GROUP 1

EXTERNAL
ASSESSMENT
 LEARNING
OBJECTIVES
• Describe the nature and purpose of an external assessment in formulating
strategies.
• identify and discuss 10 external forces that must be examined in formulating
strategies: economic, social, cultural, demographic, environmental, political,
governmental, legal, technological, and competitive
• . Explain Porter’s Five Forces Model and its relevance in formulating strategies

• Describe key sources of information used for locating vital external information.

• Discuss forecasting tools and techniques

• Explain how to develop and use an External Factor Evaluation (EFE) Matrix.

• Explain how to develop and use a Competitive Profile Matrix

Environmental
scanning

External Strategic
Management Audit

Industry analysis
External Audit

- Identification and evaluation of trends and

events beyond the control of a single firm, such
as:

• Increased foreign competition

• Population shifts

• Aging society
Purpose 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
 Key External Forces

Social, cultural,
demographic, and
natural Technological
environment Forces
forces

Political,
Economic governmental, and Competitive
Forces legal forces Forces
Relationships
Between Key
External Forces and
an Organization

Important Note: 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.
 Process of
Performing an
External Audit

a company first must gather

competitive intelligence and
After information is gathered,
information about economic,
it should be assimilated and
social, cultural, demographic,
evaluated.
environmental, political,
governmental, legal, and
technological trends.
 The Industrial Organization (I/O) View)

• The Industrial Organization (I/O) approach to

competitive advantage advocates that external
(industry) factors are more important than internal
factors in a firm achieving competitive advantage
 Economic forces Social

Cultural Demographic
10 external
forces that Natural Environment
Political
affect Forces

Organizations
Governmental Legal Forces

Technological Competitive
Forces Forces
 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.
• some economic variables to be monitored:
o Unemployment trends
o Inflation rates
o Price fluctuation
o Monetary and fiscal policies
 Social, Cultural, Demographic, and Natural Environment (SCDE)
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.
• Social, cultural, demographic, and environmental trends are shaping
the way people live, work, produce, and consume. New trends are
creating a different type of consumer and, consequently, a need for
different products, new services, and updated strategies.
 Some Key (SCDE) Variables
• Population changes by race, age, and
geographical area
• Regional changes in tastes and preferences
• Number of marriages
• Life expectancy rates
• Social programs
• Social responsibility issues
Political, Governmental and Legal Forces
• Political Issues and stances do matter for business
and do impact strategic decisions, especially in
today’s world of instant tweeting and emailing.
• Political forecast can be the most important part of
an external audit. Changes in patent laws, antitrust
legislation, tax rates and lobbying activities can
affect firms significantly.
• For example, Starbucks supports same-sex
marriage so the National Organization for Marriage
(NOM), has vowed to make Starbucks pay a “price”
for this instance.
Political, Governmental and Legal Forces
• Political Issues and stances do matter for business
and do impact strategic decisions, especially in
today’s world of instant tweeting and emailing.
• Political forecast can be the most important part of
an external audit. Changes in patent laws, antitrust
legislation, tax rates and lobbying activities can
affect firms significantly.
• For example, Starbucks supports same-sex
marriage so the National Organization for Marriage
(NOM), has vowed to make Starbucks pay a “price”
for this instance.
Technological Forces
• CIO and CTO work together to ensure that
information needed to formulate, implement and
evaluate strategies is available where and when it is
needed.
• CIO – more a manager, managing the firm’s
relationship with stakeholders;
• CTO – more a technician, focusing on technical
issues such as data acquisition, data processing,
decision-support systems, ad software and hardware
acquisition.
Competitive Forces
• Important part of an external audit is identifying rival
firms and determining their strengths, weaknesses,
capabilities, opportunities, threats, objectives, and
strategies.
• “ If you’re not faster than your competitor, you’re in
tenuous position, and if you’re only half as fast, you’re
terminal” – George Salk
• Competitive Intelligence – a systematic and ethical
process for gathering and analyzing information about
the competition’s activities. - SCIP
Competitive Forces
• 3 basic objectives of CI Program:
1. To provide a general understanding of a industry ad its
competitors
2. To identify areas in which competitors 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 firms position in the market.
 Rivalry
Among
Competi
ng Firms
Bargaini Potential
ng Entry of
Power of Porter’s New
Consum Competit
ers 5 ors
forces
Model
Potential
Bargainin Developm
g Power ent of
of Substitute
Suppliers Product
Former chair and CEO of PepsiCo Wayne Calloway said
“Nothing Focuses the mind better than the constant
sight of competitor that wants to wipe you off the map”

• Porter’s Fiver-forces Model – widely used to approach

for developing strategies in many industries.
Rivalry Among Competing Firms
• most powerful of the 5 competitive forces.
• Strategies pursued by one firm can be successful only to
the extent that they provide competitive advantage over
the strategies pursued by rival firms.
• Strategies are lowering prices, enhancing quality, adding
features, providing services etc.
• When rival firms sense weakness, typically they will
intensify both marketing and production efforts to capitalize
the “opportunity”.
Potential Entry of New Competitors
• Firms are in close competition with producers of substitute
products in other industries.
• Examples: Plastic container products competing with
glass.
Bargaining Power of Suppliers
• It affects the intensity of competition in an industry,
especially when there are few suppliers.
• Best interest of both suppliers and producers to assist
each other with reasonable prices.
Bargaining Power of Cosumers
• When customers are concentrated or large in number or
buy in volume, their bargaining power represents a major
force affecting the intensity of competition in an industry.
Sources of External Information

• Unpublished Sources – include customer survey, market research,

interviews, & conversation w/ stakeholders.
• Published Sources – include periodicals, journals, reports, government
documents, abstracts, books, directories, newspapers and manuals.
Forecasting Tools and Techniques

Forecast – is an educated assumptions about future trends and events.

• Making Assumptions – base on facts, figures, trends and research.
• Business Analytics - is an MIS technique that involves using software to mine
huge volumes of data to help executives make decisions. Also called, predictive
analysis, machine learning, or data mining.
 The External Factor Evaluation
Matrix
Is a strategic management tool used to evaluate and prioritize external factor
affecting an organization.

This can be developed in five steps:

1. Identify and list key external factors impacting the industry
2. Assigning weights to these factors based on their importance. This ranges from 0.0 (not important)
to 1.0 (very important). The sum of all weights assigned to the factors must equal to 1.
3. Assigning rating between 1-4 based on the company’s response to each factor. 4 = the response is
superior, 3 = above average, 2 = average, 1 = poor.
4. Multiply each factor’s weights by its rating to determine a weighted score.
5. Sum the weighted scores for each factors to determined the total weighted score for the
organization.
The External Factor Evaluation Matrix

1. Identify and list key external factors

impacting the industry
2. Assigning weights to these factors based
on their importance.
3. Assigning rating between 1-4 based on
the company’s response to each factor.
4. Multiply each factor’s weights by its
rating to determine a weighted score.
5. Sum the weighted scores for each factors
 The Competitive
Profile Matrix
Identifies a firm’s major competitors and its particular strengths and weaknesses.

 Weights and total weights are the same with EFE

 Critical success factors include both internal and external issues
 Assigning rating between 1-4 refers to strength and weaknesses. 4 = major
strength, 3 = minor strength, 2 = minor weakness, 1 = major weakness.
The Competitive Profile Matrix
THANK
YOU