2. 2
The Nature of an External Audit
The purpose of an external audit is to develop a finite list
of opportunities that could benefit a firm and threats that
should be avoided.
As the term finite suggests, the external audit is not aimed
at developing an exhaustive list of every possible factor
that could influence the business; rather, it is aimed at
identifying key variables that offer actionable responses.
Firms should be able to respond either offensively or
defensively to the factors by formulating strategies that
take advantage of external opportunities or that minimize
the impact of potential threats.
3. 3
Key External Forces
External forces can be divided into five broad
categories:
Economic forces;
Social, Cultural, Demographic, and Natural
environment forces;
Political, Governmental, and Legal forces;
Technological forces; and
Competitive forces.
4. 4
Relationships Between Key External
Forces and an Organization
ECONOMIC FORCES
SOCIAL,CULTURAL,DE
MOGRAPHIC AND
ENV’T FORCES
POLITICAL,LEGAL
GOV’T FORCES
TECHNOLOGICAL
FORCES
COMPETITIVE FORCES
SUPLIERS
CUSTOMERS
DISTRIBUTORS
CREDITORS
EMPLOYEES
COMMUNITIES
MANAGERS
STOCKHOLDERS
LABOUR UNIONS
GOVERNMENTS
COMPETITORS
PRODUCTS
SERVICES
MARKETS
AN
ORGANISATI
ON’S
OPPORTUNIT
IES AND
THREATS
5. 5
Cont….
Changes in external forces translate into changes
in consumer demand for both industrial and
consumer products and services.
External forces affect the types of products
developed, the nature of positioning and market
segmentation strategies, the type of services
offered, and the choice of businesses to acquire
or sell.
6. 6
Cont….
External forces directly affect both suppliers and
distributors. Identifying and evaluating external
opportunities and threats enables organizations
to develop a clear mission, to design strategies to
achieve long-term objectives, and to develop
policies to achieve annual objectives.
7. 7
Cont….
The increasing complexity of business today is
evidenced by more countries developing the
capacity and will to compete aggressively in
world markets.
Foreign businesses and countries are willing to
learn, adapt, innovate, and invent to compete
successfully in the market place. There are more
competitive new technologies in Europe and Asia
today than ever before.
8. 8
The Process of Performing an
External Audit
The process of performing an external audit
must involve as many managers and employees
as possible. As emphasized the involvement in
the strategic-management process can lead to
understanding and commitment from
organizational members.
Individuals appreciate having the opportunity to
contribute ideas and to gain a better
understanding of their firms’ industry,
competitors, and markets.
9. 9
Cont…
To perform an external audit, a company first
must gather competitive intelligence and
information about economic, social, cultural,
demographic, environmental, political,
governmental, legal, and technological trends.
10. 10
Cont….
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
the external audit.
This approach provides a continuous stream of
timely strategic information and involves many
individuals in the external-audit process.
11. 11
Cont….
The Internet provides another source for
gathering strategic information, as do corporate,
university, and public libraries. Suppliers,
distributors, salespersons, customers, and
competitors represent other sources of vital
information.
12. 12
Cont…
Once information is gathered, it should be
assimilated and evaluated. A meeting or series of
meetings of managers is needed to collectively
identify the most important opportunities and
threats facing the firm. These key external
factors should be listed on flip charts or a chalk
board.
13. 13
Cont….
A prioritized list of these factors could be
obtained by requesting that all managers rank
the factors identified, from 1 for the most
important opportunity/threat to 20 for the least
important opportunity/threat.
These key external factors can vary over time
and by industry. Relationships with suppliers or
distributors are often a critical success factor.
14. 14
The Industrial Organization
(I/O) View
The Industrial Organization (I/O) approach to
competitive advantage advocates that external
(industry) factors are more important than
internal factors in a firm achieving competitive
advantage.
15. 15
Cont…
However, it is not a question of whether external
or internal factors are more important in gaining
and maintaining competitive advantage.
Effective integration and understanding of both
external and internal factors is the key to
securing and keeping a competitive advantage.
In fact, matching key external
opportunities/threats with key internal
strengths/weaknesses provides the basis for
successful strategy formulation.
16. 16
Economic Forces
Economic factors have a direct impact on the
potential attractiveness of various strategies. For
example, when interest rates rise, funds needed
for capital expansion become more costly or
unavailable.
17. 17
Cont….
An economic variable of significant importance
in strategic planning is Gross Domestic Product
(GDP), especially across countries.
18. 18
Cont….
Trends in the dollar’s value have significant and
unequal effects on companies in different
industries and in different locations. Generally, a
strong or high dollar makes U.S. goods more
expensive in overseas markets.
19. 19
Key Economic Variables to Be
Monitored
Availability of credit
Level of disposable income
Propensity of people to spend
Interest rates
Inflation rates
Money market rates
Federal government budget deficits
20. 20
Cont…
Gross domestic product trend
Consumption patterns
Unemployment trends
Worker productivity levels
Value of the dollar in world markets
Stock market trends
Foreign countries’ economic conditions
21. 21
Cont….
Import/export factors
Demand shifts for different categories of goods
and services
Income differences by region and consumer
groups
Price fluctuations
Export of labor and capital from the United
States
22. 22
Cont…
Monetary policies
Fiscal policies
Tax rates
European Economic Community (EEC) policies
Organization of Petroleum Exporting Countries
(OPEC) policies
Coalitions of Lesser Developed Countries (LDC)
policies
23. 23
Social, Cultural, Demographic, and Natural
Environment Forces
Social, cultural, demographic, and
environmental changes have a major impact on
virtually all products, services, markets, and
customers.
Small, large, for-profit, and nonprofit
organizations in all industries are being
staggered and challenged by the opportunities
and threats arising from changes in social,
cultural, demographic, and environmental
variables.
24. 24
Key Social, Cultural, Demographic, and Natural
Environment Variables
Child bearing rates
Number of special-interest groups
Number of marriages
Number of divorces
Number of births
Number of deaths
25. 25
Cont…
Immigration and emigration rates
Social Security programs
Life expectancy rates
Per capita income
Location of retailing, manufacturing, and service businesses
Attitudes toward business
Lifestyles
26. 26
Cont…
Traffic congestion
Inner-city environments
Average disposable income
Trust in government
Attitudes toward government
Attitudes toward work
Buying habits
27. 27
Cont…
Ethical concerns
Attitudes toward saving
Sex roles
Attitudes toward investing
Racial equality
Use of birth control
Average level of education
Government regulation
28. 28
Cont….
Attitudes toward retirement
Attitudes toward leisure time
Attitudes toward product quality
Attitudes toward customer service
Pollution control
Attitudes toward foreign peoples
Energy conservation
Social programs
Number of churches
Number of church members
29. 29
Cont….
Social responsibility
Attitudes toward careers
Population changes by race, age, sex, and level of
affluence
Attitudes toward authority
Population changes by city, county, state,region,
and country
Value placed on leisure time
30. 30
Cont…
Regional changes in tastes and preferences
Number of women and minority workers
Number of high school and college
graduates by geographic area
Recycling
Waste management
Air pollution
31. 31
Political, Governmental, and
Legal Forces
Federal, state, local, and foreign governments are
major regulators, deregulators, subsidizers,
employers, and customers of organizations.
Political, governmental, and legal factors,
therefore, can represent key opportunities or
threats for both small and large organizations.
32. 32
Cont…
For industries and firms that depend heavily on
government contracts or subsidies, political
forecasts can be the most important part of an
external audit.
Changes in patent laws, antitrust legislation, tax
rates, and lobbying activities can affect firms
significantly.
33. 33
Cont…
The increasing global interdependence among
economies, markets, governments, and
organizations makes it imperative that firms
consider the possible impact of political
variables on the formulation and
implementation of competitive strategies.
34. 34
Cont…
As more and more companies around the world
accept government bailouts, those companies are
being forced to march to priorities set by political
leaders.
35. 35
Cont…
Governments worldwide are under pressure to protect
jobs at home and maintain the nation’s industrial base.
Political relations between Japan and China have
thawed considerably in recent years, which is good for
the world economy because China’s low-cost
manufactured goods have become essential for the
functioning of most industrialized nations.
36. 36
Some Political, Governmental,
and Legal Variables
Government regulations or deregulations
Changes in tax laws
Special tariffs
Political action committees
Voter participation rates
Number, severity, and location of government
protests
37. 37
Cont…
Number of patents
Changes in patent laws
Environmental protection laws
Level of defense expenditures
Legislation on equal employment
Level of government subsidies
Antitrust legislation
39. 39
Cont…
Political conditions in foreign countries
Special local, state, and federal laws
Lobbying activities
Size of government budgets
World oil, currency, and labor markets
Location and severity of terrorist activities
Local, state, and national elections
40. 40
Cont…
Local, state, and federal laws; regulatory
agencies; and special-interest groups can have a
major impact on the strategies of small, large,
for-profit, and nonprofit organizations. Many
companies have altered or abandoned strategies
in the past because of political or governmental
actions.
41. 41
Cont…
In the academic world, as state budgets have
dropped in recent years, so too has state support
for colleges and universities. Due to the decline
in monies received from the state, many
institutions of higher learning are doing more
fund raising on their own naming buildings and
classrooms, for example, for donors.
42. 42
Technological Forces
Revolutionary technological changes and
discoveries are having a dramatic impact on
organizations. The Internet has changed the very
nature of opportunities and threats by altering
the life cycles of products, increasing the speed
of distribution, creating new products and
services, erasing limitations of traditional
geographic markets, and changing the historical
trade-off between production standardization
and flexibility.
43. 43
Cont…
To effectively capitalize on e-commerce, a
number of organizations are establishing two
new positions in their firms: chief information
officer (CIO) and chief technology officer (CTO).
This trend reflects the growing importance of
information technology (IT) in strategic
management.
44. 44
Cont…
A CIO and CTO work together to ensure that
information needed to formulate, implement,
and evaluate strategies is available where and
when it is needed. These individuals are
responsible for developing, maintaining, and
updating a company’s information database.
45. 45
Cont…
The CIO is more a manager, managing the firm’s
relationship with stakeholders; the CTO is more a
technician, focusing on technical issues such as
data acquisition, data processing, decision-
support systems, and software and hardware
acquisition.
46. 46
Cont…
Technological forces represent major opportunities
and threats that must be considered in formulating
strategies. Technological advancements can
dramatically affect organizations’ products,
services, markets, suppliers, distributors,
competitors, customers, manufacturing processes,
marketing practices, and competitive position.
47. 47
Cont…
Technological advancements can create new
markets, result in a proliferation of new and
improved products, change the relative
competitive cost positions in an industry, and
render existing products and services obsolete.
48. 48
Cont…
Technological changes can reduce or eliminate
cost barriers between businesses, create shorter
production runs, create shortages in technical
skills, and result in changing values and
expectations of employees, managers, and
customers.
49. 49
Cont….
Technological advancements can create new
competitive advantages that are more powerful
than existing advantages. No company or
industry today is insulated against emerging
technological developments.
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.
50. 50
Cont…
Organizations that traditionally have limited
technology expenditures to what they can fund after
meeting marketing and financial requirements urgently
need a reversal in thinking.
The pace of technological change is increasing and
literally wiping out businesses every day. An emerging
consensus holds that technology management is one of
the key responsibilities of strategists.
51. 51
Cont….
Not all sectors of the economy are affected
equally by technological developments. The
communications, electronics, aeronautics, and
pharmaceutical industries are much more
volatile than the textile, forestry, and metals
industries.
52. 52
Examples of the Impact of
Wireless Technology
Airlines—Many airlines now offer wireless
technology in flight.
Automotive—Vehicles are becoming wireless.
Banking—Visa sends text message alerts after
unusual transactions.
Education—Many secondary (and even college)
students may use smart phones for math because
research shows this to be greatly helpful.
Energy—Smart meters now provide power on
demand in your home or business.
53. 53
Cont…
Health Care—Patients use mobile devices to monitor
their own health, such as calories consumed.
Hotels—sends daily specials and coupons to hotel
guests via text messages.
Market Research—Cell phone respondents provide
more honest answers, perhaps because they are
away from eavesdropping ears.
54. 54
Cont…
Politics—President Obama won the election
partly by mobilizing Face book and MySpace
users, revolutionizing political campaigns.
Obama announced his vice presidential selection
of Joe Biden by a text message.
Publishing—eBooks are increasingly available.
55. 55
Competitive Forces
Collecting and evaluating information on competitors
is essential for successful strategy formulation.
Identifying major competitors is not always easy
because many firms have divisions that compete in
different industries. Many multidivisional firms do
not provide sales and profit information on a
divisional basis for competitive reasons.
56. 56
characteristics describe the
most competitive companies
1. Market share matters; the 90th share point isn’t
as important as the 91st, and nothing is more
dangerous than falling to 89.
2. Understand and remember precisely what
business you are in.
57. 57
Cont…
3. Whether it’s broke or not, fix it- make it better;
not just products, but the whole company, if
necessary.
4. Innovate or evaporate; particularly in
technology-driven businesses, nothing quite
recedes like success.
58. 58
Cont…
5. Acquisition is essential to growth; the most
successful purchases are in niches that add a
technology or a related market.
6. People make a difference;
7. There is no substitute for quality and no greater
threat than failing to be cost competitive on a
global basis.
59. 59
Competitive Intelligence
Programs
What is competitive intelligence? Competitive
intelligence (CI), as formally defined by the Society
of Competitive Intelligence Professionals (SCIP), is a
systematic and ethical process for gathering and
analyzing information about the competitor’s
activities and general business trends to further a
business’s own goals (SCIP Web site).
60. 60
Cont….
Good competitive intelligence in business, as in the
military, is one of the keys to success.
The more information and knowledge a firm can
obtain about its competitors, the more likely it is that it
can formulate and implement effective strategies.
Major competitors’ weaknesses can represent external
opportunities; major competitors’ strengths may
represent key threats.
61. 61
Cont…
Any discussions with a competitor about price,
market, or geography intentions could violate
antitrust statutes. However, this fact must not
lure a firm into underestimating the need for
and benefits of systematically collecting
information about competitors for Strategic
Planning purposes.
62. 62
Cont….
Firms need an effective competitive intelligence (CI)
program. The three basic objectives of a CI program
are:
to provide a general understanding of an industry
and its competitors,
to identify areas in which competitors are
vulnerable and to assess the impact strategic actions
would have on competitors, and
to identify potential moves that a competitor might
make that would endanger a firm’s position in the
market
63. 63
Cont….
Competitive information is equally applicable for
strategy formulation, implementation, and
evaluation decisions. An effective CI program
allows all areas of a firm to access consistent and
verifiable information in making decisions.
64. 64
Cont…
Competitive intelligence is not corporate
espionage because 95 percent of the information
a company needs to make strategic decisions is
available and accessible to the public.
Sources of competitive information include trade
journals, want ads, newspaper articles, and
government filings, as well as customers,
suppliers, distributors, competitors themselves,
and the Internet.
66. 66
Key Questions About
Competitors
What are the major competitors’ strengths?
What are the major competitors’ weaknesses?
What are the major competitors’ objectives and
strategies?
How will the major competitors most likely
respond to current economic, social, cultural,
demographic, environmental, political,
governmental, legal, technological, and
competitive trends affecting our industry?
67. 67
Cont…
How vulnerable are the major competitors to our
alternative company strategies?
How vulnerable are our alternative strategies to
successful counterattack by our major competitors?
How are our products or services positioned
relative to major competitors?
To what extent are new firms entering and old firms
leaving this industry?
What key factors have resulted in our present
competitive position in this industry?
68. 68
Cont….
How have the sales and profit rankings of major
competitors in the industry changed over recent
years? Why have these rankings changed that way?
What is the nature of supplier and distributor
relationships in this industry?
To what extent could substitute products or services
be a threat to competitors in this industry?
69. 69
Market Commonality and
Resource Similarity
By definition, competitors are firms that offer
similar products and services in the same
market. Markets can be geographic or product
areas or segments. For example, in the insurance
industry the markets are broken down into
commercial/consumer, health/life, or
Europe/Asia.
70. 70
Cont…
Researchers use the terms market commonality
and resource similarity to study rivalry among
competitors.
Market commonality can be defined as the
number and significance of markets that a firm
competes in with rivals.
Resource similarity is the extent to which the
type and amount of a firm’s internal resources
are comparable to a rival.
71. 71
Cont…
One way to analyze competitiveness between
two or among several firms is to investigate
market commonality and resource similarity
issues while looking for areas of potential
competitive advantage along each firm’s value
chain.
72. 72
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.
73. 73
Cont…
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, new rivals can enter the industry with
relative ease, and both suppliers and customers
can exercise considerable bargaining leverage.
74. 74
Cont…
According to Porter, the nature of
competitiveness in a given industry can be
viewed as a composite of five forces:
1.Rivalry among competing firms
2. Potential entry of new competitors
76. 76
Cont…
The following three steps for using Porter’s Five-Forces Model can
indicate whether competition in a given industry is such that the
firm can make an acceptable profit:
1. Identify key aspects or elements of each competitive force that
impact the firm.
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.
77. 77
The Five-Forces Model of
Competition
Bargaining
power of
suppliers
Potential development
of substitute products
Bargaining
power of
consumers
Potential entry of new
competitors
Rivalry
among
competing
firms
78. 78
Rivalry Among Competing Firms
Rivalry among competing firms is usually the most powerful
of the five competitive forces. The strategies pursued by one
firm can be successful only to the extent that they provide
competitive advantage over the strategies pursued by rival
firms. Changes in strategy by one firm may be met with
retaliatory countermoves, such as lowering prices, enhancing
quality, adding features, providing services, extending
warranties, and increasing advertising.
79. 79
Cont…
The intensity of rivalry among competing firms
tends to increase as the number of competitors
increases, as competitors become more equal in
size and capability, as demand for the industry’s
products declines, and as price cutting becomes
common.
80. 80
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
When consumers can switch brands easily
When barriers to leaving the market are high
81. 81
Cont….
When barriers to entering the market are low
When fixed costs are high among firms competing
When the product is perishable
When rivals have excess capacity
When rivals have excess inventory
When rivals sell similar products/services
When mergers are common in the industry
82. 82
Potential Entry of New
Competitors
Whenever new firms can easily enter a particular
industry, the intensity of competitiveness among
firms increases.
Barriers to entry, however, can include:
the need to gain economies of scale quickly,
the need to gain technology and specialized know-
how,
lack of experience,
83. 83
Cont….
strong brand preferences,
large capital requirements,
lack of adequate distribution channels,
government regulatory policies,
tariffs,
84. 84
Cont…
lack of access to raw materials,
possession of patents,
undesirable locations,
counterattack by entrenched firms, and
potential saturation of the market.
85. 85
Cont…
Despite numerous barriers to entry, new firms
sometimes enter industries with higher-quality
products, lower prices, and substantial marketing
resources. The strategist’s job, therefore, is to identify
potential new firms entering the market, to monitor
the new rival firms’ strategies, to counterattack as
needed, and to capitalize on existing strengths and
opportunities.
86. 86
Cont…
When the threat of new firms entering the
market is strong, incumbent firms generally
fortify their positions and take actions to deter
new entrants, such as lowering prices, extending
warranties, adding features, or offering
financing specials.
87. 87
Potential Development of
Substitute Products
In many industries, firms are in close competition
with producers of substitute products in other
industries. The presence of substitute products
puts a ceiling on the price that can be charged
before consumers will switch to the substitute
product. Price ceilings equate to profit ceilings
and more intense competition among rivals.
88. 88
Cont…
Competitive pressures arising from substitute
products increase as the relative price of substitute
products declines and as consumers’ switching costs
decrease. The competitive strength of substitute
products is best measured by the inroads into the
market share those products obtain, as well as those
firms’ plans for increased capacity and market
penetration.
89. 89
Bargaining Power of
Suppliers
The bargaining power of suppliers affects the
intensity of competition in an industry,
especially when there is a large number of
suppliers, when there are only a few good
substitute raw materials, or when the cost of
switching raw materials is especially costly.
90. 90
Cont…
It is often in the best interest of both suppliers
and producers to assist each other with
reasonable prices, improved quality,
development of new services, just-in-time
deliveries, and reduced inventory costs, thus
enhancing long-term profitability for all
concerned.
91. 91
Cont…
Firms may pursue a backward integration strategy to
gain control or ownership of suppliers. This strategy is
especially effective when suppliers are unreliable, too
costly, or not capable of meeting a firm’s needs on a
consistent basis. Firms generally can negotiate more
favorable terms with suppliers when backward
integration is a commonly used strategy among rival
firms in an industry.
92. 92
Bargaining Power of Consumers
When customers are concentrated or large or buy in
volume, their bargaining power represents a major
force affecting the intensity of competition in an
industry. Rival firms may offer extended warranties
or special services to gain customer loyalty whenever
the bargaining power of consumers is substantial.
93. 93
Cont…
Bargaining power of consumers also is higher
when the products being purchased are
standard or undifferentiated. When this is
the case, consumers often can negotiate
selling price, warranty coverage, and
accessory packages to a greater extent.
94. 94
Cont….
The bargaining power of consumers can be the most
important force affecting competitive advantage.
Consumers gain increasing bargaining power under
the following circumstances:
1. If they can inexpensively switch to competing
brands or substitutes
2. If they are particularly important to the seller
95. 95
Cont…
3. If sellers are struggling in the face of falling
consumer demand
4. If they are informed about sellers’ products,
prices, and costs
5. If they have discretion in whether and when
they purchase the product
96. 96
Sources of External Information
A wealth of strategic information is available to
organizations from both published and unpublished
sources.
Unpublished sources include:
customer surveys,
market research,
speeches at professional and shareholders’ meetings,
television programs,
interviews, and
conversations with stakeholders.
97. 97
Cont…
Published sources of strategic information include :
periodicals,
journals,
reports,
government documents,
abstracts,
books,
directories,
newspapers, and
manuals.
The Internet has made it easier for firms to gather, assimilate,
and evaluate information.
98. 98
Forecasting Tools and
Techniques
Forecasts are educated assumptions about future trends and
events. Forecasting is a complex activity because of factors
such as technological innovation, cultural changes, new
products, improved services, stronger competitors, shifts in
government priorities, changing social values, unstable
economic conditions, and unforeseen events. Managers often
must rely on published forecasts to effectively identify key
external opportunities and threats.
99. 99
Cont….
Forecasting tools can be broadly categorized into two
groups: quantitative techniques and qualitative
techniques.
Quantitative forecasts are most appropriate when
historical data are available and when the
relationships among key variables are expected to
remain the same in the future.
100. 100
Cont…
No forecast is perfect, and some forecasts are even wildly
inaccurate. This fact accents the need for strategists to
devote sufficient time and effort to study the underlying
bases for published forecasts and to develop internal
forecasts of their own.
Key external opportunities and threats can be effectively
identified only through good forecasts. Accurate forecasts
can provide major competitive advantages for
organizations.
101. 101
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.
102. 102
Steps in developing the EFE
Matrix
Step 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.”
103. 103
Cont…
Step 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.
104. 104
Cont…
Step 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.
105. 105
Cont…
Step 4:
Multiply each factor’s weight by its rating to
determine a weighted score.
Step 5:
Sum the weighted scores for each variable to
determine the total weighted score for the
organization.
106. 106
Cont….
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.
107. 107
Cont…
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.
108. 108
EFE Matrix for Theatre Cinema
Complex
Key External Factor Weight Ratin
g
Weighted
Score
Opportunities
Rowan County is growing 8% annually in
population
0.05 3 0.15
TDB University is expanding 6% annually 0.08 4 0.32
Major competitor across town recently
ceased operations
0.08 3 0.24
Demand for going to cinema growing 10%
annually
0.07 2 0.14
Two new neighborhoods being developed
within 3 miles
0.09 1 0.09
Disposable income among citizens grew
5% in prior year
0.06 3 0.18
Unemployment rate in county declined to 0.03 2 0.06
109. 109
Cont….
Key External Factor Weigh
t
Ratin
g
Weighted
Score
Threats
Trend toward healthy eating eroding
concession sales
0.12 4 0.48
Demand for online movies and DVDs growing
10% annually
0.06 2 0.12
Commercial property adjacent to cinemas for
sale 0.06
0.06 3 0.18
TDB University installing an on-campus movie
theatre
0.04 3 0.12
County and city property taxes increasing 25%
this year
0.08 2 0.16
Local religious groups object to R-rated movies
being shown
0.04 3 0.12
Movies rented from local Blockbuster store up
12%
0.08 2 0.16
Movies rented last quarter from Time Warner
up 15%
0.06 1 0.06
110. 110
The Competitive Profile
Matrix (CPM)
The Competitive Profile Matrix (CPM) identifies a firm’s major
competitors and its particular strengths and weaknesses in
relation to a sample firm’s strategic position. 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.
111. 111
Cont…
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.
112. 112
An Example Competitive Profile Matrix
Company 1 Company 2 Company 3
Critical Success
Factors
Weigh
t
Ratin
g
Scor
e
Ratin
g
Scor
e
Ratin
g
Scor
e
Advertising 0.20 1 0.20 4 0.80 3 0.60
Product Quality 0.10 4 0.40 3 0.30 2 0.20
Price
Competitiveness
0.10 3 0.30 2 0.20 4 0.40
Management 0.10 4 0.40 3 0.20 3 0.30
Financial Position 0.15 4 0.60 2 0.30 3 0.45
Customer Loyalty 0.10 4 0.40 3 0.30 2 0.20
Global Expansion 0.20 4 0.80 1 0.20 2 0.40
Market Share 0.05 1 0.05 4 0.20 3 0.15
Total 1.00 3.1 2.5 2.7
113. 113
Cont…
Note: The ratings values are as follows:
1 = major weakness,
2 = minor weakness,
3 = minor strength,
4 = major strength.
As indicated by the total weighted score of 2.50, Competitor 2 is
weakest.
Only eight critical success factors are included for simplicity; this is
too few in actuality.
114. 114
Cont….
In this example, the two most important factors to being successful in the
industry are “advertising” and “global expansion,” as indicated by weights
of 0.20. If there were no weight column in this analysis, note that each factor
then would be equally important. Thus, having a weight column makes for a
more robust analysis, because it enables the analyst to assign higher and
lower numbers to capture perceived or actual levels of importance. Note in
Table above that Company 1 is strongest on “product quality,” as indicated
by a rating of 4, whereas Company 2 is strongest on “advertising.” Overall,
Company 1 is strongest, as indicated by the total weighted score of 3.15.
115. 115
Cont….
Other than the critical success factors listed in the
example CPM, factors often included in this analysis
include breadth of product line, effectiveness of
sales distribution, proprietary or patent advantages,
location of facilities, production capacity and
efficiency, experience, union relations, technological
advantages, and e-commerce expertise.
116. 116
Cont…
A word on interpretation: Just because one firm receives a
3.20 rating and another receives a 2.80 rating in a Competitive
Profile Matrix, it does not follow that the first firm is 40
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.
117. 117
Conclusion
Increasing turbulence in markets and industries
around the world means the external audit has
become an explicit and vital part of the strategic-
management process. This chapter provides a
framework for collecting and evaluating economic,
social, cultural, demographic, environmental, political,
governmental, legal, technological, and competitive
information.
118. 118
Cont….
Firms that do not mobilize and empower their managers
and employees to identify, monitor, forecast, and
evaluate key external forces may fail to anticipate
emerging opportunities and threats and, consequently,
may pursue ineffective strategies, miss opportunities,
and invite organizational demise. Firms not taking
advantage of the Internet are technologically falling.
119. 119
Cont….
A major responsibility of strategists is to ensure development
of an effective external-audit system. This includes using
information technology to devise a competitive intelligence
system that works. The external-audit approach described in
this chapter can be used effectively by any size or type of
organization. Typically, the external-audit process is more
informal in small firms, but the need to understand key trends
and events is no less important for these firms.
120. 120
Cont…
The EFE Matrix and Porter’s Five-Forces Model
can help strategists evaluate the market and
industry, but these tools must be accompanied by
good intuitive judgment. Multinational firms
especially need a systematic and effective
external-audit system because external forces
among foreign countries vary so greatly.
