Strategic Management

Chapter 3
The External Assessment

Facilitator: Javed Ahmed Shaikh

School of Business Administration,
Shaheed Benazir Bhutto University (SBBU),
Shaheed Benazirabad (SBA).
Outcomes.
 Describe how to conduct an external
 strategic-management audit.
 2. Discuss 10 major external forces that
affect organizations: economic, social,
cultural, demographic, environmental,
 political, governmental, legal, technological,
and competitive.
 3. Describe key sources of external
information, including the Internet.
 4. Discuss important forecasting tools used
 in strategic management.
 5. Discuss the importance of monitoring external
trends and events.
 6. Explain how to develop an EFE Matrix.
 7. Explain how to develop a Competitive Profile
Matrix.
 8. Discuss the importance of gathering
competitive intelligence.
 9. Describe the trend toward cooperation
 among competitors.
 10. Discuss market commonality and resource
similarity in relation to competitive analysis.
Nature of an External Audit
 Purpose: To develop a finite list of opportunities that could
benefit a firm & threats that should be avoided.
 Not aimed at developing an exhaustive list of every possible
factor that could be influence the business, rather;
 Aimed at identifying key variables that offer actionable
responses.
 Firms should be able to respond either offensively or
defensively to the factors…HOW??
By formulating strategies that take advantage of external
opportunities or that minimize the impact of potential
threats.
Relationships Between Key External Forces
and an Organization
The Process of Performing an External
Audit
 Must involves as many managers & employees
WHY ???
oLead to understanding & commitment from
organizational members
oAppreciate having the opportunity to
contribute ideas
oTo gain a better understanding of their firm’s
industry, competitors, and markets
Cont.… Process of Performing

Gather competitive intelligence &

information about
“E,S,C,P,E,L,T,G,D”

Assimilated/incorporate
and evaluated
Cont.…

 Firstly:-
o A company must gather competitive intelligence &
information about:-
 Economic
 Social
 Cultural
 Political
 Environmental Key External Forces/
Factors
 Legal
 Technological
 Governmental
 Demographic
Cont.…
 Secondly:-
o Once information is gathered, it should be
assimilated & evaluated
o The key external factors should be listed on flip
charts/ chalkboard & request all managers to
rank the factors identified:-
 From 1 the most important opportunity/ threat
 To 20 for the least important opportunity/ threat
o Key external factors may vary over time & by
industry
Cont.…

o The variables commonly used include:-

 Market share
 Wideness of competitive products
 World economies
 Foreign affiliates
 Proprietary & key account advantages
 Price competitiveness
 Technological advancement
 Population shifts
 Interest rates
 The relationship with suppliers/distributors are often
a critical success factor
Cont.…

o These key external factors should be:-

 Important to achieving long-term & annual objectives
 Measurable
 Applicable to all competing firms
 Hierarchical in the sense that some will pertain to the
overall company & others will be more narrowly focused
on functional/ divisional areas
 Communicated & distributed widely in the organization
Key External Factors

The Industrial Organization (I/O) View

 The Industrial Organization (I/O) approach to
competitive advantage advocates that external
(industry) factors are more important than
internal factors in a firm for achieving
competitive advantage.
Economic Forces
 Have a direct impact on the potential attractiveness of
various strategies.
 Also cause discretionary income decline and the demand for
discretionary goods falls.
 It is also when the market rises, consumer business wealth
will expands.
 Key Economic Variable To Be Monitored.:
 Interest Rate
 Inflation Rates
 Unemployment Trend
 Import /Export factors
 Monetary Policy
Social, Cultural, Demographic, and Natural
Environmental Forces
 Changes in social, culture, demography &
environmental tends are shaping the way
American live, work, produce and consume.
 When new trends are creating a different type
of consumer and consequently, a need for
different product, services and strategies.
Political, Governmental, and Legal
Forces

 The increasing global interdependence among

economies, markets, governments, and
organizations makes it imperative that firms
consider the possible impact of political
variables on the formulation and
implementation of competitive strategies.
 Represented a key of opportunities or threats
for both small & large organizations.
Technological Forces
 Significance of IT authority: to control the IT department, and to
compete in 21st century.
•Chief Information Officer (CIO)
•Chief Technology Officer (CTO)
 The Internet has changed the very nature of opportunities and
threats by:
◦Transform the life cycles of products,
◦increasing the speed of distribution,
◦creating new products and services,
◦erasing limitations of traditional geographic markets.
 The Internet is altering economies of scale, changing entry barriers, and redefining
the relationship between industries and various suppliers, creditors, customers, and
competitors
Competitive Forces

 An important part of an external audit is identifying rival

firms and determining their strengths, weaknesses,
capabilities, opportunities, threats, objectives, and strategies

 Characteristics of the most competitive companies:

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
Competitive Intelligence Programs
Competitive intelligence (CI)
◦ A systematic and ethical process for gathering and
analyzing information about the competition’s
activities and general business trends to further a
business’s own goals
The three basic objectives of a CI program are:
1. to provide a general understanding of an industry and
its competitors
2. to identify areas in which competitors are vulnerable
and to assess the impact strategic actions would have
on competitors
3. to identify potential moves that a competitor might
make that would endanger a firm’s position in the
market
Sources of External Information
 Unpublished sources include customer
surveys, market research, speeches at
professional and shareholders’ meetings,
television programs, interviews, and
conversations with stakeholders.
 Published sources of strategic information
include periodicals, journals, reports,
government documents, abstracts, books,
directories, newspapers, and manuals.
Competitive Analysis:
‘Porter’s Five-Force Model’
Competitive Analysis:
‘Porter’s Five-Force Model’
It is competitive analysis model, which is a widely
used approach for developing strategies in many
industries. The intensity of competition among
firms varies widely across industries.
 Rivalry among existing firms is severe/brutal/harsh,
new rivals can enter the industry with relative ease,
and both suppliers and customers can exercise
considerable bargaining leverage.
 According to Porter, the nature of competitiveness
in a given industry can be viewed by using
composite of five forces
1. Rivalry Among Competing firms
 Strategies of one firm can be successful only when they
can provide competitive advantage over the strategies of
rival firms.
 Rivalry among the competing firms will increase when:
i. the numbers of competitors increase
ii. competitor become equal in size and capability
iii. demand for the product declines
iv. customer can switch brand easily

 Rival firms become weakness, and firm will benefits the

opportunity by increase in marketing and production
sector.
2.Potential Entry of New Competitor

 New firms can easily enter in a particular industry,

and will increase the intensity/power of
competitiveness among the firms.
 Barrier that facing by the new entry:
i. need to gain technology and specialized know-how
ii. lack of experience
iii. strong customer loyalty or strong brand preference
iv. large capital requirement
 When new entry has a strong capability, existing
firm’s will try to block the new entry
3. Potential Development of Substitute
Product
 firm are in close competence with the producer of
substitute products in other industry.
 appearance of substitute products puts a ceiling on
the price that can be charged
 competitive pressure arising from substitute
product increase as the relative price of substitute
products declines and customers cost of switching
decrease
 for example, producers of eyeglasses and contact
lenses are face increasing competitive pressures
from laser eye surgery.
4. Bargaining Power of Suppliers
 Occurs when large number of supplier, only few good
substitute raw materials and cost of switching raw
materials is high
 firms may use a backward integration strategy to gain
control of supplier
 In others industry, seller are use forging/counterfeiting
strategic partnership with supplier

(1) reduce inventory and logistics costs

(2) speed the availability of next-generation
components;
(3) enhance the quality of the parts and components
being supplied and reduce defect rates;
(4)squeeze out important cost savings for both
themselves and their suppliers.
5. Bargaining Power of Customers

 occurs when customers are concentrated or large in

number or buy in volume
 Bargaining power of customer is higher when
products being purchased are standard
 others firm will offer extended warranties or special
services to gain customer loyalty.
 Customer can negotiate selling price, warranty
coverage, and accessory packages to a greater extent
 Its affect the competitive advantage in certain
circumstances:
i. If they can inexpensively switch to competing
brands
ii. If they are particularly important to the seller
iii. If seller are struggling in the face of failing
consumer demand
iv. If they are informed about seller’s product, prices
and cost
v. If they have discretion in whether and when they
purchase the product
Forecasting Tools and Techniques

 Forecasts are educated assumption about the

future trends and events.
 need to allocate sufficient time and effort to study
the underlying bases for published forecasts and
develop internal forecasts of their own
 Accurate forecast will provide a major competitive
advantage for organizations
 Forecasting tools divided into two:

a) Quantitative techniques
 appropriate when historical data are available and
when the relationships among key variables are
expected to remain the same in the future.

a) Qualitative techniques
 forecasting is based on judgments, opinions,
intuition/perception, emotions, or personal experiences
and is subjective in nature.
Making Assumptions
 assumption is the best present estimates of the
impact of the major external factors

 give a significant impact on performance or the

ability to achieve desired results.

 Assumptions are needed only for future trends and

events that are most likely to have a significant
effect on the company’s business
What Is EFE Matrix
Strategies to summarize and evaluate:

Economic
Social
Cultural
Demographic
Environmental
Political
Governmental
Legal
Technological
Competitive information
 Steps To Develop EFE (External Factors
Evaluation) Matrix

 Step 1 : (List Key External Factors as Identified in

The External Audit Process).
-list 15 to 20 factors including
opportunities and threats that affect the firm
-can be in percentage, ratios or number
 Step 2 : Assign To Each Factor a Weight That
Ranges From 0.0 (Not Important) to 1.0 (Very
Important)
- the sum of all weights assigned to the factors
must equal 1.0

 Step 3 : Assign a Rating Between 1 and 4 To Each

Key External Factor
- Ratings are based on effectiveness of the
firm’s strategies
- 4 = superior, 3 = above average, 2 = average,
1 = poor
 Step 4 : Multiply Each Factor’s Weight By Its Rating To
Determine a Weighted Score

 Step 5 : Sum The Weighted Scores For Each Variable To

Determine The Total Weighted Score For the Organization.
- highest possible total weighted score is 4.0,
lowest possible score is 1.0 and the average
total weighted is 2.5
- score of 4.0 indicates that an organization is
responding in an outstanding way to existing
opportunities and threats in its industry
The Competitive Profile Matrix (CPM)

 Function:
- to identify a firm’s major competitor and its
particular strength & weakness in relation to a
sample firm’s strategies position
 Critical success factors include internal & external
issues.
 Ratings:
4 = major strength, 3 = minor strength,
2 = minor weakness, 1 = major weakness
 The ratings and total weighted scores for rival firms
can be compared to the sample firm