External Audit Sttttud

27th Nov 2013 : psalwan@iimidr.ac.
in
The External Assessment
27th Nov 2013 : psalwan@iimidr.ac.in
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 firm
q Increased foreign competition
q Population shifts
q Information technology
External Strategic
Management Audit
Purpose of External Audit
q Identify
n Opportunities
n Threats
External Strategic
Management Audit
Key External Forces
Economic forces
Social, cultural, demographic &
environmental forces
Political, governmental & legal forces
Technological forces
Competitive forces
Competitors
Suppliers
Distributors
Creditors
Customers
Employees
Communities
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
Key
External
Forces
Opportunities
&
Threats
Key External Forces & the Organization
Gather competitive
intelligence
n Social
n Cultural
n Demographic
n Environmental
n Economic
n Political, legal governmental
n Technological
External Audit
External Audit Sources of
Information
Internet
Libraries
Suppliers
Distributors
Customers
Competition
Performing External Audit
-- Key Factors
n Vary over time
n 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
External
Factors
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
Social, Cultural, Demographic
& Environmental Forces
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
21
st
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 Key
Variables
Per capita income
Attitudes toward business
Avg. disposable income
Consumer behavior
Monitor Key
Variables
Ethical concerns
Attitudes toward saving
Racial equality
Avg. educational level
Monitor Key
Variables
Governmental regulation
Attitudes toward customer service
Attitudes toward quality
Energy conservation
Monitor Key
Variables
Social responsibility
Leisure time values
Recycling
Waste management
Monitor Key
Variables
Air & water pollution
Ozone depletion
Endangered species
Political, Government & Legal
Forces
Key opportunities & threats
n Antitrust legislation
n Tax rates
n Lobbying efforts
n Patent laws
Government Regulation
Forces
Political variables impact
q Formulation of strategies
q Implementation of strategies
Increasing Global Interdependence
Forces
Strategists in a global economy --
q Forecast political climates
q Legalistic skills
q Diverse world cultures
Increasing Global Interdependence
Forces
n Worldwide trend toward similar
consumption patterns
n Global buyers and sellers
n E-commerce
n Technology for instant currency transfers
Globalization of Industry
Key Political, Governmental, & Legal Variables
Special tariffs
Tax law changes
PACs
Voter participation rates
Regulation/deregulation
(contd)
Environmental protection laws
Changes in patent laws
Equal employment legislation
Government subsidies
Number of patents
(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 from
employees 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 forces
n Focus on competitive advantage of
strategies
Rivalry Among Competing Firms
n Barriers to entry are important
n 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
Competitive Political Cultural
Technological Environmental Social
Governmental Demographic Economic
Summarize & Evaluate
0.15 3 0.05
5. The average income for PC worker has
declined from $40K/yr to $30k/yr
0.10 1 0.10
4. China entered WTO; lowered taxes for
importing PCs
0.10 2 0.05 3. Internet use growing rapidly
0.30 3 0.10
2. Cost of PC component parts expected to
decrease 10% - 2004
0.30 3 0.10
1. Global PC market expected to grow 20%
in 2004
Opportunities
Wtd
Score
Rating Weight
Key External Factors
EFE Gateway Computers
0.05 1 0.10 1. Intense rivalry in industry
0.10 1 0.10
Threats
0.05 1 0.05
8. 30% of Chinese population can afford a
PC; only 10% of homes have a PC
0.15 3 0.05 7. U.S. (& world) economies recovering
0.10 2 0.05
6. Modernization of business firms and
government agencies
Opportunities (contd)
Wtd
Score
Rating Weight
EFE Gateway Computers (2003) (contd)
0.15 3 0.05 6. Birth rate in U.S. declining annually
0.20 4 0.05
5. Demand exceeds supply of experienced
PC workers
0.15 3 0.05 4. Palm & PDA becoming substitutes
0.05 1 0.05
3. Different countries have different regs
and infrastructure for PCs
0.20 2 0.10 2. Severe price cutting in PC industry
Threats (contd)
Wtd
Score
Rating Weight
2.40 1.00 Total
0.15 3 0.05
8. PC firms diversifying into consumer
electronics
0.10 2 0.05
7. U.s. consumers and businesses delaying
purchase of PCs
Threats (contd)
Wtd
Score
Rating Weight
Total weighted score of 4.0
n Organization response is outstanding to threats
and weaknesses
Industry Analysis EFE
Total weighted score of 1.0
n 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
0.15 3 0.15 3 0.15 3 0.05 Org. Structure
0.60 4 0.30 2 0.45 3 0.15 Global Exp.
0.30 3 0.20 2 0.30 3 0.10 Sales Distr
0.08 4 0.06 3 0.06 3 0.02 Cons. Loyalty
0.24 3 0.32 4 0.24 3 0.08 Prod. Quality
0.30 3 0.30 3 0.20 2 0.10 Fin position
0.32 4 0.16 2 0.16 2 0.08 Inventory sys
0.60 4 0.30 2 0.45 3 0.15 Market share
Wtd
Score
Rating Wtd
Score
Rating Wtd
Score
Rating Wt
CSFs
Dell Apple Gateway
3.49 2.47 2.83 1.00 Total
0.02 2 0.04 4 0.02 2 0.01 Mgt. experience
0.06 3 0.02 1 0.08 4 0.02
Price
competitive
0.40 4 0.20 2 0.30 3 0.10 Customer Serv
0.30 3 0.30 3 0.30 3 0.10 E-commerce
0.12 3 0.12 3 0.12 3 0.04 Prod. Capacity
Wtd
Score
Rating Wtd
Score
Rating Wtd
Score
Rating Wt
CSFs (contd)
Dell Apple Gateway
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 --
The Cola Wars (Timeline)
Coca-Cola
Coca-Cola invented
Kick Pepsi's can
Diet Coke
New Coke
Repair Coke and
restore
Stock price
Diversify product line
1886
1950
1960
1970
1980
1990
2000
Pepsi
Beat Coke
Pepsi Generation
Pepsi
Challenge
Foster entrepreneurial
spirit of Pepsis people
Jettison slow-growing
businesses
Diversify beyond
soft-drinks
External Context of Strategy
An internal analysis is
just half of what is
needed to build strategy
The SWOT and more
complicated frameworks
help us understand the
full picture
Internal
Strengths
Weaknesses
Capabilities
Relationships,
etc.
Blurring of Industry Boundaries
With fewer
companies
providing these
services, the
power of
buyers will be
impacted.
As services are
bundled, the
cost to switch
to another
service
provider will
be greater.
Cable
Companies
Long Distance
Telephone
Companies
Internet
Provider
Companies
u
v
w
The Balance of Power
Wal-Mart
Rubbermaid
The External Environment of the
Organization
Macro Environment
Political, Economic, Socio-
cultural, Technological,
Environmental, Legal
Industry Environment
Strategic Group
The Organization
Key Question to Ask
What macro environmental
conditions will have a
material effect on our ability
to implement our strategy
successfully?
How stable are
these
characteristics?
What is our
firms industry?
What are the
characteristics of
the industry?
Pressures Favoring Industry Globalization
Source: 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 Competition
n
Homogeneous
customer needs
n
Large scale and
scope
economies
n
Favorable trade
policies
n
Interdependent
countries
n
Global customer
needs
n
Learning and
experience
n
Common
technological
standards
n
Global
competitors
n
Global channels
n
Sourcing
efficiencies
n
Common
manufacturing
and marketing
regulations
n
Transferable
marketing
approaches
n
Favorable
logistics
n
Arbitrage
opportunities
n
High R&D costs
Key Success Factors as Barriers to Entry
Key asset or requisite
skill that all firms in an
industry must possess
in order to be a viable
competitor
Key success factor (KSF)
Ability to meet competitive
pricing
Extensive distribution
Ability to raise consumer
awareness
Broad product mix
Global presence
Well positioned bottlers and
bottling capacity
KSFs
SOFT DRI NK EXAMPLE
Industry Fragmentation and Concentration
Monopoly Duopoly Fragmented
Environmental Trends
Silent
Generation
Born 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
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 Entry
Barriers)
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 of
substitutes
Varity of substitutes
Necessity of product or service
Degree of Rivalry
Exit barriers
Industry concentration
Fixed costs/value added
Industry growth
Intermittent
overcapacity
Product differences
Switching costs
Brand identity
Diversity of rivals
Corporate stakes
Source: Adapted from M.E. Porter,
Competitive Strategy:
Techniques for Analyzing
Industries and Competitors
(New York: Free Press, 1980)
Industry value chain
from raw materials
and other inputs, to
channel to end
consumer
Complementors
Number of complements
Relative value added
Barriers to complement entry
Difficulty of engaging complements
Buyer perception of complements
Complement exclusivity
Causes of Rivarly
Barriers to Entry
Strong brands
Proprietary
technology
Start-up costs, etc.,
Barriers to Exit
Few other
opportunities
Sunk investments,
etc.,
In addition to entry
and exit barriers,
many factors drive
rivalry
History of price wars
Level of fixed costs
Industry concentration
Market growth, etc.
Supplier Power
When firms in the
supply industry can
dictate terms, they
can extract greater
profits
Diamond supply
Percent
DeBeers
Others
50
Diamond
Retailers
50
Buyer Power
Suppliers Buyers
Profits
ILLUSTRATIVE
In industries
characterized with
many suppliers and
few buyers, buyers
often capture a
greater share of
profits
Industry A
Suppliers Buyers
Industry B
Profits
Threat of Substitutes
Soft drinks
Coke Pepsi
Movie rentals
Block buster
Hollywood video
B
o
t
t
l
e
d

w
a
t
e
r
C
a
b
l
e

T
V
Impact of Complementor
Any factor that makes it more
attractive for suppliers to
supply an industry on favorable
terms or that makes it more
attractive for buyers to
purchase products or services
from an industry at prices
higher than it would pay absent
the complementor
Complementor:
Hot dogs
+
Buns
More sales
Three Examples
Music
+
MPS player
More attractive
offering
Delta
plane
orders
+
American
Airlines
plane orders
Lower costs from
Boeing
Industry Life Cycle
M
a
r
k
e
t

S
i
z
e
Time
Embryonic Growing Mature In Decline
Embryonic Growing Mature In Decline
Niche 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
industry
consolidation
Further
consolidation and
industry
regeneration
Technological
uncertainty
Customers
become better
informed
Aggressive
customers
Competitive Intelligence
nCompetitive intelligence is
a method whereby firms are
able to gather information
about their competitors.
Technological Discontinuities
Process-related
Product-related
Southwest airlines
radically changed the
airline business
model by adopting
new processes (e.g.,
a point-to-point
model)
In disk-drive industry,
virtually every new
generation of technology led
to demise of market leader
Example
Scenario Planning
Assess the strategic
implications of each
scenario
6
Specify indicators that can signal
which scenario is unfolding
5
Flesh out the picture 4
Develop the framework by defining two specific axes 3
Brainstorm key drivers, decision factors, and possible scenario
departure or divergence points
2
Define target issue, time frame, and scope for
scenarios
1
An understanding of the big
picture and a plan to manage
uncertainty
Hypercompetition
Market stability is threatened
by short product life cycles,
short product design cycles,
new technologies, frequent
entry by unexpected outsiders,
repositioning by incumbents,
and tactical redefinitions of
market boundaries as diverse
industries emerge.
Richard DAveni

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27th Nov 2013 : psalwan@iimidr.ac.

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