KEY EXTERNAL FORCES Rocky James L.

Lao-ay

External forces can be divided into five broad categories: (1) social, cultural, demographic, and
natural environment forces; (2) economic forces; (3) political, governmental, and legal forces;
(4) technological forces; and (5) competitive forces.

Changes in external forces translate into changes in consumer demand for both industrial and
consumer products and services. External forces affect the types of products developed, the
nature of positioning and market segmentation strategies, the type of services offered, and the
choice of businesses to acquire or sell. External forces directly affect both suppliers and
distributors. Identifying and evaluating external opportunities and threats enables organizations
to develop a clear mission, to design strategies to achieve long-term objectives, and to develop
policies to achieve annual objectives.

1. Social, Cultural, Demographic, and Natural Environment Forces

Social, cultural, demographic, and environmental changes have a major impact on

virtually all products, services, markets, and customers.
Small, large, for-profit, and nonprofit organizations in all industries are being
staggered and challenged by the opportunities and threats arising from changes in
social, cultural, demographic, and environmental variables.
Changes in social, culture, demography, and environmental trends are shaping the
way people live, work, produce, and consume.
New trends are creating a different type of consumer and, consequently, a need for
different products, different services, and different strategies.
Key Social, Cultural, Demographic, and Natural Environment Variables
Childbearing rates Location of retailing,
Number of special-interest manufacturing, and service
groups businesses
Number of marriages Attitudes toward business
Number of divorces Lifestyles
Number of births Traffic congestion
Number of deaths Inner-city environments
Immigration and emigration rates Average disposable income
Social Security programs Trust in government
Life expectancy rates Attitudes toward government
Per capita income Attitudes toward work
Buying habits
Ethical concerns
 Attitudes toward saving Population changes by race,
Sex roles age, sex, and level of affluence
Attitudes toward investing Attitudes toward authority
Racial equality Population changes by city,
Use of birth control
Average level of education county, state, region, and country
Government regulation Value placed on leisure time
Attitudes toward retirement Regional changes in tastes and
Attitudes toward leisure time preferences
Attitudes toward product quality Number of women and minority
Attitudes toward customer
workers
service Number of high school and
Pollution control
Attitudes toward foreign peoples college graduates by geographic
Energy conservation area
Social programs Recycling
Number of churches Waste management
Number of church members Air pollution
Social responsibility Water pollution
Attitudes toward careers Ozone depletion
Endangered species

2. Economic Forces
Individuals place a premium on time. Improved customer service, immediate availability,
trouble-free operation of products and dependable maintenance and repair services are
becoming more important. People today are more willing than ever to pay for good
service if it limits inconvenience.
When interest rates rise, funds needed for capital expansion become more costly or
unavailable. Also, when interest rates rise, discretionary income declines, and the
demand for discretionary goods falls. When stock prices increase, the desirability of
equity as a source of capital for market development increases. Also, when the market
rises, consumer and business wealth expands.
Trends in the dollars value have significant and unequal effects on companies in
different industries and in different locations.

Key Economic Variables to be Monitored

Availability of credit Inflation rates

Level of disposable income Money market rates
Propensity of people to spend Federal government budget
Interest rates
deficits
 Gross domestic product trend Import/export factors
Consumption patterns Demand shifts for different
Unemployment trends categories of goods and services
Worker productivity levels Income differences by region
Value of the dollar in world
and consumer groups
markets Price fluctuations
Stock market trends Export of labor and capital
Foreign countries economic Fiscal policies
conditions Tax rates

Advantages and Disadvantages of a Weak Dollar for Domestic Firms

Advantages Disadvantages
a. Leads to more exports a. Can lead to inflation
b. Leads to lower imports b. Can cause rise in oil prices
c. Makes U.S. goods cheaper to foreign c. Can weaken U.S. government
d. Makes it unattractive for Americans to
consumers
d. Combats deflation by pushing up prices of travel globally
e. Can contribute to fall in stock prices in long
imports
e. Can contribute to rise in stock prices in run
short run
f. Stimulates worldwide economic recession
g. Encourages foreign countries to lower
interest rates
h. Raises the revenues and profits of firms
that do business outside the United States
i. Stimulates worldwide economic expansion
j. Forces foreign firms to raise prices
k. Reduces the U.S. trade deficit
l. Encourages firms to globalize
m. Encourages foreigners to visit the United
States

3. Political, Governmental, and Legal Forces

Federal, state, local, and foreign governments are major regulators, deregulators,
subsidizers, employers, and customers of organizations. Political, governmental, and
legal factors, therefore, can represent key opportunities or threats for both small and
large organizations.
Changes in patent laws, antitrust legislation, tax rates, and lobbying activities can affect
firms significantly.
 Governments are taking control of more and more companies as the global economic
recession cripples firms considered vital to the nations financial stability.
Local, state, and federal laws; regulatory agencies; and special-interest groups can have
a major impact on the strategies of small, large, for-profit, and nonprofit organizations.

Some Political, Governmental, and Legal Variables

Government regulations or Government fiscal and monetary

deregulations policy changes
Changes in tax laws Political conditions in foreign
Special tariffs countries
Political action committees Special local, state, and federal
Voter participation rates
Number, severity, and location of laws
Lobbying activities
government protests Size of government budgets
Number of patents World oil, currency, and labor
Changes in patent laws
Environmental protection laws markets
Level of defense expenditures Location and severity of terrorist
Legislation on equal employment activities
Level of government subsidies Local, state, and national
Antitrust legislation
elections
4. 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, and changing the
historical trade-off between production standardization and flexibility.
The Internet is altering economies of scale, changing entry barriers, and redefining the
relationship between industries and various suppliers, creditors, customers, and
competitors.
Technological forces represent major opportunities and threats that must be considered
in formulating strategies.
Technological advancements can dramatically affect organizations products, services,
markets, suppliers, distributors, competitors, customers, manufacturing processes,
marketing practices, and competitive position.
Technological advancements 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 services obsolete.
Technological changes can reduce or eliminate cost barriers between businesses, create
shorter production runs, create shortages in technical skills, and result in changing
values and expectations of employees, managers, and customers.
Technological advancements can create new competitive advantages that are more
powerful than existing advantages.
Firms should pursue strategies that take advantage of technological opportunities to
achieve sustainable, competitive advantages in the marketplace.

5. Competitive Forces
An important part of an external audit is identifying rival firms and determining their
strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies.
Collecting and evaluating information on competitors is essential for successful strategy
formulation. Identifying major competitors is not always easy because many firms have
divisions that compete in different industries.
Many multidivisional firms do not provide sales and profit information on a divisional
basis for competitive reasons. Also, privately held firms do not publish any financial or
marketing information.

Key Questions About Competitors

(1) What are the major competitors strengths?

(2) What are the major competitors weaknesses?
(3) What are the major competitors objectives and strategies?
(4) How will the major competitors most likely respond to current economic, social,
cultural, demographic, environmental, political, governmental, legal, technological, and
competitive trends affecting our industry?
(5) How vulnerable are the major competitors to our alternative company strategies?
(6) How vulnerable are our alternative strategies to successful counterattack by our major
competitors?
(7) How are our products or services positioned relative to major competitors?
(8) To what extent are new firms entering and old firms leaving this industry?
(9) What key factors have resulted in our present competitive position in this industry?
(10) How have the sales and profit rankings of major competitors in the industry changed
over recent years? Why have these rankings changed that way?
(11) What is the nature of supplier and distributor relationships in this industry?
(12) To what extent could substitute products or services be a threat to competitors in this
industry?