Chapter 3 The External

Assessment
by: Justice Pajarillo
 This chapter examines the tools and concepts
needed to conduct an external strategic
management audit which focuses on identifying and
evaluating trends and events.
The purpose of external audit is to develop a finite
list of opportunities that could benefit a firm and
threats that should be avoided.
It is aimed at identifying key variables that offer
actionable responses.
 Key External Factors
Economic forces
Social, cultural, demographic, and environmental
forces
Political, governmental, and legal forces
Technological forces
Competitive forces
 Economic Forces
Economic forces refer to the nature and direction of
the economy in which business operates. Economic
factors have a tremendous impact on business firms.
The general state of the economy, interest rate, stage of
the economic cycle, balance of payments, monetary
policy, fiscal policy, are key variables in corporate
investment, employment, and pricing decisions.
 Key variables to be mentioned
Availability of credit Demand shifts for
Level of disposable income goods/services
Interest rates Income differences by
Inflation rates region/customer
Money market rates
Federal government budget Price fluctuations
deficits Exportation of labor & capital
Gross domestic product trend Monetary policies
Consumption patterns Fiscal policies
Unemployment trends Tax rates
Worker productivity levels ECC policies
Value of the dollar in world OPEC policies
markets LDC policies
Stock market trends
Foreign countries economic
conditions
Import/export factors
 Social, Cultural, Demographic,
and Environmental Forces
Major impact on:
Products
Services

Markets

Customers
 Key variables to be mentioned
Childbearing rates
Number of special-interest
groups
Number of marriages
Number of divorces
Number of births
Number of deaths
Immigration & emigration
rates
Life expectancy rates
Per capita income
Attitudes toward business
Average disposable income
Buying habits
Ethical concerns
Attitudes toward saving
Racial equality
Average level of education
Government regulation
Attitudes toward customer service
Attitudes toward product quality
Pollution control
Attitudes toward foreign people
Energy conservation
Social responsibility
Value placed on leisure time
Recycling
Waste management
Air & water pollution
Ozone depletion
Endangered species
 Political, Governmental, and
Legal Forces
Political-legal forces include the outcomes of elections,
legislation, and court judgments, as well as the decisions
rendered by various commissions and agencies. The
political sector of the environment presents actual and
potential restriction on the way an organization operates.

Local, state and federal laws; regulatory agencies; and

special-interest groups can have a major impact on the
strategies of small, large, for-profit and nonprofit
organiztions.
 Most important government actions:

Regulation
Taxation
Expenditure
Takeover
Creating a crown corporation
Privatization
 Key variables to be mentioned
Changes in tax laws Lobbying activities
Special tariffs Government budgets
Political action committees World oil, currency, & labor markets
Location and severity of terrorist
Voter participation rates
activities
Number of patents
Local, state, and national elections
Changes in patent laws
Environmental protection laws
Level of protection laws
Equal employment legislation
Level of government subsidies
Antitrust legislation/enforcement
Import-export regulations
Monetary policy
Political conditions in other
countries
 Technological Forces
Influence of technological forces in
organizations:
Technological developments can significantly alter the
demand for an organization's or industry's products or
services.
Technological change can decimate existing businesses
and even entire industries, since its shifts demand from
one product to another.
Changes in technology can affect a firm's operations as
well its products and services.
 key concerns in the technological
environment:
forecast and identify relevant developments - both
within and beyond the industry

assess the impact of these developments on existing

operations

define opportunities
 Competitive Forces
Identifying rival firms
o Strengths
o Weaknesses
o Capabilities
o Opportunities
o Threats
o Objectives
o Strategies
 Key Questions About Competitors:
1. Their strengths
2. Their weaknesses
3. Their objectives and strategies
4. Their responses to all external variables (e.g. social,
political, demographic, etc.)
5. Their vulnerability to our alternative strategies
6. Our vulnerability to successful strategic counterattack
7. Our product and service positioning relative to
competitors
8. Entry and exit of firms in the industry
9. Key factors for our current position in industry
10. Sales and profit rankings of competitors over time
11. Nature of supplier and distributor relationships
12. The threat of substitute products or services
7 characteristics of most competitive
companies:
Market share matters
Understand what business you are in
Broke or not, fix it
Innovate or evaporate
Acquisition is essential to growth
People make a difference
No substitute for quality
 Competitive Intelligence Programs

Systematic and ethical process for

gathering and analyzing information
about the competitions activities and
general business trends to further a
business own goals.
 Competitive Analysis: Porters Five-Forces Model
Potential development
of substitute products

Bargaining power Rivalry among Bargaining power

of suppliers competing firms of consumers

Potential entry of new

Potential entry of new competitors
competitors
 Rivalry among competing firms
Rivalry refers to the degree to which firms
respond to competitive moves of the other firms
in the industry.
 Rivalry among competing firms
Rivalry among existing firms may manifest itself
in a number of ways:
price competition,
new products,
increased levels of customer service,
warranties and guarantees,
advertising,
better networks of wholesale distributors, and so
on.
Two important principles of competitive
rivalry:

A powerful competitive strategy used by one company

intensifies competitive pressures on the other
companies.

The manner in which rivals employ various competitive

weapons to try to out-maneuver one another shapes
"the rules of competition" in the industry and determines
the requirements for competitive success.
 Potential entry of new competitors
Types of Entry Barriers
Economies of scale
Product differentiation
Capital requirements
Cost advantages independent of scale
Switching cost
Access to distribution channels
Governmental and legal barriers
 Potential development of substitute
products
Impact of closely-related substitute products
to sellers
The presence of readily available and competitively
priced substitutes places a ceiling on the prices
companies in and industry can afford to charge without
giving customers an incentive to switch to substitutes
and thus eroding their own market position.
Another is whether it is difficult or costly for customers
to switch to substitutes to substitutes. Typical switching
costs include, the cost of purchasing additional
equipment, employees retraining costs, the time and
costs to test the quality for technical help needed to
make the changeover.
 Bargaining power of suppliers
Supplierpower refers to the ability of
providers of inputs to determine the price
and terms of supply. Suppliers can exert
power over firms an industry by raising
prices or reducing the quality of purchased
goods and services, so reducing
profitability.
A group of suppliers is more powerful if
the following apply:
It is dominated by a few firms and is more concentrated than the
industry its sells to.
When suppliers' products are differentiated to such an extent that
it is difficult or costly for buyers to switch from one suppliers to
another.
When the buying firms are not important customers of the
suppliers group.
When the suppliers of an input do not have to compete with the
substitute inputs of suppliers in other industries.
When one or more suppliers pose a credible threat of forward
integration into the business of the buyer industry.
When the buying firms display no inclination toward backward
integration into the suppliers' business.
 Bargaining power of consumers
The 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.
 Consumers gain increasing bargaining
power under the ff. circumstances:
If they can inexpensively switch to competing brands or
substitutes.
If they are particularly important to the seller.
If the sellers are struggling in the face of falling
consumer demand.
If they are about sellers products, prices, and costs.
If they are discretion in whether and when they
purchase the product.