So, this chapter examines the tools and concepts needed to conduct

an external strategic management audit or sometimes called environmental

scanning or industry analysis. We will be tackling about strategies we can
make with external factors that can affect the businesses. We will be talking
about opportunities and threats of a company.

So, what is environmental scanning?

 Environmental Scanning processes surveys externally and interprets
the data in order to identify the external opportunities and threats that might
gone through by the company. These opportunities and threats might also
affect the decision of the business positively and negatively. It can help the
decision makers to decide things in order for them to have a good result.
Strategies that is used commonly is the SWOT Analysis – Strength,
Weaknesses, Opportunities, and Threats.

External Audit is also about identifying and evaluating trends and

events specially those that are beyond the control of a firm. These events
might be an opportunity to the firm or otherwise a threat. When a firm
evaluates and found something that they think is an opportunity to them,
then they will take advantage on it for them to make their company more
profitable and successful. On the other hand, if they evaluated a threat then
the best thing, they can plan is to avoid it to not face any hurdles and
challenges. If the thing is unavoidable then they can strategize on how they
can reduce the negative effect that they might experience when it arrives.
 The purpose of an external audit is to develop a finite list of
opportunities that could benefit a firm and threats that should be avoided. It
is only finite list because the external audit is not about listing every single
thing that could affect a business. Instead, it focuses on finding the most
important factors that the company can do something about. These factors
should help the company either take advantage of opportunities or protect
itself from potential problems. In other words, it's about coming up with
strategies to benefit from good things or deal with challenges.

So, this is an illustration on how the external audit fits into the
strategic-management process. As the illustration shows, external audit is in
the second step together with the performance of the internal audit, they are
after the development of mission and vision.
 External forces can be divided into five broad categories: (1) economic
forces; (2) social, cultural, demographic, and natural environment forces; (3)
political, governmental, and legal forces; (4) technological forces; and (5)
competitive forces. These forces affect the competitors, suppliers,
distributors, creditors, customers, employees, communities, managers,
stockholders, labor unions, governments, trade associations, special interest
groups, products, services, markets, and the natural environments. In this
way, an organization can identify opportunities and threats in the economy.
 To conduct an external audit, a company initially needs to collect data
on competitive intelligence and various trends such as economic, social,
cultural, demographic, environmental, political, governmental, legal, and
technological aspects. Once the information is gathered, it should be
organized. Managers should then hold a meeting or a series of meetings to
collaboratively pinpoint the most crucial opportunities and threats facing the
company. A prioritized list of these factors can be generated by asking all
managers to rank them, indicating the most important opportunity/threat
with a 1 and the least important with a 20. It's important to note that these
external factors can change over time and may differ by industry. Following
these steps, the collected data is evaluated.
 The Industrial Organization (I/O) approach to competitive advantage
advocates that external (industry) factors are more important than internal
factors in a firm achieving competitive advantage.
In Industrial Organization, it states that external factors are more
important than internal factors because external factors involve the market
itself wherein your goods and services will be selling, Also, externally your
target consumers are there as well as your competitors where you can
differentiate and compare your brand and goods to know if you are in need
of improvements and if your quality might be lacking.
However, internal factors are also important because it also involves
your financial capabilities and marketing structure. But external factors are
way more important than internal one.
Industrial Organization theorists contend that external factors in general and
the industry in which a firm chooses to compete has a stronger influence on
the firm’s performance than do the internal functional decisions managers
make in marketing, finance, and the like. Firm performance, they contend, is
primarily based more on industry properties. First, Economies of scale refers
to the cost advantages that a business can achieve as its production or scale
of operation increases. This can result in increased efficiency and reduced
production costs. Secondly, external side of the business is where you can
also know the barriers to market entry so when time comes that you’ll be
endorsing your goods, you already have an idea on what to do with those
barriers. Third, you can differentiate your product with other companies’
product, in that way you can know if your goods may lack quality or that
needs an improvement to dominate the market. Then, you can have the idea
on the state of the economy, you can know what’s more demand so that
your company can also compete. Lastly, you also can have the idea on the
level of competitiveness your competitor has. You must not be easy going
always.
There are three economic forces that drives the economy – Gross Domestic
Product, Unemployment, and Currency.
When an economy experiences a global economic recession, everyone is
affected specially the consumers. When recession happened there will be a
possibility that the demand of goods and services will be high however the
supply is slow.
Gross Domestic Product is a measure of the total value of all goods and
services produced within a country's borders over a specific period. It serves
as a comprehensive indicator of the overall economic activity and size of an
economy. A rising GDP generally signifies economic growth, while a declining
GDP may indicate economic contraction. Policymakers use GDP to assess the
effectiveness of economic policies and to make informed decisions.
The unemployment rate on the other hand, reflects the percentage of the
labor force that is unemployed and actively seeking employment. High
unemployment rates can lead to social and economic challenges, such as
reduced consumer spending and lower overall economic output. Low
unemployment rates, on the other hand, suggest a healthier labor market
and increased consumer confidence. Governments and policymakers closely
monitor the unemployment rate to formulate strategies that promote job
creation and economic stability.
The dollar exchange rate, or the value of a country's currency relative to
other currencies, is a crucial economic factor, especially in the era of
globalization. It impacts international trade, investment, and the overall
economic competitiveness of a nation. A strong currency can make a
country's exports more expensive, potentially affecting trade balances.
Changes in the dollar exchange rate can also influence inflation rates and
interest rates, affecting the overall economic environment.
 Social, cultural, demographic, and natural environment forces
profoundly impact products, services, markets, and customers by shaping
consumer preferences, influencing market dynamics, driving globalization.
Socially, whatever is the trend becomes one of the most demand item
because people will be eager to have one. As to cultural and demographic,
people are aging and that some are culturally mannered some older people
might go for health care services while those young ones will go for the
technological advancements.
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.
Antitrust legislation is a key opportunity as it promotes fair competition,
prevents monopolies, and fosters innovation. However, it can also be a
threat as violations may lead to legal actions, fines, and damage to a
company's reputation.
Tax rates are a key opportunity and threat because they directly impact a
business's financial health. Favorable tax rates can create opportunities by
reducing operational costs and increasing profits. On the other hand, high or
unfavorable tax rates pose a threat, potentially limiting the exports and
imports because goods coming and going out the country are subject to tax
which makes the goods more expensive and not very good to the customers.
Lobbying activity is same as communicating with the higher ups. This makes
an opportunity because customers feedbacking with the higher ups makes
them have an idea to which area must they improve.
Lastly, patent laws represent a key opportunity for businesses as they
provide a legal framework for protecting innovative ideas and creations,
allowing companies to safeguard their intellectual property. However, patent
laws also pose a threat, as infringement issues or the potential for
competitors to secure advantageous patents can impact a company's market
position and limit its freedom to operate.
The Internet has fundamentally transformed opportunities and threats in
business. It has accelerated product life cycles, enabled faster distribution,
and spawned new products and services. Traditional geographic boundaries
no longer limit markets, and the historical trade-off between standardized
production and flexibility has shifted. Economies of scale, entry barriers, and
relationships among industries, suppliers, creditors, customers, and
competitors are being reshaped by the Internet, influencing how businesses
operate and compete.
Internet and Technology really is a big impact to the economy. It makes
people shop efficiently, especially in this time where we live with high
technologies. Everything can be made with the help of technology – just
shopping without the need to get physically ready and go out. Internet also
gives opportunities to some entrepreneurs just like the shopping
applications. Also, they can advertise their products, goods, services and
even their company online unlike before where they print newspapers and
journals.
 We the evolutions of technology, most organizations are establishing
two new positions that handles the internet and social media world. The
Chief Information Officer (CIO) and Chief Technology Officer (CTO) are two
positions that was added. These two works together to ensure that
information needed to formulate, implement, and evaluate strategies is
available where and when it is needed.

The CIO is more a manager, managing the firm’s relationship with

stakeholders; the CTO is more a technician, focusing on technical issues such
as data acquisition, data processing, decision-support systems, and software
and hardware acquisition.
 To create a successful strategy, it's crucial to gather and assess
information about competitors. Understanding what competitors are doing
helps in making informed decisions and developing effective plans. This
competitive intelligence allows a company to identify strengths, weaknesses,
opportunities, and threats in the market, enabling better strategic choices for
sustainable success.
Competitive Intelligence Programs is a systematic and ethical process for
gathering and analyzing information about competitors involves methodically
collecting data about what competitors are doing in the market and general
business trends. It's important that this process is conducted in a structured
and fair manner. The aim is to use the insights gained from this information
to help achieve the business's own goals in a strategic way. This approach
ensures that the data is acquired ethically and used effectively to make
informed decisions and stay competitive in the market.
Competitors are firms that offer similar products and services in the same
market. Market Commonality and Resource Similarity are terms used by the
researchers to study the rivalry among competitors.
Market Commonality refers to the extent to which two or more firms operate
in the same markets or serve similar customer needs. For instance, two
smartphone manufacturers targeting the same consumer segment have high
market commonality. On the other hand, Resource similarity involves the
extent to which firms have comparable strategic resources, capabilities, and
assets or its internal resources. For example, smartphone industry,
particularly between Apple and Samsung. Both companies share similarities
in key resources such as technological capabilities, manufacturing expertise,
and a strong global brand presence.
These are the Five Forces of Competitions, Rivalry among competing firms in
which will be affected and will lead to Potential entry of new competitors,
bargaining power of suppliers, bargaining power of consumers, and potential
development of substitute products.

Let’s talk first about the Rivalry among competing firms, this force is the
most powerful among five forces. These focuses on the individual
competitive advantage of each firm. If they are most advantageous with a
certain strategy or certain product then they will just focus on those certain
things. This competitive advantage may lead to rivalry of the firm since they
be like “My product is the most effective of all” and this and that.
Whenever new firms can easily enter a particular industry, the intensity of
competitiveness among firms increases. When a new competitor enters, they
will be eager to experience everything and once they build a reputation there
will be possibility that they will dominate the market. So, the other
competitors will also put their guards up to the new one. When the threat of
new firms entering the market is strong, incumbent firms generally fortify
their positions and take actions to deter new entrants, such as lowering
prices, extending warranties, adding features, or offering financing specials.

The substitute product is very common in today’s world. The firms’

pressures increases when this substitute product prices decreases and the
consumers’ switching costs decreases. For example, the beverages Coca-
Cola and RC Cola. We filipinos often labeled RC Cola as a substitute beverage
of Coke. RC Cola prices are cheaper than of the Coca-Cola and also there are
consumers who prefers RC Cola now since Coke price is rising due to
inflation.
 The bargaining power of suppliers affects the intensity of competition
in an industry, especially when there is a large number of suppliers, when
there are only a few good substitute raw materials, or when the cost of
switching raw materials is especially costly. When a consumer is in need of a
certain product and there are many suppliers, bargaining power of suppliers
increases since they want the customer to buy to their product and not to
the competitor.

This is somewhat opposite to the last one, in this case the

consumers are the one who bargains. When a customer will purchase in high
volume or in bulk, they are the one bargains with the price. Commonly they
tell the supplier to sell the product 5 peso less per product.
 A wealth of strategic information is available to organizations from
both published and unpublished sources. Unpublished sources include
customer surveys, market research, speeches at professional and
shareholders’ meetings, television programs, interviews, and conversations
with stakeholders.

Also, published sources of strategic information include periodicals,

journals, reports, government documents, abstracts, books, directories,
news- papers, and manuals. The Internet has made it easier for firms to
gather, assimilate, and evaluate information.
Forecasts are educated assumptions about future trends and events.
Forecasting is a complex activity because of factors such as technological
innovation, cultural changes, new products, improved services, stronger
competitors, shifts in government priorities, changing social values, unstable
economic conditions, and unforeseen events.
Forecasting tools can be broadly categorized into two groups: quantitative
techniques and qualitative techniques. Quantitative forecasts are most
appropriate when historical data are available and when the relationships
among key variables are expected to remain the same in the future. As
historical relationships become less stable, quantitative forecasts become
less accurate and that’s when a qualitative technique will be use.

An External Factor Evaluation (EFE) Matrix allows strategists to summarize

and evaluate economic, social, cultural, demographic, environmental,
political, governmental, legal, technological, and competitive information.
The EFE Matrix can be developed in five steps. (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.
(2) Assign to each factor a weight that ranges from 0.0 (not important) to 1.0
(very important). (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. (4)
Multiply each factor’s weight by its rating to determine a weighted score. (5)
Lastly, Sum the weighted scores for each variable to determine the total
weighted score for the organization.

This is how an EFE Matrix looks like after, they list the key
opportunities and threats that affects the firm, rates it, and totaled.
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 critical success factors in a
CPM are not grouped into opportunities and threats as they are in an EFE.

This is an example of the CPM, they really differ form the EFE Matrix wherein
they list key opportunities and threats. 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.