1. Assessment of Organization’s External Environment
Session 3
08 October 2011
Civil Service College Dhaka
Presentation by
Dr. Muhammad G. Sarwar
Cell:

2. 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

3. 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

4. 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 ?

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

6. 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.

7. 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.

8. 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

9. 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

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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

17. 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

18. 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.

19. 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

20. 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

21. 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

22. 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

23. 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.

24. 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

25. 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).

26. 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

27. 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

28. Thanks