External Strategic Management Audit

External Strategic Management Audit

• Focuses on identifying and evaluating trends and events beyond a single firm's control.
• Aims to identify key opportunities and threats for the organization.
• Allows managers to formulate strategies that capitalize on opportunities.
• Enables managers to minimize the impact of potential threats.
• Involves gathering, assimilating, and analyzing external information.
• The external audit is not an exhaustive list, but instead pinpoints key variables that can be acted upon

Industrial Organization (I/O) View

• It's a perspective on strategic management.
• Michelin Manufacturing Company serves as an example of exemplary strategic management.
• Michelin has a strict code of ethics and opposes child and forced labor.

Nature of the External Audit

• The purpose is to create a finite list of opportunities and threats.
• Firms should formulate strategies to take advantage of opportunities in response.
• Firms should devise strategies that minimize the impact of potential threats.

Key External Forces

• Economic forces.
• Social, cultural, demographic, and natural environment forces.
• Political, governmental, and legal forces.
• Technological forces.
• Competitive forces.

External Forces That Affect Organizations

Economic Forces

• Directly impact the potential attractiveness of various strategies.
• High underemployment benefits discount firms.
• Commodity prices are up due to droughts, contributing to rising inflation fears.
• Benefit costs are mitigated by firms switching to part-time employment

Social, Cultural, Demographic, and Natural Environment Forces

• Impact strategic decisions on products, services, markets, and customers.
• Both for-profit and nonprofit organizations are being challenged by social issues.
• Changes in cultural, demographic, and environmental variables also pose challenges.

Political, Governmental, and Legal Forces

• Political issues and stances impact strategic decisions.
• Industries often align with political parties (e.g., aerospace with Republicans, automotive with Democrats).
• National, state, and local elections impact businesses.

Technological Forces

• New technologies fuel innovation and impact strategic decisions.
• The Internet of Things, 3D printing, cloud computing, and mobile devices are examples.
• Businesses use mobile technologies and analytics to determine customer trends.
• The amount of data from mobile devices drives the development of advanced analytics applications.

Competitive Forces

• Identifying rival firms and evaluating their strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies is important.
• Competition is intense across industries as competitors vie for price and customer service.

Characteristics of Competitive Companies

• Strive to continually increase market share.
• Use the vision/mission as a guide for all decisions.
• Continually strive to improve.
• Continually adapt, innovate, and improve, even when successful.
• Strive to grow through acquisition.
• Hire and retain the best employees and managers.
• Strive to stay cost-competitive on a global basis.

Competitive Intelligence (CI)

• A systematic and ethical process for gathering and analyzing information about competitors and business trends.
• The goal is to further a business’s own goals.
• Provides a general understanding of an industry and its competitors.
• Identifies areas where competitors are vulnerable.
• Assesses the impact of strategic actions on competitors.
• Identifies potential moves that a competitor might make.
• Applicable for strategy formulation, implementation, and evaluation decisions.
• Successful CI programs are flexible, useful, timely, and promote cross-functional cooperation.

Ways to Obtain Competitive Intelligence

• Hire top executives from rival firms.
• Reverse engineer rival firms’ products.
• Use surveys and interviews of customers, suppliers, and distributors.
• Conduct drive-by and on-site visits.
• Search online databases.
• Contact government agencies for public information.
• Systematically monitor relevant trade publications.

Porter’s Five Forces Model

• A widely used approach for developing strategies.
• Intensity of competition varies across industries.
• The nature of competitiveness is a composite of five forces:
  • Rivalry among competing firms.
  • Potential entry of new competitors.
  • Potential development of substitute products.
  • Bargaining power of suppliers.
  • Bargaining power of consumers.

External Factor Evaluation (EFE) Matrix

• Allows strategists to summarize and evaluate external information
• This includes economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive data.

Steps to Develop an EFE Matrix

• List 20 key external factors (opportunities and threats).
• Assign a weight (0.0 to 1.0) to each factor based on its importance in the industry.
• Assign a rating (1 to 4) to each factor based on the firm’s response (4 = superior, 1 = poor).
• 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.

Interpretation of EFE Matrix Scores

• Highest possible total weighted score is 4.0, and the lowest is 1.0.
• The average total weighted score is 2.5.
• A score of 4.0- indicates an outstanding response to opportunities and threats.
• A score of 1.0 indicates that the firm is not capitalizing on opportunities or avoiding threats.

Competitive Profile Matrix (CPM)

• Identifies a firm’s major competitors and their strengths and weaknesses.
• Weights and total weighted scores have the same meaning as in an EFE.
• Critical success factors include both internal and external issues.
• Ratings refer to strengths and weaknesses (4 = major strength, 1 = major weakness).
• Scores for rival firms can be compared to the sample firm.

Factors Included in CPM Analysis

• Advertising.
• Global expansion.
• Product quality.
• Price competitiveness.
• Customer loyalty.
• Breadth of product line.
• Effectiveness of sales distribution.
• Proprietary or patent advantages.
• Location of facilities.
• Production capacity and efficiency.
• Experience.
• Union relations.
• Technological advantages.
• E-commerce expertise.