MODULE 4

CHALLENGES IN THE EXTERNAL ENVIRONMENT

EXTERNAL FACTOR EVALUATION (EFE)
COMPETITIVE PROFILE MATRIX (CPM)

OBJECTIVES
After going through this module, you are expected to:

1. Define key terms and concepts.

2. Discuss the importance of monitoring external trends and events.
3. Describe how to conduct an external strategic-management audit.
4. Explain the Industrial/Organization (I/O View) approach to competitive advantage.
5. Identify the Political, Economic, Social, Technological, Legal and Environmental
(PESTLE) forces affecting the country.
6. Construct an External Factor Evaluation (EFE) Matrix.
7. Develop a Competitive Profile Matrix (CPM).

PRELIMINARY ACTIVITY
Indicate whether the following is an Internal or External Force:

____________ 1. Competitors ____________ 11. Employees

____________ 2. Products or Services ____________ 12. Economy
____________ 3. Suppliers ____________ 13. Policies
____________ 4. Labor Unions ____________ 14. Laws
____________ 5. Creditors ____________ 15. Technology
____________ 6. Government ____________ 16. Distributors
____________ 7. Trade Associations ____________ 17. Retailers
____________ 8. Culture ____________ 18. Stockholders
____________ 9. Customers ____________ 19. Innovation
____________ 10. Resources (5 Ms) ____________ 20. Company
Reputation
 DISCUSSION
Introduction

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. As the term finite suggests, the
external audit is not aimed at developing an exhaustive list of every possible factor that
could influence the business; rather, it is aimed at identifying key variables that offer
actionable responses.

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.

4.1 Key Terms and Concepts

External Environment - The external environment is the factors outside a business
that can affect its operation by influencing its activities and choices and determine its
opportunities and risks.

Environmental Scanning - is the study and interpretation of the forces existing in the
external and internal environments.

- careful monitoring of the surroundings with the end goal of ascertaining early
indications of prospects and challenges that may influence the organization's present
and future plans.

Competitors - are other businesses who can offer the same or similar goods and
services to your customers.

Industrial Organization (I/O) Approach - advocates that external (industry) factors are
more important than internal factors in a firm for achieving competitive advantage.

PESTLE Forces - refers to the Political, Economic, Socio-Cultural, Technological, Legal

and Environmental forces affecting the business.

External factor evaluation (EFE) Matrix - allows strategists to summarize and

evaluate political, economic, social, technological, legal, and environmental information.
Competitive Profile Matrix (CPM) - identifies a firm’s major competitors and its
particular strengths and weaknesses in relation to the firm’s strategic position.

4.2 Importance of Monitoring External Trends and Events

External monitoring educates the organization by making them more aware of the
following:

the concerns of customers and clients

● availability of suppliers and vendors

● actions and trends of competitors

● market trends

● economic conditions

● government policies

▪ technological developments.

4.3 The Process of Performing and External Audit

The process of performing an external audit must involve as many managers and
employees as possible. Involvement in the strategic-management process can lead to
understanding and commitment from organizational members. individuals appreciate
having the opportunity to contribute ideas and to gain a better understanding of their
firm’s industry, competitors, and markets.

To perform an external audit, a company first must gather competitive intelligence

and information about economic, social, cultural, demographic, environmental, political,
governmental, legal, and technological trends. individuals can be asked to monitor
various sources of information, such as key magazines, trade journals, and
newspapers. These persons can submit periodic scanning reports to a committee of
managers charged with performing the external audit. This approach provides a
continuous stream of timely strategic information and involves many individuals in the
external-audit process. The internet provides another source for gathering strategic
information, as do corporate, university, and public libraries. Suppliers, distributors,
salespersons, customers, and competitors represent other sources of vital information.
 Once information is gathered, it should be assimilated and evaluated. a meeting
or series of meetings of managers is needed to collectively identify the most important
opportunities and threats facing the firm. These key external factors should be listed on
flip charts or a chalkboard. A prioritized list of these factors could be obtained by
requesting that all managers rank the factors identified, from 1 for the most important
opportunity or threat to 10 for the least important opportunity or threat. These key
external factors can vary over time and by industry. Relationships with suppliers or
distributors are often a critical success factor. Other variables commonly used include
market share, breadth of competing products, world economies, foreign affiliates,
proprietary and key account advantages, price competitiveness, technological
advancements, population shifts, interest rates, and pollution abatement.

4.4 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. Proponents of the I/O view, such as Michael Porter,
contend that organizational performance will be primarily determined by industry forces.
Porter’s Five-Forces Model, presented in the next module, 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. competitive advantage is
determined largely by competitive positioning within an industry, according to I/O
advocates. Managing strategically from the 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. I/O
research provides important contributions to our understanding of how to gain
competitive advantage.

I/O theorists contend that external factors and the industry in which a firm
competes has a stronger influence on the firm’s performance than do the internal
functional issues in marketing, finance, and the like. Firm performance, they contend, is
based more on industry properties such as economies of scale, barriers to market entry,
product differentiation, the economy, and level of competitiveness than on internal
resources, capabilities, structure, and operations. The USA’s recent economic recovery
having such a positive impact on both strong and weak firms adds credence to the
notion that external forces are more important than internal. The I/O view has enhanced
the 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.
4.5 The External Environment
The external environment today is highly complex. This fundamental paradigm
conspicuously characterizes the global scenario. Nations possess different levels of
growth and development.

Political Forces

There are crucial concerns confronting nations today. Geopolitical issues have
become the focus of major political powers. Some of these issues are bureaucracy,
corruption level, freedom of the press, government stability and related changes,
terrorism, suicide bombings, global alliances, and chemical and nuclear warfare. These
critical problems are affecting the global political balance.

Examples of Political Forces

● Bureaucracy - implies a complex structure with multiple layers and procedures

that make decision making slow. These systems and procedures are designed to
maintain uniformity and control within an organization. A bureaucracy describes
the established methods in large organizations or governments.
● Corruption level - Corruption is the abuse of entrusted power for private gain.
Corruption erodes trust, weakens democracy, hampers economic development
and further exacerbates inequality, poverty, social division and the environmental
crisis. The perceived level of corruption is measured in a scale from 0 (highly
corrupt) to 10 (clean). The CPI was created and used by Transparency
International, an international non-governmental organization established in 1993
with the aim of bringing together business, civil society, and government
structures to combat corruption.
● Freedom of the press - Freedom of the press refers to the freedom to criticize
the government without suffering official interference or punishment, before or
after publication.
● Government stability and related changes - Government stability quantifies
the government functioning in office and reduced risks of violence motivated by
political interests. It also checks the independence of the government from social
pressures from different political entities in the country.
● Terrorism - Terrorism refers to the unlawful use of violence or threats to intimidate
or coerce a civilian population of government, with the goal of furthering political,
social or ideological objectives.
● Chemical and Nuclear Threats - Chemical and nuclear threats can cause
damage, destroy, or contaminate an extraordinarily wide area or inflict wide-scale
sickness, death, or injury.
● Global Alliances - Politically, nations are aligning themselves for
self-preservation and more so, for global stability and strength. Today, no nation
 attempts to stand alone because global relationships are essential to national
survival. European nations have bonded themselves as the European Union
(except United Kingdom) The same is true with ASEAN countries (Brunei,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore,
Thailand, and Vietnam)

Economic Forces

Economic Forces refer to the nature and direction of the economy in which

business operates. Economic factors have a direct impact on the potential
attractiveness of various strategies. For example, with interest rates, funds needed for
capital expansion are less costly. as interest rates rise, discretionary income declines,
and the demand for discretionary goods falls. When stock prices increase, the
desirability of equity as a source of capital for market development increases. When the
market rises, consumer and business wealth expands.

Table 10

Key Economic Variables to be Monitored

Availability of Credit Interest Rates Demand/Supply

Level of Disposable Inflation Rates Recession
Income
Propensity of people to Money Market Rates Demand shifts for different
spend categories of goods and
services
Government budget Stock Market Trends Income differences by region
deficits and consumer groups
Gross Domestic Product Exchange Rates Foreign countries’ economic
Trend conditions
Unemployment Trends Import/Export Factors Value of dollar in the world
markets
Worker productivity levels Price Fluctuations Wages

Socio-Cultural Forces

Social and cultural factors affecting business include belief systems and

practices, customs, traditions and behaviors of all people in given country, fashion
trends and market activities influencing actions and decisions. Socio-cultural
perspective is one of the most important factor influencing
decision of marketing managers and strategic goals of companies entering new foreign
markets.
 Table 11

Key Social Variables to be Monitored

Social Classes and their influence in the Susceptibility to influence

society
Average retirement age (for men and Social Organization (communities,
women) social groups, gangs, ad-hoc
gatherings, etc.)
Access to Education (free, paid) Social Mobility
Level and Access to health care Population size and rate of growth
Level of Education Job market mobility and attitude to work
Reputation of company in society Age Distribution
Conflicts within society Wealth and income disparities

Table 12

Key Cultural Variables to be Monitored

Fashion Trends Time and Punctuality

Lifestyle Customs and Taboos
Social Media Influence (Vlogging, Popular Actors, music styles, design
blogging, etc) vs. Traditional Media forms, etc.
(Press, TV, Radio)
Language Business Norms
Religion Values and Attitude

Technological Forces

Technological factors refers to the influences that developments in technology

have on consumers, business and society in general. Some positive technological
forces include increased leisure time, improved communication and better
management information systems, while some negatives might include increased
unemployment and information abuse
 Table 13

Key Technological Variables to be Monitored

Automation BlockChain Technology

The existence of 5G Technology Cloud Computing
Computer calculation speed/power Security in cryptography
Engine efficiency Mobile Payments
Internet connectivity Digital Banking
Inventory control system Innovation Potential

Legal Forces

Legal factors are external factors which refer to how the law affects the way

businesses operate and customers behave. Business is considered as a legal entity,
and to maintain that entity; businesses have to follow some laws that are imposed by
the government. Laws are made to protect a nation and its people from unfairness and
anarchy. And as businesses work by and with people, there are separate laws for
businesses as well, so that no one can use that for personal benefits.

Table 14

Key Legal Variables to be Monitored

Consumer Law Universal Health Care Law

RA 7394 (Consumer Act of the Philippines of
1991) as the legal basis for consumer protection in
the country.
RA 11223 (Universal Health Care Act) UHC
means all Filipinos are guaranteed equitable
access to quality and affordable health care
goods and services, and protected against
financial risk.

Employment Law Anti Money Laundering Act (AMLA)

The Labor Code of the Philippines stands as the RA 9160 (Anti Money Laundering Act of 2001)
law governing employment practices and labor mandated to investigate money laundering and
relations in the Philippines. other violations of the AMLA 

Tax Law Cybercrime Law

RA 7394 (Tax Reform for Acceleration and RA 10175 (Cybercrime Prevention Act of 2012)
Inclusion)

Copyright Law Ecological Solid Waste Management Act

RA 8293 (Intellectual Property Code of the RA 9003 (Ecological Solid Waste Management
Philippines) Act of 2000) aims to adopt a systematic,
comprehensive and ecological solid waste
management program that ensures the
protection of public health and environment.

Monetary Policies Export and Import limitations

Fiscal Policies Banking Law

Number of Patents Advertisement Law

Environmental Forces

Environmental factors can be explained as identifiable elements within the

cultural, economic, demographic, physical, technological or political environment
which impacts the growth, operations and survival of an organization. 

Table 15

Key Environmental Variables to be Monitored

Climate Recycling
Climate change Waste Disposal
Weather Natural resources
Pollution Geography
Availability of non-renewable goods Green Agenda

4.6 External Factor Evaluation (EFE)

An external factor evaluation (EFE) matrix allows strategists to summarize and evaluate
political, economic, social, technological, legal, and environmental information. An EFE
Matrix can be developed in five steps:

1. List key external factors as identified in the internal-audit process. Use a total of 10
internal factors, including both opportunities and threats . List opportunities first and
then threats. Be as specific as possible, using percentages, ratios, and comparative
numbers. recall that Edward Deming said: “In God we trust. Everyone else brings data.”
Include “actionable” factors that can provide insight regarding strategies to pursue.
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.

4. Multiply each factor’s weight by its rating to determine a weighted score for each
variable.

5. Sum the weighted scores for each variable to determine the total weighted score for
the organization.
Table 16

External Factor Evaluation (IFE) Matrix of McDonald's

Key External Factors Weight Rating Weighted

Score

Opportunities:

1. Global Expansion. .15 4 .60

2. Introduce new, innovative and healthier menus. .15 2 .30

3. Rebuild the brand image. .10 2 .20

4. Increase of two-income households .10 3 .30

5. Increase in demand for home delivery services. .10 3 .30

Threats:

1. Steep competition. .10 3 .30

2. Increase of health conscious customers. .05 2 .10

3. Global Economic Recession. .10 3 .30

4. Localization challenges in certain international markets. .05 3 .15

5. New regulations from governments around the world put .10 2 .20
restrictions on fast food to curb obesity.

Total 1.0 2.75

4.7 Competitive Profile Matrix (CPM)

The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and its
particular strengths and weaknesses in relation to the firm’s strategic position. The
weights and total weighted scores in both a CPM and an EFE have the same meaning.
However, critical success factors in a CPM include both internal and external issues;
therefore, the ratings refer to strengths and weaknesses, where 4 = major strength, 3 =
minor strength, 2 = minor weakness, and 1 = major weakness. The critical success
factors in a CPM are not grouped into opportunities and threats as they are in an EFE.
In a CPM, the ratings and total weighted scores for rival firms can be compared to the
sample firm. This comparative analysis provides important internal strategic information.
avoid assigning the same rating to firms included in your CPM analysis.

Examples of Critical Success Factors:

Advertising Product Quality Price Competitiveness

Management Experience Financial Position Customer Loyalty

Global Expansion Market Share Inventory System

Sales Distribution Organization Structure Production Capacity

Customer Service Low cost structure Brand Reputation

Range of Product line Customer Retention Superior IT Capabilities

Positioning Location
 Table 17

Competitive Profile Matrix (CPM) of McDonald's

REFERENCES:

Strategic Management Concepts and Cases (Global Edition) by Fred David and Forest
David, Pearson Education, 2015

Strategic Management Made Simple by Felina Young, Rex Book Store, 2015

https://ceopedia.org/index.php/Social_and_cultural_factors_affecting_business

https://pestleanalysis.com/technological-factors-affecting-business/

https://slideplayer.com/slide/14093841/
 POST- ACTIVITY
Develop a CPM for Michelin (Read Page 226)

Monitoring competitors’ performance and strategies is a key aspect of an external audit.

This exercise is designed to give you practice evaluating the competitive position of
organizations in a given industry and assimilating that information in the form of a CPM.

Instructions
Step 1 Gather information about Michelin Corporation.
Step 2 On a separate sheet of paper, prepare a CPM that includes Michelin and its two
leading competitors: Bridgestone Corporation, and Good Year Tire and Rubber
Company.

Answer the following questions:

1. Michelin has been very successful in the last decade. In your opinion, what strategy
changes would Michelin need in 2021?
2. Regarding political, economic, social, technological, legal and environmental, list in
specific factors that you feel most greatly impact Michelin's business.

EVALUATION
Read the Cohesion Case - Adidas Group 2013 (Strategic Management by David and
David pages 58 - 69)

Prepare:

1. External Factor Evaluation (EFE) Matrix of Adidas Group - 2013

2. Competitive Profile Matrix (CPM)