Chap 3 Fred R David
THE EXTERNAL ASSESSMENT – Summary| The External Assessment or External Audit is a very essential part of the Strategic Management Process. Due to the turbulent situation around the globe, it is very much necessary for organizations to conduct an effective and efficient External Audit. The purpose of external audit is to develop a list of possible opportunities and threats that an organization can face in its outer/external environment.
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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. The process of performing an external audit should include as many managers and employees as possible. This creates understanding and commitment from organizational members. There are a few external forces that an organization should take into account while making strategies. These forces can be divided into five categories: * Economic Forces:
Economic factors have a direct impact on the potential attractiveness of various strategies. For example, as interest rates rise, funds needed for capital expansion becomes costly or unavailable. In such cases, the organization’s strategies should be amended in such a way to get hold of any such Economic change that can overall affect the working of an organization. Some other key economic factors are Inflation rates, GDP trend, Stock market trends, Currency valuation, Monetary policies, Fiscal policies, Tax rates, Government Budget Deficits, and Price fluctuations etc.
State Corruption can also lead to economic downfall and can act as a potential threat to organizations. For instance, in Russia, political bureaucracy demoralizes economic progress and entrepreneurship. Russian businesspersons who do not favour local government are targeted with extensive taxes, tariffs, fines, and intrusive inspections. So far, Russia is not considered the suitable place for business due to political corruption. * Social, Cultural, Demographic, and Environmental Forces: Social, Cultural, Demographic, and Environmental changes are directly related to almost all products, services, markets, and customers.
Every organization is challenged by the opportunities and threats arising from these changes. Changes in social, cultural, demographic, and environmental aspects of any country shapes the way they live, work, produce, and consume. New trends are creating new kinds of consumers and similarly new type of products and services are required. For example; people in US are now increasing with households having people living alone or unrelated people are living together. Similarly, people are moving towards fast growing states in order to gain more in terms of money.
This type of information can be essential for successful strategy formulation, including where to locate new plants and distribution centres and where to focus marketing efforts. * Political, Governmental, and Legal Forces: In every country, there are organizations that rely on government contracts or subsidies. For such organizations, political forecast can be most important part of an external audit. For example, changes in taxation policy, patent laws, or lobbying activities can badly affect any organization. In such cases, companies may have to alter or abandon strategies due to political or government actions.
Therefore, companies should examine the potential threats that can come through these sources, and should utilize the opportunities in the best possible ways to achieve organizational goals effectively and efficiently. Some of the political, governmental, and legal variables which an organization should take into consideration while doing external audit are changes in tax laws, changes in patent laws, number of patents, number of protests against government, level of defense expenditure, fiscal and monetary policies, lobbying activities, and national elections etc. Technological Forces: Technological Forces are creating great impact on organizations. The internet is acting as a national and global economic engine that is increasing productivity, and is helping in saving billions of dollars in distribution and transaction cost from direct sales to self – service systems. In today’s world, organizations need to be technology advanced in order to work together with other organizations in the market. To effectively capitalize on Information Technology, organizations now hire Chief Information Officer (CIO) and Chief Technology Officer (CTO).
They work together to ensure that information needed to formulate, implement, and evaluate strategies is available where and when required. * Competitive Forces: It is the most important part of the external evaluation of an organization. It refers to the identification of rival firms and determining their strengths, weaknesses, opportunities, and threats. It is vital in the Strategic Management process because by evaluating the SWOT of a competitor, a particular organization would be able to formulate strategies that are better than the competitor.
Such evaluation can provide the organization with competitive advantage, if properly analyzed. For example, Italian car maker Fiat had troubles with its finances; suddenly Ford Motor increased its marketing in Italy to increase its market share in Italy. Organizations should opt the Competitive Intelligence programs; a systematic and ethical process for gathering and analyzing information about the competition. Competitive information is equally applicable for strategy formulation, implementation, and evaluation decisions.
In today’s competitive world, competitors are even working in cooperation with each other. Firms are moving to compete as groups within alliances more and more as it becomes increasingly difficult to survive alone in some industries. For example, Air Canada, Mexicana, Spanair, and United work under Star Alliance along with 12 other Air Companies. The Industrial organization (I/O) approach to competitive advantage advocates that external factors are more important than internal factors in a firm achieving competitive advantage.
So, it is essential for an organization to conduct a proper external assessment in order to achieve its targets and competitive edge over its competitors. The intensity of competition among firms varies widely across industries. According to Michael Porter, the nature of competitiveness in a given industry can be viewed as a composite of five forces: 1. Rivalry among Competing Firms: The intensity of rivalry among competing firms increase by the increase in competitors and consumers can easily shift from one organization to another. 2.
Potential Entry of New Competitors: The degree of competitiveness increases with the inception of new firms in a particular industry. Numerous barriers exist in every industry for the entrance of new organizations, but still there are firms that enter industries with higher quality products, and lower prices. Such organizations can be a threat for already existing organizations in that particular industry. 3. Potential Development of Substitute Products: Competitive pressure increases with the decline in prices of substitute products that can be used in place of other.
For example, people in Pakistan are now using more Compressed Natural Gas as compared to Petroleum due to prices differences. Apart from prices, quality betterment can also be factor which can be a potential threat for any company from its competitors. 4. Bargaining Power of Suppliers: Suppliers play a vital role for any organization to gain competitive edge. It is in the best interest of both suppliers and producers to assist each other with reasonable prices and high quality raw material.
Relationship between a supplier and a producer should be long lasting in order to maintain same quality and pricing for a longer period of time. 5. Bargaining Power of Consumers: Many organizations provide warranties or special customer services in order to gain customer loyalty. Organizations should negotiate with customers over their choice of pricing or warranty packages in order to attain a good relationship level between themselves and its customers. External competitive information can be obtained through various published or unpublished sources.
Unpublished sources include customer surveys, market research, and TV programs etc. Whereas, published sources include periodicals, journals, reports, government documents, newspapers, manuals, and competitor itself. Today the world is considered as a Global village, and every country is welcoming more and more foreign investment. A global strategy seeks to meet the needs of customers worldwide with the highest value at lower cost. Organizations should scan relevant information from various sources regarding potential opportunities and threats before entering into a particular international market.
Strategies should be made according to the business scenario in the country where an organization wants to enter. Any organization needs proper assumptions and forecasted future for making proper strategies to achieve its annual goals. No forecast is perfect, and even some forecasts are even wildly inaccurate. But, it is essential for an organization to identify future occurrences that could have a major effect on the firm. Forecasting can be quantitative or qualitative. Qualitative, when historical data is inappropriate or in accessible. Quantitative, when past data is available, uch as Method of Linear Regression. Overall Industry Analysis can be done by two methods: 1. THE EXTERNAL FACTOR EVALUATION (EFE) MATRIX: It allows strategists to evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information. It involves five steps: * List key external factors identified in external audit process. * Assign weight to each factor that ranges 0. 0 to 1. 0; 1. 0 being very important. * Assign rating between 1 to 4; 4 being superior. * Multiply each factor’s weight by its rating to determine a weighted score. Sum the weighted scores for each variable to determine the total weighted score of the organization. The total weight that any organization can achieve is 4. 0. An organization having 4. 0 weighted score means its strategies are working exactly as required in order to achieve organizational goals. 2. THE COMPETITIVE PROFILE MATRIX: It identifies a firm’s major competitors and its particular strengths and weaknesses in relation to a sample firm’s strategic position. The way to calculate is same as of EFE matrix with a slight difference that ratings refer to the level of strength and weakness i. . rating 4 means major strength. It is of great importance for every firm to analyze its external environment and prepare strategies that can help in achieving strategic goals of an organization. Moreover, managers and employees should take part in such assessment as much as possible. Firms that do not mobilize and empower their managers and employees to identify, monitor, forecast, and evaluate key external factors may fail to anticipate emerging opportunities and threats and, consequently, may pursue ineffective strategies, miss opportunities, and invite organizational demise.