Chapter 3: The External Assessment

1. Describe the nature and purpose of an external assessment in formulating strategies.

Why is it important for organizations?

Answer:

The external assessment, often referred to as environmental scanning or industry analysis,

involves identifying and evaluating trends and events beyond the control of a single firm. This
assessment aims to uncover key opportunities and threats that an organization faces, allowing
managers to formulate strategies to capitalize on the opportunities and mitigate the impact of
threats.

Nature and Purpose:

 Identifying External Factors: The primary goal is to identify significant external forces,
which can be categorized into economic, social, cultural, demographic, environmental
(SCDE), political, governmental, legal, technological, and competitive forces.
 Evaluating Trends and Events: It requires analyzing the potential impact of these
forces on the organization. This involves assessing the magnitude and likelihood of
various trends and events.
 Actionable Responses: The external audit seeks to develop a finite list of opportunities
and threats that offer actionable responses. These are the variables that the organization
can realistically address through its strategic planning.

Importance for Organizations:

 Proactive Strategy Formulation: By understanding the external environment,

organizations can formulate proactive strategies rather than simply reacting to changes.
 Opportunity Exploitation: It enables organizations to identify and capitalize on
emerging opportunities, enhancing their competitive position.
 Threat Mitigation: It helps organizations anticipate and prepare for potential threats,
reducing their vulnerability.
 Informed Decision-Making: It provides critical information for making informed
strategic decisions, ensuring that strategies are aligned with the external environment.

Example:

Consider a renewable energy company. An external assessment might reveal the following:

 Opportunity: Increasing government subsidies for renewable energy projects

(Political/Governmental).
 Threat: Decreasing cost of fossil fuels (Economic).
Based on these findings, the company might formulate strategies to:

 Actively seek and secure government subsidies to fund new projects.

 Invest in research and development to reduce the cost of renewable energy technologies.

2. Identify and discuss five external forces that impact organizations. Provide examples of
how these forces can create both opportunities and threats.

Answer:

Five significant external forces impacting organizations are:

1. Economic Forces: These factors include economic growth, interest rates, inflation,
unemployment, and exchange rates.
o Opportunity: A growing economy can increase consumer spending, creating
opportunities for businesses to expand.
o Threat: High inflation can reduce consumer purchasing power and increase
operating costs, posing a threat to profitability.
o Example: A luxury car manufacturer benefits from economic growth as
affluent consumers are more likely to purchase expensive vehicles. Conversely, a
recession can significantly reduce demand for luxury cars.
2. Social, Cultural, Demographic, and Environmental (SCDE) Forces: These
encompass changes in demographics, lifestyles, cultural values, and environmental
concerns.
o Opportunity: A growing aging population creates opportunities for healthcare
and retirement services.
o Threat: Increasing environmental regulations can raise compliance costs for
businesses.
o Example: The rise in vegetarianism/veganism presents an opportunity for plant-
based food companies, while increasing concerns about plastic waste pose a
threat to packaging companies.
3. Political, Governmental, and Legal Forces: These include changes in regulations,
government policies, trade agreements, and political stability.
o Opportunity: New government incentives for green technologies can benefit
companies in the renewable energy sector.
o Threat: Increased tariffs on imported goods can raise costs for companies that
rely on global supply chains.
o Example: A pharmaceutical company can benefit from government funding for
research and development but may face threats from stricter regulations on drug
approvals.
4. Technological Forces: These involve advancements in technology, automation, and
innovation.
o Opportunity: The development of new digital marketing tools can help
companies reach a wider audience.
o Threat: Rapid technological advancements can make existing products obsolete,
requiring constant innovation.
 o Example: E-commerce businesses benefit from advancements in mobile
technology, while traditional brick-and-mortar retailers face threats from the
growing popularity of online shopping.
5. Competitive Forces: These include the intensity of competition, the threat of new
entrants, the bargaining power of suppliers and customers, and the availability of
substitute products.
o Opportunity: A competitor exiting the market can create opportunities for other
firms to gain market share.
o Threat: The entry of a new competitor with disruptive technology can erode the
market share of existing players.
o Example: The airline industry faces intense competition from low-cost carriers,
while tech companies must contend with the constant threat of new, innovative
startups.

3. Explain Porter’s Five Forces Model and its relevance in formulating strategies. Provide
examples of how each force can impact an industry.

Answer:

Porter’s Five Forces Model is a framework for analyzing the competitive intensity and
attractiveness of an industry. It identifies five forces that shape industry competition:

1. Threat of New Entrants: This force assesses how easily new competitors can enter the
industry. High barriers to entry (e.g., high capital requirements, strong brand loyalty)
reduce the threat.
o Impact: A low threat of new entrants allows existing firms to enjoy higher
profitability.
o Example: The pharmaceutical industry has a low threat of new entrants due to
high R&D costs and regulatory hurdles.
2. Bargaining Power of Suppliers: This force examines the ability of suppliers to raise
prices or reduce the quality of goods and services. High supplier power can reduce
industry profitability.
o Impact: Powerful suppliers can squeeze the profit margins of firms in the
industry.
o Example: Intel and TSMC have high bargaining power as suppliers of
microchips to the electronics industry.
3. Bargaining Power of Buyers: This force assesses the ability of customers to negotiate
lower prices or demand higher quality. High buyer power can reduce industry
profitability.
o Impact: Powerful buyers can drive down prices, reducing the profitability of
firms in the industry.
o Example: Large retailers like Walmart have significant bargaining power over
their suppliers.
4. Threat of Substitute Products or Services: This force examines the availability of
alternative products or services that customers can use to satisfy the same need. A high
threat of substitutes limits the industry's potential.
 o Impact: The availability of close substitutes limits the prices that firms in the
industry can charge.
o Example: Streaming services are substitutes for traditional cable TV, limiting
the pricing power of cable companies.
5. Intensity of Competitive Rivalry: This force assesses the level of competition among
existing firms in the industry. High rivalry can lead to price wars and reduced
profitability.
o Impact: Intense rivalry can erode profit margins as firms compete aggressively
for market share.
o Example: The airline industry is characterized by intense competitive rivalry,
often leading to price wars and low profitability.

Relevance in Formulating Strategies:

 Industry Analysis: The Five Forces Model helps organizations understand the dynamics
of their industry and identify key competitive factors.
 Strategic Positioning: It enables organizations to position themselves strategically to
mitigate the impact of negative forces and capitalize on opportunities.
 Competitive Advantage: By analyzing the forces, firms can develop strategies to create
a sustainable competitive advantage.

4. Describe key sources of information for identifying opportunities and threats. Provide
examples of how organizations can gather and analyze this information.

Answer:

Identifying opportunities and threats requires gathering and analyzing information from various
sources:

 Industry Publications and Reports: These provide insights into industry trends, market
dynamics, and competitive landscapes.
o Example: IBISWorld and McKinsey reports offer in-depth analyses of various
industries, providing valuable information on market size, growth rates, and key
players.
 Government Data and Reports: These sources offer demographic, economic, and
regulatory information.
o Example: The U.S. Census Bureau provides detailed demographic data, while
the Bureau of Economic Analysis offers economic indicators and forecasts.
 Trade Associations: These organizations provide industry-specific data, best practices,
and advocacy efforts.
o Example: The National Restaurant Association offers data on restaurant
industry trends, consumer preferences, and regulatory issues.
 Market Research Firms: These firms conduct surveys and studies to gather information
on consumer behavior, market trends, and competitive intelligence.
o Example: Nielsen and Gartner provide market research data on consumer
products, technology, and media.
 Financial News and Reports: These sources offer insights into company performance,
financial trends, and investment opportunities.
o Example: The Wall Street Journal and Bloomberg provide financial news and
analysis, while company 10-K reports offer detailed financial information.
 Social Media and Online Forums: These platforms can provide insights into consumer
sentiment, brand perceptions, and emerging trends.
o Example: Monitoring Twitter and Facebook can reveal consumer opinions
about products and services, while online forums can provide insights into
emerging trends and technologies.
 Competitive Intelligence: Gathering information about competitors' strategies, strengths,
and weaknesses can help identify opportunities and threats.
o Example: Reverse-engineering rival firms' products, analyzing their financial
reports, and monitoring their marketing campaigns.