MODULE 3

THE EXTERNAL ASSESSMENT

LEARNING OBJECTIVES

After studying this chapter, you should be able to do the following:

1. Discuss the nature and role of labor unions in the USA as a corporate strategic issue.

2. Describe how to conduct an external strategic-management audit.

3. Discuss 10 major external forces that affect organizations: economic, social, cultural,
demographic, environmental, political, governmental, legal, technological, and
competitive.

4. Describe key sources of external information.

5. Discuss important forecasting tools used in strategic management.

6. Discuss the importance of monitoring external trends and events.

7. Explain how to develop an EFE Matrix.

8. Explain how to develop a Competitive Profile Matrix.

9. Discuss the importance of gathering competitive intelligence.

10. Describe the trend toward cooperation among competitors.

11. Discuss market commonality and resource similarity in relation to competitive

analysis.

SUGGESTED READINGS

 Strategic Management: A Competitive Advantage Approach, Concepts and Cases, 6th Ed.,
Fred R. David/Forest R. David (Chapter 7)
 Professor’s PPT
 MODULE 3
THE EXTERNAL ASSESSMENT

THE EXTERNAL AUDIT

- External audit focuses on identifying and evaluating trends and events beyond the control of
a single firm.
- It 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.

THE PURPOSE AND NATURE OF EXTERNAL AUDIT

- The purpose of an external audit is to develop a finite list of opportunities that could benefit
a firm as well as 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.

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

RELATIONSHIP BETWEEN KEY EXTERNAL FORCES AND AN ORGANIZATION

 Changes in external forces translate into changes in consumer demand for both
industrial and consumer products and services. External forces affect the types of
products developed, the nature of positioning and market segmentation strategies,
the type of services offered, and the choice of businesses to acquire or sell.
 External forces have a direct impact on both suppliers and distributors. Identifying
and evaluating external opportunities and threats enables organizations to develop
a clear mission, to design strategies to achieve long-term objectives, and to develop
policies to achieve annual objectives.
 THE PROCESS OF PERFORMING AN EXTERNAL AUDIT

 First, gather competitive intelligence and information about economic, social,

cultural, demographic, environmental, political, governmental, legal, and
technological trends.
 Information should be assimilated and evaluated.
 A final list of the most important key external factors should be communicated.

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

THE INDUSTRIAL ORGANIZATION (I/O) VIEW

 The Industrial Organization view of strategic planning advocates that external

(industry) factors are more important than internal ones for gaining and sustaining
competitive advantage.
 Proponents of the I/O view, such as Michael Porter, contend that organizational
performance will be primarily determined by industry forces, such as falling gas
prices that no single firm can control.
 Firm performance is based more on industry properties.

TEN (10) EXTERNAL FORCES THAT AFFECTS AN ORGANIZATION

1. Economic Forces
 Economic factors have a direct impact on the potential attractiveness of various
strategies. For example, high underemployment (minimum wage-type employment)
in the United States bodes well for discount firms such as Dollar Tree, T.J. Maxx,
Walmart, and Subway, but hurts thousands of traditional-priced retailers in many
industries.
2. Social, Cultural, Demographic, And Natural Environment Forces
 Social, cultural, demographic, and environmental changes impact strategic decisions
on virtually all products, services, markets, and customers.
  Small, large, for-profit, and nonprofit organizations in all industries are being
staggered and challenged by the opportunities and threats arising from changes in
social, cultural, demographic, and environmental variables.
3. 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.
4. Technological Forces
 A variety of new technologies are fueling innovation in many industries, and
impacting strategic-planning decisions.
5. Competitive Forces
 An important part of an external audit is identifying rival firms and determining their
strengths, weaknesses, capabilities, opportunities, threats, objectives, and
strategies.
 Collecting and evaluating information on competitors is essential for successful
strategy formulation.
 Characteristics of the most competitive companies:
1. Market share matters
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. People make a difference
7. Strive to stay cost-competitive on a global basis

COMPETITIVE INTELLIGENCE PROGRAMS START

 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 competitor 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.

MARKET COMMONALITY AND RESOURCE SIMILARITY

 Market commonality
- The number and significance of markets that a firm competes in with rivals
  Resource similarity
- The extent to which the type and amount of a firm’s internal resources are
comparable to a rival

PORTER’S FIVE-FORCES MODEL OF COMPETITION

- Porter’s Five-Forces Model of competitive analysis is a widely used approach for developing
strategies in many industries.

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.

 Rivalry among competing firms

- Most powerful of the five forces
- Focus on competitive advantage of strategies over other firms
 Potential Entry of New Competitors
- Barriers to entry are important
- Quality, pricing, and marketing can overcome barriers
 Potential development of substitute products
- Pressure increases when:
 Prices of substitutes decrease
 Consumers’ switching costs decrease
 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
 Bargaining power of consumers
- 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
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

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.

FORECASTING TOOLS AND TECHNIQUES

 Forecasts
o educated assumptions about future trends and events
o quantitative, qualitative techniques
 Assumptions
o 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.
 Business analytics
o is an MIS technique that involves using software to mine huge volumes of data to help
executives make decisions. Sometimes called predictive analytics, machine learning, or
data mining, this software enables a researcher to assess and use the aggregate
experience of an organization, which is a priceless strategic asset for a firm.

EXTERNAL FACTOR EVALUATION (EFE) MATRIX

- An External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate
economic, social, cultural, demographic, environmental, political, governmental, legal,
technological, and competitive information.
- The EFE Matrix can be developed in five steps:
 1. List 20 key external factors as identified in the external-audit process, including
both opportunities and threats that affect the firm and its industry.
2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very
important).
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.
4. Multiply each factor’s weight by its rating to determine a weighted score.
5. Sum the weighted scores for each variable to determine the total weighted
score for the organization.

THE COMPETITIVE PROFILE MATRIX (CPM)

- The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and its particular
strengths and weaknesses in relation to a sample firm’s strategic position.
- Critical success factors include internal and external issues.

SUMMARY

Increasing turbulence in markets and industries around the world means the external audit has
become an explicit and vital part of the strategic-management process. This chapter provided a
framework for collecting and evaluating economic, social, cultural, demographic, environmental,
political, governmental, legal, technological, and competitive information. Firms that do not mobilize
and empower their managers and employees to identify, monitor, forecast, and evaluate key external
forces may fail to anticipate emerging opportunities and threats and, consequently, may pursue
ineffective strategies, miss opportunities, and invite organizational demise. Firms not taking advantage
of e-commerce and social media networks are technologically falling behind.

A major responsibility of strategists is to ensure development of an effective external-audit system.

This includes using information technology to devise a competitive intelligence system that works. The
external-audit approach described in this chapter can be used effectively by any size or type of
organization. Typically, the external-audit process is more informal in small firms, but the need to
understand key trends and events is no less important for these firms. The EFE Matrix and Porter’s Five-
Forces Model can help strategists evaluate the market and industry, but these tools must be
accompanied by good intuitive judgment. Multinational firms especially need a systematic and effective
external-audit system because external forces among foreign countries vary so greatly.

REVIEW QUESTIONS

1. List the 10 key external forces that give rise to opportunities and threats. Give a specific
example of each force, for your college or university.
2. Regarding economic variables, list in order of importance six specific factors that you feel
greatly impact your college or university.
3. Regarding social, cultural, demographic, and natural environment variables, list in order of
importance six specific factors that you feel most greatly impact your college or university.
4. Regarding political, governmental, and legal variables, list in order of importance six specific
factors that you feel most greatly impact your college or university.
5. Choose any four industries and explain how wireless technology is impacting four industries.