external audit

17th Nov 2013 Mumbai

The External Assessment


The Nature of the External Audit

The Industrial Organization (I/O) View

Social, Cultural, Demographic & Environmental Forces


Political, Governmental, and Legal Forces

Technological Forces

Competitive Forces


Porters Five-Forces Model

Sources of External Information

Forecasting Tools & Techniques


Global Challenge

The External Factor Evaluation (EFE) Matrix

Competitive Profile Matrix (CPM)


It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. Charles Darwin

External Assessment

Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map. Wayne Calloway, Former CEO, PepsiCo


External Strategic Management Audit

-- Environmental Scanning

-- Industry Analysis


Identify & Evaluate factors beyond the control of a single firmq Increased foreign competitionq Population shiftsq Information technology



Purpose of External Auditq Identify

n Opportunitiesn Threats



Key External Forces

Economic forces

Social, cultural, demographic & environmental forces

Political, governmental & legal forces

Technological forces

Competitive forces


CompetitorsSuppliers

DistributorsCreditors

CustomersEmployees

CommunitiesManagers

StockholdersLabor Unions

Special Interest GroupsProductsServices

KeyExternalForces

Opportunities&

Threats

Key External Forces & the Organization


Gather competitive intelligence

n Socialn Culturaln Demographicn Environmentaln Economicn Political, legal governmental n Technological

External Audit


External Audit Sources of Information

Internet

Libraries

Suppliers

Distributors

Customers

Competition


Performing External Audit

-- Key Factorsn Vary over timen Vary by industry


Performing External Audit --Variables

Market share

Breadth of competing products

World economies

Foreign affiliates

Proprietary account advantages


Performing External Audit --Variables

Price competitiveness

Technological advancements

Interest rates

Pollution abatement


Performing External Audit

ExternalFactors

Measurable

Long-term orientation

Applicable to competing firms

Hierarchical


Industrial Organization (I/O) View

-- Industry factors more important than internal factors

n Performance determined by industry forces


Economies of Scale

Industry Properties

Barriers to market entry

Product differentiation

Level of competitiveness

I/O Perspective Firm Performance


Economic Forces

Availability of credit

Level of disposable income

Interest rtes

Inflation rates


Economic Forces

Money market rates

Fed Govt deficits

GDP trend

Consumption patterns


Key Economic Variables

Balance of Payment in world markets

Worker productivity levels

Stock market trends

Foreign economic conditions

Unemployment trends



Income differences by region/customer

Demand shifts for goods/services

Price fluctuations

Exportation of labor and capital

Import/Export factors



Tax rates

Fiscal policies

OPEC policies

ECC policies

Monetary policies



Major Impact

Products

Services

Markets

Customers



U.S. Facts

Aging population

Less Caucasian

Widening gap between rich & poor

2025 = 18.5% population >65 years

2075 = no ethnic or racial majority


n Services: 65 per cent n Industry: 18 per cent n Agriculture: 17 per cent n 60% of Population less than 25 year s


India

n Specialist coffee shop chains, which target the out-of-home consumption of urban youth in India, to double to 4,000 in numbers by 2015: Rabobank

n Italian fashion house, Gucci, plans large investments in India. To open boutiques & refurbish existing stores to expand presence and tap the good opportunity in India



Facts

World population > 6.5 billion

Indias population 1.32 Billion

U.S. population < 300 million



Population characteristics require global strategies


Global trends

Chinas labor rates less than Mexico

China provides more site location incentives than Mexico




More educated consumers

Aging population

Minorities more influential

Local rather than federal solutions

21st Century Trends


Key Social, Cultural, Demographic & Environmental Variables

Number of marriages & divorces

Number of special interest groups

Number of births & deaths

Immigration & emigration rates

Childbearing rates


Actuarial rates

Monitor KeyVariables

Per capita income

Attitudes toward business

Avg. disposable income



Consumer behavior


Ethical concerns

Attitudes toward saving

Racial equality



Avg. educational level


Governmental regulation

Attitudes toward customer service

Attitudes toward quality



Energy conservation


Social responsibility

Leisure time values

Recycling



Waste management


Air & water pollution

Ozone depletion

Endangered species



Political, Government & Legal Forces

Key opportunities & threatsn Antitrust legislationn Tax ratesn Lobbying effortsn Patent laws

Government Regulation



Political variables impact q Formulation of strategiesq Implementation of strategies

Increasing Global Interdependence



Strategists in a global economy --q Forecast political climatesq Legalistic skillsq Diverse world cultures

Increasing Global Interdependence



n Worldwide trend toward similarconsumption patterns

n Global buyers and sellersn E-commercen Technology for instant currency transfers

Globalization of Industry


Key Political, Governmental, & Legal Variables

Special tariffs

Tax law changes

PACs

Voter participation rates

Regulation/deregulation


Key Political, Governmental, & Legal Variables (contd)

Environmental protection laws

Changes in patent laws

Equal employment legislation

Government subsidies

Number of patents


Key Political, Governmental, & Legal Variables (contd)

Import/export regulations

Global relationships

Political conditions

Location and severity of terrorist activity

Anti-trust enforcement



Major Impact

Internet

Communications

Semiconductors



Significance of IT

Chief Information Officer (CIO)

Chief Technology Officer (CTO)



Essential for nearly every strategic decision

Technology-based issues


Competitive Forces

Collection & evaluation of data on competitors is essential for successful strategy formulation


Competitive Forces

Competition on virtually all industries can be described as intense.


Competitive Forces

Strengths

Weaknesses

Capabilities

Opportunities

Threats

Objectives

Strategies

Identifying Rival Firms


Key Questions Concerning Competitors

Their objectives and strategies

Their weaknesses

Their responses to external variables

Their vulnerability to our alternative strategies

Their strengths


Key Questions Concerning Competitors (contd)

Entry and exit of firms in the industry

Our product/service positioning

Key factors for our current position in industry

Sales/profit rankings of competitors over time

Our vulnerability to strategic counterattack


Key Questions Concerning Competitors (contd)

The threat of substitute products/services

Nature of supplier & distributor relationships

Should we keep our strategies secret fromemployees and stakeholders?


Competitive Forces

Moodys Manuals

Standard Corporation Descriptions

Value Line Investment Surveys

Duns Business Rankings

Standard & Poors Industry Surveys

Industry Week

Forbes, Fortune, Business Week

Sources of Corporate Information


Competitive Forces

1. Market share matters

2. Understand what business you are in

3. Broke or not, fix it

4. Innovate or evaporate

7 Characteristics of most Competitive Indian Firms:


Competitive Forces

5. Acquisition is essential to growth

6. People make a difference

7. No substitute for quality

7 Characteristics of most Competitive Indian Firms


The Five-Forces Model of Competition

Potential development of substitute products

Rivalry among competing firms

Bargaining power of suppliers

Potential entry of new competitors

Bargaining power of consumers


The Five-Forces Model

n Most powerful of the five forcesn Focus on competitive advantage of

strategies

Rivalry Among Competing Firms



n Barriers to entry are importantn Quality, pricing, and marketing can

overcome barriers

Potential Entry of New Competitors



n Pressures increase when consumers switching costs decrease

n Firms plans for increased capacity & market penetration

Potential Development of Substitute Products



n Large number of suppliers & few substitutes affects intensity of competition

n Backward integration can gain control or ownership of suppliers

Bargaining Power of Suppliers



n Customers concentrated or buy in volume affects intensity of competition

n Consumer power is higher where products are standard or undifferentiated

Bargaining Power of Consumers


The Global Challenge

Faced by Indian. Firms --

Gain & maintain exports to other nations

Defend domestic markets against imported goods



Simultaneously globally competitive & nationally responsive

Multinational Corporations (MNCs)



Worldwide integration of:

Strategy formulation

Strategy implementation

Strategy evaluation

Globalization



Similar consumption patterns

Global buyers and sellers

E-commerce

Instant transmission of money & information

Globalization of Industries


Industry Analysis: The External Factor Evaluation (EFE) Matrix

CompetitivePoliticalCultural

TechnologicalEnvironmentalSocial

GovernmentalDemographicEconomic

Summarize & Evaluate


0.1530.055. The average income for PC worker has declined from $40K/yr to $30k/yr

0.1010.104. China entered WTO; lowered taxes for importing PCs

0.1020.053. Internet use growing rapidly

0.3030.102. Cost of PC component parts expected to decrease 10% - 2004

0.3030.101. Global PC market expected to grow 20% in 2004

Opportunities

Wtd ScoreRatingWeightKey External Factors

EFE Gateway Computers


0.0510.101. Intense rivalry in industry

0.1010.10Threats

0.0510.058. 30% of Chinese population can afford a PC; only 10% of homes have a PC

0.1530.057. U.S. (& world) economies recovering

0.1020.056. Modernization of business firms and government agencies

Opportunities (contd)


EFE Gateway Computers (2003) (contd)


0.1530.056. Birth rate in U.S. declining annually

0.2040.055. Demand exceeds supply of experienced PC workers

0.1530.054. Palm & PDA becoming substitutes

0.0510.053. Different countries have different regs and infrastructure for PCs

0.2020.102. Severe price cutting in PC industry

Threats (contd)




2.401.00Total

0.1530.058. PC firms diversifying into consumer electronics

0.1020.057. U.s. consumers and businesses delaying purchase of PCs

Threats (contd)




Total weighted score of 4.0n Organization response is outstanding to threats

and weaknesses

Industry Analysis EFE

Total weighted score of 1.0n Firms strategies not capitalizing on opportunities

or avoiding threats


Industry Analysis EFE

Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.

Important --


Industry Analysis: Competitive Profile Matrix (CPM)

Identifies firms major competitors and their strengths & weaknesses in relation to a sample firms strategic positions


0.1530.1530.1530.05Org. Structure

0.6040.3020.4530.15Global Exp.

0.3030.2020.3030.10Sales Distr

0.0840.0630.0630.02Cons. Loyalty

0.2430.3240.2430.08Prod. Quality

0.3030.3030.2020.10Fin position

0.3240.1620.1620.08Inventory sys

0.6040.3020.4530.15Market share

Wtd Score

RatingWtd Score

RatingWtd Score

RatingWtCSFsDellAppleGateway


3.492.472.831.00Total

0.0220.0440.0220.01Mgt. experience

0.0630.0210.0840.02Price competitive

0.4040.2020.3030.10Customer Serv

0.3030.3030.3030.10E-commerce

0.1230.1230.1230.04Prod. Capacity

Wtd Score

RatingWtd Score

RatingWtd Score

RatingWtCSFs (contd)

DellAppleGateway


Industry Analysis CPM

Just because one firm receives a 3.2 rating and another receives a 2.8 rating, it does not follow that the first firm is 20 percent better than the second.

Important --

external audit

Documents

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mumbai porters

external assessment17th

industry forces17th

key factorsn

industry factors

environmental scanning

industry analysis17th