1. The External Assessment Chapter Three

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

3. The Nature of an External Audit
The external audit 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.

4. 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

5. Relationships Between Key External Forces and an Organization

6. 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.

7. The Process of Performing an External Audit
Information should be assimilated and evaluated
A final list of the most important key external factors should be communicated

8. The Process of Performing an External Audit
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

9. 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 for achieving competitive advantage.

10. The Industrial Organization (I/O) View
Firm performance is based more on industry properties
Economies of scale
Barriers to market entry
Product differentiation
The economy
Level of competitiveness

11. Economic Forces Availability of credit in market
Level of disposable income
Interest rates of Financial Institutes
Inflation rates
Expenditure capacity of buyers / Consumption patterns
Taxation
Gov’t deficits
GDP trend

12. Social, Cultural, Demographic, and Natural Environmental Forces
Facts
World population 7 billion
World population = 8 billion by 2028
World population = 9 billion by 2054
U.S. population > 310 million

13. Key Social, Cultural, Demographic, and Natural Environment Variables

14. 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.

15. Political, Government, and Legal Variables
Sino American relationships
Russian American relationships
European American relationships
African American relationships
Import–export regulations
Government fiscal and monetary policy changes
Political conditions in foreign countries
Special local, state, and federal laws
Lobbying activities
Size of government budgets
World oil, currency, and labor markets
Location and severity of terrorist activities
Local, state, and national elections
▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬ Government regulations or deregulations Changes in tax laws Special tariffs Political action committees Voter participation rates Number, severity, and location of government protests Number of patents Changes in patent laws Environmental protection laws Level of defense expenditures Legislation on equal employment Level of government subsidies Antitrust legislation

16. Technological Forces
The Internet has changed the very nature of opportunities and threats by:
altering the life cycles of products,
increasing the speed of distribution,
creating new products and services,
erasing limitations of traditional geographic markets,
changing the historical trade-off between production standardization and flexibility.

17. Technological Forces
The Internet has lowered entry barriers, and redefined the relationship between industries and various suppliers, creditors, customers, and competitors.

18. Technological Forces
Many firms now have a Chief Information Officer (CIO) and a Chief Technology Officer (CTO) who work together to ensure that information needed to formulate, implement, and evaluate strategies is available where and when it is needed

19. Competitive Forces
An important part of an external audit is identifying rival firms and determining their strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies

20. Competitive Intelligence Programs
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

21. Competitive Intelligence Programs
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 competitors are
vulnerable and to assess the impact strategic
actions would have on competitors

22. Competitive Intelligence Programs
3. to identify potential moves that a competitor
might make that would endanger a firm’s
position in the market

23. The Five-Forces Model of Competition

24. 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.

25. Threat of New Entrants Threat of new entrants Entry barrier
new entrants to an industry bring new capacity, a desire to gain market share and substantial resources
Entry barrier
an obstruction that makes it difficult for a company to enter an industry
New entrants to an industry typically bring to it new capacity, a desire to gain market share and potentially substantial resources.
An entry barrier is an obstruction that makes it difficult for a company to enter an industry.

26. Threat of Substitute Products or Services
a product that appears to be different but can satisfy the same need as another product
The identification of possible substitute products means searching for products that can perform the same function, even though they have a different appearance.
A substitute product is a product that appears to be different but can satisfy the same need as another product. The identification of possible substitute products or services means searching for products or services that can perform the same function, even though they have a different appearance and may not appear to be easily substitutable.

27. The Bargaining Power of Buyers
ability of buyers to force prices down, bargain for higher quality and play competitors against each other
Large purchases, backward integration, alternative suppliers, low cost to change suppliers, product represents a high percentage of buyer’s cost, buyer earns low profits, product is unimportant to buyer
Buyers affect an industry through their ability to force down prices, bargain for higher quality or more services and play competitors against each other. A buyer or a group of buyers is powerful if some of the following factors hold true: large purchases, backward integration, alternative suppliers, low cost to change suppliers, product represents a high percentage of buyer’s cost, buyer earns low profits and product is unimportant to buyer.

28. The Bargaining Power of Suppliers
Buyers affect an industry through their ability to force down prices, bargain for higher quality or more services and play competitors against each other.
Buyers affect an industry through their ability to force down prices, bargain for higher quality or more services and play competitors against each other.

29. The Bargaining Power of Suppliers
A buyer or a group of buyers is powerful if some of the following factors hold true:
Industry is dominated by a few companies
Unique product or service
Substitutes are not readily available
Ability to forward integrate
Unimportance of product or service to the industry
A buyer or a group of buyers is powerful if some of the following factors hold true:
• Industry is dominated by a few companies
• Unique product or service
• Substitutes are not readily available
• Ability to forward integrate
• Unimportance of product or service to the industry

30. The Five-Forces Model Rivalry among competing firms
Most powerful of the five forces
Focus on competitive advantage of strategies over other firms

31. The Five-Forces Model
TABLE 3-7 Conditions That Cause High Rivalry Among Competing Firms
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1. High number of competing firms
2. Similar size of firms competing
3. Similar capability of firms competing
4. Falling demand for the industry’s products
5. Falling product or service prices in the industry
6. When consumers can switch brands easily
7. When barriers to leaving the market are high
8. When barriers to entering the market are low
9. When fixed costs are high among firms competing
10. When the product is perishable
11. When rivals have excess capacity
12. When consumer demand is falling
13. When rivals have excess inventory
14. When rivals sell similar products/services
15. When mergers are common in the industry

32. 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.

33. Industry Analysis: The External Factor Evaluation (EFE) Matrix
External Factor Evaluation (EFE) matrix method is a strategic-management tool often used for assessment of current business conditions. The EFE matrix is a good tool to visualize and prioritize the opportunities and threats that a business is facing.

34. Industry Analysis: The External Factor Evaluation (EFE) Matrix
Economic
Social
Cultural
Demographic
Environmental
Political
Governmental
Technological
Competitive
Legal

35. EFE Matrix Steps
1. List key external factors 2. Weight from 0 to 1 3. Rate effectiveness of current strategies 4. Multiply weight * rating 5. Sum weighted scores

36. EFE – Gateway Computers (2003)
Key External Factors
Weight
Rating
Wtd Score
Opportunities
1. Global PC market expected to grow 20% in 2004
0.10 3
0.30
2. Cost of PC component parts expected to decrease 10%
3. Internet use growing rapidly
0.05 2
4. China entered WTO; lowered taxes for importing PC’s 1
5. The average income for PC worker has declined from $40K/yr to $30k/yr
0.15

37. EFE – Gateway Computers (2003) (cont’d)
Key External Factors
Weight
Rating
Wtd Score
Opportunities (cont’d)
6. Modernization of business firms and government agencies
0.05 2
0.10
7. U.S. (& world) economies recovering 3
0.15
8. 30% of Chinese population can afford a PC; only 10% of homes have a PC 1
Threats
1. Intense rivalry in industry

38. EFE – Gateway Computers (2003) (cont’d)
Key External Factors
Weight
Rating
Wtd Score
Threats (cont’d)
2. Severe price cutting in PC industry
0.10 2
0.20
3. Different countries have different reg’s and infrastructure for PC’s
0.05 1
4. Palm & PDA becoming substitutes 3
0.15
5. Demand exceeds supply of experienced PC workers 4
6. Birth rate in U.S. declining annually

39. EFE – Gateway Computers (2003) (cont’d)
Key External Factors
Weight
Rating
Wtd Score
Threats (cont’d)
7. U.s. consumers and businesses delaying purchase of PC’s
0.05 2
0.10
8. PC firms diversifying into consumer electronics 3
0.15
Total
1.00
2.40

40. Total weighted score of 4.0
Industry Analysis EFE
Total weighted score of 4.0
Organization response is outstanding to threats and weaknesses
Total weighted score of 1.0
Firm’s strategies not capitalizing on opportunities or avoiding threats

41. Industry Analysis: Competitive Profile Matrix (CPM)
Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions
Critical success factors include internal and external issues

42. Competitive Profile Matrix (CPM) - Example
Nissan
Toyota
Honda
Critical Success Factors (CSF)
Weightage
Rating
Wt’d Score
Market share
0.10
Financial status
0.05
Product Quality
0.25
Competitive Prize
0.30
Organization setup
0.20
Global Exposure
Total
1.00

43. Competitive Profile Matrix (CPM) – Example – Give rating to each company
Nissan
Toyota
Honda
Critical Success Factors (CSF)
Weightage
Rating
Wt’d Score
Market share
0.10 3 4 2
Financial status
0.05
Product Quality
0.25 5
Competitive Prize
0.30
Organization setup
0.20
Global Exposure
Total
1.00

44. Competitive Profile Matrix (CPM) – Example – Final Solution by multiplying CSF to rating and then adding them
Nissan
Toyota
Honda
Critical Success Factors (CSF)
Weightage
Rating
Wt’d Score
Market share
0.10 3
0.30 4
0.40 2
0.20
Financial status
0.05
0.15
Product Quality
0.25
1.00 5
1.25
0.75
Competitive Prize
0.90
1.20
0.60
Organization setup
0.80
Global Exposure
Total
3.25
4.15
2.60

45. EFE Matrix for a Local Ten-Theater Cinema Complex
TABLE 3-8 EFE Matrix for a Local 10-Theater Cinema Complex
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Key External Factors Weight Rating Weighted Score
Opportunities___________________________________________________________________________
1. Rowan County is growing 8 percent annually in population
2. TDB University is expanding 6 percent annually
3. Major competitor across town recently ceased operations
4. Demand for going to cinema growing 10 percent annually
5. Two new neighborhoods being developed within 3 miles
6. Disposable income among citizens grew 5 percent in prior year
7. Unemployment rate in county declined to 3.1 percent
Threats________________________________________________________________________________
8. Trend toward healthy eating eroding concession sales
9. Demand for online movies and DVDs growing 10 percent annually
10. Commercial property adjacent to cinemas for sale
11. TDB University installing an on-campus movie theater
12. County and city property taxes increasing 25 percent this year
13. Local religious groups object to R-rated movies being shown
14. Movies rented from local Blockbuster store up 12 percent
15. Movies rented last quarter from Time Warner up 15 percent
Total

46. Industry Analysis: Competitive Profile Matrix (CPM)
Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions
Critical success factors include internal and external issues

47. An Example Competitive Profile Matrix
TABLE An Example Competitive Profile Matrix
▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬
Company Company Company 3____________
Critical Success
Factors_ ___ _ Weight Rating Score Rating Score Rating Score____ ____
Advertising
Product Quality
Price Competitiveness
Management
Financial Position
Customer Loyalty
Global Expansion
Market Share
Total
Note: The ratings values are as follows: 1 = major weakness, 2 = minor weakness, 3 = minor strength, 4 = major strength. As indicated by the total weighted score of 2.50, Competitor 2 is weakest. Only eight critical success factors are included for simplicity; this is too few in actuality.