external audit sttttud

8/10/2019 External Audit Sttttud

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27th Nov 2013 : [email protected]

The External Assessment


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The Nature of the External Audit

The Industrial Organization (I/O) View

Social, Cultural, Demographic &Environmental Forces


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Political, Governmental, and Legal Forces

Technological Forces

Competitive Forces


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Porters Five-Forces Model

Sources of External Information

Forecasting Tools & Techniques


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Global Challenge

The External Factor Evaluation (EFE) Matrix

Competitive Profile Matrix (CPM)


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It is not the strongest of the species thatsurvive, nor the most intelligent, but the onemost responsive to change.

Charles Darwin

External Assessment

Nothing focuses the mind better than the

constant sight of a competitor who wants towipe you off the map. Wayne Calloway, Former CEO, PepsiCo


7/105


External Strategic

Management Audit

-- Environmental Scanning

-- Industry Analysis


8/105


Identify & Evaluate factors beyond the

control of a single firm

q Increased foreign competition

q Population shifts

q

Information technology

External Strategic

Management Audit


9/105


Purpose of External Auditq Identify

nOpportunit ies

nThreats

External Strategic

Management Audit


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Key External Forces

Economic forces

Social, cultural, demographic &

environmental forces

Political, governmental & legal forces

Technological forces

Competitive forces


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Competitors

Suppliers

DistributorsCreditors

CustomersEmployeesCommunities

Managers

StockholdersLabor Unions

Special Interest GroupsProductsServices

Key

ExternalForces

Opportunities&

Threats

Key External Forces & the Organization


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Gather competitiveintelligence

n Socialn Cultural

n Demographic

n Environmental

n Economic

n Political, legal governmentaln Technological

External Audit


13/105


External Audit Sources of

Information

Internet

Libraries

Suppliers

Distributors

CustomersCompetition


14/105


Performing External Audit

-- Key Factorsn Vary over time

n Vary by industry


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Performing External Audit --

Variables

Market share

Breadth of competing products

World economies

Foreign affiliates

Proprietary account advantages


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Performing External Audit --

Variables

Price competitiveness

Technological advancements

Interest rates

Pollution abatement


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Performing External Audit

External

Factors

Measurable

Long-term orientation

Applicable to

competing firms

Hierarchical


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Industrial Organization (I/O)

View

-- Industry factors more important thaninternal factors

n Performance determined by industry forces


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Economies of Scale

Industry Properties

Barriers to market entry

Product differentiation

Level of competitiveness

I/O Perspective Firm Performance


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Economic Forces

Availability of credit

Level of disposable income

Interest rtes

Inflation rates


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Economic Forces

Money market rates

Fed Govt deficitsGDP trend

Consumption patterns


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Key Economic Variables

Balance of Payment in world markets

Worker productivity levels

Stock market trends

Foreign economic conditions

Unemployment trends


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Income differences by region/customer

Demand shifts for goods/services

Price fluctuations

Exportation of labor and capital

Import/Export factors


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Tax rates

Fiscal policies

OPEC policies

ECC policies

Monetary policies


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Social, Cultural, Demographic

& Environmental Forces

Major Impact

Products

Services

Markets

Customers


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U.S. Facts

Aging population

Less Caucasian

Widening gap between rich & poor

2025 = 18.5% population >65 years

2075 = no ethnic or racial majority


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n Services: 65 per cent

n Industry: 18 per cent

n

Agriculture: 17 per centn 60% of Population less than 25 year s


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India

n Specialist coffee shop chains, which targetthe out-of-home consumption of urban youthin India, to double to 4,000 in numbers by

2015: Rabobank

n Italian fashion house, Gucci, plans largeinvestments in India. To open boutiques &

refurbish existing stores to expand presenceand tap the good opportunity in India


29/105




Facts

World population > 6.5 billion

Indias population 1.32 Billion

U.S. population < 300 million


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Population characteristics require

global strategies


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Global trends

Chinas labor rates less than Mexico

China provides more site locationincentives than Mexico




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Social, Cultural, Demographic &

Environmental Forces

More educated consumers

Aging population

Minorities more influential

Local rather than federal solutions

21st Century Trends


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Key Social, Cultural, Demographic &

Environmental Variables

Number of marriages & divorces

Number of special interest groups

Number of births & deaths

Immigration & emigration rates

Childbearing rates


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Actuarial rates

Monitor Key

Variables

Per capita income

Attitudes toward business

Avg. disposable income




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Consumer behavior

Monitor Key

Variables

Ethical concerns

Attitudes toward saving

Racial equality




36/105


Avg. educational level

Monitor Key

Variables

Governmental regulation

Attitudes toward customer service

Attitudes toward quality




37/105


Energy conservation

Monitor Key

Variables

Social responsibility

Leisure time values

Recycling




38/105


Waste management

Monitor Key

Variables

Air & water pollution

Ozone depletion

Endangered species




39/105


Political, Government & Legal

Forces

Key opportunities & threats

n Antitrust legislation

n Tax rates

n Lobbying efforts

n Patent laws

Government Regulation


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Forces

Political variables impact

q Formulation of strategies

q Implementation of strategies

Increasing Global Interdependence


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Forces

Strategists in a global economy --

q Forecast political climates

q Legalistic skills

q Diverse world cultures

Increasing Global Interdependence


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Forces

n Worldwide trend toward similarconsumption patterns

n Global buyers and sellers

n E-commerce

n Technology for instant currency transfers

Globalization of Industry


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Key Political, Governmental, & Legal Variables

Special tariffs

Tax law changes

PACs

Voter participation rates

Regulation/deregulation


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(contd)

Environmental protection laws

Changes in patent laws

Equal employment legislation

Government subsidies

Number of patents


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(contd)

Import/export regulations

Global relationships

Political conditions

Location and severity of terrorist activity

Anti-trust enforcement


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Major Impact

Internet

Communications

Semiconductors


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Significance of IT

Chief Information Officer (CIO)

Chief Technology Officer (CTO)


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Essential for nearly every strategic decision

Technology-based issues


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Competitive Forces

Collection & evaluation of data oncompetitors is essential for successfulstrategy formulation


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Competitive Forces

Competition on virtually all industries can bedescribed as intense.


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Competitive Forces

Strengths

Weaknesses

Capabilities

Opportunities

Threats

Objectives

Strategies

Identifying Rival Firms


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Key Questions Concerning Competitors

Their objectives and strategies

Their weaknesses

Their responses to external variables

Their vulnerability to our alternative strategies

Their strengths


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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


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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?


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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


62/105


Competitive Forces

1. Market share matters2. Understand what business you are in

3. Broke or not, fix it

4. Innovate or evaporate

7 Characteristics of mostCompetitive Indian Firms:


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Competitive Forces

5. Acquisition is essential to growth6. People make a difference

7. No substitute for quality

7 Characteristics of mostCompetitive Indian Firms


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The Five-Forces Model of Competition

Potential developmentof substitute products

Rivalry amongcompeting firms

Bargaining powerof suppliers

Potential entry of newcompetitors

Bargaining powerof consumers


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The Five-Forces Model

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

strategies

Rivalry Among Competing Firms


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

overcome barriers

Potential Entry of New Competitors


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n Pressures increase when consumersswitching costs decrease

n Firms plans for increased capacity &

market penetration

Potential Development of Substitute

Products


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n Customers concentrated or buy in volumeaffects intensity of competition

n Consumer power is higher where productsare standard or undifferentiated

Bargaining Power of Consumers


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The Global Challenge

Faced by Indian. Firms --

Gain & maintain exports to other

nations

Defend domestic markets againstimported goods


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Simultaneously globally competitive &nationally responsive

Multinational Corporations (MNCs)


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Worldwide integration of:

Strategy formulation

Strategy implementation

Strategy evaluation

Globalization


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Similar consumption patterns

Global buyers and sellers

E-commerce

Instant transmission of money &information

Globalization of Industries


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

0.1010.104. China entered WTO; lowered taxes forimporting PCs

0.1020.053. Internet use growing rapidly

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

0.3030.101. Global PC market expected to grow 20%

in 2004

Opportunities

WtdScore

RatingWeightKey External Factors

EFE Gateway Computers


76/105


0.0510.101. Intense rivalry in industry

0.1010.10Threats

0.0510.058. 30% of Chinese population can afford aPC; 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)

WtdScore


EFE Gateway Computers (2003) (contd)


77/105


0.1530.056. Birth rate in U.S. declining annually

0.2040.05

5. Demand exceeds supply of experienced

PC workers

0.1530.054. Palm & PDA becoming substitutes

0.0510.053. Different countries have different regsand infrastructure for PCs

0.2020.102. Severe price cutting in PC industry

Threats (contd)

WtdScore




78/105


2.401.00Total

0.1530.058. PC firms diversifying into consumerelectronics

0.1020.057. U.s. consumers and businesses delayingpurchase of PCs

Threats (contd)

Wtd

ScoreRatingWeightKey External Factors



79/105


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 opportunitiesor avoiding threats


80/105


Industry Analysis EFE

Understanding the factors used in the EFEMatrix is more important than the actualweights and ratings assigned.

Important --


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Industry Analysis: Competitive Profile

Matrix (CPM)

Identifies firms major competitors and

their strengths & weaknesses inrelation to a sample firms strategicpositions


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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. Quality0.3030.3030.2020.10Fin position

0.3240.1620.1620.08Inventory sys

0.6040.3020.4530.15Market share

Wtd

Score

RatingWtd

Score

RatingWtd

Score

RatingWtCSFs

DellAppleGateway


83/105


3.492.472.831.00Total

0.0220.0440.0220.01Mgt. experience

0.0630.0210.0840.02Pricecompetitive

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


84/105


Industry Analysis CPM

Just because one firm receives a 3.2 ratingand another receives a 2.8 rating, it does notfollow that the first firm is 20 percent better

than the second.

Important --


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The Cola Wars (Timeline)Coca-Cola

Coca-Cola invented

Kick Pepsi's canDiet Coke

New Coke

Repair Coke andrestore

Stock price

Diversify product line

1886

1950

1960

1970

1980

1990

2000

Pepsi

Beat Coke

Pepsi Generation

PepsiChallenge

Foster entrepreneurialspirit of Pepsis people

Jettison slow-growingbusinesses

Diversify beyondsoft-drinks


86/105


External Context of Strategy

An internal analysis isjust half of what is

needed to build strategy

The SWOT and morecomplicated frameworkshelp us understand thefull picture

Internal

Strengths

Weaknesses

Capabilities

Relationships,etc.

l i f d d i


87/105


Blurring of Industry Boundaries

With fewer

companiesproviding these

services, the

power ofbuyers will be

impacted.

As services arebundled, the

cost to switch

to another

serviceprovider will

be greater.

Cable

Companies

Long Distance

Telephone

Companies

Internet

Provider

Companies

u v

w

Th B l f P


88/105


The Balance of Power

Wal-Mart

Rubbermaid

Th E t lE i t f th


89/105


The External Environment of theOrganization

Macro EnvironmentPolitical, Economic, Socio-

cultural, Technological,Environmental, Legal

Industry Environment

Strategic Group

The Organization

K Q ti t A k


90/105


Key Question to Ask

What macro environmental

conditions will have amaterial effect on our ability

to implement our strategy

successfully?

How stable are

thesecharacteristics?

What is our

firms industry?

What are the

characteristics ofthe industry?

PressuresFavoringIndustryGlobalization


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Pressures Favoring Industry Globalization

So u r c e : Adapted from M.E. Porter, Competition in Global industries (Boston: Harvard Business School Press, 1986); G.

Yip, Global Strategy in a World of Nations, Sloan Management review 31:1 (1989), 29-40

Markets Costs Governments Competitionn Homogeneous

customer needs

n Large scale andscopeeconomies

n Favorable tradepolicies

n Interdependentcountries

n Global customerneeds

n Learning andexperience

n Commontechnological

standards

n Globalcompetitors

n Global channels n Sourcingefficiencies

n Commonmanufacturing

and marketingregulations

n Transferable

marketing

approaches

n Favorable

logistics

n Arbitrage

opportunitiesn High R&D costs


92/105


Key Success Factors as Barriers to Entry

Key asset or requisiteskill that all firms in anindustry must possess

in order to be a viablecompetitor

Key success factor (KSF) Ability to meet competitive

pricing

Extensive distribution

Ability to raise consumerawareness

Broad product mix

Global presence

Well positioned bottlers andbottling capacity

KSFs

SOFT DR I NK EXAM PLE

IndustryFragmentationandConcentration


93/105


Industry Fragmentation and Concentration

Monopoly Duopoly Fragmented

E i t l T d


94/105


Environmental Trends

Silent

GenerationBorn between 1932 and 1945

Baby Boomers Born between 1946 and 1964

Generation X Born between 1965 and 1977

Generation Y -Born between 1978 and 1994

AnalyzingIndustryStructureUsingFiveForces


95/105


Analyzing Industry Structure Using Five Forces

Buyer Power (Channel and End

consumer)

Bargaining leverage

Buyer volume

Buyer information

Brand identity

Price sensitivity

Threat of backward integration

Product differentiation

Buyer concentration vs. industry

Substitutes available

Buyers incentives

Supplier Power

Supplier concentration

Importance of volume to supplier

Differentiation of inputs

Impact of inputs on cost or differentiation

Switching costs of firms in the industry

Presence of substitute inputs

Threat of forward integration

Cost relative to total purchases in industry

Threat of New Entrants (and EntryBarriers)

Absolute cost advantages

Proprietary learning curve

Access to inputs

Government policy

Economies of scale

Capital requirements

Brand identity

Switching costs

Access to distribution

Expected retaliation

Proprietary products

Threat of Substitutes

Switching costs

Buyer inclination to substitute

Price-performance tradeoff ofsubstitutes

Varity of substitutes

Necessity of product or service

Degree of Rivalry

Exit barriers

Industry concentration

Fixed costs/value added

Industry growth

Intermittentovercapacity

Product differences

Switching costs

Brand identity

Diversity of rivals

Corporate stakes

S o u r c e : Adapted from M.E. Porter,

Competitive Strategy:

Techniques for Analyzing

Industries and Competitors

(New York: Free Press, 1980)

Industry value chain from raw materialsand other inputs, tochannel to endconsumer

Complementors

Number of complements

Relative value added

Barriers to complement entry

Difficulty of engaging complements

Buyer perception of complements

Complement exclusivity


96/105

S li P


97/105


Supplier Power

When firms in thesupply industry candictate terms, theycan extract greaterprofits

Diamond supply

Percent

DeBeers

Others

50

DiamondRetailers

50

B P ILLUSTRATIVE


98/105


Buyer Power

Suppliers Buyers

Profits

ILLUSTRATIVE

In industriescharacterized withmany suppliers andfew buyers, buyersoften capture agreater share ofprofits

Industry A

Suppliers Buyers

Industry B

Profits

Th t f S b tit t


99/105


Threat of Substitutes

Soft drinks

Coke Pepsi

Movie rentals

Block buster

Hollywood video

Bottled

water

CableT

V

Impactof Complementor


100/105


Impact of Complementor

Any factor that makes it moreattractive for suppliers tosupply an industry on favorableterms or that makes it moreattractive for buyers topurchase products or services

from an industry at priceshigher than it would pay absentthe complementor

Complementor:

Hot dogs

+

Buns

More sales

Three Examples

Music

+

MPS player

More attractiveoffering

Deltaplane

orders+

American

Airlines

plane orders

Lower costs fromBoeing

I d t Lif C l


101/105


Industry Life Cycle

MarketSize

Time

Embryonic Growing Mature In DeclineEmbryonic Growing Mature In DeclineNiche market

selected products

for selected

markets

Market expands

beyond niche

Proliferation of

products and

markets served

Product/market

contraction

Participants

emphasize

problem solving product as

solution

More competitors

enter

Market volatility

and beginnings of

industryconsolidation

Further

consolidation and

industryregeneration

Technologicaluncertainty

Customersbecome better

informed

Aggressivecustomers

CompetitiveIntelligence


102/105


Competitive Intelligence

nCompetitive intelligence isa method whereby firms areable to gather informationabout their competitors.

Technological Discontinuities


103/105


Technological Discontinuities

Process-related

Product-related

Southwest airlinesradically changed the

airline business

model by adoptingnew processes (e.g.,

a point-to-point

model)

In disk-drive industry,

virtually every newgeneration of technology led

to demise of market leader

Example

ScenarioPlanning


104/105


Scenario Planning

Assess the strategicimplications of each

scenario

6

Specify indicators that can signalwhich scenario is unfolding

5

Flesh out the picture4

Develop the framework by defining two specific axes3

Brainstorm key drivers, decision factors, and possible scenariodeparture or divergence points

2

Define target issue, time frame, and scope for

scenarios1

An understanding of the bigpicture and a plan to manage

uncertainty

Hypercompetition


105/105

Hypercompetition

Market stability is threatenedby short product life cycles,short product design cycles,new technologies, frequententry by unexpected outsiders,

repositioning by incumbents,and tactical redefinitions ofmarket boundaries as diverseindustries emerge.

Richard DAveni

external audit sttttud

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