Chapter 3 The External Assessment

Achmad Mustakim
The External Assesment

Prediction is very difficult, especially

about the future.
Neils Bohr

Also called:
– Environmental scanning
– Industry analysis
The External Assesment

Purpose:

– Development of Finite List:

• Opportunities
• Threats to be avoided
The External Assesment

External Audit:
– Identification and evaluation of
trends and events beyond control of
single firm
• Increased foreign competition
• Populations shifts
• Aging society
• Information technology
• Computer revolution
5 key external factors
1. Economic forces
2. Social, cultural, demographic, &
environmental forces
3. Political, governmental, and legal
forces
4. Technological factors
5. Competitive forces
Relationships Between Key
External Forces and an
Organization
Competitors
Suppliers
Distributors
Creditors
Key Customers Opportunities
External Employees &
Forces Communities Threats
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
Perform External Audit

Gather competitive inteligence and

information about:

Economics, social, cultural,

demographic, environmental, political,
govermental, legal and technological
trends
Perform External Audit

Source of Information:
– Internet
– Libraries (corporate, university,
public)
– Suppliers
– Distributors
– Customers
– Competition
Perform External Audit
Variables include:
– Market share
– Breadth of competing products
– World economies
– Foreign affiliates
– Proprietary account advantages
– Price competitiveness
– Technological advancements
– Interest rates
– Pollution abatement
Perform External Audit
Once all information gathered, It should
assimilated and evaluated. managers
make lists of opportunities and
threats, then identify the most
important opportunities and threats.

A prioritize list of these factors could be

obtained by requesting that all
managers rank the factors identified.
From 1 for the most important
opportunity/threat to 20 for the least
important opportunity/threat.
Perform External Audit

Key External Factors:

1. Oriented to long-term & annual

objectives
2. Measurable
3. Applicable to all competing firms
4. Hierarchical
• Overall company
• Divisional or functional areas
Economic Forces

Economics factors have direct impact on

the potential attractiveness of
various strategies
Economic Forces

Monitor Key Economic Variables:

 Availability of credit
 Level of disposable income
 Interest rates
 Inflation rates
 Money market rates
 Federal government budget deficits
 Gross domestic product trend
 Consumption patterns
Economic Forces
• Unemployment trends
• Worker productivity levels
• Value of the dollar in world markets
• Stock market trends
• Foreign countries’ economic
conditions
• Import/export factors
• Demand shifts for goods/services
• Income differences by
region/customer
Economic Forces
• Price fluctuations
• Exportation of labor & capital
• Monetary policies
• Fiscal policies
• Tax rates
Social, Cultural, Demographic, and
Natural Environment Forces

Major impact on: Products, Services,

Markets, customers. Small, large,
for-profit, and non profit
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
Natural Environment Forces

• NAFTA
– U.S. exports to Mexico increased
170%
– 2000, U.S. trade deficits:
• Mexico -- $25 billion
• China -- $84 billion
• Japan -- $81 billion
– 2001 Recession (U.S. and World)
• > 60,000 laid off along Mexico Border
with U.S.
Social, Cultural, Demographic, and
Natural Environment Forces

Trends for the 2000’s –

– More educated consumers

– Population aging
– Minorities more influential
– Local rather than federal solutions
– Fixation with youth decreasing
– Hispanics increase to 15% by 2021
– African Americans increase to 14%
by 2021
Social, Cultural, Demographic, and
Natural Environment Forces

Key variables:
• Childbearing rates
• Number of special-interest groups
• Number of marriages
• Number of divorces
• Number of births
• Number of deaths
• Immigration & emigration rates
Social, Cultural, Demographic, and
Natural Environment Forces

Key variables:
• Life expectancy rates
• Per capita income
• Attitudes toward business
• Average disposable income
• Buying habits
• Ethical concerns
• Attitudes toward saving
Social, Cultural, Demographic, and
Natural Environment Forces

Key variables:
• Racial equality
• Average level of education
• Government regulation
• Attitudes toward customer service
• Attitudes toward product quality
• Energy conservation
• Social responsibility
Social, Cultural, Demographic, and
Natural Environment Forces

Key variables:
• Value placed on leisure time
• Recycling
• Waste management
• Air & water pollution
• Ozone depletion
• Endangered species
Political, Governmental and
Legal Forces

Federal, state, local and foreign

governments are regulators,
deregulators, subsidizer, employers
and customer of organizations.
Political, Governmental and
Legal Forces
• For industries and firms that depend on
government contract or subsidies, political
forecast can be the most important part of
external audit
• In the face of a deepening global
recession, countries worldwide are
protectionism to safeguard their own
industries. Example: European Union
nations restricts imports of US chicken and
beef. Russia raising tariffs on most import
and subsidizing its own export
Political, Governmental and
Legal Forces
• Governments are taking control of more
and more companies as the global
economic recession cripples firms
considered vital to the nation’s stability.
Example: France in 2009 took a 2.35
percent equity stake in troubled car-parts
maker Valeo SA, The UK government in
2009 took 95 percent stake in the banking
giant Royal Bank of Scotland Group PLC in
dramatic move toward nationalization.
• Political relations between China and
Japan, China become the third largest
trading partner for Japan
Political, Governmental and
Legal Forces

Key Political, government & legal

variables:

• Government
regulation/deregulation
• Tax law changes
• Special tariffs
• Political Action Committees (PACs)
• Voter participation rates
• Number of patents
• Changes in patent laws
Political, Governmental and
Legal Forces

Key Political, government & legal

variables:

• Environmental protection laws

• Equal employment legislation
• Level of government subsidies
• Antitrust legislation/enforcement
• Sino-American relationships
• Russian-American relationships
• European-American relationships
Political, Governmental and
Legal Forces

Key Political, government & legal

variables:

• African-American relationships
• Import-export regulations
• Monetary policy
• Political conditions in other
countries
• Government budgets
• World oil, currency, & labor markets
• Location and severity of terrorist
activities
Technological Forces
Revolutionary technological forces:

• Profound impact on
organizations
• Internet
• Semiconductors
• XML technologies
• UWB communications
Technological Forces

Internet changes the nature of

opportunities and threats --

• Alters life cycle of products

• Increases speed of distribution
• Creates new products and services
• Eases limitations of geographic
markets
• Alters economies of scale
• Changes entry barriers
Technological Forces

Two establishing two new positions:

• Chief Information Officer (CIO)
• Chief Technology Officer (CTO)

This trend reflects the growing

importance of IT in strategic
management.
Technological Forces

Technological changes can reduce or

eliminate cost barriers between
businesses, create shorter
production runs, create shortages in
technical skills, result in changing
values and expectation of
employees, managers and customer,
can create new competitive
advantages.
Competitive Forces

• Collection and evaluation of

information on competitors is
essential for successful strategy
formulation
• Competition in virtually all industries
can be described as intense.
Competitive Forces

Key Questions About Competitors:

• Their strengths
• Their weaknesses
• Their objectives and strategies
• Their responses to all external
variables (e.g. social, political,
demographic, etc.)
• Their vulnerability to our alternative
strategies
Competitive Forces

Key Questions About Competitors:

• Our vulnerability to successful
strategic counterattack
• Our product and service positioning
relative to competitors
• Entry and exit of firms in the
industry
• Key factors for our current position
in industry
Competitive Forces

Key Questions About Competitors:

• Sales and profit rankings of
competitors over time
• Nature of supplier and distributor
relationships
• The threat of substitute products or
services
Competitive Forces

Firms need an effective competitive

intelligences (CI) program. The three
objectives of CI program are:
1. Provide 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 in competitors
3. Identify potential moves that a
competitor might make that would
endanger a firm’s position in the
market
Competitive Forces

Sources of Corporate Information:

• Moody’s Manuals
• Standard Corporation Descriptions
• Value Line Investment Surveys
• Dun’s Business Rankings
• Standard & Poor’s Industry Surveys
• Industry Week
• Forbes, Fortune, Business Week
Competitive Analysis: Porter’s
Five-Forces Model

Potential development
of substitute products

Bargaining power Rivalry among Bargaining power

of suppliers competing firms of consumers

Potential entry of new

competitors
Competitive Analysis: Porter’s
Five-Forces Model

• Three steps for using Porter’s Five-

Forces Model:
– Identify key aspect or elements of
each competitive force that impact
the firm
– Evaluate how strong and important
each element is for the firm
– Decide whether the collective
strength of the elements is worth the
firm entering or staying in the
industry
Competitive Analysis: Porter’s
Five-Forces Model

• Rivalry Among Competing Firms

– Usually the most powerful of the five
competitive forces
– The strategies pursued by one firm
can be successful only to the extent
that they provide competitive
advantage over the strategies
pursued by rival firms
Competitive Analysis: Porter’s
Five-Forces Model

Rivalry Among Competing Firms

Conditions that cause high rivalry among
competing firms:
• High number of competing firms
• Similar size of firms competing
• Similar capability of firms competing
• Falling demand for the industry’s product
• When customer can switch brands easily
• When barriers of leaving the market are high
• When barriers of entering the market are low
Competitive Analysis: Porter’s
Five-Forces Model

Rivalry Among Competing Firms

Conditions that cause high rivalry among
competing firms:
• When the product is perishable
• When customer demand is falling
• When rivals have excess capacity
• When rivals have excess inventory
• When rivals sell similar product/services
Competitive Analysis: Porter’s
Five-Forces Model

Potential Entry of New Competitors

Whenever new firms can easily enter a

particular industry, the intensity of
competitiveness among firms increase.
Competitive Analysis: Porter’s
Five-Forces Model

Potential Entry of New Competitors

Barriers to entry:
• Lack of experience
• Strong customer loyalty
• Large capital requirements
• Lack of distribution channel
• Government policies
• Lack of access raw materials
• Possession of patents
• Undesirable locations
• Saturation of the market
Competitive Analysis: Porter’s
Five-Forces Model

Potential Development of Substitute Products

• In many industries, firms are in close competition
with producers of substitute product in other
industries. Example: plastic container producers
competing with glass, paperboard, and aluminum
can producers.
• Competitive pressure arising from substitute
product increase as the relative price of substitute
product decline and as consumer’s switching costs
decrease
Competitive Analysis: Porter’s
Five-Forces Model

Bargaining power of supplier

• Bargaining power of suppliers affects the intensity

of competition in an industry, especially when there
is a large number of suppliers, when there are only
a few good substitute raw materials, or when the
cost of switching raw materials is especially costly.
Competitive Analysis: Porter’s
Five-Forces Model

Bargaining power of supplier

• Sellers are forging strategic partnerships with select
suppliers in effort to:
– Reduce inventory and logistic cost (e.g. just in time
deliveries)
– Speed the availability of next generation
components
– Enhance the quality of the parts and components
being supplied and reduce defect rate
– Squeeze out important cost saving for both
themselves and their suppliers
Competitive Analysis: Porter’s
Five-Forces Model

Bargaining power of Consumers

• When customers are concentrated or large or buy in
volume, their bargaining power represents a major
force affecting the intensity of competition in an
industry.
• Bargaining power of consumers can be the most
important force affecting competitive advantages
Competitive Analysis: Porter’s
Five-Forces Model

Bargaining power of Consumers

• Consumers gain increasing bargaining power under
the following circumstances:
– If they can inexpensively switch to competing brand
or substitute
– If they are particularly important to the seller
– If seller are struggling against the falling consumer
demand
– If they are informed about seller’s product, price,
costs
Industry Analysis (EFE)

External Factor Evaluation Matrix

Summarize & evaluate:
Demographic Governmental
Economic

Social Environmental Technological

Cultural Political Competitive

Industry Analysis (EFE)

Five-Step process:
• List key external factors (10-
20)
Opportunities & threats
• Assign weight to each (0 to
1.0)
Sum of all weights = 1.0
Industry Analysis (EFE)
• Five-step process:
• Assign 1-4 rating to each factor
• Firm’s current strategies response to
the factor

• Multiply each factor’s weight by its

rating
• Produces a weighted score
Industry Analysis (EFE)

Five-step process:
• Sum the weighted scores for
each
Determines the total
weighted score for the
organization.
• Highest possible weighted
score for the organization is
4.0; the lowest, 1.0. Average
= 2.5
 UST—Key External Factors
Opportunities Weighted
Weight Rating
score

Global markets untapped .15 1 .15

Increased demand .05 3 .15
Astronomical Internet growth .05 1 .05
Pinkerton leader in discount market .15 4 .60
More social pressure to quit smoking .10 3 .30

Threats

Legislation against the tobacco industry .10 2 .20

Production limits on tobacco .05 3 .15
Smokeless market SE region U.S. .05 2 .10
Bad media exposure from FDA .10 2 .20
Clinton Administration .20 1 .20
TOTAL 1.00 2.10
Industry Analysis (EFE)

Total weighted score of 4.0 =

Organization response is outstanding to
threats & weaknesses

Total weighted score of 1.0 =

Firm’s strategies not capitalizing on
opportunities or avoiding threats
Industry Analysis (EFE)

Important

• Understanding of the factors used in the

EFE Matrix is more important than the
actual weights and ratings assigned.
Industry Analysis (CPM)
Competitive Profile Matrix

• Identifies firm’s major

competitors and their strengths
& weaknesses in relation to a
sample firm’s strategic position
 (CPM) Procter
Avon L’Oreal & Gamble
Critical Success Weight Rating Score Rating Score Rating Score
Factor
Advertising 0.20 1 0.20 4 0.80 3 0.60

Product Quality 0.10 4 0.40 4 0.40 3 0.30

Price Competition 0.10 3 0.30 3 0.30 4 0.40

Management 0.10 4 0.40 3 0.30 3 0.30

Financial Position 0.15 4 0.60 3 0.45 3 0.45

Customer Loyalty 0.10 4 0.40 4 0.40 2 0.20

Global Expansion 0.20 4 0.80 2 0.40 2 0.40

Market Share 0.05 1 0.05 4 0.20 3 0.15

Total 1.00 3.15 3.25 2.80

Assignment 3
Try to make EFE matrix and CPM
matrix of your company. Gather all
information needed. You can use
internet, or asking directly to the
stakeholder, etc to gather the
information. Please make it
objectively although you are part
of the company

Submit to me before Monday 28th April