The External Assessment

Chapter 3
Meeting 5-6
 Kompetensi Khusus
Students are able to create a corporate standart
evaluation with external factor evaluation matrix (C3)

Outline:

1. The purposes and nature of an external audit

2. The external forces that affect organizations
3. Porter's five-forces model
4. Source of external information
5. The external factor evaluation matrix
6. The competitive profile matrix
1. The purposes and nature of an
external audit
• The purpose of an external audit is to develop a finite list of
oppurtunities that could benefit a firm as well as threats that should
be avoided.

• Reveals key opportunities and threats confronting an organization

so that managers can formulate strategies to take advantage of the
opportunities and avoid or reduce the impact of threats

• External forces can be divided into five broad categories :

1. Economic forces
2. Social, cultural, demographic, and natural environment forces
3. Political, governmentael, and legal forces
4. Technological forces
5. Competitive forces
Relationships Between Key External Forces and an
Organization

Figure 3.1
Relationships Between Key External Forces and an Organization (David & David 2017)
 The Process of Performing an External Audit

• A company first must gather competitive intelligence and

information about economic, social, cultural, demographic,
environmental, political, governmental, legal, and
technological trends from various sources.

• After information is gathered, it should be assimilated and

evaluated to identify the most important opportunities and
threats facing the firm.

• A final list of the most important key external factors should be

communicated
 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 for achieving
competitive advantage.

• I/O theorists contend that external factors such as :

1. Economies of scale
2. Barriers to market entry
3. Product differentiation
4. The economy
5. Level of competitiveness
2. The external forces that affect
organizations
 Economic Forces
• Economic factors have a direct impact on the potential
attractiveness of various strategies. Every country has its own
economic situation, and those situations impact where
companies choose to spend money and do business

• Key economic variables to be monitored :

1. Availability of credit
2. Level of disposable income
3. Prospensity of people to spend
4. Interest rates
5. Inflation rates
 Economic Forces Cont…
6. Gross domestic product trends
7. Consumption patterns
8. Unemployment trends
9. Value of the dollar in world markets
10. Impor/export factors
11. Demand shifts for different goods and services
12. Income differences by region and consumer groups
13. Price fluctuatuions
14. Foreign countries economic condition
15. Monetary and fiscal policies
16. Stock market trends
17. Tax rate variation by country and state
18. European economic community (EEC) policies
19. Organization of petroleum exporting countries (OPEC) policies.
Social, Cultural, Demographic, and Natural Environmental Forces

Table 3-1 Key Social, Cultural, Demographic, and Natural Environment Variables
(David & David, 2017)
 Political, Governmental, and legal forces

Table 3-2 Some Political, Governmental, and legal forces Variables

(David & David, 2017)
 Technological forces

• A variety of new technologies such as the internet, mobile

devices, and artificial intelligence are fueling innovation in
many industries, and impacting strategic-planning decisions.

• Result of technological advancements are varied, as shown in

the following list :
1. They represent major oppurtunities and threats that must be
considered in formulating strategies
2. They can dramatically affect organizations product services,
markets, suppliers, distributors, competitors, customer,
manufacturing processes, marketing pratices, and competitive
position
 Technological forces Cont…

3. They 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
service obsolete
4. They can reduce or eliminate cost barriers between
business, create shorter production runs, create shortages in
technical skills, and result in changing values and
expectations of employees, manager, and customers.
5. They can create new competitive advantages that are more
powerful than existing advantages
 Competitive Forces

Table 3-3 key questions about competitors

(David & David, 2017)
3. Porter's five-forces model
Figure 3.2 The Five Forces Model of Competition
David & David 2017
 3.1 Rivalry among competing firms

• Most powerful of the five forces and Focus on competitive

advantage of strategies over other firms

• Conditions that cause high rivalry among competing firms :

1. When the number of competing firms is high
2. When competing firms are of similar size
3. When competing firms have similar capabilities
4. When the demand for an industry’s products is falling
5. When the product or service prices in the industry are falling
6. When consumers can switch brands easily
7. When barriers to leaving the market are high
8. When barriers to entering the market are low
9. When fixed costs are high among competing firms
 3.1 Rivalry among competing firms Cont…

10. When the product is perishable

11. When rivals have excess capacity
12. When consumer demand is falling
13. When rivals have excess inventory
14. When rivals sell similar products/services
15. When mergers are common in the industry
 3.2 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 :

1. The need to gain economies of scale quickly
2. The need to gain technology and specialized know-how
3. Lack of experience
4. Strong customer loyalty
5. Strong brand preferences
6. Large capital requirements
7. Lack of adequate distribution channels
 3.2 Potential Entry of New Competitors Cont…

8. Government regulatory policies

9. Tariffs
10. Lack of access to raw materials
11. Possession of patents
12. Undesirable locations
13. Counterattack by entrenched firms
14. Potential saturation of the market
 3.3 Potential development of substitute products
• In many industries, firms are in close competition with producers of
substitute products in other industries.

• Competitive pressures arising from substitute products increase as

the relative price of substitute products declines and consumer
switch to substitute products
 3.4 Bargaining Power of Suppliers
• The bargaining power of suppliers affects the intensity of
competition in an industry, especially when there are few suppliers,
when there are few good substitute raw materials, or when the cost
of switching raw materials is especially high.

• 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 firms
needs on a consistent basis.
 3.5 Bargaining Power of Consumers
• When customers are concentrated or large in number or buy in
volume, their bargaining power represents a major force affecting
the intensity of competition in industry.

• 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
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
4. Source 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.

• Published sources of strategic information include periodicals,

journals, reports, government documents, abstracts, books,
directories, newspapers, and manuals.
5. The external factor evaluation 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 :

1. List 20 key external factors as identified in the external-audit
process, including both opportunities and threats that affect the
firm and its industry
2. Assign to each factor a weight that ranges from 0.0 (not
important) to 1.0 (very important).
 The external factor evaluation matrix Cont…
3. Assign a rating between 1 and 4 to each key external factor to
indicate how effectively the firms current strategies respond to the
factor, where the response is 4 = superior, 3 = above average, 2 =
average, 1 = poor.
4. Multiply each factors weight by its rating to determine a weighted
score
5. Si, the weighted scores for each variables to determine the total
weighted score for the organization.

• Regardless of the number of key opportunities and threats include

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
 The external factor evaluation matrix Cont…
• A total weighted score 4.0 indicates that an organization strategies
effectively take advantage of existing opportunities and minimize
potential adverse effects of external threats.

• A total weighted score 1.0 indicates that an organization strategies

are not capitalizing on opportunities or avoiding external threats.
Table 3-4 EFE Matrix for a Local 10 Theater Cinema
(David & David, 2017)
6. The competitive profile matrix
• The Competitive profil 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 CPM and an

EFE have the same meaning. However critical success
factors in a CPM include both internal and external issues.

• The rating refer to strengths and weaknesses, where 4 =

major strengths, 3 = minor strengths, 2 = minor weakness,
and 1 = major weakness.
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 2.20, Competitor 3 is weakest overall.
Only eight critical success factors are included for simplicity; this is too few in actuality.

Table 3-5 An Example Competitive Profile Matris

(David & David, 2017)
Summary :
•This chapter provided a framework for collecting and evaluating
economic, social, cultural, demographic, environmental, political,
governmental, legal, technological, and competitive information.

•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 judgement.

•The external-audit approach described in this chapter can be used

effectively by any size or type organization.
Thank You