External Factor Evaluation

EXTERNAL FACTOR
EVALUATION
WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE,

6/26/2021 1
JAKARTA.
LEARNING OBJECTIVES
After studying this chapter, you should be able to do the following:
1. Describe the nature and purpose of an external assessment in formulating strategies.
2. Identify and discuss 10 external forces that must be examined in formulating strategies:
economic, social, cultural, demographic, environmental, political, governmental, legal,
technological, and competitive.
3. Explain Porter’s Five Forces Model and its relevance in formulating strategies.
4. Describe key sources of information used for locating vital external information.
5. Discuss forecasting tools and techniques.
6. Explain how to develop and use an External Factor Evaluation (EFE) Matrix.
7. Explain how to develop and use a Competitive Profile Matrix.
WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 2
THE PURPOSE AND NATURE OF AN 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.
• 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.

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; and
5. Competitive forces

PRIORITIZING KEY EXTERNAL FACTOR
• When identifying and prioritizing key external factors in strategic planning,
make sure the factors selected are
(1) specific (i.e., quantified to the extent possible);
(2) actionable (i.e., meaningful in terms of having strategic implications); and
(3) stated as external trends, events, or facts rather than as strategies the firm could pursue.
• Key external factors can vary over time and by industry.

• Prioritization is absolutely essential in strategic planning because no organization can do
everything that would benefit the firm.

THE PROCESS OF PERFORMING AN EXTERNAL AUDIT
• The process of performing an external audit must involve as many managers and employees as
possible.
• A company first must gather competitive intelligence and information about economic, social,
cultural, demographic, environmental, political, governmental, legal, and technological trends.
• After information is gathered, it should be assimilated and evaluated.

✔A prioritized list must be obtained by requesting that all managers individually rank the factors identified,
from 1 (for the most important opportunity/threat) to 20 (for the least important opportunity/threat) or
managers simply place a checkmark by their most important “top 10 factors” and then sum the rankings.

TEN EXTERNAL FORCES THAT AFFECT ORGANIZATIONS
1. Economic Forces
2. Social, Cultural, Demographic, and Natural Environment Forces
3. Political, Governmental, and Legal Forces
4. Technological Forces
5. Competitive Forces

EXAMPLE OF PESTEL ANALYSIS: PHARMACEUTICAL
INDUSTRY

COMPETITIVE FORCES
• An important part of an external audit is identifying rival firms and determining

their strengths, weaknesses, capabilities, opportunities, threats, objectives, and
strategies. George Salk stated, “If you’re not faster than your competitor, you’re in a
tenuous position, and if you’re only half as fast, you’re terminal.”
• Collecting and evaluating information on competitors is essential for successful

strategy formulation.

KEY QUESTIONS ABOUT COMPETITORS
1. What are the strengths of our major competitors?
2. What are the weaknesses of our major competitors?
3. What are the objectives and strategies of our major competit ors?
• 4. How will our major competitors most likely respond to current economic,
social, cultural, demographic, environmental, political, governmental, legal,
technological, and competitive trends affecting our industry?
• 5. How vulnerable are the major competitors to our alternative company
strategies?

KEY QUESTIONS ABOUT COMPETITORS (CONTINUED)
6. How vulnerable are our alternative strategies to successful counterattack by our major
competitors?
7. How are our products or services positioned relative to major competitors?
8. To what extent are new firms entering and old firms leaving this industry?
9. What key factors have resulted in our present competitive position in this industry?
10. How have the sales and profit rankings of our major competitors in the industry
changed over recent years? Why have these rankings changed that way?
11. What is the nature of supplier and distributor relationships in this industry?
12. To what extent could substitute products or services be a threat to our competitors?
PORTER’S FIVE-FORCES MODEL
• Porter’s Five-Forces Model of competitive analysis is a widely used

approach for developing strategies in many industries.
• The intensity of competition among firms varies widely across industries.

• According to Porter, the nature of competitiveness in a given
industry can be viewed as a composite of five forces:
1. Rivalry among competing firms

2. Potential entry of new competitors
3. Potential development of substitute products
4. Bargaining power of suppliers
5. Bargaining power of consumers
THE EXTERNAL FACTOR EVALUATION 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.

FIVE STEPS OF EFE MATRIX
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.
List the opportunities first and then the threats. Be as specific as possible,
using percentages, ratios, and comparative numbers whenever possible.
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. 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.

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

• The highest possible total weighted score for an organization is 4.0 and
the lowest possible total weighted score is 1.0.
• The average total weighted score is 2.5.
• A total weighted score of 4.0 indicates that an organization is
responding in an outstanding way to existing opportunities and threats
in its industry.
• A total score of 1.0 indicates that the firm’s strategies are not
capitalizing on opportunities or avoiding external threats

EFE MATRIX OF SYRIAN WHEAT PRODUCTION

EFE MATRIX FOR APPLE

EFE MATRIX FOR REFRESHING BREEZE EXPRESS SPA

THE COMPETITIVE PROFILE MATRIX
• 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.
• 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.
• 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.


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EXTERNAL FACTOR

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE,

• Identifying and evaluating external opportunities and threats enables

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 4

• External forces can be divided into five broad categories:

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 22

• Key external factors can vary over time and by industry.

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 25

• After information is gathered, it should be assimilated and evaluated.

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 26

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 27

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 31

• An important part of an external audit is identifying rival firms and determining

• Collecting and evaluating information on competitors is essential for successful

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 42

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 43

• Porter’s Five-Forces Model of competitive analysis is a widely used

• The intensity of competition among firms varies widely across industries.

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 45

1. Rivalry among competing firms

• An External Factor Evaluation (EFE) Matrix allows strategists to summarize

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 55

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

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 57

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 58

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 59

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 60

WILFRIDUS B. ELU. STRATEGIC MANAGEMENT. PERBANAS INSTITUTE, JAKARTA. 6/26/2021 61

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