Lecture - 3

3. The External Assessment

Chapter Outline:
The Nature of the External Audit
The Industrial Organization (I/O) View
Social, Cultural, Demographic & Environmental
Forces
Political, Governmental, and Legal Forces
Technological Forces
Competitive Forces
Porters Five-Forces Model
Sources of External Information
Forecasting Tools & Techniques
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External Strategic Management Audit

Environmental Scanning
Industry Analysis
Identify & Evaluate factors beyond the control of a
single firm
Increased foreign competition
Population shifts
Aging society
Stock market volatility
Purpose of External Audit
Identify
o Opportunities
o Threats
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Key External Forces & the Organization Relationship

Key External Forces

Competitors
Suppliers
Distributors
Creditors
Customers
Employees
Communities
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
Markets
Natural Environment

Organizations Opportunities & Threats

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External Audit - competitive

intelligence/ info needed:
Economic
Social
Cultural
Demographic
Environmental
Governmental
Legal
Technological
5

External Audit Sources of

Information
Internet
Libraries
Suppliers
Distributors
Salespersons
Customers
Competition
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Performing External Audit

- Key Factors
Vary over time
Vary by industry
- Variables to be monitored
Relationships with suppliers & distributors
Market share
Breadth of competing products
World economies
Foreign affiliates
Proprietary account advantages
Price competitiveness
Technological advancements
Interest rates
Pollution abatement
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Industrial Organization (I/O) View approach to competitive

advantage
External/ Industry factors more important than internal factors
Approach focuses on analyzing external forces and industry
variables for achieving and maintaining competitive advantage
I/O Perspective
Firms performance primarily based on Industry Properties:
Economies of Scale
Barriers to market entry
Product differentiation
Level of competitiveness
Still, effective integration and understanding of both external and
internal factors is the key for securing and keeping a competitive
advantage

Key External Forces (broad

categories)
1. Economic forces
2.
Social, cultural, demographic
& environmental forces
3. Political, governmental & legal
forces
4. Technological forces
5. Competitive forces
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1. Economic Forces:
Economic factors have a direct impact on the
potential attractiveness of various strategies:
Trends in the dollars value (export/ import
competitiveness)
Layoffs
Standard of living
Availability of credit
Level of disposable income
Interest rates
Inflation rates
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2. Social, Cultural, Demographic & Environmental Forces

Such changes have a major Impact on:
o Products
o Services
o Markets
o Customers
U.S. Facts
Aging population
Widening gap between rich & poor
2025 = 18.5% population >65 years
Facts
World population approaching 7 billion in 2013
World population = 8 billion by 2028
World population = 9 billion by 2054
U.S. population < 300 million
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Social, Cultural, Demographic & Environmental Forces (Contd.)

Trends
More American households with people living alone
Aging Americans affects all organizations
Population shift to the south and west (sunbelt)
Less interested in fitness and exercise
Degradation of the natural environment
Global trends
2003 China largest exporter to U.S.
2003 Asia receives highest foreign direct investment
Cheaper labor and utilities than Mexico
China joined WTO
Chinas labor rates less than Mexico
China provides more site location incentives than Mexico

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Key Social, Cultural, Demographic & Environmental Variables Monitoring of relevant variables, e.g:
Childbearing rates
Number of special interest groups
Number of marriages & divorces
Number of births & deaths
Immigration & emigration rates
Per capita income
Avg. disposable income
Avg. educational level
Governmental regulations
Attitudes toward customer service
Attitudes toward quality
Energy conservation
Social responsibility
Recycling
Waste management
Air & water pollution
Ozone depletion
Endangered species
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3. Political, Government & Legal Forces

Federal, state, local , foreign Govts as
regulators/ de-regulators, subsidizers,
employers, and customers
Political forecasts: important for
government contracts or subsidies
Changes could represent key opportunities
& threats:
o
o
o
o

Antitrust legislation
Tax rates
Lobbying efforts
Patent laws
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Political, Government & Legal Forces (Contd.)

Increasing Global Interdependence (economies, markets,
govts, organizations)
Firms consider possible impact of political variables on:
Formulation of strategies
Implementation of strategies
Strategists in a global economy need:
Forecast political climates
Decision-making process in countries
Legalistic skills
Diverse world cultures/ lifestyles
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Political, Government & Legal Forces (contd.)

Key Political, Governmental, & Legal Variables

Regulation/deregulation
Tax law changes
Special tariffs
Voter participation rates
Number of patents
Changes in patent laws
Environmental protection laws
Equal employment legislation
Government subsidies
Global relationships
Import/export regulations
Political conditions
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4. Technological Forces represent major opportunities & threats

Revolutionary technological changes and discoveries impacting organizations:
Superconductivity advancements
Internet
Communications
Technology changes affect:
Products
Markets
Suppliers
Distributors
Competitors
Customers
Manufacturing processes
Marketing practices
Competitive position
Technology management is a key area for strategists
Represents key opportunities and threats in high-tech industries
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5. Competitive Forces
Collection & evaluation of data on competitors is
essential for successful strategy formulation
Identifying major competitors is not always easy
(divisions may compete in different industries)
Identifying Rival Firms and determining their:
Strengths, weaknesses, capabilities,
opportunities, threats, objectives, strategies
Many businesses use internet to obtain most
of competitors info.
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Competitive Forces (Contd.)

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
Our product/service positioning
Entry and exit of firms in the industry
Key factors for our current competitive position in industry
Changes of sales/profit rankings of competitors over time; reasons
Nature of supplier & distributor relationships in industry
The threat of substitute products/services to competitors in
industry

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Competitive Intelligence (CI) Programs

CI is a systematic and ethical process for gathering and
analyzing information about the competitions activities and
general business trends to further a businesss own goals
Basic missions of a CI program:
1. Provide general understanding of an industry and
competitors
2. Identify competitors weak areas; assess impact of
strategic actions on them
3. Identify competitors potential moves
Competitive information is equally applicable for strategy
formulation, implementation and evaluation decisions
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Competitive Analysis: Porters Five-Forces Model

Widely used approach for developing strategies in
many industries
Intensity of competition among firms vary widely
among across industries
Intensity of competition is highest among lowerreturn (ROE) industries
Porter views competitiveness in a given industry as
a composite of five forces:
1.
2.
3.
4.
5.

Rivalry among competing firms

Potential entry of new competitors
Potential development of substitute products
Bargaining power of suppliers
Bargaining power of consumers
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The Five-Forces Model of Competition

Potential development
of substitute products

Bargaining
power
of suppliers

Rivalry among
competing
firms

Bargaining
power
of
consumers

Potential entry of
new competitors
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The Five-Forces Model

1. Rivalry among Competing Firms
Most powerful of the five forces
Focus on competitive advantage of strategies in relation
to those of rival firms
Strategy change may invite retaliatory countermoves
(prices, quality, features, services, warranties, advertising)
Intensity of rivalry increases as:
o
o
o
o
o
o
o

Number of competitors increase

Competitors become more equal in size/ capability
Demand for industrys products declines
Price cutting becomes common
Consumers can switch brands easily
Barriers to leaving the market are high (e.g fixed costs)
Rivalry intensifying -- declining industry profits

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The Five-Forces Model (Contd.)

2. Potential Entry of New Competitors
Ease of entry to industry -- increasing intensity of
competitiveness
Barriers to entry are important
Quality, pricing, and marketing can overcome barriers
3. Potential Development of Substitute Products
Firms in many industries compete with substitute
products from other industries
Pressures increase when substitutes prices and
consumers switching costs decrease
Competing firms plans for increased capacity & market
penetration a pointer
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The Five-Forces Model (Contd.)

4. Bargaining Power of Suppliers
Large number of suppliers & few substitutes affects intensity of
competition
Backward integration can gain control or ownership of suppliers
5. Bargaining Power of Consumers
Customers 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 they can inexpensively switch
If they are particularly important
If sellers are struggling in the face of falling consumer demand
If they are informed about sellers products, prices and costs
If they have discretion in whether and when they purchase the
product
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Sources of External Information :

Unpublished sources:
Customer surveys
Market research
Speeches at professional and shareholders meetings
Television programs
Interviews
Conversations with stakeholders
Published sources:
Periodicals
Journals
Reports
Government documents
Books
Directories
Newspapers
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Forecasting Tools and Techniques

Forecasts are educated assumptions about
future trends and events
Managers often rely upon published forecasts to
identify key external opportunities and threats
Forecasting tools:
o Quantitative techniques Most appropriate when
historical data is available and there is a continuing
relationship among variables
o Qualitative techniques

Planning may not be possible without

assumptions
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