Assessment of Assessment of Organization’s External Organization’s External Environment Environment

Session 308 October 2011Civil Service College Dhaka

Presentation byDr. Muhammad G. SarwarEmail: sarwar_mg@yahoo.comCell: 01821443741

Presentation Contents of 2nd Presentation Contents of 2nd SessionSessionSelective review of topics

discussed in the first sessionStrategy Making HierarchyDeveloping Organization's Vision

StatementPreparing Organization’s Mission

StatementLinking Vision / Mission with

Organization vales2

Presentation Contents of 3Presentation Contents of 3rdrd SessionSessionDefining External Environment /

Audit of an OrganizationNature of External AuditMajor External ForcesProcess of Performing External AuditCompetitive Analysis: Porter’s FF

ModelIndustry Analysis: EFE MatrixCP Matrix

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Strategic Management: course Strategic Management: course outlineoutlineSl. No.

Topic Title Session no.

1 Strategic Management: an overview 1

2 Strategy Formulation Designing Vision and Mission Statements 1• External Assessment 1• Internal Assessment 1• Setting Company/Organization Objectives

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• Strategy Analysis and Choice 14 Strategy Implementation 1

4 Strategy Evaluation 1

5 Limitations of Strategic Management: why strategy may fail ?

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Stages of Strategic Management

Strategic Management process consists of 3 stages:

1.Strategy formulation,2.Strategy implementation, and3.Strategy evaluation.

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Strategy formulationStrategy formulationStrategy formulation includes:Developing a vision and mission

statementsIdentifying organization’s external

opportunities and threatsIndentifying internal strengths and

weaknessesEstablishing long-term objectivesGenerating alternative strategiesChoosing particular strategies.

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What is External What is External Environment of an Environment of an Organization ?Organization ?External Environment of an

Organization, also called External Management Audit, or Environmental scanning or Industry Analysis.

It focuses on identifying and evaluating trends and events beyond the control of a single firm /organization, such as political turmoil, increasing inflation, increasing foreign competition, stock market volatility, etc.

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Purpose of External Purpose of External Management Audit Management Audit Purpose of an External audit is to

develop a finite list (may be 10) of opportunities that could benefit an organisation and threats that should be avoided.

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

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Key External ForcesKey External Forces5 broad categories of External Forces:1.Economic forces;2.Social, cultural, demographic, and

environmental forces;3.Political, governmental, and legal

forces;4.Technological forces; and5.Competitive forces

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Process of Performing External Process of Performing External AuditAuditProcess must involve as many managers and

employees as possible; Organization first collect competitive

intelligence / information about all the 5 key external forces;

Once the intelligence is gathered, it should be assimilated and evaluated;

Series of meetings of managers would collectively identify the most opportunities and threats facing the organization.

Final list of most important key external factors should be communicated widely in the organization.

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Economic ForcesEconomic ForcesEconomic forces have both direct and

indirect impact on the potential attractiveness of various management strategies.

Intelligence monitoring on all the macroeconomic variables are essential.

Key economic variables are: economic growth, population below poverty line, inflation rate, unemployment rate, exchange rate, interest rate, credit availability, stock market price index, etc.

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Social, cultural, Social, cultural, demographic, and demographic, and environmental forcesenvironmental forcesSocial, cultural, demographic, and

environmental changes have major impact upon virtually all products, services, markets, and customers.

Key variables to be monitored are: social attitude towards poverty, corruption, business, social responsibility, collective actions, demographic trend, cleanliness, environmental pollution, climate change, etc.

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Political, governmental, and Political, governmental, and legal forceslegal forcesPolitical, governmental, and legal

factors have impact on key opportunities or threats for all organizations.

Key political, governmental and legal factors includes: political stability, legitimacy of governments, human rights, governance transparency and accountability, size of the government budget, business regulations, property rights, antitrust regulations, environment protection law, etc.

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Technological forcesTechnological forcesRevolutionary technological

changes and discoveries have dramatic impact on organizations in terms of new opportunities and threats like internet communication and networking.

Not all industries are affected by technological development at same level.

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Competitive forcesAn important part of external environment

audit is to identify rival organizations and determine their strengths, weakness, capabilities, opportunities, threats, objectives and strategies.

Collecting intelligence about rival competitors and evaluating those intelligence is essential for management strategy formulation.

Organizations need to have effective CI (competitive intelligence) program for systematic information gathering about their rivals.

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Competitive Analysis: Porter’s 5 Competitive Analysis: Porter’s 5 FF ModelFF ModelNature of competitiveness in a given

industry can be analyzed as a composite of five forces:

1.Rivalry among competing organization2.Potential entry of new competitors3.Potential development of substitute

products/services4.Bargaining power of suppliers5.Bargaining power of

consumers/stakeholders16

Competitive Analysis: 5 FF Competitive Analysis: 5 FF ModelModel

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Rivalry among competing Rivalry among competing organizationorganizationRivalry intensifies when competitors

attempt to boost their market share.Rivalry increases as the number of

competitors increases and competitors become more equal in size and capability.

Rivalry is usually stronger in slow moving markets and weaker in fast moving markets.

Rivalry is usually weaker in industries comprised of too many rivals as impact of action of one organization spread thin across the whole industry.

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Potential entry of new Potential entry of new competitorscompetitorsCommon barriers to new entry are:Presence of sizable economies of scale Strong brand preferences and high

degrees of customer loyaltyHigh capital requirementRestrictive regulationDifficulties of building network of

distributors and retailersHigh tariff and non-tariff trade

restrictions

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Potential development of Potential development of substitute products/servicessubstitute products/services

Competitive pressure would depend on:

Whether substitutes are readily available and attractively priced

Whether substitutes are comparable or better in terms of quality, performance and other relevant attributes

Cost of switching to substitutes

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Bargaining power of Input Bargaining power of Input supplierssuppliersBargaining power of input suppliers

depends on:Whether the item being supplied is readily

available from many suppliersWhether a few large suppliers are the

primary source of a particular itemHow costly or difficult it is to switch over to

other suppliersWhether the items are in short supplyCollaborative partnership with the

suppliers21

Bargaining power of Bargaining power of consumers/stakeholdersconsumers/stakeholdersBargaining power of consumers depends on:

Consumers’ cost of switching to competing brands and substitutes

Number of consumersConsumer demandConsumers’ access to information

about product / service quality and price

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Industry Analysis: EFE MatrixIndustry Analysis: EFE MatrixAn EFE (external factor evaluation) Matrix summarizes

and evaluate all the five external forces that affect an organization. It is developed in 5 stages:

1. List key external factors identified in external audit;2. Assign to each factor weight ranging from say 0.0

(not important) to 1.0 (very important) indicating relative importance of that factor to be successful in the industry.

3. Assign rating say between 1 (poor response) and 4 (superior response) based on effectiveness of the organization’s strategies.

4. Multiply weight by its rating to get weighted score5. Sum up to get total weighted score for the

organization.

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Example of EFE Matrix Example of EFE Matrix Key External Factors Weig

htRating

Weighted score

Opportunities1. Domestic demand increasing 10% annually2. Export demand increasing 15%

annually3. Input price decreasing 5% annuallyThreats1. Rival organizations increasing ad by 20% annually2. Govt. Tightening its regulation 3. Interest rates are increasing 3% annually Total

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Competitive Profile (CP) Competitive Profile (CP) Matrix Matrix CP Matrix identifies a organization’s

strategic competitors and its particular strengths and weakness in relation to the organization’s strategic position.

CP Matrix is broader as it includes both internal and external issues.

In CP Matrix rating refers to strengths and weakness between I (major weakness) and 4 (major strength).

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Example of CP MatrixExample of CP MatrixOrg A Org B Org C

Critical success factors

weight

rating

score

rating

score

Rating

score

Product qualityPrice competitivenessAdvertisingManagementFinancial positionMarket shareCustomer loyaltyGlobal expansionTotal

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Strategic Management: Strategic Management: referencesreferencesChapter 3: Fred R. David (2008),

Strategic Management: Concepts and Cases, 11th Edition, Prentice Hall

Chapter 3: Arthur A. Thompson, Jr. (2010) Crafting and Executing Strategy: the quest for comparative, 16th Edition, McGraw Hill

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ThanksThanks28