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Chapter 3The External Assessment

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Key External ForcesKey External Forces

Economic

Governmental DemographicEnvironmental

Political

Social

Legal

Cultural

Technological

Competitive

©1999 Prentice Hall

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External Strategic Management Audit

Also called:Also called:– Environmental scanning– Industry analysis

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External Strategic Management Audit

External Audit:External Audit:– Identification and evaluation of trends and events

beyond control of single firmExamples:• Increased foreign competition• Populations shifts• Aging society• Information technology• Computer revolution

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Purpose:

– Development of:• Opportunities

• Threats to be avoided

Nature of External Audit

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Importance of External Environment on Firm Behavior

Changes in the External

Environment

Changes in the External

Environment

Changes in Consumer Demand

Changes in Consumer Demand

Changes in the Products and

Services a Firm Offers

Changes in the Products and

Services a Firm Offers

©1999 Prentice Hall

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CompetitorsSuppliersCreditorsCustomersEmployeesCommunitiesManagersStockholdersLabor unionsGovernmentsTrade associationsSpecial interest groupsProductsServicesMarketsNatural environment

CompetitorsSuppliersCreditorsCustomersEmployeesCommunitiesManagersStockholdersLabor unionsGovernmentsTrade associationsSpecial interest groupsProductsServicesMarketsNatural environment

AN ORGANIZATION’S OPPORTUNITIES AND

THREATS

AN ORGANIZATION’S OPPORTUNITIES AND

THREATS

Economic Forces

Social, cultural, demographic, and

environmental forces

Technological forces

Competitive forces

Economic Forces

Social, cultural, demographic, and

environmental forces

Technological forces

Competitive forces

Relationship Between Key External Forces and an Organization

©1999 Prentice Hall

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Economic Forces

• Examples include interest rates, tax rates, inflation rates, consumption patterns, value of the dollar, etc.

• What opportunities or threats might these provide?

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Social, Cultural, Demographic, and Environmental Forces

• Examples include population, race, age, marriage/divorce rates, buying habits, ethical concerns, gender roles, social responsibility, pollution concerns, etc.

• Affects the way we live, work, produce and consume.

• Potential threats and opportunities?

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Political, Governmental and Legal Forces

• Government regulates, deregulates, subsidizes, employs and consumes.

• Examples include tax, antitrust and patent legislation, lobbying activities, import-export regulations, fiscal and monetary policy, etc.

• Any threats or opportunities?

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Technological Forces

• Include advances and applications in technology.

• Threats or opportunities resulting from these forces?

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Competitive Forces

• Understanding one’s competitors is a must.• Competitive intelligence

Systematic and ethical process for gathering and analyzing information about the

competition’s activities and general business trends to further a business’ own goals.

– helps understand competition– helps develop strategy

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Competitive Analysis: Porter’s Five-Forces Model

Potential development of substitute products

Rivalry among competing firms

Bargaining power of suppliers

Potential entry of new competitors

Bargaining power of consumers

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Who are ourcompetitors?Who are ourcompetitors?

Where are ourcompetitors

located?

Where are ourcompetitors

located?

What areCompetitors’

Strengths?

What areCompetitors’

Strengths?

What areCompetitors’Objectives?

What areCompetitors’Objectives?

How Vulnerableare we to ourCompetitors’Strategies?

How Vulnerableare we to ourCompetitors’Strategies?

What are Competitors’Weaknesses?

What are Competitors’Weaknesses?

Key Questions About Competitors

©1999 Prentice Hall

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Sources of Information About the Environment

• Magazines, trade journals and newspapers• On-line databases and Web sites, libraries• Suppliers, distributors, salespeople, customers,

competitors• Table 3-7 on pages 102-03 could be very helpful

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Forecasting• Quantitative

– regression models– trend extrapolation

• Qualitative– salesforce estimates– juries of executive opinion– market research– scenario forecasts– brainstorming

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External Factor Evaluation (EFE) Matrix

• Allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information. Includes:

– Factors (opportunities and threats)

– Weights (indicates the factor’s importance to success in the firm’s industry)

– Ratings (of how effectively the firm’s current strategy responds to the factor)

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Competitive Profile Matrix (CPM)

• Identifies a firm’s major competitors and their strengths and weaknesses in relation to a sample firm’s strategic positions. Includes:

– Critical success factors (for competing)

– Weights (relative importance of factor to success in industry)

– Ratings (company’s strength/weakness regarding each success factor)