MGT 657

STRATEGIC MANAGEMENT
CHAPTER 3 :
THE EXTERNAL ASSESSMENT

1
 3.1Nature of an External
Audit
Purpose: To develop a set list of opportunities that
could benefit a firm & threats that should be
avoided.
Not aimed at developing an comprehensive list of
every possible factor that could be influence the
business, rather;
Aimed at identifying key variables that offer actionable
responses.
Firms should be able to respond either offensively or
defensively to the factorsHOW??
By formulating strategies that take advantage of
external opportunities or that minimize the impact of
potential threats.
 3.2The Process of Performing an
External Audit
Must involves as many managers &
employees
WHY ???
o Lead to understanding & commitment
from organizational members
o Appreciate having the opportunity to
contribute ideas
o To gain a better understanding of their
firms industry, competitors, and
markets
 Cont. Process of
Performing

Gather competitive intelligence & information

about E,S,C,P,E,L,T,G,D

Assimilated and evaluated

 Cont.
Firstly:-
o A company must gather competitive intelligence
& information about:-
Economic
Social
Cultural
Political
Environmental Key External Forces/ Factors
Legal
Technological
Governmental
Demographic
 Cont.
Secondly:-
o Once information is gathered, it should be
assimilated & evaluated
o The key external factors should be listed on
flip charts/ chalkboard & request all
managers to rank the factors identified:-
From 1 the most important opportunity/ threat
To 20 for the least important opportunity/ threat
o Key external factors may vary over time &
by industry
 Cont.
o The variables commonly used include:-
Market share
extent of competitive products
World economies
Foreign affiliates
Proprietary & key account advantages
Price competitiveness
Technological advancement
Population shifts
Interest rates
Pollution abatement but
The relationship with suppliers/ distributors are
often a critical success factor
 Cont.
o These key external factors should be:-
Important to achieving long-term & annual objectives

Measurable

Applicable to all competing firms

Hierarchical in the sense that some will pertain to the

overall company & others will be more narrowly
focused on functional/ divisional areas
Communicated & distributed widely in the
organization
 Economic Forces
Have a direct impact on the possible attractiveness of
various strategies.
Also cause optional income decline and the demand for
discretionary goods falls.
It is also when the market rises, consumer business
wealth will expands.
Key Economic Variable To Be Monitored.:
Interest Rate
Inflation Rates
Unemployment Trend
Import /Export factors
Fiscal Policy
Monetary Policy

3-9
 Social, Cultural, Demographic, and
Natural Environmental Forces
Changes in social, culture, demography &
environmental tends are shaping the way
Somalilanders live, work, produce and
consume.
When new trends are creating a different
type of consumer and consequently, a
need for different product, services and
strategies.

3-10
Political, Governmental, and Legal Forces
The increasing global interdependence
among economies, markets, governments,
and organizations makes it very important
that firms consider the possible impact of
political variables on the formulation and
implementation of competitive strategies.
Represented a key of opportunities or
threats for both small & large organizations.

3-11
 Technological Forces
The Internet has changed the very nature of
opportunities and threats by:

Transform the life cycles of products,

increasing the speed of distribution,
creating new products and services,
erasing limitations of traditional geographic markets,
changing the historical trade-off between production standardization
and flexibility.

The Internet is altering economies of scale, changing entry

barriers, and redefining the relationship between industries and
various suppliers, creditors, customers, and competitors

3-12
 Competitive Forces
An important part of an external audit is identifying rival firms
and determining their strengths, weaknesses, capabilities,
opportunities, threats, objectives, and strategies

Characteristics of the most competitive companies:

1.Market share matters
2.Understand and remember precisely what business you are in
3.Whether its broke or not, fix itmake it better
4.Innovate or evaporate
5.Acquisition is essential to growth
6.People make a difference
7.There is no substitute for quality

3-13
 Competitive Intelligence Programs

Competitive intelligence (CI)

a systematic and ethical process for gathering and
analyzing information about the competitions activities
and general business trends to further a businesss own
goals
The three basic objectives of a CI program are:
1. to provide a general understanding of an industry
and its competitors
2. to identify areas in which competitors are
vulnerable and to assess the impact strategic
actions would have on competitors
3. to identify potential moves that a competitor might make
that would endanger a firms position in the market
3-14
Sources of External Information
Unpublished sources include customer
surveys, market research, speeches at
professional and shareholders meetings,
television programs, interviews, and
conversations with stakeholders.
Published sources of strategic information
include periodicals, journals, reports,
government documents, abstracts, books,
directories, newspapers, and manuals.

3-15
 POTENTIAL DEVELOPMENT OF 3
SUBTITUTE PRODUCT
POTENTIAL ENTRY OF NEW 2
COMPETITORS
RIVALRY AMONG COMPETING 1
FIRMS
Porters Five-Force Model
Competitive Analysis:
 BARGAINING POWER OF 5
CUSTOMER
BARGAINING POWER OF 4
SUPPLIERS
1. Rivalry Among Competing firms
Strategies of one firm can be successful only
when they can provide competitive advantage
over the strategies of rival firms.
Rivalry among the competing firms will
increase when:
i. the numbers of competitors increase
ii. competitor become equal in size and capability
iii. demand for the product declines
iv. customer can switch brand easily

rival firms become weakness, firm will benefits

the opportunity by increase marketing and
production
2. Potential Entry of New Competitor
new firms can easily enter a particular
industry, will increase the concentration of
competitiveness among the firms.
barrier that facing by the new entry:
i. need to gain technology and specialized know-
how
ii. lack of experience
iii. strong customer loyalty or strong brand
preference
iv. large capital requirement
when new entry has a strong capability,
existing firm will block the new entry
 3. Potential Development of
Substitute Product
firm are compete with the producer of
substitute products in other industry.
appearance of substitute products puts a
maximum on the price that can be charged
competitive pressure arising from substitute
product increase as the relative price of
substitute products declines and customers
cost of switching decrease
for example, producers of eyeglasses and
contact lenses are face increasing
competitive pressures from laser eye surgery.
4. Bargaining Power of Suppliers

Occurs when large number of supplier, only

few good substitute raw materials and cost of
switching raw materials is high
firms may use a backward integration
strategy to gain control of supplier
In others industry, seller are use forging
strategic partnership with supplier
5. Bargaining Power of Customers

occurs when customers are concentrated or

large in number or buy in volume
Bargaining power of customer is higher when
products being purchased are standard
others firm will offer extended warranties or
special services to gain customer loyalty.
Customer can negotiate selling price,
warranty coverage, and accessory packages
to a greater extent