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MGT603 - Strategic Management - Lecture Handout 07

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EXTERNAL ASSESSMENT

Objectives:

This lecture examines the tools and concepts needed to conduct an external strategic-management audit.

  • The Nature of an External Audit
  • Economic Forces

External Assessment:

Prediction is very difficult, especially about the future.
Neils Bohr

External Strategic Management Audit Is also called:

  1. Environmental scanning
  2. Industry analysis

In this lecture we will examine the tools and concepts needed to conduct an external strategic-management audit (sometimes called environmental scanning or industry analysis). An external audit focuses on identifying and evaluating trends and events beyond the control of a single firm, such as increased foreign competition, population shifts to the Sunbelt, an aging society, information technology, and the computer revolution. An external audit reveals key opportunities and threats confronting an organization so that managers can formulate strategies to take advantage of the opportunities and avoid or reduce the impact of threats. This chapter presents a practical framework for gathering, assimilating, and analyzing external information.

Key External Forces

External forces can be divided into five broad categories:

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

Relationships among these forces and an organization are depicted in Figure External trends and events significantly affect all products, services, markets, and organizations in the world.

Key External Forces

Relationships between Key External Forces and an Organization are shown in the above figure. Changes in external forces translate into changes in consumer demand for both industrial and consumer products and services. External forces affect the types of products developed, the nature of positioning and market segmentation strategies, the types of services offered, and the choice of businesses to acquire or sell. External forces directly affect both suppliers and distributors. 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 increasing complexity of business today is evidenced by more countries' developing the capacity and will to compete aggressively in world markets. Foreign businesses and countries are willing to learn, adapt, innovate, and invent to compete successfully in the marketplace. There are more competitive new technologies in Europe and the Far East today than ever before. American businesses can no longer beat foreign competitors with ease.

The Nature of an External Audit

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. As the term finite suggests, the external audit is not aimed at developing an exhaustive list of every possible factor that could influence the business; rather, it is aimed at identifying key variables that offer actionable responses. Firms should be able to respond either offensively or defensively to the factors by formulating strategies that take advantage of external opportunities or that minimize the impact of potential threats. Figure below illustrates how the external audit fits into the strategicmanagement process.

External Audit

The Process of Performing an External Audit

The process of performing an external audit must involve as many managers and employees as possible. As emphasized in earlier discussions, involvement in the strategic-management process can lead to understanding and commitment from organizational members. Individuals appreciate having the opportunity to contribute ideas and to gain a better understanding of their firm's industry, competitors, and markets.
To perform an external audit, a company first must gather competitive intelligence and information about social, cultural, demographic, environmental, economic, political, legal, governmental, and technological trends. Individuals can be asked to monitor various sources of information such as key magazines, trade journals, and newspapers. These persons can submit periodic scanning reports to a committee of managers charged with performing the external audit. This approach provides a continuous stream of timely strategic information and involves many individuals in the external-audit process. The Internet provides another source for gathering strategic information, as do corporate, university, and public libraries. Suppliers, distributors, salespersons, customers, and competitors represent other sources of vital information.

Once information is gathered, it should be assimilated and evaluated. A meeting or series of meetings of managers is needed to collectively identify the most important opportunities and threats facing the firm. These key external factors should be listed on flip charts or a blackboard. A prioritized list of these factors could be obtained by requesting all managers to rank the factors identified, from 1 for the most important opportunity/threat to 20 for the least important opportunity/threat. These key external factors can vary over time and by industry. Relationships with suppliers or distributors are often a critical success factor. Other variables commonly used include market share, breadth of competing products, world economies, foreign affiliates, proprietary and key account advantages, price competitiveness, technological advancements, population shifts, interest rates, and pollution abatement.
Freund emphasized that these key external factors should be:

  • Important to achieving long-term and annual objectives,
  • Measurable,
  • Applicable to all competing firms, and
  • Hierarchical in the sense that some will pertain to the overall company and others will be more narrowly focused on functional or divisional areas.

A final list of the most important key external factors should be communicated and distributed widely in the organization. Both opportunities and threats can be key external factors.

Economic Forces

Economic factors have a direct impact on the potential attractiveness of various strategies. For example, as interest rates rise, then funds needed for capital expansion become more costly or unavailable. Also, as interest rates rise, discretionary income declines, and the demand for discretionary goods falls. As stock prices increase, the desirability of equity as a source of capital for market development increases. Also, as the market rises, consumer and business wealth expands. A summary of economic variables that often represent opportunities and threats for organizations is provided in Table given below.

Key Economic Variables to Be Monitored
  • Shift to a service economy in the United States
  • Availability of credit
  • Level of disposable income
  • Propensity of people to spend
  • 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 different categories of goods and services
  • Income differences by region and consumer groups
  • Price fluctuations
  • Exportation of labor and capital from the United States
  • Monetary policies
  • Fiscal policies
  • Tax rates
  • European Economic Community (ECC) policies
  • Organization of Petroleum Exporting Countries (OPEC) policies
  • Coalitions of Lesser Developed Countries (LDC) policies

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