Assessment of Organization’s External Environment Session 3 08 October 2011 Civil Service College Dhaka Presentation by Dr. Muhammad G. Sarwar Email: sarwar_mg@yahoo.com Cell: 01821443741

Presentation Contents of 2nd Session Selective review of topics discussed in the first session Strategy Making Hierarchy Developing Organization's Vision Statement Preparing Organization’s Mission Statement Linking Vision / Mission with Organization vales

Presentation Contents of 3rd Session Defining External Environment / Audit of an Organization Nature of External Audit Major External Forces Process of Performing External Audit Competitive Analysis: Porter’s FF Model Industry Analysis: EFE Matrix CP Matrix

Strategic Management: course outline Sl. No. Topic Title Session no. 1 Strategic Management: an overview 2 Strategy Formulation Designing Vision and Mission Statements External Assessment Internal Assessment Setting Company/Organization Objectives Strategy Analysis and Choice 4 Strategy Implementation Strategy Evaluation 5 Limitations of Strategic Management: why strategy may fail ?

Stages of Strategic Management Strategic Management process consists of 3 stages: Strategy formulation, Strategy implementation, and Strategy evaluation.

Strategy formulation Strategy formulation includes: Developing a vision and mission statements Identifying organization’s external opportunities and threats Indentifying internal strengths and weaknesses Establishing long-term objectives Generating alternative strategies Choosing particular strategies.

What is External Environment of an 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.

Purpose of External 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

Key External Forces 5 broad categories of External Forces: Economic forces; Social, cultural, demographic, and environmental forces; Political, governmental, and legal forces; Technological forces; and Competitive forces

Process of Performing External Audit Process 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.

Economic Forces Economic 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.

Social, cultural, demographic, and environmental forces Social, 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.

Political, governmental, and legal forces Political, 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.

Technological forces Revolutionary 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.

Competitive forces An 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.

Competitive Analysis: Porter’s 5 FF Model Nature of competitiveness in a given industry can be analyzed as a composite of five forces: Rivalry among competing organization Potential entry of new competitors Potential development of substitute products/services Bargaining power of suppliers Bargaining power of consumers/stakeholders

Competitive Analysis: 5 FF Model Rivalry among competing firms Potential development of substitute Bargaining power of consumers Bargaining power of suppliers Potential entry of new competitors

Rivalry among competing organization Rivalry 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.

Potential entry of new competitors Common barriers to new entry are: Presence of sizable economies of scale Strong brand preferences and high degrees of customer loyalty High capital requirement Restrictive regulation Difficulties of building network of distributors and retailers High tariff and non-tariff trade restrictions

Potential development of substitute 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

Bargaining power of Input suppliers Bargaining power of input suppliers depends on: Whether the item being supplied is readily available from many suppliers Whether a few large suppliers are the primary source of a particular item How costly or difficult it is to switch over to other suppliers Whether the items are in short supply Collaborative partnership with the suppliers

Bargaining power of consumers/stakeholders Bargaining power of consumers depends on: Consumers’ cost of switching to competing brands and substitutes Number of consumers Consumer demand Consumers’ access to information about product / service quality and price

Industry Analysis: EFE Matrix An EFE (external factor evaluation) Matrix summarizes and evaluate all the five external forces that affect an organization. It is developed in 5 stages: List key external factors identified in external audit; 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. Assign rating say between 1 (poor response) and 4 (superior response) based on effectiveness of the organization’s strategies. Multiply weight by its rating to get weighted score Sum up to get total weighted score for the organization.

Example of EFE Matrix Key External Factors Weight Rating Weighted score Opportunities 1. Domestic demand increasing 10% annually Export demand increasing 15% annually 3. Input price decreasing 5% annually Threats 1. Rival organizations increasing ad by 20% annually 2. Govt. Tightening its regulation 3. Interest rates are increasing 3% annually Total

Competitive Profile (CP) 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).

Example of CP Matrix Org A Org B Org C Critical success factors weight rating score Rating Product quality Price competitiveness Advertising Management Financial position Market share Customer loyalty Global expansion Total

Strategic Management: references Chapter 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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