Chapter three

External Strategic Management Audit

Also called:
 Environmental scanning
 Industry analysis
External Strategic Management Audit

External Audit:
– Identification and evaluation of trends and
events beyond control of single firm
• Increased foreign competition
• Populations shifts
• Aging society
• Information technology
• Computer revolution
Nature of External Audit
Purpose:

 Development of Finite List:

 Opportunities
 Threats to be avoided
 Key External Forces
1. Remote Environment
1. Comprises factors that originate beyond, and
usually irrespective of any single firm’s operating
situation:
A. Economic forces
B. Social, cultural, demographic, & environmental
forces
C. Political, governmental, and legal forces
D. Technological factors
E. Competitive forces
2. Industry Environment
 The general conditions for competition that
influence all businesses that provide similar
products and services
 Entry barriers

 Supplier power

 Buyer power

 Substitute availability

 Competitive rivalry
3. Operating Environment
 Factors in the immediate competitive situation
that affect a firm’s success in acquiring needed
resources.
 Competitors

 Creditors

 Customers

 Labor

 Suppliers
The Process of Performing an External Audit

1. Gather competitive intelligence and

information on the factors
Sources of information include:
 Internet

 Libraries (corporate, university, public)

 Suppliers

 Distributors

 Customers

 Competition
Process….
2. Assimilation and evaluation of gathered
information to identify the most important
opportunities and threats facing the firm
Economic Factors
1. Economic Conditions of a nation
 Gross Domestic Product
 Per Capita Income
 Markets For Goods And Services
 Availability Of Capital
 Foreign Exchange Reserve
 Growth Of Foreign Trade
 Strength Of Capital Market etc
 2. Economic Policies

 Industrial policy: covers all those principles,

policies, rules, regulations and procedures, which
direct and control the industrial enterprises of the
country and shape the pattern of industrial
development.
 Fiscal policy: It includes government policy in
respect of public expenditure, taxation and public
debt.
 Monetary policy: It includes all those activities
and interventions that aim at smooth supply of
credit to the business and a boost to trade and
industry.
 Foreign investment policy: This policy aims at
regulating the inflow of foreign investment in various
sectors for speeding up industrial development and take
advantage of the modern technology.
 Export–Import policy (Exim policy): It aims at
increasing exports and bridge the gap between expert
and import. Through this policy, the government
announces various duties/levies. The focus now-a-days
lies on removing barriers and controls and lowering the
custom duties.
 Economic System
Capitalist economy, Socialist economy; and Mixed
economy(co-existence of public sector and private sector)
 Unemployment trends

 Worker productivity levels

 Value of the dollar in world markets

 Stock market trends

 Foreign countries’ economic conditions

 Import/export factors

 Demand shifts for goods/services

 Income differences by region/customer

Social, Cultural, Demographic &
Environmental Forces
Key variables –
 Childbearing rates
 Number of special-interest groups
 Number of marriages
 Number of divorces
 Number of births
 Number of deaths
 Immigration & emigration rates
 Life expectancy rates
 Per capita income
 Attitudes toward business
 Average disposable income
 Buying habits
 Ethical concerns
 Attitudes toward saving
Political, Govt., & Legal Forces
 Government Regulation
• Tax rates
• Lobbying efforts
• Patent laws
 Environmental protection laws
 Equal employment legislation
 Level of government subsidies
 Government regulation/deregulation
 Tax law changes
 Special tariffs
 Voter participation rates
 Number of patents
 Changes in patent laws
Technological factors

Internet
 Internet
 Industry Analysis: Porter’s Five-Forces
Model
Potential development
of substitute products

Bargaining power Rivalry among Bargaining power

of suppliers competing firms of consumers

Potential entry of new

competitors
Bargaining Power of Buyers
 Buyer power refers to the ability of customers of the
industry to influence the price and terms of purchase.
 The competitive strength of buyers can range from strong
to weak.
 The buyers are powerful when:
• They are concentrated and buy in large volume.
• The buyer's purchases are a sizable percentage of the
selling industry's total sales.
• The supplying industry is comprised of large numbers of
relatively small sellers.
• The buyers pose a threat of integrating backward to make
the industry's product.
Bargaining Power Of Suppliers
 Refers to the ability of providers of inputs to determine
the price and terms of supply.
 Suppliers can exert power over firms an industry by
raising prices or reducing the quality of input
 Suppliers is more powerful if the following apply:
 It is dominated by a few firms

 When suppliers' products are differentiated to such an

extent that it is difficult or costly for buyers to switch

from one suppliers to another.
 When the buying firms are not important customers of

the suppliers group.

 When the buying firms display no inclination toward

backward integration into the suppliers' business.

Threat Of New Entrants
 It is a function of both barriers to entry and the reaction
from existing competitors. Types of entry barriers
 Economies of scale: force the entrants either to come in
on a large scale or to accept a cost disadvantage
 Product differentiation , or brand identification, creates a
barrier by forcing entrants to spend heavily to overcome
customer loyalty
 Capital requirements
 Switching costs..
 Access to distribution channels.
 Governmental and legal barriers. Government agencies
can limit or even bar entry by requiring licenses and
permits.
Threat Of Substitutes
Determinants
 Relative price

 Performance of substitutes

 Switching costs

 Buyer propensity to substitute

Evaluation of External factors
A. External Factor Evaluation(EFE): Five-Step process
1. List key external factors (10-20): Opportunities &
threats
2. Assign weight to each (0 to 1.0): The weight indicates
the relative importance of that factor to being successful
in the firm’s industry: Sum of all weights = 1.0
3. Assign 1-4 rating to each factor : rate indicate how
effectively the firm’s current strategies respond to the
factor, where 4 = the response is superior, 3 = above
average, 2 = average, and 1 = poor.
4. Multiply each factor’s weight by its rating
5. Sum the weighted scores for each
 XYZ—Key External Factors Weighted
Weight Rating
Opportunities score

Global markets untapped .15 1 .15

Increased demand .05 3 .15
Astronomical Internet growth .05 1 .05
Pinkerton leader in discount market .15 4 .60
More social pressure to quit smoking .10 3 .30
Threats
Legislation against the tobacco industry .10 2 .20
Production limits on tobacco .05 3 .15
Smokeless market SE region U.S. .05 2 .10
Bad media exposure from FDA .10 2 .20
Administration .20 1 .20
TOTAL 1.00 2.10
 EFE –analysis
Then if,
 Total weighted score of 4.0 = Organization

response is outstanding to threats & weaknesses

 Total weighted score of 1.0 = Firm’s strategies not

capitalizing on opportunities
 Total weight score of 2.5= average

 Xyz (in the previous example), has a total weighted

score of 2.10 indicating that the firm is below

average in its effort to pursue strategies that
capitalize on external opportunities and avoid
threats avoiding threats
 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.
 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.
 (CPM) Procter
Avon L’Oreal & Gamble
Critical Success Weight Rating Score Rating Score Rating Score
Factor
Advertising 0.20 1 0.20 4 0.80 3 0.60
Product Quality 0.10 4 0.40 4 0.40 3 0.30
Price Competition 0.10 3 0.30 3 0.30 4 0.40
Management 0.10 4 0.40 3 0.30 3 0.30
Financial Position 0.15 4 0.60 3 0.45 3 0.45
Customer Loyalty 0.10 4 0.40 4 0.40 2 0.20
Global Expansion 0.20 4 0.80 2 0.40 2 0.40
Market Share 0.05 1 0.05 4 0.20 3 0.15
Total 1.00 3.15 3.25 2.80