Strategic Management
Lecture 4:
The External Assessment
External Strategic
Management Audit
– Environmental Scanning
– Industry Analysis
External Strategic
Management Audit
Identify & evaluate factors beyond the
control of a single firm
Increased foreign competition
Population shifts
Aging society
Fear of traveling
Stock market volatility
The Nature of an External Audit
The purpose of an external audit is to
develop a finite list of opportunities that could
benefit a firm and threats that should be
avoided.
It is aimed at identifying key variables that
offer actionable responses. Firms should be
able to respond by formulating strategies that
take advantage of external opportunities or
that minimize the impact of potential threats.
External Strategic
Management Audit
Purpose of an External Audit
Develop a finite list of
opportunities that could benefit a firm
threats that should be avoided
External Audit
Gather competitive intelligence
Assimilate information
Evaluate
Resulting in a list of the most
important key external factors
Performing External Audit
Long-term Orientation
Measurable
External
Factors Applicable to
Competing Firms
Hierarchical
Performing External Audit
Key external factors should be
1)Important to achieving long-term and annual
objectives
2)Measurable
3)Applicable to all competing firms
4)Hierarchical in the sense that some will pertain
to the overall important key external factors
should be communicated throughout the
organization
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 achieving competitive
advantage.
I/O perspective entails firms striving to compete
in attractive industries, avoiding weak or faltering
industries, and gaining a full understanding of
key external factor relationships within that
attractive industry.
The Industrial Organization (I/O)
View
The I/O view has enhanced our understanding
of strategic management. However, it is not a
question of whether external or internal factors
are more important in gaining and maintaining
competitive advantage. Effective integration
and understanding of both external and
internal factors is the key to securing and
keeping a competitive advantage
Economic Forces
Economic Challenges
Inconsistency in government policies,
poor law enforcement conditions,
unfriendly business environment, and
selective judiciary system are some of the
main challenges that Pakistan is facing to
attract investors.
Social, Cultural, Demographic, and
Natural Environmental Forces
Facts
Young population
Widening gap between rich and poor
Family plays a central role in Pakistani society.
Plethora of cheap labor supplies.
Social challenges like gender discrimination, a
lower healthcare system, poor transportation,
poor literacy rate.
Political, Governmental, and
Legal Forces
Government Regulation
Key opportunities & threats
Tax rates
Lobbying activities
Petrol Prices and rising prices
Political, Governmental, and
Legal Forces
Government Regulation
Key opportunities & threats
Pakistan also has a very unstable political
environment. For instance, frequent conflict
and disagreement between the government
and opposition, protests and strikes.
Technological Forces
Major Impact –
•Internet
•Social media
•Pakistan requires a huge investment to
develop an entrepreneurial and innovative
mindset, tech literacy, and digital skill.
Technological Forces
Competitive Forces
Collection & evaluation of data on
competitors is essential for successful
strategy formulation
Competitive Forces
Identify Rival Firms’
•Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies
Key Questions Concerning
Competitors
Their strengths
Their weaknesses
Their objectives and strategies
Their responses to external variables
Their vulnerability to our alternative
strategies
Our vulnerability to strategic counterattack
Key Questions Concerning
Competitors
Our product/service positioning
Entry and exit of firms in the industry
Key factors for our current position in industry
Sales/profit ranking of competitors over time
Nature of supplier and distributor
relationships
The threat of substitute products/services
Competitive Intelligence
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
Objectives of Competitive
Intelligence
Provide a general understanding of industry
and competitors
Identify areas where competitors are
vulnerable and assess impact of actions on
competitors
Identify potential moves that a competitor
might make
Sources of Competitive Intelligence
Internet Consultants
Employees Trade journals
Managers Want ads
Suppliers Newspaper articles
Distributors Government filings
Customers Competitors
Creditors
Steps to Determine if an Acceptable
Profit Can Be Earned
1. Identify key aspects or elements of each
competitive force
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
The Five-Forces Model of Competition
The Five-Forces Model of Competition
The Five-Forces Model
Rivalry among competing firms
Most powerful of the five forces
Focus on competitive advantage of
strategies over other firms
Conditions that Cause High Rivalry
Among Competing Firms
High number of competing firms
Similar size of firms competing
Similar capability of firms competing
Falling demand for the industry’s products
Falling product/service prices in the
industry
Conditions that Cause High Rivalry
Among Competing Firms
Consumers can switch brands easily
Barriers to leaving the market are high
Barriers to entering the market are low
Fixed costs are high among firms
competing
The product is perishable
Conditions that Cause High Rivalry
Among Competing Firms
Rivals have excess capacity
Consumer demand is falling
Rivals have excess inventory
Rivals sell similar products/services
Mergers are common in the industry
The Five-Forces Model
Potential development of substitute
products
Pressure increases when:
Prices of substitutes decrease
Consumers’ switching costs
decrease
The Five-Forces Model
Bargaining Power of Suppliers is
increased when there are:
Large numbers of suppliers
Few substitutes
Costs of switching raw materials is high
Backward integration is gaining control or
ownership of suppliers
The Five-Forces Model
Bargaining power of consumers/buyers
Customers being concentrated or
buying in volume affects intensity of
competition
Consumer power is higher where
products are standard or
undifferentiated
Conditions Where Consumers Gain
Bargaining Power
If buyers can inexpensively switch
If buyers are particularly important
If sellers are struggling in the face of falling
consumer demand
If buyers are informed about sellers’
products, prices, and costs
If buyers have discretion in whether and
when they purchase the product
Sources of External Information:
Unpublished Sources
Customer surveys
Market research
Speeches at professional
or shareholder meetings
Television programs
Interviews and
conversations with
stakeholders
Sources of External Information:
Published Sources
Periodicals
Journals
Reports
Government documents
Abstracts
Books
Directories
Newspapers
Manuals
Sources of External Information:
Web Sites
http://marketwatch.multexinvestor.com
http://moneycentral.msn.com
http://finance.yahoo.com
www.clearstation.com
https://us.etrade.com/e/t/invest/markets
www.hoovers.com
Industry Analysis: The External Factor
Evaluation (EFE) Matrix
By analysing the external environment with
the tools like PESTLE analysis, Porter’s Five
Forces etc the key external factors can be
identified.
Industry Analysis: The External Factor
Evaluation (EFE) Matrix
Economic Political
Social Governmental
Cultural Technological
Demographic Competitive
Environmental Legal
Industry Analysis EFE
Total weighted score of 4.0
Organization response is outstanding to threats and weaknesses
Total weighted score of 1.0
Firm’s strategies not capitalizing on opportunities or avoiding
threats
EFE Matrix Steps
1. List key external factors
2. Weight from 0 (Low importance) to 1(High importance).
Sum of all weight must equal 1.
3. Rate effectiveness of current strategies
1. The ratings in external matrix refer to how effectively company’s
current strategy responds to the opportunities and threats.
2. The numbers range from 4 to 1, where 4 means a superior
response, 3 – above average response, 2 – average response
and 1 – poor response.
4. Multiply weight * rating
5. Sum weighted scores
EFE Matrix Steps
Separate factors should not be given too much
emphasis (assigning a weight of 0.30 or more)
because the success in an industry is rarely
determined by one or few factors.
EFE Matrix for a University
Industry Analysis: Competitive
Profile Matrix (CPM)
Identifies firm’s major competitors and their strengths
& weaknesses in relation to a sample firm’s strategic
positions
Critical success factors include internal and external
issues
Industry Analysis: Competitive
Profile Matrix (CPM)
Identifies firm’s major competitors and their strengths
& weaknesses in relation to a sample firm’s strategic
positions.
Critical success factors include internal and external
issues
CPM Matrix for a University
