Chapter 3 -External Assessment Tutorial
• Objectives
• Process
• Key external factors
• Sources of external information
• Forecasting tools and techniques
• Porter’s 5 Forces Model of Competition
• EPE Matrix
• Competitive Profile Matrix
ISSUES FOR REVIEW AND DISCUSSION
1. Explain how to conduct an external strategic-management audit.
Answer: An effective approach for conducting an external strategic-management audit consists of four basic steps: (1) select key variables, (2) select key sources of information, (3) use forecasting tools and techniques, and (4) construct an EFE Matrix.
2. Identify a recent economic, social, political, or technological trend that significantly affects financial institutions.
Answer:
Economic—Interest rates remain low.
Social—Many states are passing no smoking ordinances.
Political—Eastern European countries are experiencing political instability.
Technological—Use of the Internet is doubling every 100 days.
3. Discuss the following statement: Major opportunities and threats usually result from an interaction among key environmental trends rather than from a single external event or factor.
Answer: This statement is accurate. It reveals how complex the external audit part of strategy formulation can be. There are an infinite number of interactions among key external factors.
4. Identify two industries experiencing rapid technological changes and three industries that are experiencing little technological change. How does the need for technological forecasting differ in these industries? Why?
Answer: The computer industry, communications industry, and aerospace industry are experiencing rapid technological change. Three industries that are experiencing little technological change are the forest products industry, the shipping industry, and the dairy industry.
5. Use Porter’s five-forces model to evaluate competitiveness within the U.S. banking industry.
Answer: Porter identifies five competitive forces that determine the intensity of competition in an industry and the total value of profits created in a particular industry. The five forces are 1) new entrants, 2) substitute products or services, 3) bargaining power of suppliers, 4) bargaining power of buyers, and 5) rivalry among existing firms. A key to selecting appropriate generic strategies is to analyze these competitive forces in terms of trends, opportunities, and threats facing the firm. Ask your students to apply an analysis of these forces to the banking industry.
6. What major forecasting techniques would you use to identify (1) economic opportunities and threats and (2) demographic opportunities and threats? Why are these techniques most appropriate?
Answer: With the advent of sophisticated computers, simultaneous systems of regression equations have become the most widely used approach for forecasting economic variables. Scenario development is the most popular of all techniques for social and demographic forecasting, although surveys and market research are also widely used.
7. How does the external audit affect other components of the strategic-management process?
Answer: In countless ways, external audit results can and often do affect all other components of the strategic-management model.
8. As the owner of a small business, explain how you would organize a strategic-information scanning system. How would you organize such a system in a large organization?
Answer: In both small and large organizations, strategists could assign specific publications to particular individuals who could then monitor their assigned source and regularly report strategic information to a coordinator. Also, both small businesspeople and chief executive officers of large businesses could effectively use on-line databases.
9. Construct an EFE Matrix for an organization of your choice.
Answer: An EFE Matrix allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information.
10 There are five steps in developing an EFE Matrix as illustrated in Table 3-9.
List key external factors as identified in the external-audit process. Include a total of 10-20 factors from both the opportunities and threats.
Assign to each factor a weight from .0 (not important) to 1.0 (very important). These weights show the relative importance. The total of all the weights should equal 1.0.
Assign a 1-4 rating to each factor to indicate how effectively the firm’s current response strategy: 1= the response is poor, 2 = the response is average, 3 = the response is above average, and 4 = the response is superior.
Multiply each factor’s weight by its rating to get a weighted score.
Sum the weighted scores for each variable to determine the total weighted score for the organization.
While each answer will vary for this question, students should follow these guidelines.
10. As strategist for a local bank, explain when you would use qualitative versus quantitative forecasts.
Answer: Qualitative forecasts are most appropriate when historical data are not available and when relationships among key variables are expected to vary greatly in the future. In addition, when conditions are exploratory in nature, qualitative data can be very useful. Quantitative forecasts require access to quantitative data.
11. What is your forecast for interest rates and the stock market in the next several months? As the stock market moves up, do interest rates always move down? Why? What are the strategic implications of these trends?
Answer: As the stock market goes up, interest rates usually go down. An underlying reason for this trend is that investors find stocks more attractive than certificates of deposit as investment opportunities when stock prices rise. The primary strategic implications of these trends concern the relative attractiveness of stock versus debt as a source of capital to finance strategy implementation. As stock prices move up and interest rates move down, debt becomes more attractive as a source of capital.
12. Explain how information technology affects strategies of the organization where you have worked most recently.
Answer: Answers will vary for each student. If asking this question as a class exercise, encourage students to think about how information technology might have represented a strength or weakness for that organization. In addition, mention that rapidly changing information technology can represent a threat or opportunity for a firm.
13. Let’s say your boss develops an EFE Matrix that includes 62 factors. How would you suggest reducing the number of factors to 20?
Answer: Let a group of knowledgeable individuals in the organization evaluate the relative importance of each factor by assigning a 1 = not important, 2 = somewhat important, and 3 = very important. Then add the ratings each factor receives. The 20 factors with the highest sum score should be included in the EFE Matrix.
14. Discuss the ethics of gathering competitive intelligence.
Answer: Gathering competitive intelligence information is not corporate espionage because all the information needed is available by ethical means, mostly accessible through the Internet. Firms owe it to all their stakeholders to gather competitive intelligence and to perform this activity systematically and ethically.
15. Do you agree with I/O theorists that external factors are more important than internal factors in a firm achieving competitive advantage? Explain both your and their position.
Answer: While I/O theorists claim that industry factors are more important than internal factors, research findings suggest that only 20% of a firm’s profitability can be explained by industry factors and 36% explained by internal factors. Regardless, it is not a question of whether external or internal factors are more important. Rather, effective integration and understanding of both external and internal factors is the key to securing and keeping a competitive advantage.
16. Define, compare, and contrast the Weights vs Ratings in an EFEM vs IFEM.
Answer: The weight in an EFE Matrix indicates the relative importance of that factor to being successful in the firm’s industry. The rating indicates how effectively the firm’s current strategies respond to each key external factor. Thus, the weight allows more important factors to receive more consideration while the rating evaluates how well the firm handles each factor. Weights are industry-based but ratings are company-based.
The weight in an IFE also indicates the relative importance of the factor to the firm’s successfulness in the industry. However, in the IFE the factors under consideration are internal factors rather than external factors. Ratings in the IFE indicate whether the factor is a major or minor weakness or strength. Like in the EFE, weights industry-based while ratings are company-based.
17. Develop a Competitive Profile Matrix for your university. Include 6 factors.
Answer:
List critical success factors identified in the internal and external analysis.
Assign to each factor a weight from .0 (not important) to 1.0 (very important). These weights show the relative importance. The total of all the weights should equal 1.0.
Assign a 1-4 rating to each factor to describe the factor: 1= major weakness, 2 = minor weakness, 3 = minor strength, and 4 = major strength.
Multiply each factor’s weight by its rating to get a weighted score.
Sum the weighted scores for each variable to determine the total weighted score for the organization.
Do the same for one or more competing organizations using the same critical success factors and weights.
While each answer will vary for this question, students should follow these guidelines.
A template is provided below.
University 1:
University 2:
Critical Success Factors Weight Rating Score Rating Score
Tuition costs
Quality of faculty
Academic reputation
Average class size
Campus landscaping
Athletic programs
Quality of students
Graduate programs
Location of campus
Campus culture
Totals 1.0
List the 10 external areas that give rise to opportunities and threats.
Answer: The ten external areas are economic, social, cultural, demographic, environmental, political, government, legal, and technological.
