Chapter 3 The External Assessment

by: Justice Pajarillo

This chapter examines the tools and concepts needed to conduct an external strategic management audit which focuses on identifying and evaluating trends and events. The purpose of external audit is to develop a finite list of opportunities that could benefit a firm and threats that should be avoided. It is aimed at identifying key variables that offer actionable responses.

Key External Factors

Economic forces Social, cultural, demographic, and environmental forces Political, governmental, and legal forces Technological forces Competitive forces

Economic Forces

Economic forces refer to the nature and direction of the economy in which business operates. Economic factors have a tremendous impact on business firms. The general state of the economy, interest rate, stage of the economic cycle, balance of payments, monetary policy, fiscal policy, are key variables in corporate investment, employment, and pricing decisions.

Key variables to be mentioned

Availability of credit Level of disposable income Interest rates Inflation rates Money market rates Federal government budget deficits Gross domestic product trend Consumption patterns Unemployment trends Worker productivity levels Value of the dollar in world markets Stock market trends Foreign countries economic conditions Import/export factors

Demand shifts for goods/services Income differences by region/customer Price fluctuations Exportation of labor & capital Monetary policies Fiscal policies Tax rates ECC policies OPEC policies LDC policies

Social, Cultural, Demographic, and Environmental Forces

Major impact on:

Products Services Markets Customers

Key variables to be mentioned

Childbearing rates Number of special-interest groups Number of marriages Number of divorces Number of births Number of deaths Immigration & emigration rates Life expectancy rates Per capita income Attitudes toward business Average disposable income Buying habits Ethical concerns Attitudes toward saving Racial equality

Average level of education Government regulation Attitudes toward customer service Attitudes toward product quality Pollution control Attitudes toward foreign people Energy conservation Social responsibility Value placed on leisure time Recycling Waste management Air & water pollution Ozone depletion Endangered species

Political, Governmental, and Legal Forces

Political-legal forces include the outcomes of elections, legislation, and court judgments, as well as the decisions rendered by various commissions and agencies. The political sector of the environment presents actual and potential restriction on the way an organization operates.
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 organiztions.

Most important government actions:

Regulation
Taxation Expenditure Takeover Creating

a crown corporation Privatization

Key variables to be mentioned

Changes in tax laws Special tariffs Political action committees Voter participation rates Number of patents Changes in patent laws Environmental protection laws Level of protection laws Equal employment legislation Level of government subsidies Antitrust legislation/enforcement Import-export regulations Monetary policy Political conditions in other countries
Lobbying activities Government budgets World oil, currency, & labor markets Location and severity of terrorist activities Local, state, and national elections

Technological Forces

Influence of technological forces in organizations:

Technological developments can significantly alter the demand for an organization's or industry's products or services. Technological change can decimate existing businesses and even entire industries, since its shifts demand from one product to another. Changes in technology can affect a firm's operations as well its products and services.

key concerns in the technological environment:

forecast and identify relevant developments - both within and beyond the industry assess the impact of these developments on existing operations define opportunities

Competitive Forces

o o o o o

Identifying rival firms

Strengths Weaknesses Capabilities Opportunities Threats Objectives Strategies

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Key Questions About Competitors:

1. 2. 3. 4.
5. 6. 7. 8. 9. 10. 11. 12.

Their strengths Their weaknesses Their objectives and strategies Their responses to all external variables (e.g. social, political, demographic, etc.) Their vulnerability to our alternative strategies Our vulnerability to successful strategic counterattack Our product and service positioning relative to competitors Entry and exit of firms in the industry Key factors for our current position in industry Sales and profit rankings of competitors over time Nature of supplier and distributor relationships The threat of substitute products or services

7 characteristics of most competitive companies:

Market share matters Understand what business you are in Broke or not, fix it Innovate or evaporate Acquisition is essential to growth People make a difference No substitute for quality

Competitive Intelligence Programs

Systematic and ethical process for gathering and analyzing information about the competitions activities and general business trends to further a business own goals.

Competitive Analysis: Porters Five-Forces Model

Potential development of substitute products

Bargaining power of suppliers

Rivalry among competing firms

Bargaining power of consumers

Potential entry of new competitors

Potential entry of new competitors

Rivalry among competing firms

Rivalry refers to the degree to which firms respond to competitive moves of the other firms in the industry.

Rivalry among competing firms

Rivalry among existing firms may manifest itself in a number of ways: price competition, new products, increased levels of customer service, warranties and guarantees, advertising, better networks of wholesale distributors, and so on.

Two important principles of competitive rivalry:

A powerful competitive strategy used by one company intensifies competitive pressures on the other companies. The manner in which rivals employ various competitive weapons to try to out-maneuver one another shapes "the rules of competition" in the industry and determines the requirements for competitive success.

Potential entry of new competitors

Types of Entry Barriers

Economies of scale Product differentiation Capital requirements Cost advantages independent of scale Switching cost Access to distribution channels Governmental and legal barriers

Potential development of substitute products

Impact of closely-related substitute products to sellers

The presence of readily available and competitively priced substitutes places a ceiling on the prices companies in and industry can afford to charge without giving customers an incentive to switch to substitutes and thus eroding their own market position. Another is whether it is difficult or costly for customers to switch to substitutes to substitutes. Typical switching costs include, the cost of purchasing additional equipment, employees retraining costs, the time and costs to test the quality for technical help needed to make the changeover.

Bargaining power of suppliers

Supplier

power refers to the ability of providers of inputs to determine the price and terms of supply. Suppliers can exert power over firms an industry by raising prices or reducing the quality of purchased goods and services, so reducing profitability.

A group of suppliers is more powerful if the following apply:

It is dominated by a few firms and is more concentrated than the industry its sells to. When suppliers' products are differentiated to such an extent that it is difficult or costly for buyers to switch from one suppliers to another. When the buying firms are not important customers of the suppliers group. When the suppliers of an input do not have to compete with the substitute inputs of suppliers in other industries. When one or more suppliers pose a credible threat of forward integration into the business of the buyer industry. When the buying firms display no inclination toward backward integration into the suppliers' business.

Bargaining power of consumers

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.

Consumers gain increasing bargaining power under the ff. circumstances:

If they can inexpensively switch to competing brands or substitutes. If they are particularly important to the seller. If the sellers are struggling in the face of falling consumer demand. If they are about sellers products, prices, and costs. If they are discretion in whether and when they purchase the product.