Chapter 3
The External Assessment
Ahsan Ali Ashraf
Faculty Member at Lahore LEADS University,
Department of Management Sciences
Ch 3 -1
External Strategic
Management Audit
Identify & Evaluate factors beyond
the control of a single firm
– Increased foreign competition
– Population shifts
– Information technology
– Globalization
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Ch 3 -2
Key External Forces & the Organization
1) All Stakeholders
Key
External
Forces
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Competitors
Suppliers
Distributors
Creditors
Customers
Employees
Communities
Managers
Stockholders
Labor Unions
Special Interest Groups
2). Products
Services
Opportunities
&
Threats
Ch 3 -3
Performing External Audit
Long-term orientation
External
Factors
Measurable
Applicable to
competing firms
Hierarchical
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Ch 3 -4
I/O Perspective Firm Performance
Industry Properties
Economies of Scale
Barriers to market entry
Product differentiation
Level of competitiveness
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Ch 3 -5
Social, Cultural, Demographic
& Environmental Forces
U.S. Facts
•Aging population
•Widening gap between rich & poor
•2025 = 18.5% population >65 years
•2075 = no ethnic or racial majority
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Ch 3 -6
Key Social, Cultural, Demographic &
Environmental Variables
Childbearing rates
Number of special interest groups
Number of marriages & divorces
Number of births & deaths
Immigration rates
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Ch 3 -7
Political, Government & Legal
Forces
Globalization of Industry
• Worldwide trend toward similar
consumption patterns
• Global buyers and sellers
• E-commerce
• Technology for instant currency transfers
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Ch 3 -8
Competitive Forces
Identifying Rival Firms
•Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies
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Ch 3 -9
The Five-Forces Model of Competition
Potential development
of substitute products
Bargaining power
of suppliers
Rivalry among
competing firms
Bargaining power
of consumers
Potential entry of new
competitors
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Ch 3 -10
Industry Analysis: The External Factor
Evaluation (EFE) Matrix
Summarize & Evaluate
Economic
Demographic
Governmental
Social
Environmental
Technological
Cultural
Political
Competitive
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Ch 3 -11
External Factor Evaluation Matrix (EFE)
1) List key external factors as identified in the external-audit process. Include a
total of 15 to 20 factors, including both opportunities and threats, that affect the
firm and its industry. List the opportunities first and then the threats. Be as
specific as possible, using percentages, ratios, and comparative numbers
whenever possible. Recall that
Edward Deming said, “In God we trust. Everyone else bring data.”
2) Assign to each factor a weight that ranges from 0.0 (not important) to 1.0
(very important). The weight indicates the relative importance of that factor to
being successful in the firm’s industry. Opportunities often receive higher
weights than threats, but threats can receive high weights if they are especially
severe or threatening. Appropriate weights can be determined by comparing
successful with unsuccessful competitors or by discussing the factor and
reaching a group consensus. The sum of all weights assigned to the factors
must equal 1.0.
Ch 3 -12
3) Assign a rating between 1 and 4 to each key external factor to indicate how
effectively the firm’s current strategies respond to the factor, where 4 = the
response is superior, 3 = the response is above average, 2 = the response is
average, and 1 = the response is poor. Ratings are based on effectiveness of the
firm’s strategies. Ratings are thus company-based, whereas the weights in Step
2 are industry-based. It is important to note that both threats and opportunities
can receive a 1, 2, 3, or 4.
4) Multiply each factor’s weight by its rating to determine a weighted score.
5) Sum the weighted scores for each variable to determine the total weighted
score for the organization.
Copyright 2007 Prentice Hall
Ch 3 -13
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Ch 3 -14
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Ch 3 -15
Industry Analysis EFE
Total weighted score of 4.0
• Organization response is outstanding to threats
and weaknesses
Total weighted score of 1.0
• Firm’s strategies not capitalizing on opportunities
or avoiding threats
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Ch 3 -16
Industry Analysis: Competitive Profile
Matrix (CPM)
Identifies firm’s major competitors
and their strengths & weaknesses
in relation to a sample firm’s
strategic positions
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Ch 3 -17
Gateway
Apple
Dell
Wt
Rating
Wt’d
Score
Ratin
g
Wt’d
Score
Rating
Wt’d
Score
Market share
0.15
3
0.45
2
0.30
4
0.60
Inventory sys
0.08
2
0.16
2
0.16
4
0.32
Fin. position
0.10
2
0.20
3
0.30
3
0.30
Prod. Quality
0.08
3
0.24
4
0.32
3
0.24
Cons. Loyalty
0.02
3
0.06
3
0.06
4
0.08
Sales Distr
0.10
3
0.30
2
0.20
3
0.30
Global Exp.
0.15
3
0.45
2
0.30
4
0.60
Org. Structure
0.05
3
0.15
3
0.15
3
0.15
CSF’s
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Ch 3 -18
Gateway
Apple
Dell
CSF’s (cont’d)
Wt
Rating
Wt’d
Score
Ratin
g
Wt’d
Score
Rating
Wt’d
Score
Prod. Capacity
0.04
3
0.12
3
0.12
3
0.12
E-commerce
0.10
3
0.30
3
0.30
3
0.30
Customer Serv 0.10
3
0.30
2
0.20
4
0.40
Price
competitive
0.02
4
0.08
1
0.02
3
0.06
Mgt.
experience
0.01
2
0.02
4
0.04
2
0.02
Total
1.00
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2.83
2.47
3.49
Ch 3 -19