The External Assessment
Strategic Management:
Dr. Sayed Elsayed
The External Assessment
Prediction is very difficult, especially
about the future.
-- Neils Bohr
Dr. Sayed Elsayed
External Strategic Management Audit
Also called:
– Environmental scanning
– Industry analysis
Dr. Sayed Elsayed
External Strategic Management Audit
External Audit:
– Identification and evaluation of trends and
events beyond control of single firm
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Increased foreign competition
Populations shifts
Aging society
Information technology
Computer revolution
Dr. Sayed Elsayed
Nature of External Audit
Purpose:
– Development of Finite List:
• Opportunities
• Threats to be avoided
Dr. Sayed Elsayed
Key External Forces
Five (5) broad categories:
1. Economic forces
2. Social, cultural, demographic, &
environmental forces
3. Political, governmental, and legal forces
4. Technological factors
5. Competitive forces
Dr. Sayed Elsayed
Relationships Between Key External Forces
and an Organization
Key
External
Forces
Dr. Sayed Elsayed
Competitors
Suppliers
Distributors
Creditors
Customers
Employees
Communities
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
Opportunities
&
Threats
Performing an External Audit
Gather competitive intelligence on factors:
– Social
– Cultural
– Demographic
– Environmental
– Economic
– Political, legal, governmental
– technological
Dr. Sayed Elsayed
Performing an External Audit
Sources of information include:
– Internet
– Libraries (corporate, university, public)
– Suppliers
– Distributors
– Customers
– Competition
Dr. Sayed Elsayed
Performing an External Audit
Key factors:
– Vary over time
– Vary by industry
Dr. Sayed Elsayed
Performing an External Audit
Variables include:
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Market share
Breadth of competing products
World economies
Foreign affiliates
Proprietary account advantages
Price competitiveness
Technological advancements
Interest rates
Pollution abatement
Dr. Sayed Elsayed
Key External Factors
Key External Factors:
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Oriented to long-term & annual objectives
Measurable
Applicable to all competing firms
Hierarchical
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Overall company
Divisional or functional areas
Dr. Sayed Elsayed
Economic Forces
Monitor Key Economic Variables:
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Availability of credit
Level of disposable income
Interest rates
Inflation rates
Money market rates
Federal government budget deficits
Gross domestic product trend
Consumption patterns
Dr. Sayed Elsayed
Monitor Key Economic Variables:
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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
Dr. Sayed Elsayed
Monitor Key Economic Variables:
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Price fluctuations
Exportation of labor & capital
Monetary policies
Fiscal policies
Tax rates
ECC policies
OPEC policies
LDC policies
Dr. Sayed Elsayed
Social, Cultural, Demographic &
Environmental Forces
Major impact on:
– Products
– Services
– Markets
– customers
Dr. Sayed Elsayed
Social, Cultural, Demographic &
Environmental Forces
Consider:
United States—
– Population growing older
– Less Caucasian
– Gap between rich and poor widening
– 65 and older will rise to 18.5% of population
by 2025
– By 2075, no racial or ethnic majority
Dr. Sayed Elsayed
Social, Cultural, Demographic &
Environmental Forces
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World population > 6 billion
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U.S. population < 300 million
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Great potential for domestic production
expansion to other markets
Domestic only is a risky strategy
Dr. Sayed Elsayed
Social, Cultural, Demographic &
Environmental Forces
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NAFTA
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U.S. exports to Mexico increased 170%
– 2000, U.S. trade deficits:
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Mexico -- $25 billion
China -- $84 billion
Japan -- $81 billion
2001 Recession (U.S. and World)
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Dr. Sayed Elsayed
> 60,000 laid off along Mexico Border with U.S.
Social, Cultural, Demographic &
Environmental Forces
Trends for the 2000’s –
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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
Dr. Sayed Elsayed
Social, Cultural, Demographic &
Environmental Forces
Key variables –
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Childbearing rates
Number of special-interest groups
Number of marriages
Number of divorces
Number of births
Number of deaths
Immigration & emigration rates
Dr. Sayed Elsayed
Monitor Key Variables
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Life expectancy rates
Per capita income
Attitudes toward business
Average disposable income
Buying habits
Ethical concerns
Attitudes toward saving
Dr. Sayed Elsayed
Monitor Key Variables
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Racial equality
Average level of education
Government regulation
Attitudes toward customer service
Attitudes toward product quality
Energy conservation
Social responsibility
Dr. Sayed Elsayed
Monitor Key Variables
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Value placed on leisure time
Recycling
Waste management
Air & water pollution
Ozone depletion
Endangered species
Dr. Sayed Elsayed
Political, Govt., & Legal Forces
Government Regulation
• Key opportunities & key threats
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Dr. Sayed Elsayed
Antitrust legislation (Microsoft)
Tax rates
Lobbying efforts
Patent laws
Political, Govt., & Legal Forces
Increasing Global Interdependence
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Impact of political variables
– Formulation of Strategies
– Implementation of Strategies
Dr. Sayed Elsayed
Political, Govt., & Legal Forces
Increasing Global Interdependence
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Strategists in a global economy
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Forecast political climates
• Legalistic skills
• Diverse world cultures
Dr. Sayed Elsayed
Political, Govt., & Legal Forces
Globalization of Industry
• Worldwide trend toward similar
consumption patterns
• Global buyers & sellers
• E-commerce
• Instant transmission of money &
information across continents
Dr. Sayed Elsayed
Political, Govt., & Legal Forces
Key Political, govt., & legal variables:
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Government regulation/deregulation
Tax law changes
Special tariffs
Political Action Committees (PACs)
Voter participation rates
Number of patents
Changes in patent laws
Dr. Sayed Elsayed
Key Political, Government &
Legal Variables
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Environmental protection laws
Equal employment legislation
Level of government subsidies
Antitrust legislation/enforcement
Sino-American relationships
Russian-American relationships
European-American relationships
Dr. Sayed Elsayed
Key Political, Government &
Legal Variables
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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
Dr. Sayed Elsayed
Technological Forces
Revolutionary technological forces:
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Profound impact on organizations
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Internet
• Semiconductors
• XML technologies
• UWB communications
Dr. Sayed Elsayed
Technological Forces
Internet changes the nature of opportunities and
threats -•
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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
Dr. Sayed Elsayed
Technological Forces
Capitalizing on Information Technology (IT)
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Chief Information Officer (CIO)
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Chief Technology Officer (CTO)
Dr. Sayed Elsayed
Technological Forces
Technology-based issues
– Underlie nearly every strategic decision
Dr. Sayed Elsayed
Competitive Forces
Collection and evaluation of information on
competitors is essential for successful
strategy formulation
Dr. Sayed Elsayed
Competitive Forces
Competition in virtually all industries can be
described as intense.
Dr. Sayed Elsayed
Competitive Forces
Identifying rival firms
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Strengths
Weaknesses
Capabilities
Opportunities
Threats
Objectives
Strategies
Dr. Sayed Elsayed
Competitive Forces
Key Questions About Competitors:
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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
Dr. Sayed Elsayed
Competitive Forces
Key Questions About Competitors:
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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
Dr. Sayed Elsayed
Competitive Forces
Key Questions About Competitors:
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Sales and profit rankings of competitors
over time
• Nature of supplier and distributor
relationships
• The threat of substitute products or
services
Dr. Sayed Elsayed
Competitive Forces
Sources of Corporate Information:
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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
Dr. Sayed Elsayed
Competitive Forces
7 Characteristics of most competitive U.S.
firms:
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Market share matters
Understand what business you are
in
Broke or not, fix it
Innovate or evaporate
Dr. Sayed Elsayed
Competitive Forces
7 Characteristics of most competitive
U.S. firms:
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Acquisition is essential to growth
People make a difference
No substitute for quality
Dr. Sayed Elsayed
Competitive Forces
Competitive Intelligence Programs:
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Systematic and ethical process for
gathering and analyzing information
about the competition’s activities
and general business trends to
further a business’ own goals.
Dr. Sayed Elsayed
Competitive Analysis: Porter’s FiveForces Model
Potential development
of substitute products
Bargaining power
of suppliers
Rivalry among
competing firms
Potential entry of new
competitors
Dr. Sayed Elsayed
Bargaining power
of consumers
Global Challenge
International Challenge faced by U.S. firms:
– How to gain and maintain exports to other
nations
– How to defend domestic markets against
imported goods
Dr. Sayed Elsayed
Industry Analysis (EFE)
External Factor Evaluation Matrix
Summarize & evaluate:
Economic
Demographic
Governmental
Social
Environmental
Technological
Cultural
Political
Competitive
Dr. Sayed Elsayed
Industry Analysis (EFE)
Five-Step process:
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List key external factors (10-20)
Opportunities
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& threats
Assign weight to each (0 to 1.0)
Sum
Dr. Sayed Elsayed
of all weights = 1.0
Industry Analysis (EFE)
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Five-step process:
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Assign 1-4 rating to each factor
• Firm’s current strategies response to the
factor
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Multiply each factor’s weight by its rating
• Produces a weighted score
Dr. Sayed Elsayed
Industry Analysis (EFE)
Five-step process:
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Sum the weighted scores for each
Determines
the total weighted score
for the organization.
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Highest possible weighted score for
the organization is 4.0; the lowest,
1.0. Average = 2.5
Dr. Sayed Elsayed
UST—Key External Factors
Weight
Rating
Weighted
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
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
Opportunities
Threats
TOTAL
Dr. Sayed Elsayed
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
Dr. Sayed Elsayed
Industry Analysis (EFE)
UST (in the previous example), has
a total weighted score of 2.10
indicating that the firm is below
average in its effort to pursue
strategies that capitalize on
external opportunities and avoid
threats.
Dr. Sayed Elsayed
Industry Analysis (EFE)
Important
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Understanding of the factors used in the
EFE Matrix is more important than the
actual weights and ratings assigned.
Dr. Sayed Elsayed
Industry Analysis (CPM)
Competitive Profile Matrix
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Identifies firm’s major competitors
and their strengths & weaknesses
in relation to a sample firm’s
strategic position
Dr. Sayed Elsayed
(CPM)
Critical Success
Factor
Avon
Weight Rating Score Rating Score Rating Score
Advertising
0.20
Product Quality
0.10
Price Competition
0.10
Management
0.10
Financial Position
0.15
Customer Loyalty
0.10
Global Expansion
0.20
Market Share
0.05
Total
1.00
Dr. Sayed Elsayed
L’Oreal
Procter
& Gamble
1
4
3
4
4
4
4
1
0.20
0.40
0.30
0.40
0.60
0.40
0.80
0.05
3.15
4
4
3
3
3
4
2
4
0.80
3
0.60
0.40
3
0.30
0.30
4
0.40
0.30
3
0.30
0.45
3
0.45
0.40
2
0.20
0.40
2
0.40
0.20
3
0.15
3.25
2.80
Key Terms
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America Online
Chief Information Officer (CIO)
Chief Technology Officer (CTO)
Competitive advantages
Competitive analysis
Competitive intelligence (CI)
Competitive Profile Matrix (CPM)
Dr. Sayed Elsayed
Key Terms
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Critical success factors
Cyberspace
Decruiting
Director of competitive analysis
Downsizing
Econometric models
Environmental scanning
External audit
External Factor Evaluation (EFE) Matrix
Dr. Sayed Elsayed
Key Terms
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External forces
Industry analysis
Information Technology (IT)
Industrial policies
Internet learning from the partner
Linear regression
Dr. Sayed Elsayed
Key Terms
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Porter’s Five-Forces Model
Netscape
On-Line databases
Rightsizing
Trend extrapolation
World Wide Web (www)
Dr. Sayed Elsayed