strategic management presentation admas university

strategic management presentation admas university

1. Chapter Three: External
Environment Analysis
Admas University

2. OutlineOutline

3.1 The nature of external audit
3.2 Performing External audit
3.3 Competitive analysis: Porter’s five forces model
3.4 External Factors Evaluation(EFE) Matrix
3.5 Competitor Profile Matrix(CPM)
3.6 Case Work on external environment analysis:-
Group work
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3. An external audit sometimes called environmental scanning
or industry analysis
It focuses on Identifying & Evaluating factors beyond the
control of a single firm
To cope with what are often ambiguous and incomplete
environmental data and to increase their understanding of
the general environment,
firms engage in a process called external
environmental analysis.
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The Nature of External Audit

4. The purpose of an external audit is to develop a finite
list of opportunities that could benefit a firm and
threats that should be minimized.
Prior to the developing its strategy, a company must
perform a survey or audit of its external environment in
order to identify potential external opportunities and
threats to the company.
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The Nature of External Audit..
Purpose: Develop a Finite List of:
Opportunities- that could benefit a firm
Threats to be minimized.

5. 2
Approaches to competitive advantage
Industrial Organization
Model
1 Resource-Based Model

6. 1.Resource-Based Model
The Resource-Based Model suggests that
above-average returns for any firm are
largely determined by characteristics
inside the firm.
The Resource-Based view focuses on developing or
obtaining valuable resources and capabilities which
are difficult or impossible for rivals to imitate.
According to this approach the source of
competitive advantage lies in the Organization’s
resources.
Internal resources are more important for a firm than
external factors in achieving and sustaining
competitive advantage.

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8. I/O Model of Superior Returns
The Industrial Organization Model suggests that
above-average returns for any firm are largely
determined by characteristics outside the firm.
The I/O model largely focuses on industry
structure or attractiveness of the external
environment rather than internal characteristics
of the firm.
Not withstanding the above, it should be noted that
effective integration and understanding of both external
and internal factors is the key to securing and keeping a
competitive advantage.

9. External forces can be divided into five broad categories:
•(1) economic forces;
•(2) social, cultural, demographic, and natural environment
forces;
•(3)political, governmental, and legal forces;
•(4) technological forces; and
• (5) competitive forces
Relationships among these forces and an organization are
depicted in Figure below.
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Key External Forces

10. Relationships Between Key External Forces Relationships Between Key External Forces
and an Organizationand an Organization
Key
External
Forces-
Economic
Social , Cultural,
Political, Legal
&Gov’tal
Technological
Competitive
Competitors
Suppliers
Distributors
Creditors
Customers
Employees
Communities
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
Opportunities
&
Threats

11. The Process of Performing an External
Audit
1) Gather 1) Gather competitive intelligence competitive intelligence and and information on Key External information on Key External
Forces Forces : :

Must involve as many managers and employees as possible. Company Must involve as many managers and employees as possible. Company
first must gather: first must gather:
•Competitive intelligenceCompetitive intelligence
•a systematic and ethical processa systematic and ethical process for for gathering and analyzing gathering and analyzing
information about the competition’s activities and general business information about the competition’s activities and general business
trends to further a business’ own goals trends to further a business’ own goals
•And information about economic, social, cultural, demographic, environmental, And information about economic, social, cultural, demographic, environmental,
political, governmental, legal, and technological trends.political, governmental, legal, and technological trends.
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Objectives of Competitive Intelligence :
Provide a general understanding of industry and competitors
Identify areas where competitors are vulnerable and assess
impact of actions on competitors
Identify potential moves that a competitor might make

12. The Process of Performing an External
Audit
2)2) Assimilate and evaluate information
(A meeting or series of meetings of managers is
needed to collectively identify the most important
opportunities and threats facing the firm).
3) Resulting in a list of the most important
key external factors
(A final list of important key external factors should be (A final list of important key external factors should be
communicated and distributed in the organization).communicated and distributed in the organization).
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13. Performing an External Audit
Sources of information include:
•Internet
•Government reports
•Libraries
•Suppliers
•Distributors
•Customers
•Competitors
•Consultants
•Newspaper articles etc

14. Economic Forces-Monitor Key Economic
Variables:-
Availability of credit
Level of disposable
income
Interest rates
Inflation rates
Federal government
budget deficits/surplus
Gross domestic
product(GDP) trend
Consumption patterns
Unemployment trends
Trends in dollar value
relative to Birr
Foreign countries’
economic conditions
Import/export factors
Demand shifts for
goods/services
Income differences by
region/customer
Price fluctuations
Monetary policies etc

15. Social, Cultural, Demographic, and
Natural Environmental Forces
These forces have major Impact on firms decision on –
•Products
•Services
•Markets
•Customers
Key Variables to monitor:--
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16. Social, Cultural, Demographic, and
Natural Environmental Forces
Childbearing rates
Number of marriages
Number of divorces
Number of births
Number of deaths
Household pattern
Religion and tradition
Population
pattern( e.g. aging
society)
Norm on Gender
Life expectancy rates
Per capita income
Attitudes toward
business
Language
Buying habits
Ethical concerns
Attitudes toward saving

17. Social, Cultural, Demographic, and
Natural Environmental Forces
Racial equality
Average level of
education
Attitudes toward
customer service
Attitudes toward
product quality
Energy conservation
Social responsibility
Value placed on
leisure time
Recycling
Waste management
Air & water pollution
Endangered
species etc

18. Political, Governmental, and
Legal Forces
•Government regulation/deregulation
•Tax law and Tax law changes
•Special tariffs
•Patent laws and Change in Patent laws
•Environmental protection laws
•Equal employment legislation
•Level of government subsidies
•Import-export regulations
•Political conditions in other countries
•Location and severity of terrorist activities etc
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19. Technological Forces
Essential for nearly every strategic decision
- No company or industry today is insulated against emerging
technological developments. E.g online banking, E-books, E-ticket in
airlines and etc….

-In high-tech industries, identification and evaluation of key
technological opportunities and threats can be the most important part
of the external strategic-management audit.
Technological change eg. Internet, changes the nature of
opportunities and threats --
Increases speed of distribution
Creates new products and services
Eases limitations of geographic markets
Changes entry barriers
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20. Competitive Forces
Competition, in virtually all industries, definitely impose influences on
firms strategic management endeavor.
Hence, there is a need for competitive force analysis which basically mean that
Identify Rival Firms’(i.e. firms with similar market focus and internal
resource capacity)
The above notwithstanding, competitive forces analysis should aims at understanding
of the nature of competition within the given industry. Thus, apart from competitors,
the influence of other actors i.e. suppliers, customers , distributers and so on must be
analyzed( see porter model).
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Identifying rival firms
•Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies

21. Competitive Forces
Key Questions Concerning Competitors-After identifying
major rival firms, need for identify and analyze:
•Their strengths
•Their weaknesses
•Their objectives and strategies
•Their responses to all external variables (e.g.
social, political, demographic, etc.)
•Their vulnerability to our alternative strategies
•Our vulnerability to strategic counterattack

22. Competitive Forces
Key Questions Concerning Competitors-
•Our product and service positioning relative to competitors
•Entry and exit of firms in the industry
•Key factors for our current position in industry
•Sales and profit rankings of competitors over time
•Nature of supplier and distributor relationships
•The threat of substitute products or services

23. Competitive Analysis: Porter’s Five-
Forces Model
Porter’s Five-Forces Model of competitive analysis is
a widely used approach for developing strategies in
many industries
The intensity of competition among firms varies
widely across industries.
•Intensity of competition is highest in lower investment
return industries(period).
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24. Competitive Analysis: Porter’s Five-
Forces Model
Potential development
of substitute products
Rivalry among
competing firms
Bargaining power
of suppliers
Potential entry of new competitors
Bargaining power
of consumers

25. The Five-Forces Model
Rivalry among competing firms
•Most powerful of the five forces
•Focus on competitive advantage of strategies over other firms
Conditions that Cause High Rivalry Among Competing Firms
•High number of competing firms
•Similar size of firms competing
•Similar capability of firms competing
•Falling demand for the industry’s products
•Falling product/service prices in the industry
•Consumers can switch brands easily e.g mobile industry
•Barriers to entering the market are low
•The product is perishable
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26. The Five-Forces Model(Cont’d)(Cont’d)
Potential Entry of New Competitors
Whenever new firms can easily enter a particular industry,
the intensity of competitiveness among firms increases.
Barriers to entry can include
•The need to gain technology and specialized know-how,
•The lack of experience,
•Strong customer loyalty,
•Strong brand preferences,
•Large capital requirements,
•Lack of adequate distribution channels,
•Government regulatory policies, tariffs,
•Lack of access to raw materials, etc
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27. The Five-Forces Model(Cont’d)(Cont’d)
Potential development of substitute
products
•Pressure increases when:
•Prices of substitutes decrease
•Large number of substitute products are available
•Consumers’ switching costs decrease
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28. The Five-Forces Model(Cont’d)(Cont’d)
Bargaining Power of Suppliers is
increased when there are:
•Smaller numbers of suppliers
•Few substitute-Uniqueness of each supplier’s
product
•Costs of switching raw materials is high
Backward integration is gaining control or
ownership of suppliers
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29. The Five-Forces Model (Cont’d)(Cont’d)
Bargaining power of Buyers (consumers)- increases
when there are :-
•Customers being concentrated or buying in volume affects
intensity of competition(high size of each customer order)
•Consumer power is higher where products are standard or
undifferentiated
•Buyer’s ability to substitute
•Buyer’s information availability
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30. The Five-Forces Model(Cont’d)(Cont’d)
N.B. The collective impact of competitive forces is so
brutal in some industries that the market is clearly
“unattractive” from a profit-making standpoint.
Rivalry among existing firms is severe(High Rivalry),
New rivals can enter the industry with relative ease(Low
entry barrier)
Strong threats of substitutability, and
Both suppliers and customers can exercise
considerable bargaining leverage(High bargaining
power).
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31. Industry Analysis: The External Factor
Evaluation(EFE) Matrix
An External Factor Evaluation (EFE) Matrix allows strategists to
summarize and evaluate economic, social, cultural, demographic,
environmental, political, governmental, legal, technological, and
competitive information.
The EFE Matrix can be developed in five steps:
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External Factor Evaluation MatrixExternal Factor Evaluation Matrix
Summarize & evaluate:
CompetitivePoliticalCultural
TechnologicalEnvironmentalSocial
GovernmentalDemographic
Economic

32. EFE Matrix Steps
1) List key external factors (15 to 20 OT factors)
2) Weight from 0 to 1: Assign to each factor a weight that ranges from
0.0 (not important) to 1.0 (very important).
3) Rate effectiveness of current strategies: 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.
4) Multiply weight * rating i.e Multiply each factor’s weight by its rating
to determine a weighted score
5) Sum weighted scores i.e. Sum the weighted scores for each
variable to determine the total weighted score for the
organization.
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33. EFE Matrix Steps
N.B. Regardless of the number of key opportunities and threats
included in an EFE Matrix,
The highest possible total weighted score for an organization is
4.0 and the lowest possible total weighted score is 1.0.
The average total weighted score is 2.5.
A total weighted score of 4.0 indicates that
•An organization is responding in an outstanding way to existing
opportunities and threats in its industry.
•In other words, the firm’s strategies effectively take advantage of
existing opportunities and minimize the potential adverse effects of
external threats.
A total score of 1.0 indicates that
•The firm’s strategies are not capitalizing on opportunities or avoiding
external threats.
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34. Table 3.1-EFE Matrix for a Local
–Theater Cinema Complex
Key External Factor Weight Rating Weighted
Score
Opportunities
1. The city is growing 8% annually in
population
0.05 3 0.15
2. The nearby University is expanding 5%
annually
0.08 4 0.32
3. Major Competitors across city recently
ceased operations
0.08 3 0.24
4.Demand for going cinema is growing
10% annually
0.07 2 0.14
5. Two new neighborhoods being
developed within 3 miles
0.09 1 0.09
6. Disposal income among citizens grew
5% in prior years
0.06 3 0.18
7.Unemployment rate in the country
declined to 5%
0.03 2 0.06

35. Table 3.1-EFE Matrix for a Local
–Theater Cinema Complex
Key External Factor Weight Rating Weighted
Score
Threats
8. Demand for Online Movie and DVD is
growing 10% annually
0.06 2 0.12
9. Commercial property adjacent to cinemas
for sale
0.06 3 0.18
10. The nearby University is installing an on-
campus movie theater
0.04 3 0.12
11. Tax rates in city is increasing 25% this
year
0.08 2 0.16
12. Local Religious group objects/opposes
some movies being shown
0.04 3 0.12
13. Movies rented from local store up 12%0.08 2 0.16
14. Bad Media Exposure for Theater 0.12 4 0.48
15. Movies rented last quarter from nearby
store up 15%
0.06 1 0.06
Total 1.00 2.58

36. Industry Analysis: Competitive Profile
Matrix (CPM)
 Identifies firm’s major competitors and their strengths & weaknesses in
relation to a sample firm’s strategic positions
 The weights and total weighted scores in both a CPM and an EFE have
the same meaning. However, critical success factors in a CPM include
both internal and external issues; therefore, the ratings refer to strengths
and weaknesses, where 4 = major strength, 3 = minor strength, 2 =
minor weakness, and 1 = major weakness.
 The critical success factors in a CPM are not grouped into opportunities
and threats as they are in an EFE.
 In a CPM, the ratings and total weighted scores for rival firms can be
compared to the sample firm.
 This comparative analysis provides important internal strategic
information.
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38. Industry Analysis: Competitive Profile
Matrix (CPM)
A word on interpretation: Just because one firm
receives a 3.2 rating and another receives a 2.80
rating in a Competitive Profile Matrix, it does not
follow that the first firm is 10 percent better than the
second.

Numbers reveal the relative strengths of firms, but
their implied precision is an illusion. Numbers are not
magic.
The aim is not to arrive at a single number, but
rather to assimilate and evaluate information in a
meaningful way that aids in decision making.
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39. Group Work-Case Analysis
Task 1: Given your selected case organization, reflect on the
various environmental forces(economic, social, cultural,
demographic, natural environment, political, governmental,
legal, technological and competitive forces) that may affect
the organization and comment critically on the opportunities
and threats.
Task2: Given the opportunities and threats identified in task 1,
construct the external factors evaluation matrix
Task 3-Identify two major rival organizations to your selected
organization and construct Competitive profile matrix(CPM)

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