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competitors, andmarkets.To perform an external audit, a company fir st must gather competitive intelligence and information aboutsocial, cultural, d emographic, environmental, economic, political, legal, governmental, and technol ogicaltrends. Individuals can be asked to monitor various sources of information such as key magazines, trade journals, and newspapers. These persons can submit periodic scanning reports to a committee of managers charged with performing th e external audit. This approach provides a continuous stream of timely strategic information and involves many individuals in the external-audit process. The In ternetprovides another source for gathering strategic information, as do corpora te, university, and public libraries. Suppliers,distributors, salespersons, cust omers, and competitors represent other sources of vital information.Once informa tion is gathered, it should be assimilated and evaluated. A meeting or series of meetings of managers is needed to collectively identify the most important oppo rtunities and threats facing the firm.These key external factors should be liste d on flip charts or a blackboard. A prioritized list of these factorscould be ob tained by requesting all managers to rank the factors identified, from 1 for the most importantopportunity/threat to 20 for the least important opportunity/thre at. These key external factors can varyover time and by industry. Relationships with suppliers or distributors are often a critical success factor.Other variabl es commonly used include market share, breadth of competing products, world econ omies,foreign affiliates, proprietary and key account advantages, price competit iveness, technologicaladvancements, population shifts, interest rates, and pollu tion abatement.Freund emphasized that these key external factors should be:Impor tant to achieving long-term and annual objectives,Measurable,Applicable to all c ompeting firms, andHierarchical in the sense that some will pertain to the overa ll company and others will be more narrowlyfocused on functional or divisional a reas.A final list of the most important key external factors should be communica ted and distributed widely inthe organization. Both opportunities and threats ca n be key external factors. Economic Forces Economic factors have a direct impact on the potential attractiveness of various strategies. For example,as interest rates rise, then funds needed for capital e xpansion become more costly or unavailable. Also,as interest rates rise, discret ionary income declines, and the demand for discretionary goods falls. Asstock pr ices increase, the desirability of equity as a source of capital for market deve lopment increases.Also, as the market rises, consumer and business wealth expands. A summary of economic va riables that oftenrepresent opportunities and threats for organizations is provi ded in Table given below. Social, Cultural, Demographic, and Environmental Forces Social, cultural, demographic, and environmental changes have a major impact upo n virtually all products(Preferences change), services, markets, and customers . Small, large, for-profit, and nonprofitorganizations in all industries are being staggered and challenged by the opportunities and threats arisingfrom changes i n social, cultural, demographic, and environmental variables. In every way, the UnitedStates is much different today than it was yesterday, and tomorrow promise s even greater changes. Wemay use the following analysis in understanding the So cial, Cultural, Demographic, and EnvironmentalForces: Consider Pakista

Political, Governmental, and Legal Forces Federal, state, local, and foreign governments are major regulators, deregulator s, subsidizers,employers,and customers of organizations. Political, governmental , and legal factors, therefore, canrepresent key opportunities or threats for bo th small and large organizations. For industries and firms thatdepend heavily on government contracts or subsidies, political forecasts can be the most importan t partof an externalaudit. Changes in patent laws, antitrust legislation, tax ra tes, and lobbying activities can affect firmssignificantly.In the world of impol itic, Americans are still deeply divided over issues such as assisted suicide, g enetictesting, genetic engineering, cloning, and abortion. Such political issues have great ramifications for companies in many industries ranging from pharmace uticals to computers.The increasing global interdependence among economies, mark ets, governments, and organizationsmakes it imperative that firms consider the p ossible impact of political variables on the formulation andimplementation of co mpetitive strategies technological forces: Revolutionary technological changes and discoveries such as superconductivity, c omputer engineering,thinking computers, robotics, unemployed factories, miracle drugs, space communications, spacemanufacturing, lasers, cloning, satellite netw orks, fiber optics, biometrics, and electronic funds transfer are having a drama tic impact on organizations. Superconductivity advancements alone, which increas ethe power of electrical products by lowering resistance to current, are revolut ionizing business operations,especially in the transportation, utility, health c are, electrical, and computer industries.The Internet is acting as a national an d even global economic engine that is spurring productivity, acritical factor in a country's ability to improve living standards. he Internet is saving companies billions of dollars in distribution and transact ion costs from direct sales toself-service systems. For example, the familiar Hy pertext Markup Language (HTML) is being replaced byExtensible Markup Language (X ML). XML is aprogramming language based on "tags" whereby a number represents a price, an invoice, a date, a zipcode, or whatever. XML is forcing companies to m ake a major strategic decision in terms of whether toopen their information to t he world in the form of catalogs, inventories, prices and specifications, or att empt to hold their data closely to preserve some perceived advantage. XML is res haping industries,reducing prices,accelerating global trade, and revolutionizing all commerce. Microsoft has reoriented most of its softwaredevelopment around X ML, replacing HTML.Ultra-wideband (UWB) wireless communications that sends infor mation on tiny wave pulses may soonreplace continuous radio waves, allowing ever -smaller devices to do vastly more powerful wirelesscommunications. The Federal Communications Commission (FCC) is slow to approve UWB in fear of itsdisrupting existing wireless communication, but UWB technology pioneered by Time Domain of Huntsville, Alabama, has the potential to permanently change the way all individ uals and businessescommunicate worldwide. Competitive Forces Collecting and evaluating information on competitors is essential for successful strategy formulation.Identifying major competitors is not always easy because m any firms have divisions that compete indifferent industries. Most multidivision al firms generally do not provide sales and profit information on adivisional ba sis for competitive reasons. Also, privately held firms do not publish any finan cial or marketing information.Despite the problems mentioned above, information on leading competitors in particular industries can befound in publications such as Moody's Manuals, Standard Corporation Descriptions, Value LineInvestment Sur veys, Ward's Business Directory, Dun's Business Rankings, Standard & Poor's Indu strySurveys, Industry Week, Forbes,Fortune, Business Week, and Inc. However, man y businesses use the Internet to obtain most of their information on competitors . The Internet is fast, thorough, accurate, and increasingly indispensable in th isregard. Questions about competitors such as those presented in Table are impor tant to address inperforming an external audit. competitive analysis porter's five forces model

Michael Porter provided a framework that models an industry as being influenced by five forces. Thestrategic business manager seeking to develop an edge over ri val firms can use this model to better understand the industry context in which the firm operates. Rivalry among competing firms; Economists measure rivalry by indicators of industry concentration. The Concentr ation Ratio (CR) is onesuch measure. The Bureau of Census periodically reports t he CR for major Standard IndustrialClassifications (SIC's). The CR indicates the percent of market share held by the four largest firms (CR'sfor the largest 8, 25, and 50 firms in an industry also are available). A high concentration ratio indicatesthat a high concentration of market share is held by the largest firms - the industry is concentrated. Withonly a few firms holding a large market shar e, the competitive landscape is less competitive (closer to amonopoly). A low co ncentration ratio indicates that the industry is characterized by many rivals, n one of which has a significant market share. These fragmented markets are said t o be competitive. Theconcentration ratio is not the only available measure; the trend is to define industries in terms that conveymore information than distribu tion of market share. Potential entry of new competitors; It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms mayenter the industry also affects competition. In th eory, any firm should be able to enter and exit a market,and if free entry and e xit exists, then profits always should be nominal. In reality, however, industri espossess characteristics that protect the high profit levels of firms in the ma rket and inhibit additional rivalsfrom entering the market. These are barriers to entry.Barriers to entry are more than the normal equilibrium adjustm ents that markets typically make. For example, when industry profits increase, w e would expect additional firms to enter the market to takeadvantage of the high profit levels, over time driving down profits for all firms in the industry. Wh en profitsdecrease, we would expect some firms to exit the market thus restoring a market equilibrium. Fallingprices, or the expectation that future prices will fall, deters rivals from entering a market. Firms also maybe reluctant to enter markets that are extremely uncertain, especially if entering involves expensive start-up costs. These are normal accommodations to market conditions. But if fi rms individually (collectiveaction would be illegal collusion) keep prices artif icially low as a strategy to prevent potential entrantsfrom entering the market, such entry-deterring pricing establishes a barrier.Barriers to entry are unique industry characteristics that define the industry. Barriers reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry. From a strategicperspective, barriers can be created or exploited to enhance a firm's competitive advantage. Barriers toentry arise from several sour ces: Potentional development of substitute product; In Porter's model, substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product's demand is affect ed by the price change of a substitute product. Aproduct's price elasticity is a ffected by substitute products - as more substitutes become available, thedemand becomes more elastic since customers have more alternatives. A close substitute productconstrains the ability of firms in an industry to raise prices.The compe tition engendered by a Threat of Substitute comes from products outside the indu stry. Theprice of aluminum beverage cans is constrained by the price of glass bo ttles, steel cans, and plasticcontainers. These containers are substitutes, yet they are not rivals in the aluminum can industry. To themanufacturer of automobi le tires, tire retreads are a substitute. Today, new tires are not so expensive thatcar owners give much consideration to retreading old tires. But in the truck ing industry new tires areexpensive and tires must be replaced often. In the tru ck tire market, retreading remains a viablesubstitute industry. In the disposabl

e diaper industry, cloth diapers are a substitute and their pricesconstrain the price of disposables. Bargaining Power of Suppliers Suppliers are the businesses that supply materials & other products into the ind ustry.The cost of items bought from suppliers (e.g. raw materials, components) c an have a significant impacton a company's profitability. If suppliers have high bargaining power over a company, then in theory thecompany's industry is less a ttractive. The bargaining power of suppliers will be high when:- There are many buyers and few dominant suppliers- There are undifferentiated, highly valued pro ducts- Suppliers threaten to integrate forward into the industry (e.g. brand man ufacturers threatening to set uptheir own retail outlets)- Buyers do not threate n to integrate backwards into supply- The industry is not a key customer group t o the suppliers Bargaining Power of Buyers Buyers are the people / organisations who create demand in an industryThe bargai ning power of buyers is greater when - There are few dominant buyers and many sellers in the industry- Products are s tandardised- Buyers threaten to integrate backward into the industry- Suppliers do not threaten to integrate forward into the buyer's industry- The industry is not a key supplying group for buyers Industry Analysis: The External Factor Evaluation (EFE) Matrix We can prepare EFE matrix after evaluating the key external factors discuss in t he later lectures. Thereare all key factors which are needed to be summarized in order to make EFE matrix. An External Factor Evaluation (EFE) Matrix allows str ategists to summarize and evaluate economic, social, cultural,demographic, envir onmental, political, governmental, legal, technological, and competitive informa tion.The EFE matrix consists of five steps process. Five-Step process: List key external factors 1. List key external factors as identified in the external-audit process. Includ e a total of from ten to twentyfactors, including both opportunities and threats affecting the firm and its industry. List theopportunities first and then the t hreats. Be as specific as possible, using percentages, ratios, andcomparative nu mbers whenever possible.2. Assign to each factor a weight that ranges from 0.0 ( not important) to 1.0 (very important). The weightindicates the relative importa nce of that factor to being successful in the firm's industry.Opportunities ofte n receive higher weights than threats, but threats too can receive high weights if theyare especially severe or threatening. Appropriate weights can be determin ed by comparing successfulwith unsuccessful competitors or by discussing the fac tor and reaching a group consensus. The sum of all weights assigned to the facto rs must equal 1.0.3. Assign a 1-to-4 rating to each key external factor to indic ate how effectively the firm's current strategiesrespond to the factor, where 4 5 the response is superior, 3 5 the response is above average, 2 5 theresponse i s average, and 1 5 the response is poor. Ratings are based on effectiveness of t he firm'sstrategies. Ratings are, thus, company based, whereas the weights in St ep 2 are industry based. It isimportant to note that both threats and opportunit ies can receive a 1, 2, 3, or 4.4. Multiply each factor's weight by its rating t o determine a weighted score.5. Sum the weighted scores for each variable to det ermine the total weighted score for theorganization. EFE matrix example Leave a Comment You must be logged in to leave a comment. Submit Characters: 400 Follow Us! scribd.com/scribd twitter.com/scribd

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