CHAPTER 3: THE EXTERNAL ASSESSMENT Proponents of the I/O view, such as Michael Porter, contend that

organizational performance will be primarily determined by

External strategic management audit - sometimes called industry forces.
environmental scanning or industry analysis
Economic factors have a direct impact on the potential
External audit - focuses on identifying and evaluating trends and attractiveness of various strategies.
events beyond the control of a single firm, such as
increased foreign competition Key Economic Variables to Be Monitored
population shifts to the Sunbelt Shift to a service economy in the United States
an aging society Availability of credit
consumer fear of traveling Level of disposable income
stock market volatility Propensity of people to spend
Interest rates
- reveals key opportunities and threats confronting an Inflation rates
organization so that managers can formulate strategies to take Money market rates
advantage of the opportunities and avoid or reduce the impact of Federal government budget deficits
threats. Gross domestic product trend
- To develop a finite list of opportunities that could benefit Consumption patterns
a firm and threats that should be avoided. Unemployment trends
Worker productivity levels
As the term finite suggests, the external audit is not aimed at Value of the dollar in world markets
developing an exhaustive list of every possible factor that could Stock market trends
influence the business; rather, it is aimed at identifying key variables
Foreign countries economic conditions
that offer actionable responses
Import/export factors
Demand shifts for different categories of goods and
Key External Forces
services
1. economic forces
Income differences by region and consumer groups
2. social, cultural, demographic, and natural environment
Price fluctuations
forces
Export of labor and capital from the United States
3. political, governmental, and legal forces
Monetary policies
4. technological forces Fiscal policies Tax rates
5. competitive forces European Economic Community (EEC) policies
Organization of Petroleum Exporting Countries (OPEC)
Changes in external forces translate into changes in consumer
policies
demand for both industrial and consumer products and services.
Coalitions of Lesser Developed Countries (LDC) policies

External forces affect

Social, cultural, demographic, and environmental changes have a
the types of products developed
major impact on virtually all products, services, markets, and
the type of services offered
customers
the nature of positioning and market segmentation
Childbearing rates
strategies
Number of special-interest groups
the choice of businesses to acquire or sell and directly
Number of marriages
affect both suppliers and distributors
Number of divorces
Number of births
Freund emphasized that these key external factors should be
Number of deaths
1. important to achieving long-term and annual objectives
Immigration and emigration rates
2. measurable
Social Security programs
3. applicable to all competing firms
Life expectancy rates
4. hierarchical in the sense that some will pertain to the
overall company and others will be more narrowly focused Per capita income
on functional or divisional areas Location of retailing, manufacturing, and service
businesses
Industrial Organization (I/O) - approach to competitive advantage Attitudes toward business
advocates that external (industry) factors are more important than Lifestyles Traffic congestion
internal factors in a firm achieving competitive advantage. Inner-city environments
Average disposable income
 Trust in government Political action committees
Attitudes toward government Voter participation rates
Attitudes toward work Number, severity, and location of government protests
Buying habits Number of patents
Ethical concerns Special local, state, and federal laws
Attitudes toward saving Environmental protection laws
Sex roles Level of defense expenditures
Attitudes toward investing Legislation on equal employment
Racial equality Level of government subsidies
Use of birth control Antitrust legislation
Average level of education Sino-American relationships
Government regulation Russian-American relationships
Attitudes toward retirement European-American relationships
Attitudes toward leisure time African-American relationships
Attitudes toward product quality Importexport regulations
Attitudes toward customer service Government fiscal and monetary policy changes
Pollution control Political conditions in foreign countries
Attitudes toward foreign peoples Lobbying activities
Energy conservation Size of government budgets
Social programs World oil, currency, and labor markets
Number of churches Location and severity of terrorist activities
Number of church members Local, state, and national elections
Social responsibility
Attitudes toward careers
Population changes by race, age, sex, and level of Internet - has changed the very nature of opportunities and threats
affluence by
Attitudes toward authority altering the life cycles of products
Population changes by city, county, state, region, and increasing the speed of distribution
country creating new products and services
Value placed on leisure time erasing limitations of traditional geographic markets
Regional changes in tastes and preferences changing the historical trade-off between production
Number of women and minority workers standardization and flexibility
Number of high school and college graduates by
geographic area - altering economies of scale, changing entry barriers, and
Recycling redefining the relationship between industries and various
Waste management suppliers, creditors, customers, and competitors.
Air pollution
Water pollution - has become an excellent medium for gathering competitive
Ozone depletion intelligence
Endangered species
- has made it easier for firms to gather, assimilate, and evaluate
information.
Lifecare facilities

To effectively capitalize on e-commerce, a number of organizations

Federal, state, local, and foreign governments are major regulators,
are establishing two new positions in their firms:
deregulators, subsidizers, employers, and customers of
organizations Chief Information Officer (CIO) - manager
Chief Technology Officer (CTO) - technician
Political, governmental, and legal factors - can represent key
opportunities or threats for both small and large organizations. CIO and CTO work together to ensure that information needed to
formulate, implement, and evaluate strategies is available where
Some Political, Governmental, and Legal Variables and when it is needed.
Government regulations or deregulations
These individuals are responsible for developing, maintaining, and
Changes in tax laws
updating a companys information database
Changes in patent laws
Special tariffs
Technological forces represent major opportunities and threats that
must be considered in formulating strategies.
Technological advancements - can dramatically affect organizations
products, services, markets, suppliers, distributors, competitors,
customers, manufacturing processes, marketing practices, and
competitive position
- can create new markets, result in a proliferation of new
and improved products, change the relative competitive cost
positions in an industry, and render existing products and services
obsolete
- can create new competitive advantages that are more
powerful than existing advantages.
Technological changes can reduce or eliminate cost barriers
between businesses, create shorter production runs, create
shortages in technical skills, and result in changing values and
expectations of employees, managers, and customers.
Competitive intelligence (CI) - defined by the Society of
Competitive Intelligence Professionals (SCIP)
- is a systematic and ethical process for gathering and
analyzing information about the competitions activities and general
business trends to further a businesss own goals.
3 basic objectives of a CI program
to provide a general understanding of an industry and its
competitors
to identify areas in which competitors are vulnerable and
to assess the impact strategic actions would have on
competitors
to identify potential moves that a competitor might make
that would endanger a firms position in the market
Competitive information - is equally applicable for strategy
formulation, implementation, and evaluation decisions
Special characteristics of a successful CI program
flexibility
usefulness
timeliness
cross-functional cooperation
The responsibilities of a director of competitive analysis
planning
collecting data
analyzing data
Facilitating the process of gathering and analyzing data
disseminating intelligence on a timely basis
researching special issues
recognizing what information is important and who needs
to know
Competitive intelligence is not corporate espionage because 95
percent of the information a company needs to make strategic
decisions is available and accessible to the public
Sources of competitive information include
trade journals
want ads
newspaper articles
government filings
customers
suppliers
distributors
competitors
Internet
Unethical tactics - should never be used to obtain information
Bribery
Wiretapping
computer break-ins
Competitors - are firms that offer similar products and services in
the same market.
Markets - can be geographic or product areas or segments
Market commonality - can be defined as the number and
significance of markets that a firm competes in with rivals
Resource similarity is the extent to which the type and amount of a
firms internal resources are comparable to a rival
Porters Five-Forces Model - of competitive analysis is a widely used
approach for developing strategies in many industries
1. Rivalry among competing firms
2. Potential entry of new competitors
3. Potential development of substitute products
4. Bargaining power of suppliers
5. Bargaining power of consumers
3 steps for using five forces model
Identify key aspects 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
Rivalry among competing firms is usually the most powerful of the
five competitive forces
Conditions That Cause High Rivalry among Competing Firms
1. High number of competing firms
2. Similar size of firms competing
3. Similar capability of firms competing
4. Falling demand for the industrys products
5. Falling product/service prices in the industry
6. When consumers can switch brands easily It includes the following sections:
7. When barriers to leaving the market are high 1. Current Environment
8. When barriers to entering the market are low 2. Industry Trends
9. When fixed costs are high among firms competing 3. How the Industry Operates
10. When the product is perishable 4. Key Industry Ratios and Statistics
11. When rivals have excess capacity 5. How to Analyze a Company
12. When consumer demand is falling 6. Glossary of Industry Terms
13. When rivals have excess inventory 7. Additional Industry Information
14. When rivals sell similar products/services 8. References
15. When mergers are common in the industry 9. Comparative Company Financial Analysis

The presence of substitute products puts a ceiling on the price that
can be charged before consumers will switch to the substitute
product
Price ceilings equate to profit ceilings and more intense competition
among rivals
Competitive pressures arising from substitute products increase as
the relative price of substitute products declines and as consumers
switching costs decrease
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
Bargaining power of consumers also is higher when the products
being purchased are standard or undifferentiated
Consumers gain increasing bargaining power under the following
circumstances:
1. If they can inexpensively switch to competing brands or
substitutes
2. If they are particularly important to the seller
3. If sellers are struggling in the face of falling consumer demand
4. If they are informed about sellers products, prices, and costs
5. If they have discretion in whether and when they purchase the
product
Forecasts - are educated assumptions about future trends and
events.
- is a complex activity because of factors such as:
technological innovation
cultural changes
new products
improved services
stronger competitors
shifts in government priorities
changing social values
unstable economic conditions
unforeseen events
Forecasting tools can be broadly categorized into two groups:
quantitative techniques and qualitative techniques
Quantitative forecasts are most appropriate when historical data
are available and when the relationships among key variables are
expected to remain the same in the future
Linear regression - is based on the assumption that the future will
be just like the pastwhich, of course, it never is
As historical relationships become less stable, quantitative forecasts
become less accurate.
Planning would be impossible without assumptions
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

Sources of External Information - are needed only for future trends and events that are
Unpublished sources Published sources most likely to have a significant effect on the companys business
customer surveys periodicals
External Factor Evaluation (EFE) Matrix - allows strategists to
market research journals
summarize and evaluate economic, social, cultural, demographic,
speeches at reports environmental, political, governmental, legal, technological, and
professional and
government competitive information
shareholders
meetings documents
4= the response is superior,
television programs abstracts
3 = the response is above average,
interviews books
2 = the response is average
conversations with directories 1 = the response is poor
stakeholders newspapers
manuals Competitive Profile Matrix (CPM) - identifies a firms major
competitors and its particular strengths and weaknesses in relation
to a sample firms strategic position
Industry Surveys - These documents are exceptionally up-to-date
and give valuable information about many different industries.
- Critical success factors in a CPM include both internal and
external issues
4= major strength,
3 = minor strength,
2 = minor weakness
1 = major weakness