assessment of organization’s external environment
DESCRIPTION
Assessment of Organization’s External Environment. Session 3 08 October 2011 Civil Service College Dhaka Presentation by Dr. Muhammad G. Sarwar Email: [email protected] Cell: 01821443741. Presentation Contents of 2nd Session. Selective review of topics discussed in the first session - PowerPoint PPT PresentationTRANSCRIPT
Assessment of Assessment of Organization’s External Organization’s External Environment Environment
Session 308 October 2011Civil Service College Dhaka
Presentation by
Dr. Muhammad G. SarwarEmail: [email protected]: 01821443741
Presentation Contents of 2nd Presentation Contents of 2nd SessionSessionSelective review of topics
discussed in the first sessionStrategy Making HierarchyDeveloping Organization's Vision
StatementPreparing Organization’s Mission
StatementLinking Vision / Mission with
Organization vales
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Presentation Contents of 3Presentation Contents of 3rdrd SessionSessionDefining External Environment /
Audit of an OrganizationNature of External AuditMajor External ForcesProcess of Performing External AuditCompetitive Analysis: Porter’s FF
ModelIndustry Analysis: EFE MatrixCP Matrix
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Strategic Management: course Strategic Management: course outlineoutlineSl. No.
Topic Title Session no.
1 Strategic Management: an overview 1
2 Strategy Formulation Designing Vision and Mission Statements 1• External Assessment 1
• Internal Assessment 1
• Setting Company/Organization Objectives
1
• Strategy Analysis and Choice 1
4 Strategy Implementation 1
4 Strategy Evaluation 1
5 Limitations of Strategic Management: why strategy may fail ?
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Stages of Strategic Management
Strategic Management process consists of 3 stages:
1.Strategy formulation,2.Strategy implementation, and3.Strategy evaluation.
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Strategy formulationStrategy formulation
Strategy formulation includes:Developing a vision and mission
statementsIdentifying organization’s external
opportunities and threatsIndentifying internal strengths and
weaknessesEstablishing long-term objectivesGenerating alternative strategiesChoosing particular strategies.
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What is External What is External Environment of an Environment of an Organization ?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.
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Purpose of External Purpose of External Management Audit 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
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Key External ForcesKey External Forces
5 broad categories of External Forces:
1.Economic forces;2.Social, cultural, demographic, and
environmental forces;3.Political, governmental, and legal
forces;4.Technological forces; and5.Competitive forces
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Process of Performing External Process of Performing External AuditAudit
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.
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Economic ForcesEconomic ForcesEconomic 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.
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Social, cultural, Social, cultural, demographic, and demographic, and environmental forcesenvironmental forcesSocial, 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.
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Political, governmental, and Political, governmental, and legal forceslegal forcesPolitical, 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.
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Technological forcesTechnological forcesRevolutionary 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.
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Competitive forcesAn 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.
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Competitive Analysis: Porter’s 5 Competitive Analysis: Porter’s 5 FF ModelFF Model
Nature of competitiveness in a given industry can be analyzed as a composite of five forces:
1.Rivalry among competing organization2.Potential entry of new competitors3.Potential development of substitute
products/services4.Bargaining power of suppliers5.Bargaining power of
consumers/stakeholders16
Competitive Analysis: 5 FF Competitive Analysis: 5 FF ModelModel
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Rivalry among competing Rivalry among competing organizationorganizationRivalry 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.
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Potential entry of new Potential entry of new competitorscompetitors
Common barriers to new entry are:Presence of sizable economies of scale Strong brand preferences and high
degrees of customer loyaltyHigh capital requirementRestrictive regulationDifficulties of building network of
distributors and retailersHigh tariff and non-tariff trade
restrictions
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Potential development of Potential development of substitute products/servicessubstitute 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 20
Bargaining power of Input Bargaining power of Input supplierssuppliers
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 supplyCollaborative partnership with the
suppliers21
Bargaining power of Bargaining power of consumers/stakeholdersconsumers/stakeholders
Bargaining power of consumers depends on:
Consumers’ cost of switching to competing brands and substitutes
Number of consumersConsumer demandConsumers’ access to information
about product / service quality and price
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Industry Analysis: EFE MatrixIndustry Analysis: EFE MatrixAn EFE (external factor evaluation) Matrix
summarizes and evaluate all the five external forces that affect an organization. It is developed in 5 stages:
1. List key external factors identified in external audit;2. 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.
3. Assign rating say between 1 (poor response) and 4 (superior response) based on effectiveness of the organization’s strategies.
4. Multiply weight by its rating to get weighted score5. Sum up to get total weighted score for the
organization.23
Example of EFE Matrix Example of EFE Matrix Key External Factors Weig
htRating
Weighted score
Opportunities
1. Domestic demand increasing 10% annually
2. 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 24
Competitive Profile (CP) Competitive Profile (CP) Matrix 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).
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Example of CP MatrixExample of CP MatrixOrg A Org B Org C
Critical success factors
weight
rating
score
rating
score
Rating
score
Product quality
Price competitiveness
Advertising
Management
Financial position
Market share
Customer loyalty
Global expansion
Total
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Strategic Management: Strategic Management: referencesreferencesChapter 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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ThanksThanks
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