BJTH 3123

STRATEGIC MANAGEMENT IN
TECHNOLOGY
Topic 3:
THE EXTERNAL
AUDIT
 Chapter Objectives
1. Describe how to conduct an external strategic
management audit.
2. Discuss 10 major external forces that affect
organizations: economic, social, cultural,
demographic, environmental, political,
governmental, legal, technological, and competitive.
3. Describe key sources of external information.
4. Discuss important forecasting tools used in strategic
management.
 Chapter Objectives (cont.)
5. Discuss the importance of monitoring external trends
and events.
6. Explain how to develop an EFE Matrix.
7. Explain how to develop a Competitive Profile Matrix.
8. Discuss the importance of gathering competitive
intelligence.
9. Describe the trend toward cooperation among competitors.
10. Discuss market commonality and resource similarity in
relation to competitive analysis.
 External Audit
• External audit
– focuses on identifying and evaluating trends and
events beyond the control of a single firm
– 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.
The Nature of an External Audit
• The external audit 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.
 Key External Forces
External forces can be divided into
five (5) broad categories:
1. economic forces
2. social, cultural, demographic, and natural
environment forces
3. political, governmental, and legal forces
4. technological forces
5. competitive forces
Relationships Between Key
External Forces and an
Organization
 The Process of Performing
an External Audit
• First, gather competitive intelligence and
information about economic, social,
cultural, demographic, environmental,
political, governmental, legal, and
technological trends.
• Next, information should be assimilated
and evaluated
• A final list of the most important key
external factors should be
communicated
 The Process of Performing an
External Audit
Key external factors should be:
1. important to achieving long-term and annual
objectives
2. measurable
3. applicable to all competing firms, and
4. hierarchical in the sense that some will pertain to
the overall company and others will be more
narrowly focused on functional or divisional areas
 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.
 The Industrial Organization
(I/O) View
• Firm performance is based more on industry
properties
Economic Forces
Advantages and Disadvantages of
a Weak Dollar
 Social, Cultural, Demographic, and
Natural Environmental Forces
• U.S. Facts
– Aging population
– Less white
– Widening gap between rich & poor
– 2025 = 18.5% population > 65 years
– 2075 = no ethnic or racial majority
 Social, Cultural, Demographic, and
Natural Environmental Forces

• Facts
– World population 7 billion
– World population = 8 billion by 2028
– World population = 9 billion by 2054
– U.S. population > 310 million
Key Social, Cultural, Demographic,
and Natural Environment Variables
Examples of Social, Cultural, Demographic, and
Natural Environmental Forces (Opportunities/
Threats )

1. Unemployment rate is improving, as a result qualifying

more people for home loans.
2. Men are increasingly concerned with their appearance.
3. Research shows that by 2015, global women’s
purchasing power is expected to increase by $5 trillion
and beauty is the category these consumers are most
likely to spend money.
4. The USA is expected to see a 10% increase in
population growth over the next 10 years.
Political, Governmental, and Legal
Forces
• 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.
Political, Government, and
Legal Variables
 Examples of Political, Government, and
Legal Variables (Opportunities/ Threats )

1. Governments potentially forcing all restaurants to label

all nutrition information on the menu at the point of sale.
2. European countries lowering or doing away with tourist
taxes will attract more vacationers.
3. Regulatory rules in Europe can change that would
restrain the way Ryanair does business.
 Technological Forces
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,
•changing the historical trade-off between production
standardization and flexibility.
 Technological Forces
• The Internet has lowered entry barriers,
and redefined the relationship between
industries and various suppliers, creditors,
customers, and competitors.
 Technological Forces
• Many firms now have a Chief Information
Officer (CIO) and a Chief Technology Officer
(CTO) who work together to ensure that
information needed to formulate, implement, and
evaluate strategies is available where and when
it is needed
 Technological Forces
Technological advancements can:
• Create new markets
• Result in a proliferation of new and improved
products
• Change the relative competitive cost positions in

an industry
• Render existing products and services obsolete
 Examples of Technological Forces
(Opportunities/ Threats )
1. Social media enables retailers to listen to
customers in real time.
2. Digital distribution of media is growing at a rate
of 30% a year.
3. Potential for attacks on Amazon’s website and
servers.
4. Internet has led to more competitive pricing and
more price sensitivity to industry.
 Competitive Forces
• An important part of an external audit is
identifying rival firms and determining their
strengths, weaknesses, capabilities,
opportunities, threats, objectives, and strategies
 Competitive Forces
Characteristics of the most competitive companies:
1. Market share matters
2. Use the vision/mission as a guide for all decisions
3. Whether it’s broke or not, fix it–make it better
4. Continually adapt, innovate, improve
5. Acquisition is essential to growth
6. People make a difference
7. Strive to stay cost-competitive on a global basis
Key Questions About Competitors
 Competitive Intelligence Programs
• Competitive
intelligence (CI)
– a systematic and ethical
process for gathering and
analyzing information
about the competition’s
activities and general
business trends to further
a business’s own goals
Competitive Intelligence Programs
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 firm’s
position in the market
 Competitive Intelligence Programs
Various legal and ethical ways to obtain competitive intelligence
include the following:

Competitive
intelligence is not the
following:
 Market Commonality and Resource
Similarity
Way to analyze competitiveness:

•Market commonality
– the number and significance of markets that a firm
competes in with rivals
• Resource similarity
– the extent to which the type and mount of a firm’s
internal resources are comparable to a rival
 Examples of Competitive Forces
(Opportunities/ Threats )
1. Many restaurants such as Wendy’s, Subway,
and even Pizza Hut offer customers low calorie
options on the menu. (Domino)
2. PayPal is owned by competitor Ebay. (Amazon)
3. Rivals such as Blockbuster are struggling with
their business models. (Netflix)
The Porter’s Five-Forces Model of
Competition
 The Five-Forces Model of
Competition
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.
 The Five-Forces Model
• Rivalry among competing firms
– Most powerful of the five forces
– Focus on competitive advantage of strategies
over other firms
The Five-Forces Model
 The Five-Forces Model
• Potential Entry of New Competitors
– Barriers to entry are important
– Quality, pricing, and marketing can overcome
barriers
 Barriers to Entry
• Need to gain economies of scale quickly
• Need to gain technology and specialized
know-how
• Lack of experience
• Strong customer loyalty
• Strong brand preferences
• Large capital requirements
• Lack of adequate distribution channels
 Barriers to Entry
• Government regulatory policies
• Tariffs
• Lack of access to raw materials
• Possession of patents
• Undesirable locations
• Counterattack by entrenched firms
• Potential saturation of the market
 The Five-Forces Model
• Potential development of substitute
products
– Pressure increases when:
• Prices of substitutes decrease
• Consumers’ switching costs decrease
 The Five-Forces Model
• Bargaining Power of Suppliers is
increased when there are:
– Few numbers of suppliers
– Few substitutes
– Costs of switching raw materials is high
• Backward integration is gaining control or
ownership of suppliers
 The Five-Forces Model
• Bargaining power of consumers
– Customers being concentrated or large in
number or volume will affects intensity of
competition
– Consumer power is higher where products
are standard or undifferentiated
Conditions Where Consumers Gain
Bargaining Power
1. If buyers can inexpensively switch
2. If buyers are particularly important
3. If sellers are struggling in the face of falling
consumer demand
4. If buyers are informed about sellers’ products,
prices, and costs
5. If buyers have discretion in whether and when
they purchase the product
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.
Forecasting Tools and Techniques
• Forecasts
– educated assumptions about future trends
and events
– Reflects the changes in; technology, cultural,
customer needs, new product, social value,
etc.
– quantitative, qualitative techniques
 Making Assumptions
• Assumptions
– Best present estimates of the impact of major
external factors, over which the manager has
little if any control, but which may exert a
significant impact on performance or the
ability to achieve desired results.
 Industry Analysis: The External Factor
Evaluation (EFE) Matrix

• Economic • Political
• Social • Governmental
• Cultural • Technological
• Demographic • Competitive
• Environmental • Legal
 EFE Matrix Steps
1. List key external factors
2. Weight from 0 to 1
3. Rate effectiveness of current strategies
1 = response is poor; 2= average; 3= above
average; 4 = response is superior
4. Multiply weight * rating
5. Sum weighted scores
EFE Matrix for a Local Ten-Theater Cinema
Complex
 Industry Analysis: Competitive
Profile Matrix (CPM)
• Identifies firm’s major competitors and
their strengths & weaknesses in relation to
a sample firm’s strategic positions
• Critical success factors include internal
and external issues
– Rating refer to 1= major weakness to 4=
major strength.
An Example Competitive
Profile Matrix