MGT108 Uu

Chapter 3 – The External Assessment in Strategic Management

External Audit:
 Focuses on identifying and evaluating trends and events beyond the control of a single
firm
 Reveals key opportunities and threats an organization faces so managers can create
strategies to take advantage of opportunities and avoid threats

The Nature of an External Audit:

 Aimed at identifying key variables that offer actionable responses
 Firms should respond offensively or defensively to the factors by formulating strategies
that take advantage of external opportunities or that minimize impact of potential threats

Key External Forces:

 External forces can be divided into 5 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

The Process of Performing an External Audit:

 Gather competitive intelligence and info about economic, social, cultural, demographic,
environmental, political, governmental, legal and technological trends
 Info should be assimilated and evaluated
 A list of most important key external factors should be communicated distributed widely
in the organization.
 Both opportunities and threats can be key external factors.

The Industrial Organization (I/O) View:

 Advocates that external (industry) factors that are more important than internal factors for
gaining/sustaining competitive advantage

Economic Forces – Shift to service economy, availability of credit, level of disposable income,
interest/inflation rates, tax rate variations, price fluctuations, value of the dollar, unemployment
trends, GDP trends, Import/export factors  Price fluctuations  Tax rates  Federal
government budget deficits

Key Social, Cultural, Demographic, and Natural Environmental Variables:

 Number of marriages, divorces, births, deaths
  Attitudes toward retirement, product quality, customer service, foreign people
 Population changes (in race, age, geographic area)
 Regional changes in tastes/preferences
 Immigration/Emigration rates

Political, Governmental, and Legal Forces:

 Increasing global interdependence among economies, markets, governments, and
organizations make it imperative that firms consider the possible impact of political
variables on formulation/implementation of competitive strategies
 Variables:
o Environmental regulations
o # of/Changes in patents
o Unionization trends
o Local, state and national elections, laws

Technological Forces:
 New technologies such as: Internet of things, 3D printing, the cloud, mobile devices,
biotech, analytics, auto-tech, robotics, and AI
o Are fueling innovation in many industries, and impacting strategic-planning
decisions
 Firms have Chief Information Officer (CIO) and a Chief Technology Offer (CTO) who
work together to ensure that info needed to formulate, implement, and evaluate strategies
is available where and when it is needed

Results of Technological Advances:

1. Opportunities/threats needs to be considered when creating strategies
2. Affect organizations’ products, services, markets, suppliers, customers, etc.
3. Can create new markets, new/improved products, change relative cost position
4. Can reduce/eliminate cost barriers b/w businesses
5. Create new competitive advantages that are more powerful than existing advantages

Competitive Forces:
 Identify rival firms and determine their strengths, weaknesses, capabilities,
opportunities, threats, objectives, and strategies
 Characteristic:
1. Strive to increase market share (constant)
2. Use vision/mission as a guide for all decisions
3. Whether it’s broke or not, fix it – make it better
4. Continually adapt, innovate, improve
5. Acquisition is essential to growth
 6. Hire/retain best employees/managers
7. Strive to stay cost-competitive on a global basis

Competitive Intelligence Programs:

 CI systematic, ethical process for gathering/analyzing info about the competition’s
activities and general business trend to further a business’ own goals
 3 Basic Objectives:
1. Provide general understanding of an industry and its competitors
2. Identify areas in which competitors are vulnerable and to assess the impact
strategic actions would have on competitors
3. Identify potential moves that a competitor might make that would endanger a
firm’s position in the market

Five Forces Model of Competition:

 Background

o Michael Porter came up with the models while researching the nature of competition.
o Industries differ from one other with respect to factors like profitability, product
development, etc.
o Porter outlined 5 factors to analyse the profitability and attractiveness of an industry.
Use- if you are trying to start a new business in an industry.

1. Rivalry among competing firms

o Most powerful of the 5 forces
o Focuses on competitive advantage of strategies over other firms
2. Potential development of substitute products
o Barriers to entry are important
o Quality, pricing, and marketing can overcome barriers
o Pressure increases when prices of substitutes decrease, consumers’ switching costs
decrease
3. Bargaining power of consumers
o Increased when there are few suppliers, few substitutes, costs of switching raw materials
is high
o Backward integration is gaining control/ownership of suppliers
o Customers being concentrated or buying in volume affects intensity of competition
o Consumer power is higher where products are standard or undifferentiated
4. Potential entry of new competitors
o If suppliers have high bargaining power they can influence pricing and thereby influence
profits
o The suppliers in an industry are powerful when:
* There are few
* Customers are small
* Few substitutes
* Cost to switch suppliers is high
o Example:
* Airline companies

5. Bargaining power of suppliers

o Customers can exert pressure and drive prices down.
o The customers in an industry are powerful when:
* There are few customers
* They have plenty of suppliers to choose from with low switching costs.
* Selected customers purchase significant quantities.
o Examples:
* Airline companies

 Purposes:
o Identify key aspects/elements of each competitive force that impact the firm
o Evaluate strength and importance of each element in the firm
o Decide whether the collective strength of the elements is worth the firm
entering/staying in the industry

Sources of External Info:

 Unpublished sources – customer surveys, market research, speeches at meetings, TV
programs
 Published sources – periodicals, journals, reports, government documents, manuals,
newspapers
 These documents are exceptionally up-to-date and give valuable information about many
different industries. Each report is authored by a Standard & Poor’s industry research
analyst and includes the following sections:
 1. Current Environment
2. Industry Trends
3. How the Industry Operates
4. Key Industry Ratios and Statistics
5. How to Analyze a Company
6. Glossary of Industry Terms
7. Additional Industry Information
8. References
9. Comparative Company Financial Analysis

Forecasting Tools and Techniques:

 Forecasts – educated assumptions about future trends and events; no forecast is perfect
 Assumptions – best present estimates of the impact of major external factors, over which
the manager has little/no control; may exert significant impact on performance/ability to
achieve desired results

Business Analytics:
 Using software to mine huge volumes of data
 Helps executives make decisions

Industry Analysis: The External Factor Evaluation (EFE) Matrix:

 Summarize/evaluate: Social, cultural, demographic, economic, environmental, political,
governmental, legal, technological, competitive factors
 Steps:
1. List 20 key external factors
2. Weight from 0.0 to 1.0
3. Rate the effectiveness of current strategies from 1- 4
4. Multiply weight * rating
5. Sum weighted scores

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

Prepared by:
Group 1
 Norsam L. Ampuan
 Farmaidah A. Alikhan
 Saliha E. Abdullah
 Lailah B. Abdullah