CHAPTER 3
The External Assessment
Strategic Management
COBSTRM
Bryan N. Bernabe, RN, LPT, MBA
Chapter Objectives
1. 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.
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Chapter Objectives (cont.)
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.
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External Audit
v External audit
9 focuses on identifying and evaluating trends
and events beyond the control of a single
firm
9 reveals key opportunities and threats
confronting an organization so that managers
can formulate strategies to take advantage of
the opportunities and avoid or reduce the
impact of threats
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The Nature of an External Audit
v The external audit is aimed at identifying
key variables that offer actionable
responses
v Firms should be able to respond either
offensively or defensively to the factors by
formulating strategies that take advantage
of external opportunities or that minimize
the impact of potential threats.
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A Comprehensive Strategic-Management
Model
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Key External Forces
External forces can be divided into five
broad categories:
1. economic forces
2. social, cultural, demographic, and natural
environment forces
3. political, governmental, and legal forces
4. technological forces
5. competitive forces
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Relationships Between Key External Forces and an
Organization
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The Process of Performing an
External Audit
v First, gather competitive intelligence
and information about economic, social,
cultural, demographic, environmental,
political, governmental, legal, and
technological trends.
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The Process of Performing an External Audit
v Information should be assimilated and
evaluated
v A final list of the most important key
external factors should be communicated
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The Process of Performing an External Audit
Key external factors should be:
1. important to achieving long-term and annual
objectives
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
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The Industrial Organization (I/O)
View
v 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.
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The Industrial Organization (I/O)
View
v Firm performance
is based more on Economies of scale
industry properties Barriers to market
entry
Product differentiation
The economy
Level of
competitiveness
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Economic Forces
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Advantages and Disadvantages of a Weak
Dollar
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Social, Cultural, Demographic, and Natural
Environmental Forces
v U.S. Facts
9 Aging population
9 Less white
9 Widening gap between rich & poor
9 2025 = 18.5% population > 65 years
9 2075 = no ethnic or racial majority
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Social, Cultural, Demographic, and Natural
Environmental Forces
v Facts
9 World population 7 billion
9 World population = 8 billion by 2028
9 World population = 9 billion by 2054
9 U.S. population > 310 million
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Key Social, Cultural, Demographic, and
Natural Environment Variables
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Political, Governmental, and Legal Forces
v 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.
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Political, Government, and Legal
Variables
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American Labor Unions
v The extent that a state is unionized can be a
significant political factor in strategic planning
decisions as related to manufacturing plant
location and other operational matters
v The size of American labor unions has fallen
sharply in the last decade due in large part to
erosion of the U.S. manufacturing base
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Technological Forces
The Internet has changed the very nature of
opportunities and threats by:
valtering the life cycles of products,
vincreasing the speed of distribution,
vcreating new products and services,
verasing limitations of traditional geographic
markets,
vchanging the historical trade-off between
production standardization and flexibility.
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Technological Forces
v The Internet is altering economies of
scale, changing entry barriers, and
redefining the relationship between
industries and various suppliers,
creditors, customers, and competitors
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Technological Forces
New technologies such as:
v the Internet of Things
v 3D printing
v the cloud
v mobile devices
v biotech
v analytics
v autotech
v robotics and
v artificial intelligence
are fueling innovation in many industries, and impacting
strategic-planning decisions.
Copyright ©2017
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Pearson Education,
Technological Forces
v Many firms now have a Chief
Information Officer (CIO) and a Chief
Technology Officer (CTO) who work
together to ensure that information
needed to formulate, implement, and
evaluate strategies is available where and
when it is needed
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Results of Technological Advances
1. Major opportunities and threats that must be considered in formulating
strategies.
2. Can affect organizations’ products, services, markets, suppliers,
distributors, competitors, customers, manufacturing processes, marketing
practices, and competitive position.
3. Can create new markets, result in new and improved products, change the
relative competitive cost positions, and render existing products and
services obsolete.
4. Can reduce or eliminate cost barriers between businesses, create shorter
production runs, create shortages in technical skills, and result in changing
values and expectations of employees, managers, and customers.
5. Can create new competitive advantages that are more powerful than
existing advantages.
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Competitive Forces
v An important part of an external audit is
identifying rival firms and determining
their strengths, weaknesses, capabilities,
opportunities, threats, objectives, and
strategies
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Competitive Forces
Characteristics of the most competitive
companies:
1. Strive to continually increase market share
2. Use the vision/mission as a guide for all decisions
3. Whether it's broke or not, fix it–make it better
4. Continually adapt, innovate, improve
5. Acquisition is essential to growth
6. Hire and retain the best employees and managers
possible
7. Strive to stay cost-competitive on a global basis
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Key Questions About Competitors
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Competitive Intelligence Programs
v Competitive intelligence (CI)
9 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
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Competitive Intelligence Programs
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
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Market Commonality and Resource
Similarity
v Market v Resource
commonality similarity
9 the number and 9 the extent to which
significance of the type and
markets that a firm amount of a firm’s
competes in with internal resources
rivals are comparable to
a rival
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The Five-Forces Model of
Competition
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The Five-Forces Model of
Competition
1. Identify key aspects or elements of each
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.
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The Five-Forces Model
v Rivalry among competing firms
9 Most powerful of the five forces
9 Focus on competitive advantage of strategies
over other firms
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The Five-Forces Model
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The Five-Forces Model
v Potential Entry of New Competitors
9 Barriers to entry are important
9 Quality, pricing, and marketing can overcome
barriers
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Barriers to Entry
v Need to gain economies of scale quickly
v Need to gain technology and specialized know-
how
v Lack of experience
v Strong customer loyalty
v Strong brand preferences
v Large capital requirements
v Lack of adequate distribution channels
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Barriers to Entry
v Government regulatory policies
v Tariffs
v Lack of access to raw materials
v Possession of patents
v Undesirable locations
v Counterattack by entrenched firms
v Potential saturation of the market
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The Five-Forces Model
v Potential development of substitute
products
9 Pressure increases when:
• Prices of substitutes decrease
• Consumers’ switching costs decrease
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The Five-Forces Model
v Bargaining Power of Suppliers is
increased when there are:
9 Large numbers of suppliers
9 Few substitutes
9 Costs of switching raw materials is high
v Backward integration is gaining control or
ownership of suppliers
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The Five-Forces Model
v Bargaining power of consumers
9 Customers being concentrated or buying in
volume affects intensity of competition
9 Consumer power is higher where products
are standard or undifferentiated
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Conditions Where Consumers Gain Bargaining
Power
1. If buyers can inexpensively switch
2. If buyers are particularly important
3. If sellers are struggling in the face of falling
consumer demand
4. If buyers are informed about sellers’ products,
prices, and costs
5. If buyers have discretion in whether and when
they purchase the product
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Sources of External Information
v Unpublished sources include customer
surveys, market research, speeches at
professional and shareholders’ meetings,
television programs, interviews, and
conversations with stakeholders.
v Published sources of strategic information
include periodicals, journals, reports,
government documents, abstracts, books,
directories, newspapers, and manuals.
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Sources of External Information
vhttp://finance.yahoo.com
v www.hoovers.com
v http://globaledge.msu.edu/industries/
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Forecasting Tools and Techniques
v Forecasts
9 educated assumptions about future trends
and events
9 quantitative, qualitative techniques
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Making Assumptions
v Assumptions
9 Best present estimates of the impact of major
external factors, over which the manager has
little if any control, but which may exert a
significant impact on performance or the
ability to achieve desired results.
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Business Analytics
vUsing software to mine huge volumes of data
vHelps executives make decisions
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Industry Analysis: The External Factor
Evaluation (EFE) Matrix
v Economic v Political
v Social v Governmental
v Cultural v Technological
v Demographic v Competitive
v Environmental v Legal
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EFE Matrix Steps
1. List key external factors
2. Weight from 0 to 1
3. Rate effectiveness of current strategies
from 1-4
4. Multiply weight * rating
5. Sum weighted scores
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EFE Matrix for a Local Ten-Theater Cinema Complex
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Industry Analysis: Competitive Profile Matrix
(CPM)
v Identifies firm’s major competitors and
their strengths & weaknesses in relation
to a sample firm’s strategic positions
v Critical success factors include internal
and external issues
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An Example Competitive
Profile Matrix
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Reference
• David, F. (2013). The external assessment. In Strategic
management: A competitive advantage approach, concept and
cases (14th ed., pp. 58-79). Upper Saddle River, NJ: Prentice
Hall: Pearson Education, Inc.
