MGT 657STRATEGIC MANAGEMENT

CHAPTER 3 :THE EXTERNAL ASSESSMENT

Group Members:Ahmad Rif’at Bin Abdul Rahman

2011120835Mohamad Aizuddin Bin Abu Bakar

2011778845Muhamad Zikrullah Bin Bahrunnizam

2011789027Muhamad Shakir Bin Mohd Samsuri

2011503187

Date of Presentation:6th Oct 2013

Presented For:SIR WAN ASRI BIN WAN AB AZIZ

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3.1 Nature of an External Audit Purpose: To develop a finite list of opportunities that could

benefit a firm & threats that should be avoided. Not aimed at developing an exhaustive list of every possible

factor that could be influence the business, rather; Aimed at identifying key variables that offer actionable

responses. Firms should be able to respond either offensively or

defensively to the factors…HOW??By formulating strategies that take advantage of external

opportunities or that minimize the impact of potential threats.

Cont....

Cont....

Develop Vision & Mission Statement

Perform External Audit

Perform Internal Audit

Establish Long-Term

Objectives

3.2 The Process of Performing an External Audit

Must involves as many managers & employeesWHY ???

o Lead to understanding & commitment from organizational members

o Appreciate having the opportunity to contribute ideas

o To gain a better understanding of their firm’s industry, competitors, and markets

Cont.… Process of Performing

Gather competitive intelligence & information about “E,S,C,P,E,L,T,G,D”

Assimilated and evaluated

Cont.…

Firstly:-o A company must gather competitive intelligence &

information about:- Economic Social Cultural Political Environmental Key External Forces/ Factors Legal Technological Governmental Demographic

Cont.…

Secondly:-o Once information is gathered, it should be assimilated

& evaluatedo The key external factors should be listed on flip

charts/ chalkboard & request all managers to rank the factors identified:- From 1 the most important opportunity/ threat To 20 for the least important opportunity/ threat

o Key external factors may vary over time & by industry

Cont.…

o The variables commonly used include:- Market share Breadth of competitive products World economies Foreign affiliates Proprietary & key account advantages Price competitiveness Technological advancement Population shifts Interest rates Pollution abatement but… The relationship with suppliers/ distributors are often a

critical success factor

Cont.…

o These key external factors should be:- Important to achieving long-term & annual objectives Measurable Applicable to all competing firms Hierarchical in the sense that some will pertain to the overall

company & others will be more narrowly focused on functional/ divisional areas

Communicated & distributed widely in the organization

Key External Factors

The Industrial Organization (I/O) ViewThe Industrial Organization (I/O) approach

to competitive advantage advocates that external (industry) factors are more important than internal factors in a firm for achieving competitive advantage.

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Economic Forces• Have a direct impact on the potential attractiveness of various

strategies. • Also cause discretionary income decline and the demand for

discretionary goods falls.• It is also when the market rises, consumer business wealth will

expands.• Key Economic Variable To Be Monitored.: Interest Rate Inflation Rates Unemployment Trend Import /Export factors Fiscal Policy Monetary Policy

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Social, Cultural, Demographic, and Natural Environmental Forces

• Changes in social, culture, demography & environmental tends are shaping the way American live, work, produce and consume.

• When new trends are creating a different type of consumer and consequently, a need for different product, services and strategies.

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Political, Governmental, and Legal Forces

The increasing global interdependence among economies, markets, governments, and organizations makes it imperative that firms consider the possible impact of political variables on the formulation and implementation of competitive strategies.

Represented a key of opportunities or threats for both small & large organizations.

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Technological Forces

The Internet has changed the very nature of opportunities and threats by:

–Transform the life cycles of products, –increasing the speed of distribution, –creating new products and services, –erasing limitations of traditional geographic markets,–changing the historical trade-off between production standardization and flexibility.

The Internet is altering economies of scale, changing entry barriers, and redefining the relationship between industries and various suppliers, creditors, customers, and competitors

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Competitive Forces

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

Characteristics of the most competitive companies:1.Market share matters

2.Understand and remember precisely what business you are in

3.Whether it’s broke or not, fix it–make it better

4.Innovate or evaporate

5.Acquisition is essential to growth

6.People make a difference

7.There is no substitute for quality

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Competitive Intelligence Programs

• 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

The three basic objectives of a CI program are: 1. to provide a general understanding of an industry and its

competitors2. to identify areas in which competitors are vulnerable and to

assess the impact strategic actions would have on competitors

3. to identify potential moves that a competitor might make that would endanger a firm’s position in the market 3-17

Sources of External Information

• Unpublished sources include customer surveys, market research, speeches at professional and shareholders’ meetings, television programs, interviews, and conversations with stakeholders.

• Published sources of strategic information include periodicals, journals, reports, government documents, abstracts, books, directories, newspapers, and manuals.

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Competitive Analysis: Porter’s Five-Force Model

1• RIVALRY AMONG COMPETING FIRMS

2• POTENTIAL ENTRY OF NEW COMPETITORS

3• POTENTIAL DEVELOPMENT OF SUBTITUTE

PRODUCT

4• BARGAINING POWER OF SUPPLIERS

5• BARGAINING POWER OF

CUSTOMER

1. Rivalry Among Competing firms• Strategies of one firm can be successful only when they

can provide competitive advantage over the strategies of rival firms.

• Rivalry among the competing firms will increase when:i. the numbers of competitors increaseii. competitor become equal in size and capability iii. demand for the product declinesiv. customer can switch brand easily

• rival firms become weakness, firm will benefits the opportunity by increase marketing and production

2. Potential Entry of New Competitor• new firms can easily enter a particular industry, will

increase the intensity of competitiveness among the firms.

• barrier that facing by the new entry:i. need to gain technology and specialized know-howii. lack of experienceiii. strong customer loyalty or strong brand preferenceiv. large capital requirement

• when new entry has a strong capability, existing firm will block the new entry

3. Potential Development of Substitute Product

• firm are compete with the producer of substitute products in other industry.

• appearance of substitute products puts a ceiling on the price that can be charged

• competitive pressure arising from substitute product increase as the relative price of substitute products declines and customers cost of switching decrease

• for example, producers of eyeglasses and contact lenses are face increasing competitive pressures from laser eye surgery.

4. Bargaining Power of Suppliers

• Occurs when large number of supplier, only few good substitute raw materials and cost of switching raw materials is high

• firms may use a backward integration strategy to gain control of supplier

• In others industry, seller are use forging strategic partnership with supplier

5. Bargaining Power of Customers

• occurs when customers are concentrated or large in number or buy in volume

• Bargaining power of customer is higher when products being purchased are standard

• others firm will offer extended warranties or special services to gain customer loyalty.

• Customer can negotiate selling price, warranty coverage, and accessory packages to a greater extent

• Its affect the competitive advantage in certain circumstances:i. If they can inexpensively switch to competing brands ii. If they are particularly important to the selleriii. If seller are struggling in the face of failing consumer

demandiv. If they are informed about seller’s product, prices and

costv. If they have discretion in whether and when they

purchase the product

Forecasting Tools and Techniques

• Forecasts are educated assumption about the future trends and events.

• need to allocate sufficient time and effort to study the underlying bases for published forecasts and develop internal forecasts of their own

• Accurate forecast will provide a major competitive advantage for organizations

• Forecasting tools divided into two:

a) Quantitative techniques appropriate when historical data are available and

when the relationships among key variables are expected to remain the same in the future.

a) Qualitative techniques forecasting is based on judgments, opinions, intuition,

emotions, or personal experiences and is subjective in nature.

Making Assumptions

• assumption is the best present estimates of the impact of the major external factors

• give a significant impact on performance or the ability to achieve desired results.

• Assumptions are needed only for future trends and events that are most likely to have a significant effect on the company’s business

What Is EFE MatrixStrategies to summarize and evaluate:

EconomicSocialCulturalDemographicEnvironmentalPoliticalGovernmentalLegalTechnologicalCompetitive information

Steps To Develop EFE Matrix

• Step 1 : (List Key External Factors as Identified in The External Audit Process).

-list 15 to 20 factors including opportunities and threats that affect the firm-can be in percentage, ratios or number

• Step 2 : Assign To Each Factor a Weight That Ranges From 0.0 (Not Important) to 1.0 (Very Important)

- the sum of all weights assigned to the factors must equal 1.0

• Step 3 : Assign a Rating Between 1 and 4 To Each Key External Factor

- Ratings are based on effectiveness of the firm’s strategies- 4 = superior, 3 = above average, 2 = average, 1 = poor

• 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.

- highest possible total weighted score is 4.0, lowest possible score is 1.0 and the average total weighted is 2.5- score of 4.0 indicates that an organization is responding in an outstanding way to

existing opportunities and threats in its industry

The Competitive Profile Matrix (CPM)

• Function:- to identifies a firm’s major competitor

and its particular strength & weakness in relation to a sample firm’s strategies position• Critical success factors include internal & external issues.• Ratings:

4 = major strength, 3 = minor strength, 2 = minor strength, 1 = major weakness

• The ratings and total weighted scores for rival firms can be compared to the sample firm