Chapter 3: The External Assessment
External Audit:
– focuses on identifying and evaluating trends and events
beyond the control of a single firm
– reveals opportunities and threats to formulate strategies
+ take advantage of the opportunities + avoid threats
The Purpose? 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.
Key External Forces:
1. economic
2. social, cultural, demographic, and environmental (SCDE)
3. political, governmental, and legal
4. technological
5. competitive
The AQCD Test: identifying and prioritizing key external
factors in strategic planning, the following 4 factors are
important: Actionable, Quantitative, Comparative, Divisional
It is a measure of the quality of an external factor.
- Economic Forces: Interest, Inflation, GDP
trends, Consumption patterns, Unemployment
trends, Value of the dollar
- SCDE Variables: # marriages, # divorces,
immigration and emigration rates, Social
Security programs
- Political, Governmental, and Legal: Changes in
patent laws, environmental regulations,
- Tech forces: 3D printing, cloud, mobile devices
o
Many firms now have a Chief Information
Officer (CIO) and a Chief Technology Officer
(CTO) who work together to do strategy.
Competitive Forces: An important part of an external audit is
identifying rival firms and determining their strengths,
weaknesses..
Obtaining Competitive Intelligence:
1. Reverse-engineer rival firms’ products.
2. Use surveys and interviews of customers, suppliers,
and distributors of rival firms.
3. Analyze rival firm’s Form 10-K.
4. Conduct fly-over and drive-by visits to rival firm
operations.
Chapter 3: The External Assessment
5. Search online databases.
6. Contact government agencies for public information
about rival firms.
7. Monitor relevant trade publications, magazines, and
newspapers.
8. Purchase social-media data about customers of all
firms in the industry.
9. Hire top executives from rival firms.
Competitive intelligence (CI): a systematic and ethical process
for gathering and analyzing information about the
competition's activities, general business trends, and goals
The Five-Forces Model of Competition:
•
•
Rivalry among competing firms
– Most powerful of the five forces
– Focus on competitive advantage of strategies over
other firms
Potential Entry of New Competitors
– Barriers to entry are important: economies of scale,
large capital requirements, customer loyalty..
–
Quality, pricing, and marketing can overcome
barriers
• Substitute products
– Prices of substitutes decrease
– Consumers' switching costs decrease
• Bargaining Power of Suppliers increases when:
– Few suppliers AND/OR Few substitutes
– Costs of switching raw materials is high
Backward integration is gaining control or ownership of suppliers
• Bargaining power of consumers
– higher where products are standard or
undifferentiated
– Customers being concentrated or buying in volume
affects intensity of competition
– Conditions Where Consumers Gain Bargaining
Power
1. If buyers can inexpensively switch
2. If buyers are particularly important
3. If sellers are struggling in the face of falling
consumer demand
4. If buyers are informed about sellers' products,
prices, and costs
5. If buyers have discretion in whether and when they
purchase the product
Chapter 3: The External Assessment
Sources of External Information:
– Unpublished customer surveys, market research, speeches
at professional and shareholders' meetings, interviews
– Published periodicals, journals, reports, government
documents, abstracts, books, directories, newspapers
– IBISWorld
– Lexis-Nexis Academic
– Lexis-Nexis Company Dossier
– Mergent Online
– PrivCo
– S&P NetAdvantage
– Value Line Investment Survey
– Company Annual Reports On-Line (CAROL)
Forecasting Tools and Techniques: educated assumptions
about future trends and events. no forecast is perfect
Making Assumptions: Best present estimates of the impact of
major external factors, over which the manager has little if
any control, but which may exert a significant impact on
performance or the ability to achieve desired results.
Industry Analysis: The External Factor Evaluation (E F E) Matrix
•
•
•
•
•
Social
Cultural
Demographic
Economic
Environmental
•
•
•
•
•
Political
Governmental
Legal
Technological
Competitive
E F E Matrix 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
Industry Analysis: Competitive Profile Matrix (C P M)
• 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
How to Gain and Sustain Competitive Advantages