Chapter 3

The External Assessment

By
Muhammad Masood Mir

Book : Strategic Management: Cases and Concepts

By
Fred R David
External Strategic Management Audit

Identify & Evaluate Factors Beyond

The Control of a Single Firm

◦ Increased foreign competition

◦ Population shifts
◦ Information technology
Key External Forces & The Organization
•Competitors
•Suppliers
•Distributors
•Creditors
Key •Customers Opportunities
External •Employees &
Forces •Communities Threats
•Managers
•Stockholders
•Labor Unions
•Special Interest
Groups
•Products
•Services
Political

Economical

Social
Technological

Legal

Environmental
Competitive Forces
Identifying Rival Firms

Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies
Guidelines for Making External
Factor Evaluation (EFA)

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.
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.

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.
 EFE – Gateway Computers (2003)
Wtd
Key External Factors Weight Rating
Score

Opportunities
1. Global PC market expected to grow
0.10 3 0.30
20% in 2004
2. Cost of PC component parts
0.10 3 0.30
expected to decrease 10% - 2004
3. Internet use growing rapidly 0.05 2 0.10
4. China entered WTO; lowered taxes
0.10 1 0.10
for importing PC’s
5. The average income for PC worker
0.05 3 0.15
has declined from $40K/yr to $30k/yr
 EFE – Gateway Computers (2003) (cont’d)
Wtd
Key External Factors Weight Rating
Score

Opportunities (cont’d)
6. Modernization of business firms and
0.05 2 0.10
government agencies
7. U.S. (& world) economies recovering 0.05 3 0.15
8. 30% of Chinese population can
afford a PC; only 10% of homes have a 0.05 1 0.05
PC
Threats 0.10 1 0.10

1. Intense rivalry in industry 0.10 1 0.05

 EFE – Gateway Computers (2003) (cont’d)
Wtd
Key External Factors Weight Rating
Score

Threats (cont’d)
2. Severe price cutting in PC industry 0.10 2 0.20
3. Different countries have different
0.05 1 0.05
reg’s and infrastructure for PC’s
4. Palm & PDA becoming substitutes 0.05 3 0.15
5. Demand exceeds supply of
0.05 4 0.20
experienced PC workers
6. Birth rate in U.S. declining annually 0.05 3 0.15
 EFE – Gateway Computers (2003) (cont’d)
Wtd
Key External Factors Weight Rating
Score

Threats (cont’d)
7. U.s. consumers and businesses
0.05 2 0.10
delaying purchase of PC’s
8. PC firms diversifying into consumer
0.05 3 0.15
electronics

Total 1.00 2.40

Industry Analysis EFE

Total weighted score of 4.0

 Organization response is outstanding to threats
and weaknesses

Total weighted score of 1.0

• Firm’s strategies not capitalizing on opportunities
or avoiding threats
Industry Analysis: Competitive Profile
Matrix (CPM)

Identifies firm’s major competitors and their

strengths & weaknesses in relation to a sample
firm’s strategic positions
 Gateway Apple Dell
Wt Rating Wt’d Rating Wt’d Rating Wt’d
CSF’s Score Score Score

Market share 0.15 3 0.45 2 0.30 4 0.60

Inventory sys 0.08 2 0.16 2 0.16 4 0.32
Fin position 0.10 2 0.20 3 0.30 3 0.30
Prod. Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distr 0.10 3 0.30 2 0.20 3 0.30
Global Exp. 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15
 Gateway Apple Dell
Wt Rating Wt’d Ratin Wt’d Rating Wt’d
CSF’s (cont’d) Score g Score Score

Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12

E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Serv 0.10 3 0.30 2 0.20 4 0.40
Price
0.02 4 0.08 1 0.02 3 0.06
competitive
Mgt. 0.01 2 0.02 4 0.04 2 0.02
experience

Total 1.00 2.83 2.47 3.49

 END of Chapter 03
Discussion On Chapter 03