Competitive forces

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 Economic Forces
Monitor Key Economic Variables:
 Availability of credit Price fluctuations
 Level of disposable income Monetary policies
 Interest rates Fiscal policies
 Inflation rates
Tax rates
 Federal government budget deficits
 Gross domestic product trend OPEC policies
 Consumption patterns
 Unemployment trends
 Worker productivity levels
 Value of the dollar in world markets
 Stock market trends
 Foreign countries’ economic conditions
 Import/export factors
 Demand shifts for goods/services
 Income differences by region/customer
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 Social, Cultural, Demographic &
Environmental Forces
Key variables –
 Number of special-interest groups
 Number of marriages
 Number of divorces
 Number of births
 Number of deaths
 Immigration & emigration rates
 Life expectancy rates
 Per capita income
 Attitudes toward business
 Average disposable income
 Buying habits
 Ethical concerns
 Attitudes toward saving
Racial equality
Average level of education
Government regulation
Attitudes toward customer service
Attitudes toward product quality
Energy conservation
Social responsibility
Value placed on leisure time
Recycling
Waste management
Air & water pollution
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Social, Cultural, Demographic &
Environmental Forces
Major impact on:

 Products
 Services

 Markets

 customers

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 Political, Govt., & Legal Forces
Key Political, govt., & legal variables:
• Government regulation/deregulation •Environmental protection laws
• Tax law changes
• Special tariffs •Equal employment legislation
• Number of patents •Level of government subsidies
• Changes in patent laws
• Import-export regulations •Antitrust
legislation/enforcement
• Monetary policy
• Political conditions in other countries
• Government budgets
• World oil, currency & labor markets
• Location and severity of terrorist
activities

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 Political, Govt., & Legal Forces
Government Regulation
 Key opportunities & key threats
Antitrust legislation (Microsoft)
Tax rates
Patent laws
 Increasing Global Interdependence
 Impact of political variables
Formulation of Strategies
Implementation of Strategies

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 Political, Govt., & Legal Forces

Globalization of Industry

• Worldwide trend toward similar consumption

patterns
• Global buyers & sellers
• E-commerce
• Instant transmission of money & information
across continents

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Political, Govt., & Legal Forces

Increasing Global Interdependence

 Strategists in a global economy

• Forecast political climates
• Legalistic skills
• Diverse world cultures

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Technological Forces
Revolutionary technological forces:

Profound impact on organizations

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Technological Forces
Internet changes the nature of opportunities and threats --

• Alters life cycle of products

• Increases speed of distribution
• Creates new products and services
• Eases limitations of geographic markets
• Alters economies of scale
• Changes entry barriers

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Technological Forces
Capitalizing on Information Technology (IT)

 Chief Information Officer (CIO)

 Chief Technology Officer (CTO)

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 Competitive Forces
Collection and evaluation of information on competitors
is essential for successful strategy formulation
Identifying rival firms
• Strengths
• Weaknesses
• Capabilities
• Opportunities
• Threats
• Objectives
• Strategies
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 Competitive Forces
Key Questions About Competitors:
• Their strengths
• Their weaknesses
• Their objectives and strategies
• Their responses to all external variables (e.g.
social, political, demographic, etc.)
• Their vulnerability to our alternative
strategies

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 Competitive Forces
Key Questions About Ourselves:
 Our vulnerability to successful strategic counterattack
 Our product and service positioning relative to
competitors
 Entry and exit of firms in the industry
 Key factors for our current position in industry
 Sales and profit rankings of competitors over time
 Nature of supplier and distributor relationships
 The threat of substitute products or services

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 Competitive Forces
7 Characteristics of most competitive U.S. firms:
1. Market share matters
2. Understand what business you are in
3. Broke or not, fix it
4. Innovate or evaporate
5. Acquisition is essential to growth
6. People make a difference
7. No substitute for quality

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 Competitive Analysis: Porter’s Five-Forces Model

Potential development
of substitute products

Bargaining power Rivalry among Bargaining power

of suppliers competing firms of consumers

Potential entry of new

competitors

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Global Challenge

International Challenge faced by U.S. firms:

 How to gain and maintain exports to

other nations

 How to defend domestic markets

against imported goods

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Industry Analysis (EFE)
External Factor Evaluation Matrix
Summarize & evaluate:

Economic Demographic Governmental

Social Environmental Technological

Cultural Political Competitive

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 Industry Analysis (EFE)
Five-Step process:
 List key external factors (10-20)
Opportunities & threats
 Assign weight to each (0 to 1.0)
Sum of all weights = 1.0
 Assign 1-4 rating to each factor
Firm’s current strategies response to the factor
 Multiply each factor’s weight by its rating
Produces a weighted score
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 Industry Analysis (EFE)

Five-step process:
 Sum the weighted scores for each
Determines the total weighted score
for the organization.
 Highest possible weighted score for the
organization is 4.0; the lowest, 1.0.
Average = 2.5
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 UST—Key External Factors Weighted
Weight Rating
Opportunities score

Global markets untapped .15 1 .15

Increased demand .05 3 .15
Astronomical Internet growth .05 1 .05
Pinkerton leader in discount market .15 4 .60
More social pressure to quit smoking .10 3 .30
Threats
Legislation against the tobacco industry .10 2 .20
Production limits on tobacco .05 3 .15
Smokeless market SE region U.S. .05 2 .10
Bad media exposure from FDA .10 2 .20
Clinton Administration .20 1 .20
TOTAL 1.00 2.10
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Industry Analysis (EFE)

Total weighted score of 4.0 =

Organization response is outstanding to
threats & weaknesses

Total weighted score of 1.0 =

Firm’s strategies not capitalizing on
opportunities or avoiding threats
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Industry Analysis (EFE)

UST (in the previous example), has a

total weighted score of 2.10 indicating
that the firm is below average in its
effort to pursue strategies that
capitalize on external opportunities and
avoid threats.

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Industry Analysis (EFE)

Important

 Understanding of the factors used in the

EFE Matrix is more important than the
actual weights and ratings assigned.

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Industry Analysis (CPM)
Competitive Profile Matrix

 Identifies firm’s major competitors and

their strengths & weaknesses in
relation to a sample firm’s strategic
position

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