This chapter examines the tools and concepts necessary to conduct an external strategic direction audit (sometimes known as an environmental assessment or industry analysis).
An external audit focuses on identifying and evaluating trends and events that are beyond the control of a single company
An external audit reveals the key opportunities and threats facing a company. In such a way that managers are able to formulate strategies to take advantage of opportunities and avoid or reduce the impact of threats.
KEY EXTERNAL FORCES.
- External forces are divided into five main categories: 1) economic forces2) social, cultural, demographic and environmental forces3) political, governmental and legal forces, 4) technological forces5) competitive forces.
THE NATURE OF AN EXTERNAL AUDIT.
- The purpose of an external audit is to create a defined list of the opportunities that could benefit a company and the threats to avoid. The objective of the external audit is not to compile an exhaustive list of every possible factor that could influence the company. Rather, their objective is to identify the main variables that offer practical answers. Companies must respond to factors both offensively and defensively.
TECHNOLOGICAL FORCES
- Revolutionary technological changes and discoveries have a strong impact on companies, advances in super productivity alone that increase the power of electrical products by decreasing the resistance of electricity, revolutionize business operations especially in Transportation industries, utilities, health care, electric power, computers. The Internet acts as a national, even global, economic engine that stimulates productivity, an important factor in a country's ability to improve its living conditions. the very nature of opportunities and threats, altering product life cycles, increasing the speed of distribution, creating new products,By removing traditional geographic market barriers and shifting the historical balance of product standardization and flexibility. Technological forces represent significant opportunities and threats that must be considered in formulating strategy. Technological advancements dramatically affect:
- · Products · Services · Markets · Suppliers · Distributors · Competitors · Clients
- Technological advancements result in the proliferation of new and better products, change the positions of relative competitive costs in an industry, and make existing products and services obsolete. Technological changes reduce or eliminate cost barriers between companies, create shorter production processes, produce a shortage of technical skills and modify the values and expectations of employees and customers, also generate new competitive advantages that are more effective than existing ones.
Many strategists spend countless hours determining:
Market share
- Product positioning Price Sales forecast Market size Distributor supervision
And technology doesn't get the same attention.
Technological advances do not affect all sectors of the economy equally, the communications, electronics, aeronautics, and pharmaceutical industries are much more volatile than:
- TextileForestryMetalurgy
COMPETITIVE FORCES
- Collecting and evaluating information about competitors is essential to successfully formulating strategies, most companies with multiple divisions do not provide information about the sales and profits of their divisions for competitive reasons. Many companies use the Internet to obtain the Most of its information on its competitors, the competition in all the industries is intense, if any company detects a weakness of a competitor, it does not show any mercy when taking advantage of its problems.
Seven characteristics describe the most competitive companies:
- Market share Understanding and remembering what your business is Fixing the entire company if necessary Innovating or disappearing Acquisitions are essential to grow People make the difference There is no substitute for quality, there is no greater threat than not being competitive.
COMPETITIVE INTELLIGENCE.
- Competitive intelligence is a systematic process to collect and gather information on the activities and general business trends of the competition with the purpose of achieving objectives of a company. Competitive intelligence, as in the military is one of the keys to success The more information and knowledge a company obtains about its competitors, the more likely it is to formulate and implement strategies. Competitor weaknesses represent external opportunities, competitor strengths represent threats.
As a consequence, three misperceptions prevail about business intelligence:
- Running an intelligence program requires a lot of staff and computers. Gathering intelligence on competitors violates antitrust laws as it amounts to espionage.
Gathering intelligence is dishonest business practice
- The collection of information through: Employees Managers Suppliers Suppliers Distributors Customers Creditors Consultants
They make the difference in having superior intelligence or general competitiveness.
- Businesses need to: Allow general understanding of competitors Vulnerable competitors Evaluate impact of strategic actions Identify potential actions Competitor that hurts company position
COOPERATION BETWEEN COMPETITORS
- The strategists highlight cooperation between competitors, since the collaboration between them is successful both companies must contribute something different. The information not covered in the agreement is exchanged frequently in interactions and daily contact between: Engineers, Marketing managers, Product designers
COMPETITIVE ANALYSIS: MODELS OF THE FIVE FORCES OF PORTER.
The five porter forces model is a widely used analysis to formulate strategies and they are:
- RIVALITY BETWEEN COMPETITOR COMPANIES POTENTIAL INPUT OF NEW COMPETITORS
External evaluation
- POTENTIAL DEVELOPMENT OF PRODUCT SUBSTITUTES POWER OF NEGOTIATION WITH SUPPLIERS POWER OF NEGOTIATION WITH CONSUMERS.
Very important strategies for the development of a company.
SOURCES OF EXTERNAL INFORMATION
Among the most important are:
- Magazine Publications Reports Government Documents Abstracts Books Directories Manuals Newspapers The Internet offers consumers and businesses a wide range of services and sources of information from around the world, interactive services provide users with not only access to information but also the ability to communicate with the person or business who created the information.
The global challenge
- Globalization is a process of global integration of strategy formulation, implementation and evaluation activities. A global strategy tries to satisfy the needs of customers around the world, offering the highest value at the lowest cost. The most efficient strategy to achieve that a company to go global is to conduct extensive research on culture, distributors, suppliers and customers before establishing operations in a foreign country
INDUSTRY ANALYSIS
- The external factor evaluation matrix (EFE).This allows strategists to summarize and evaluate economic, social, democratic, environmental, political, governmental, legal, technological and competitive information.
The EFE matrix is developed in 5 steps:
- Prepare a list of external factors that were identified in the external audit process. Include 10 to 20 factors, list the opportunities first, and then the threats. Give each factor a value that ranges from 0.0 (not important) to 1.0 (very important). Assign a rating of 1 to 4 each Key external factor to indicate how effectively the company's current strategies respond to this factor, where 4 corresponds to the excellent response, 3 to above the average, 2 average level, and 1 deficient. Multiply the value of each factor by its classification to determine a weighted value. Sum the weighted values of each variable to determine the total weighted value of the company.
Example of external factor evaluation matrix for UST Inc.
- The highest possible weighted value for a company is 4.0 and the lowest possible is 1.0.4.0 indicates that a company responds surprisingly to the opportunities and threats present in its sector 1.0 means that the company's strategies do not take advantage of opportunities or avoid external threats.
The Competitive Profile Matrix (MPC):
- Identifies the main competitors of the company, as well as their specific strengths and weaknesses in relation to the strategic position of a company under study. The values and total value scores in both the MPC and the EFE matrix have the same meaning; however, important factors for success in a CPM include both internal and external aspects. The rankings therefore refer to strengths and weaknesses, where 4 corresponds to the main strength, 3 to the minor strength, 2 to the minor weakness. and 1 to the main weakness The rankings and total value scores of rival companies are compared with those of the company under study. This comparative analysis provides important internal strategic information. In addition to the factors shown in the MPC example list,It often includes others such as: breadth of product line, effectiveness of sales distribution, brand or patent advantages, location of facilities, experience and skill in e-commerce.
IMPORTANT WEBSITES FOR STRATEGIC PLANNING
ACADEMICS
- Strategic Management Society.American Management Association- www.amanet.org Academy of Management Online.Strategic Leadership Forum.
CONSULTANTS
- Strategic Planning Systems- www.checkmateplan.comMind Tools- www.mindtools.com/planpage.htmlPalo Alto Software.Center for Strategic Management- www.csmweb.comBoston Consulting Group (BCG) - www.bcg.comFuld & Company- www.fuld.com
To carry out the exercises corresponding to this chapter
EXTERNAL EVALUATION
Contributed by: DANIEL JIMENEZ GALAN [email protected]
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