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Strategic Management

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Strategic Management ­ MGT603
VU
Lesson 7
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.
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.
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Strategic Management ­ MGT603
VU
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 strategic-
management process.
A Comprehensive Strategic-Management Model
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.
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Strategic Management ­ MGT603
VU
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
Import/export factors
Availability of credit
Demand shifts for different categories of
Level of disposable income
goods and services
Propensity of people to spend
Income  differences  by  region  and
consumer groups
Interest rates
Price fluctuations
Inflation rates
Money market rates
Exportation of labor and capital from
the United States
Federal  government  budget
Monetary policies
deficits
Gross domestic product trend
Fiscal policies
Consumption patterns
Tax rates
European Economic Community (ECC)
Unemployment trends
policies
Worker productivity levels
Organization of Petroleum Exporting
Value of the dollar in world
Countries (OPEC) policies
markets
Coalitions
of
Lesser
Developed
Stock market trends
Countries (LDC) policies
Foreign countries' economic
conditions
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Table of Contents:
  1. NATURE OF STRATEGIC MANAGEMENT:Interpretation, Strategy evaluation
  2. KEY TERMS IN STRATEGIC MANAGEMENT:Adapting to change, Mission Statements
  3. INTERNAL FACTORS & LONG TERM GOALS:Strategies, Annual Objectives
  4. BENEFITS OF STRATEGIC MANAGEMENT:Non- financial Benefits, Nature of global competition
  5. COMPREHENSIVE STRATEGIC MODEL:Mission statement, Narrow Mission:
  6. CHARACTERISTICS OF A MISSION STATEMENT:A Declaration of Attitude
  7. EXTERNAL ASSESSMENT:The Nature of an External Audit, Economic Forces
  8. KEY EXTERNAL FACTORS:Economic Forces, Trends for the 2000ís USA
  9. EXTERNAL ASSESSMENT (KEY EXTERNAL FACTORS):Political, Governmental, and Legal Forces
  10. TECHNOLOGICAL FORCES:Technology-based issues
  11. INDUSTRY ANALYSIS:Global challenge, The Competitive Profile Matrix (CPM)
  12. IFE MATRIX:The Internal Factor Evaluation (IFE) Matrix, Internal Audit
  13. FUNCTIONS OF MANAGEMENT:Planning, Organizing, Motivating, Staffing
  14. FUNCTIONS OF MANAGEMENT:Customer Analysis, Product and Service Planning, Pricing
  15. INTERNAL ASSESSMENT (FINANCE/ACCOUNTING):Basic Types of Financial Ratios
  16. ANALYTICAL TOOLS:Research and Development, The functional support role
  17. THE INTERNAL FACTOR EVALUATION (IFE) MATRIX:Explanation
  18. TYPES OF STRATEGIES:The Nature of Long-Term Objectives, Integration Strategies
  19. TYPES OF STRATEGIES:Horizontal Integration, Michael Porterís Generic Strategies
  20. TYPES OF STRATEGIES:Intensive Strategies, Market Development, Product Development
  21. TYPES OF STRATEGIES:Diversification Strategies, Conglomerate Diversification
  22. TYPES OF STRATEGIES:Guidelines for Divestiture, Guidelines for Liquidation
  23. STRATEGY-FORMULATION FRAMEWORK:A Comprehensive Strategy-Formulation Framework
  24. THREATS-OPPORTUNITIES-WEAKNESSES-STRENGTHS (TOWS) MATRIX:WT Strategies
  25. THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX
  26. THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX
  27. BOSTON CONSULTING GROUP (BCG) MATRIX:Cash cows, Question marks
  28. BOSTON CONSULTING GROUP (BCG) MATRIX:Steps for the development of IE matrix
  29. GRAND STRATEGY MATRIX:RAPID MARKET GROWTH, SLOW MARKET GROWTH
  30. GRAND STRATEGY MATRIX:Preparation of matrix, Key External Factors
  31. THE NATURE OF STRATEGY IMPLEMENTATION:Management Perspectives, The SMART criteria
  32. RESOURCE ALLOCATION
  33. ORGANIZATIONAL STRUCTURE:Divisional Structure, The Matrix Structure
  34. RESTRUCTURING:Characteristics, Results, Reengineering
  35. PRODUCTION/OPERATIONS CONCERNS WHEN IMPLEMENTING STRATEGIES:Philosophy
  36. MARKET SEGMENTATION:Demographic Segmentation, Behavioralistic Segmentation
  37. MARKET SEGMENTATION:Product Decisions, Distribution (Place) Decisions, Product Positioning
  38. FINANCE/ACCOUNTING ISSUES:DEBIT, USES OF PRO FORMA STATEMENTS
  39. RESEARCH AND DEVELOPMENT ISSUES
  40. STRATEGY REVIEW, EVALUATION AND CONTROL:Evaluation, The threat of new entrants
  41. PORTER SUPPLY CHAIN MODEL:The activities of the Value Chain, Support activities
  42. STRATEGY EVALUATION:Consistency, The process of evaluating Strategies
  43. REVIEWING BASES OF STRATEGY:Measuring Organizational Performance
  44. MEASURING ORGANIZATIONAL PERFORMANCE
  45. CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM:Contingency Planning