Lesson 2 TOPIC: External Assessment

• External Strategic Management Audit

• Industrial Organisation (I/O) View
• Economic Forces
• Social, Cultural, Demographic and
Environmental Forces
• Political, Government and Legal Forces
• Technological Forces
• Competitive Forces
• Five-Forces Model of Competition
• The Global Challenge
• Industry Analysis

Why This Lesson

Organisations do not exist in a vacuum, isolated from other beings. Being part of a society, an industry, and a
country or the world at large makes an organisation vulnerable to changes that happen in its external
environment. The current COVID-19 pandemic is a perfect example of how businesses are affected by their
external environment. To glove makers like Top Glove, the pandemic is a blessing in disguise which pushes their
revenue and share price beyond their expectations. To AirAsia and other airlines, the pandemic is a nightmare
that they are not able to erase. This topic discusses at length what constitutes the external environment of an
organisation and how the changes in the environment can become opportunities or will they threaten the
organisation.

External Strategic Management Audit

Audit in external management strategies checks the company’s economic assumptions and compares them to
actual values. There are two tools used:
• Environmental Scanning
• Industry Analysis

Both of these tools help to identify and evaluate factors beyond the control of a firm. Those factors are:
• Increased foreign competition
• Population shift
• Aging society
• Stock market volatility
• Fear of traveling

The purpose of the audit is to identify opportunities and threats. Its key external forces are:
• Economic forces
• Social, cultural, demographic and environmental forces
• Political, governmental and legal forces
• Technological forces
• Competitive forces

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The diagram below shows how the key external forces are transferred in the external audit.

Competitors
Suppliers
Distributors
Creditors
Customers
Employees
Communities
Managers Opportunities &
Key External Forces
Stockholders Threats
Labor Unions
Special Interest
Groups
Products
Services
Markets
Natural Environment

The external key factors are gathered through competitive intelligence from these categories:
• Social
• Cultural
• Demographic
• Environmental
• Governmental
• Legal
• Technological

Its source of information comes from:

• Internet
• Libraries
• Suppliers
• Distributors
• Salespersons
• Customers
• Competition

When performing an external audit there are variables to consider:

• Market share
• Breadth of competing products
• World economics
• Foreign affiliates
• Proprietary account advantages
• Price competitiveness

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 • Technological advancements
• Interest rates
• Pollution abatement

In summary, the performing external audit can be seen in the diagram below.

Long-term orientation

Measurable

External
Factors
Applicable to competing firms

Hierarchical

Industrial Organisation (I/O) View

Industrial Organisation (I/O) view refers to how the industry factor is more important than the internal factor. The
performance is determined by the industry forces.

Industry Properties
• Economies of Scale
• Barriers to market entry
• Product differentiation
• Level of competitiveness

Economic Forces

Economic forces refer to the nature and direction of the economy in which the business operates and how it
impacts the firms.

Economic forces are applied to:

• Trends in the dollar’s value
• European Union
• Layoffs
• Economic standard of living

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They are also used to measure the:
• Availability of credit
• Level of disposable income
• Interest rates
• Inflation rates

Social, Cultural, Demographic and Environmental Forces

Social, cultural, demographic and environmental forces focus on the norms and values of the society in which a
business operates. They can create many opportunities for a business to thrive. The major impacts are toward:
• Products
• Services
• Markets
• Customers

They can be applied to the present through trends such as:

• Educated consumers
• Aging population
• Local rather than federal solutions

The key variables for the four forces are:

• Childbearing rates
• Number of special interest groups
• Number of marriages and divorces
• Number of births and deaths
• Immigration and emigration rates

However, the monitored variables that use these forces are:

• Actuarial rates
• Per capita income
• Attitudes toward business
• Average disposable income
• Consumer behaviour
• Ethical concerns
• Attitudes toward saving
• Racial equality
• Average educational level
• Governmental regulation
• Attitudes toward customer service
• Attitudes toward quality
• Energy conservation
• Social responsibility
• Leisure time values
• Recycling
• Waste management
• Air and water pollution
• Ozone depletion
• Endangered species

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 Political, Government, and Legal Forces

Political, government and legal forces focus on the decisions made by various commissions and agencies, as
well as presenting potential restrictions on how an organisation operates. There are 3 points that will be discussed
in this section.

Government Regulation
These are rules that define the bounds of legal behaviour. They focused on key opportunities and threats to the
business such as:
• Anti-trust legislation
• Tax rates
• Lobbying efforts
• Patent laws

Increasing Global Interdependence

Global interdependence refers to worldwide mutual dependence between countries. The political variables
impact on:
• Formulation of strategies
• Implementation of strategies

Strategists that work in the global economy focused on:

• Forecast political climates
• Legalistic skills
• Diverse world cultures

Globalisation of Industry
A process linked by interconnected cross-border production and it enables firms to enter into new markets. It
focuses on:
• Worldwide trend toward similar consumption patterns
• Global buyers and sellers
• E-commerce
• Technology for instant currency transfers

In terms of key variables, they are:

• Regulation/deregulation
• Tax law changes
• Special tariffs
• Voter participation rates
• Number of patents
• Environmental protection laws
• Equal employment legislation
• Government subsidies
• Anti-trust enforcement
• Global relationships
• Import/export regulations
• Political conditions
• Location and severity of terrorist activity

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 Technological Forces

Technological forces refer to the developments in technology that have on consumers, businesses, and society.
It causes a major impact on the:
• Internet
• Communications
• Semiconductors

The impacts are done by both the Chief Information Officer (CIO) and Chief Technological Officer (CTO) in the
IT department.
• CIO oversees the people, processes and technologies within a company’s IT organisation.
• CTO is in charge of an organisation’s technological needs as well as its research and development.

Technological forces have experienced technology-based issues. The issues are related to any essentials that are
required in every strategic decision.

Competitive Forces

Competitive forces are factors and variables that threaten a company’s profitability and prevent its growth. They
collect and evaluate data on competitors that are important for a successful strategy formulation. The
competition is intense in all industries.

To collect and evaluate data, competitive forces must identify the rival firm’s:
• Strengths
• Weaknesses
• Capabilities
• Opportunities
• Threats
• Objectives
• Strategies

When concerning competitors, the key questions must focus on:

• Their strengths
• Their weaknesses
• Their objectives and strategies
• Their responses to external variables
• Their vulnerability to our alternative strategies
• Our vulnerability to strategic counterattack
• Our product/service positioning
• Entry and exit of firms in the industry
• Key factors for our current position in the industry
• Sales/profit rankings of competitors over time
• Nature of supplier and distributor relationships
• Threat of substitute products/services
• Keeping the strategies a secret from employees and stakeholders

Competitive forces gained their corporate information from the following sources:

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 • Moody’s Manuals
• Standard Corporation Descriptions
• Value Line Investment Surveys
• Dun’s Business Rankings
• Standard and Poor’s Industry Surveys
• Industry Week
• Forbes, Fortune, Business Week

The United States has the most competitive firms. There are 7 characteristics of how the firms are successful:
1. Market share matters
2. Understand what business you are in
3. Broke or not, fix it
4. Innovate or evaporate
5. Acquisition is essential to growth
6. People make a difference
7. No substitute for quality

Five-Forces Model of Competition

Potential
development of
substitute
products

Bargaining Bargaining
Rivalry among power of
power of competing firms
suppliers consumers

Potential entry of
new competitors

Rivalry among competing firms:

• Most powerful of the five forces
• Focus on the competitive advantage of strategies

Potential entry of new competitors

• Barriers to entry are important
• Quality, pricing, and marketing can overcome barriers

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Potential development of substitute products:
• Pressures increase when consumer’s switching costs decrease
• Firm’s plans for increased capacity and market penetration

Bargaining power of suppliers:

• Large number of suppliers and few substitutes affect the intensity of the competition
• Backward integration can gain control or ownership of suppliers

Bargaining power of consumers:

• Customers concentrated or buying in volume affects the intensity of competition
• Consumer power is higher where products are standard or undifferentiated

When the consumer gains bargaining power, there are several conditions to consider:
• If they can inexpensively switch
• If they are particularly important
• If sellers are struggling in the face of falling consumer demand
• If they are informed about the seller’s products, prices and costs
• If they have discretion in whether and when they purchase the product

In order to determine how an acceptable profit can be earned, the following steps are:
1. Identify key aspects or elements of each competitive force
2. Evaluate how strong and important each element is for the firm
3. Decide whether the collective strength of the elements is worth the firm entering or staying in the industry

The competition also uses forecasts to predict future trends and events. It uses 2 types of techniques:
• Quantitative technique (when historical data is available and there is a constant relationship)
• Qualitative technique

The Global Challenge

There are 3 factors that cause global challenges in strategic management.

1. Multinational Corporation (MNC’s) - which is globally competitive and naturally responsive.

2. Globalisation – worldwide integration of:

a. strategy formulation
b. strategy implementation
c. strategy evaluation

3. Globalisation of industries – has similar consumption patterns. Seen in global buyers and sellers such as e-
commerce and instant transmission of money and information.

Industry Analysis

Industry analysis is a method that helps to understand a company’s position relative to other participants in the
industry.

It uses the External Factor Evaluation (EFE) matrix, a tool used to evaluate the firm’s external environment and its
strengths and weaknesses.

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Another matrix is the Competitive Profile Matrix (CFM), which identifies the firm’s major competitors and their
strengths and weaknesses in relation to firm’s strategic position.

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