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OBJECTIVES
❖ Describe the nature and purpose of ❖ Identify and discuss 10 external The purpose is to develop a
an external assessment in forces that must be examined in The Nature of an finite list of opportunities
formulating strategies. formulating strategies
External Audit/
❖ Explain Porter’s Five Forces Model
❖ Describe key sources of information
used for locating vital external
Environmental
and its relevance in formulating
strategies.
information. scanning/
❖ Explain how to develop and use an
Industry analysis Firms should be able to Term finite suggests-
❖ Discuss forecasting tools and External Factor Evaluation (EFE)
respond either identifying key variables
techniques. Matrix. offensively or that offer actionable
defensively responses

Miss Gulnaz ❖ Explain how to develop and use a

Competitive Profile Matrix.

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Key External Forces

Key External Forces Key External Forces
specific (i.e.,
quantified to the
extent possible)

factors Should be
stated as external
actionable (i.e.,
trends, events, or
meaningful in terms
facts rather than as
of having strategic
strategies the firm
implications) and
could pursue.

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Key External Forces

Key External Forces

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Shift to a Level of Propensity of

Availability of Money market
service disposable people to Interest rates Inflation rates
credit rates
economy income spend

Federal Worker Value of the

Gross domestic Consumption Unemployment Stock market
government productivity dollar in world
product trend patterns trends trends
budget deficits levels markets

Foreign
Income
countries’ Import/export Demand shifts consumer Price
and services differences by
economic factors of goods groups fluctuations
region and
conditions

Export of labor
Monetary
and capital Fiscal policies Tax rates
policies
from the

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Political, Governmental, and Legal Forces

Population changes by Regional changes in Number of marriages Number of divorces Key Impact of Strategists in a The increasing Globalization of
race, age, and tastes and preferences Attitudes toward Attitudes toward opportunities & political variables global economy global Industry:
geographic area Energy conservation product quality customer service key threats interdependence
•Formulation of •Forecast political among economies, •Worldwide trend
•Antitrust Strategies climates markets, toward similar
legislation •Implementation •Legalistic skills governments, and consumption
(Microsoft) of Strategies •Diverse world organizations patterns
Immigration and Social Security •Tax rates cultures makes it •Global buyers &
Number of births Number of deaths emigration rates programs Social •Lobbying efforts imperative that sellers
Energy conservation programs •Patent laws firms consider the •E-commerce
possible impact of •Instant
political variables transmission of
on the formulation money &
Social media and information
Life expectancy rates Per capita income pervasiveness Social implementation of across continents
responsibility issues competitive
strategies.

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Political, Governmental, and Legal Variables Technological Forces

Government Voter
Number,
severity, and
Technological Forces
Changes in tax Political action
regulations or
laws
Special tariffs
committees
participation location of Technological advancement, e.g.,
deregulations rates government
protests Internet of Mobile Artificial
• Technological advancements can create new markets, result in a
3D printing The cloud Biotech Analytics Autotech Robotics,
things devices intelligence • proliferation of new and improved products,
Environmental Level of Legislation on Level of • change the relative competitive cost positions in an industry,
Number of Changes in
protection defense equal government
patents patent laws
laws expenditures employment subsidies • and render existing products and services obsolete.
• In high-tech industries, identification and evaluation of key
Government Political technological opportunities and threats can be the most important
Antitrust Intercountry Import–export fiscal and conditions in
Special local, The internet has changed the very nature of opportunities and threats part of the external strategic-management audit.
state, and
legislation relationships regulations monetary foreign
federal laws by
policy changes countries • Not all sectors of the economy are affected equally by technological
Changing the historical
Erasing limitations of trade-off between
developments.
Location and Altering the life cycles Increasing the speed Creating new products
Size of World oil, Local, state, traditional geographic production
Lobbying severity of of products, of distribution, and services,
markets, standardization and
government currency, and and national
activities terrorist flexibility.
budgets labor markets elections
activities

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Competitive Forces Key Questions about Competitors: Seven characteristics of most competitive companies
Strive to continually increase market share.

Their responses Our vulnerability to Use the vision/mission as a guide for all decisions.
Identifying rival to all external Their vulnerability successful strategic
Their Their Their objectives counterattack Our
firms: variables to our alternative product and service
“Collection and strengths weaknesses and strategies
strategies Continually strive to improve everything about the firm.
•Strengths (e.g. social, political, positioning relative
evaluation of Competition in demographic, etc.) to competitors
information on virtually all •Weaknesses
competitors is industries can be •Capabilities broke or not, fix it. Continually adapt, innovate, improve
essential for described as •Opportunities
successful strategy intense •Threats Strive to grow through acquisition
formulation” Sales and profit
•Objectives Entry and exit of
Key factors for our
rankings of
Nature of supplier The threat of
current position in and distributor substitute products
•Strategies firms in the industry
industry
competitors over
relationships or services Hire and retain the best employees and managers possible.
time

Strive to stay cost-competitive on a global basis.

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Competitive Intelligence (CI) Programs Hire top executives from rival firms.
Basic objectives of CI
Various legal and Reverse engineer rival firms’ products.

ethical ways to Use surveys and interviews of customers, suppliers, To provide a general understanding of an industry and its
obtain and distributors. competitors,

competitive Conduct drive-by and on-site visits to rival firm

operations.
intelligence To identify areas in which competitors are vulnerable and to
Search online databases. assess the impact strategic actions would have on competitors,

Contact government agencies for public information

about rival firms. To identify potential moves that a competitor might make that would
Systematically monitor relevant trade publications, endanger a firm’s position in the market
magazines, and newspapers.

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Misperceptions about business intelligence Sources of External •Customer surveys, The External Factor Evaluation (EFE) Matrix
•Market research,
Information •Speeches at
Running an intelligence program requires lots of people, computers, and professional and
shareholders’ meetings,
other resources. Unpublished •Television programs, A widely used strategic
sources •Interviews,
• The Internet has become an excellent medium for gathering competitive intelligence. planning analytical tool
•Conversations with
stakeholders designed to summarize and
Collecting intelligence about competitors violates antitrust laws; business evaluate economic, social,
intelligence equals espionage. cultural, demographic,
• Competitive intelligence is not corporate espionage because 95 percent of the information a •Periodicals, environmental, political,
company needs to make strategic decisions is available and accessible to the public. •Journals, governmental, legal,
Published sources •Reports,
of •Government
technological, and competitive
Intelligence gathering is an unethical business practice. documents, information
•Abstracts, books,
• Unethical tactics such as bribery, wiretapping, and computer break-ins should never be used •Directories,
to obtain information. •Newspapers,
•Manuals.

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The External Factor Evaluation (EFE) Matrix The Internal Factor Evaluation (IFE) Matrix The External Factor Evaluation (EFE) Matrix

❖ List key external factors as identified in the Step 2: ❖ The weight indicates the relative importance of that
Step • Assign a rating between 1 and 4 to each key
external-audit process factor to being successful in the firm’s industry. external factor to indicate how effectively the
Step 1: ❖ Include a total of 15 to 20 factors, including Assign a ❖ Opportunities often receive higher weights than
3: firm’s current strategies respond to the factor,
where
both opportunities and threats, that affect threats, but threats can receive high weights if they
List key the firm and its industry weight are especially severe or threatening. • 4 = the response is superior

External ❖ List the opportunities first and then the

threats
that ❖ Appropriate weights can be determined by
comparing successful with unsuccessful competitors
Assign • 3 = the response is above average,
• 2 = the response is average
factors ❖ Be as specific as possible, using percentages,
ranges or by discussing the factor and reaching a group
a • 1 = the response is poor.
consensus.
ratios, and comparative numbers whenever from 0.0 ❖ The sum of all weights assigned to the factors must
possible.
to 1.0 equal 1.0. rating

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The Five-Forces Model of Competition

The External Factor Evaluation (EFE) Matrix The External Factor Evaluation (EFE) Matrix
Potential development
of substitute products

Step 4: Step 5:
Multiply each
Sum the weighted scores for Bargaining power Rivalry among Bargaining power
factor’s weight by its of suppliers competing firms of consumers
each variable to determine
rating to determine
a weighted score for the total weighted score for
each variable the organization
Potential entry of new competitors

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The Competitive Profile Matrix (CPM) The weights and total weighted scores in both a
CPM and EFE have the same meaning. However,
the factors in a CPM include both internal and
external issues

The Competitive Profile Matrix (CPM) Differences between the EFE and CPM.
identifies a firm's major competitors • the critical success factors in a CPM are
broader; they do not include specific or
and their particular strengths and factual data and even may focus on
weaknesses in relation to a sample internal issues.
firm's strategic position. • The critical success factors in a CPM also
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.

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