Chapter 3 External Assessment

The Five-Forces Model

1. High number of competing firms 2. Similar size of firms competing 3. Similar capability of firms competing 4. Falling demand for the industry's products 5. Falling product or service prices in the industry 6. When consumers can switch brands easily 7. When barriers to leaving the market are high 8. When barriers to entering the market are low 9. When fixed costs are high among firms competing 10. When the product is perishable 11. When rivals have excess capacity 12. When consumer demand is falling 13. When rivals have excess inventory 14. When rivals sell similar products/services 15. When mergers are common in the industry

Conditions Where Consumers Gain Bargaining Power

1. If buyers can inexpensively switch 2. If buyers are particularly important 3. If sellers are struggling in the face of falling consumer demand 4. If buyers are informed about sellers' products, prices, and costs 5. If buyers have discretion in whether and when they purchase the product

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?

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 5. competitive forces

external audit

An evaluation conducted by one organization, such as a CPA firm, on another.

Economic Forces

Interest rates, inflation, unemployment, economic growth, and other factors that affect the general health and well-being of a nation or the regional economy of an organization.

Technological Forces

Technological advancements can: ► Create new markets ► Result in a proliferation of new and improved products ► Change the relative competitive cost positions in an industry ► Render existing products and services obsolete

Competitive Forces

►An important part of an external audit is identifying rival firms and determining their strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies

►Potential Entry of New Competitors

►Barriers to entry are important ►Quality, pricing, and marketing can overcome barriers

►Bargaining power of consumers

►Customers being concentrated or buying in volume affects intensity of competition ►Consumer power is higher where products are standard or undifferentiated

The Industrial Organization

►Firm performance is based more on industry (external) properties

►Bargaining Power of Suppliers is increased when there are:

►Low number of suppliers ►Few substitutes ►Costs of switching raw materials is high ►Backward integration is gaining control or ownership of suppliers

►Rivalry among competing firms

►Most powerful of the five forces ►Focus on competitive advantage of strategies over other firms

►Potential development of substitute products

►Pressure increases when: ►Prices of substitutes decrease ►Consumers' switching costs decrease

►Competitive intelligence (CI)

►a systematic and ethical process for gathering and analyzing information about the competition's activities and general business trends to further a business's own goals

►Forecasts

►educated assumptions about future trends and events ►quantitative, qualitative techniques