EXTERNAL AUDIT

CHAPTER 3
PESTEL ANALYSIS
-a complementary tool to SWOT, expands on the analysis of external
context by looking in detail at specific types of issues that frequently
have an impact on implementation of project/ initiatives. The term
‘PESTEL’ refers to the domains it considers: Political, Economic,
Social, Technological, Environmental and Legal. PESTEL involves
identifying the factors in each of these six domains that are relevant
for the project being considered.
PESTEL ANALYSIS
-a complementary tool to SWOT, expands on the analysis of external
context by looking in detail at specific types of issues that frequently
have an impact on implementation of project/ initiatives. The term
‘PESTEL’ refers to the domains it considers: Political, Economic,
Social, Technological, Environmental and Legal. PESTEL involves
identifying the factors in each of these six domains that are relevant
for the project being considered.
Political Factor
Example:
Economic Factor
Example:
Social Factor
Example:
Technological
Factor
Example:
Environmental Factor
Example:
Legal Factor
Example:
 Porter’s Five Forces of Competitive Position
Analysis
➢It was developed in 1979 by Michael E. Porter of Harvard Business
School as a framework or a guide for assessing and evaluating the
competitive strength and position of a business organization.
➢he identifies five forces that determine the competitiveness and
attractiveness of a market and which seek to locate the power in a
business situation, its current competitive position, and the strength of a
position that an organization may enter into.
➢These five forces help in identifying if new products or services are
potentially profitable. Once the area, where power lies is identifies, then
areas of strength can be pinpointed and exploited, solutions to
weaknesses may be proposed, and possible mistakes avoided.
Porter’s Five Forces of Competitive Position
Analysis
 Porter’s Five Forces of Competitive
Position Analysis
1. Rivalry among competing firms
✓The number and capability of competitors in the
market will also impact on the attractiveness of the
market.
✓If competitors are numerous and offer basically similar
products and services, the market will be less attractive.
✓Low capability of competitors to meet the market’s
current needs will serve as an attractive opportunity for
the firm.
 Porter’s Five Forces of Competitive
Position Analysis
2. Bargaining Power of Supplier
✓It is important to assess how much power the supplier
has in his ability to drive up prices.
✓A supplier enjoys this power if there are a few suppliers of
an essential input and they therefore control the supply of
that input.
✓Another source of power is how unique the product or
service is. The more unique the product, the easier it is for
the supplier to drive up the price.
 Porter’s Five Forces of Competitive
Position Analysis
3. Bargaining Power of Consumers
✓The smaller the number of buyers in the market, the
greater is the power enjoyed by the buyer. Likewise, the
more important an individual buyer is to the
organization, the greater his power is.
✓The buyer’s cost of switching from one supplier to
another is also a determinant of the extent of the
buyer’s power to bring prices down.
✓If cost is minimal, then it will be easy for the buyer to
switch to another supplier and bargain on lower prices
of the input.
 Porter’s Five Forces of Competitive
Position Analysis
4. Potential Development of Substitute
Products
✓When it is easy to substitute products in
a market, it is expected that buyers will
switch to alternatives in case of price
increases.
✓The suppliers will enjoy less power to
drive prices up and the market will be less
attractive.
 Porter’s Five Forces of Competitive
Position Analysis
5. Potential Entry of New Competitors
✓When investors see that a market is profitable,
they will desire to join the bandwagon and get
a share of the profits.
✓But when new investors enter a market, the
share of the participants in the market will be
divided among more people and will therefore
decline, thus, eroding profits.
INDUSTRY ANALYSIS
EXTERNAL FACTOR EVALUATION (EFE) MATRIX
COMPETITIVE PROFILE MATRIX (CPM)
 The External factor evaluation (EFE)
MATRIX
External Factor Evaluation (EFE) Matrix
allows strategists to summarize and evaluate
economic, social, cultural, demographic,
environmental, political, governmental, legal,
technological, and competitive information.
 EFE can be developed in FIVE steps
Step 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
 EFE Matrix
A total weighted score of 4.0 indicates
that an organization is responding in an
outstanding way to existing opportunities
and threats in its industry. In other words,
the firm’s strategies effectively take
advantage of existing opportunities and
minimize the potential adverse effects of
external threats. A total score of 1.0
indicates that the firm’s strategies are not
capitalizing on opportunities or avoiding
external threats
 EFE can be developed in FIVE steps
Step 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
 EFE Matrix
A total weighted score of 4.0 indicates
that an organization is responding in an
outstanding way to existing opportunities
and threats in its industry. In other words,
the firm’s strategies effectively take
advantage of existing opportunities and
minimize the potential adverse effects of
external threats. A total score of 1.0
indicates that the firm’s strategies are not
capitalizing on opportunities or avoiding
external threats
 EFE can be developed in FIVE steps
Step 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 Matrix
A total weighted score of 4.0 indicates
that an organization is responding in an
outstanding way to existing opportunities
and threats in its industry. In other words,
the firm’s strategies effectively take
advantage of existing opportunities and
minimize the potential adverse effects of
external threats. A total score of 1.0
indicates that the firm’s strategies are not
capitalizing on opportunities or avoiding
external threats
 EFE can be developed in FIVE steps
Step 4
Multiply each factor’s weight by its
rating to determine a weighted score.
Step 5
Sum the weighted scores for each
variable to determine the total
weighted score for the organization
 EFE Matrix
A total weighted score of 4.0 indicates
that an organization is responding in an
outstanding way to existing opportunities
and threats in its industry. In other words,
the firm’s strategies effectively take
advantage of existing opportunities and
minimize the potential adverse effects of
external threats. A total score of 1.0
indicates that the firm’s strategies are not
capitalizing on opportunities or avoiding
external threats
 EFE Matrix
Regardless of the number of key
opportunities and threats included in
an EFE Matrix, the highest possible
total weighted score for an
organization is 4.0 and the lowest
possible total weighted score is 1.0.
The average total weighted score is
2.5.
 EFE Matrix
A total weighted score of 4.0 indicates
that an organization is responding in an
outstanding way to existing opportunities
and threats in its industry. In other words,
the firm’s strategies effectively take
advantage of existing opportunities and
minimize the potential adverse effects of
external threats. A total score of 1.0
indicates that the firm’s strategies are not
capitalizing on opportunities or avoiding
external threats
 EFE Matrix
A total weighted score of 4.0 indicates
that an organization is responding in an
outstanding way to existing opportunities
and threats in its industry. In other words,
the firm’s strategies effectively take
advantage of existing opportunities and
minimize the potential adverse effects of
external threats. A total score of 1.0
indicates that the firm’s strategies are not
capitalizing on opportunities or avoiding
external threats
 The Competitive Profile Matrix (CPM)
-identifies a firm’s major competitors and its
particular strengths and weaknesses in relation to
a sample firm’s strategic position. The weights
and total weighted scores in both a CPM and an
EFE have the same meaning. However, critical
success factors in a CPM include both internal and
external issues; therefore, the ratings refer to
strengths and weaknesses, where 4 = major
strength, 3 = minor strength, 2 = minor
weakness, and 1 = major weakness.
 The Competitive Profile Matrix (CPM)
The critical success factors in a CPM are not
grouped into opportunities and threats as they
are in an EFE. In a CPM, the ratings and total
weighted scores for rival firms can be compared
to the sample firm. This comparative analysis
provides important internal strategic information
 The Competitive Profile Matrix (CPM)
The critical success factors in a CPM are not
grouped into opportunities and threats as they
are in an EFE. In a CPM, the ratings and total
weighted scores for rival firms can be compared
to the sample firm. This comparative analysis
provides important internal strategic information
 The Competitive Profile Matrix (CPM)
In this example, the two most important factors
to being successful in the industry are
“advertising” and “global expansion,” as indicated
by weights of 0.20.
Company 1 is strongest on “product quality,” as
indicated by a rating of 4, whereas Company 2 is
strongest on “advertising.” Overall, Company 1 is
strongest, as indicated by the total weighted
score of 3.15.
 The Competitive Profile Matrix (CPM)
Other than the critical success factors listed in the
example CPM, factors often included in this
analysis include breadth of product line,
effectiveness of sales distribution,
proprietary or patent advantages, location of
facilities, production capacity and efficiency,
experience, union relations, technological
advantages, and e-commerce expertise.
 The Competitive Profile Matrix (CPM)
Just because one firm receives a 3.2 rating and
another receives a 2.80 rating in a Competitive
Profile Matrix, it does not follow that the first firm
is 20 percent better than the second. Numbers
reveal the relative strengths of firms, but their
implied precision is an illusion. Numbers are not
magic. The aim is not to arrive at a
single number, but rather to assimilate and
evaluate information in a meaningful way that
aids in decision making.