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Lecture No 07 The External Assessment

Lecture No 07 The External Assessment. Lecture Outline. The Nature of an External Audit Economic Forces Social, Cultural, Demographic, and Environmental Forces. Lecture Outline. Political, Governmental, and Legal Forces Technological Forces Competitive Forces. Lecture Outline.

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Lecture No 07 The External Assessment

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  1. Lecture No 07The External Assessment

  2. Lecture Outline • The Nature of an External Audit • Economic Forces • Social, Cultural, Demographic, and Environmental Forces

  3. Lecture Outline • Political, Governmental, and Legal Forces • Technological Forces • Competitive Forces

  4. Lecture Outline • Competitive Analysis: • Porter’s Five-Forces Model • Sources of External Information • Forecasting Tools and Techniques

  5. Lecture Outline • The Global Challenge • Industry Analysis: • The External Factor Evaluation Matrix • The Competitive Profile Matrix

  6. The External Assessment Prediction is very difficult, especially about the future. -- Neils Bohr

  7. External Strategic Management Audit Also called: • Environmental scanning • Industry analysis

  8. External Strategic Management Audit External Audit: • Identification and evaluation of trends and events beyond control of single firm • Increased foreign competition • Populations shifts • Aging society • Information technology • Computer revolution

  9. Nature of External Audit Purpose: • Development of Finite List: • Opportunities • Threats to be avoided

  10. Key External Forces Five (5) broad categories: • Economic forces • Social, cultural, demographic, & environmental forces • Political, governmental, and legal forces • Technological factors • Competitive forces

  11. Relationships Between Key External Forces and an Organization Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Key External Forces Opportunities & Threats

  12. Performing an External Audit Gather competitive intelligence on factors: • Social • Cultural • Demographic • Environmental • Economic • Political, legal, governmental • technological

  13. Performing an External Audit Sources of information include: • Internet • Libraries (corporate, university, public) • Suppliers • Distributors • Customers • Competition

  14. Performing an External Audit Key factors: • Vary over time • Vary by industry

  15. Performing an External Audit Variables include: • Market share • Breadth of competing products • World economies • Foreign affiliates • Proprietary account advantages • Price competitiveness • Technological advancements • Interest rates • Pollution abatement

  16. Key External Factors Key External Factors: • Oriented to long-term & annual objectives • Measurable • Applicable to all competing firms • Hierarchical • Overall company • Divisional or functional areas

  17. Economic Forces Monitor Key Economic Variables: • Availability of credit • Level of disposable income • Interest rates • Inflation rates • Money market rates • Federal government budget deficits • Gross domestic product trend • Consumption patterns

  18. Monitor Key Economic Variables: • Unemployment trends • Worker productivity levels • Value of the dollar in world markets • Stock market trends • Foreign countries’ economic conditions • Import/export factors • Demand shifts for goods/services • Income differences by region/customer

  19. Monitor Key Economic Variables: • Price fluctuations • Exportation of labor & capital • Monetary policies • Fiscal policies • Tax rates • ECC policies • OPEC policies • LDC policies

  20. Social, Cultural, Demographic & Environmental Forces Major impact on: • Products • Services • Markets • customers

  21. Social, Cultural, Demographic & Environmental Forces Consider: United States— • Population growing older • Less Caucasian • Gap between rich and poor widening • 65 and older will rise to 18.5% of population by 2025 • By 2075, no racial or ethnic majority

  22. Social, Cultural, Demographic & Environmental Forces • World population > 6 billion • U.S. population < 300 million • Great potential for domestic production expansion to other markets • Domestic only is a risky strategy

  23. Social, Cultural, Demographic & Environmental Forces • NAFTA • U.S. exports to Mexico increased 170% • 2000, U.S. trade deficits: • Mexico -- $25 billion • China -- $84 billion • Japan -- $81 billion • 2001 Recession (U.S. and World) • > 60,000 laid off along Mexico Border with U.S.

  24. Social, Cultural, Demographic & Environmental Forces Trends for the 2000’s – • More educated consumers • Population aging • Minorities more influential • Local rather than federal solutions • Fixation with youth decreasing • Hispanics increase to 15% by 2021 • African Americans increase to 14% by 2021

  25. Social, Cultural, Demographic & Environmental Forces Key variables – • Childbearing rates • Number of special-interest groups • Number of marriages • Number of divorces • Number of births • Number of deaths • Immigration & emigration rates

  26. Monitor Key Variables • Life expectancy rates • Per capita income • Attitudes toward business • Average disposable income • Buying habits • Ethical concerns • Attitudes toward saving

  27. Monitor Key Variables • Racial equality • Average level of education • Government regulation • Attitudes toward customer service • Attitudes toward product quality • Energy conservation • Social responsibility

  28. Monitor Key Variables • Value placed on leisure time • Recycling • Waste management • Air & water pollution • Ozone depletion • Endangered species

  29. Political, Govt., & Legal Forces Government Regulation • Key opportunities & key threats • Antitrust legislation (Microsoft) • Tax rates • Lobbying efforts • Patent laws

  30. Political, Govt., & Legal Forces Increasing Global Interdependence • Impact of political variables • Formulation of Strategies • Implementation of Strategies

  31. Political, Govt., & Legal Forces Increasing Global Interdependence • Strategists in a global economy • Forecast political climates • Legalistic skills • Diverse world cultures

  32. Political, Govt., & Legal Forces Globalization of Industry • Worldwide trend toward similar consumption patterns • Global buyers & sellers • E-commerce • Instant transmission of money & information across continents

  33. Political, Govt., & Legal Forces Key Political, govt., & legal variables: • Government regulation/deregulation • Tax law changes • Special tariffs • Political Action Committees (PACs) • Voter participation rates • Number of patents • Changes in patent laws

  34. Key Political, Government & Legal Variables • Environmental protection laws • Equal employment legislation • Level of government subsidies • Antitrust legislation/enforcement • Sino-American relationships • Russian-American relationships • European-American relationships

  35. Thank You

  36. Lecture No 08

  37. Lecture Outline • Key Political, Government & Legal Variables • Technological Forces • Competitive Forces • Porter’s Five-Forces Model • Industry Analysis (EFE) • Industry Analysis (CPM)

  38. Key Political, Government & Legal Variables • African-American relationships • Import-export regulations • Monetary policy • Political conditions in other countries • Government budgets • World oil, currency, & labor markets • Location and severity of terrorist activities

  39. Technological Forces Revolutionary technological forces: • Profound impact on organizations • Internet • Semiconductors • XML technologies • UWB communications

  40. Technological Forces Internet changes the nature of opportunities and threats -- • Alters life cycle of products • Increases speed of distribution • Creates new products and services • Eases limitations of geographic markets • Alters economies of scale • Changes entry barriers

  41. Technological Forces Capitalizing on Information Technology (IT) • Chief Information Officer (CIO) • Chief Technology Officer (CTO)

  42. Technological Forces Technology-based issues • Underlie nearly every strategic decision

  43. Competitive Forces Collection and evaluation of information on competitors is essential for successful strategy formulation

  44. Competitive Forces Competition in virtually all industries can be described as intense.

  45. Competitive Forces Identifying rival firms • Strengths • Weaknesses • Capabilities • Opportunities • Threats • Objectives • Strategies

  46. Competitive Forces Key Questions About Competitors: • Their strengths • Their weaknesses • Their objectives and strategies • Their responses to all external variables (e.g. social, political, demographic, etc.) • Their vulnerability to our alternative strategies

  47. Competitive Forces Key Questions About Competitors: • Our vulnerability to successful strategic counterattack • Our product and service positioning relative to competitors • Entry and exit of firms in the industry • Key factors for our current position in industry

  48. Competitive Forces Key Questions About Competitors: • Sales and profit rankings of competitors over time • Nature of supplier and distributor relationships • The threat of substitute products or services

  49. Competitive Forces Sources of Corporate Information: • Moody’s Manuals • Standard Corporation Descriptions • Value Line Investment Surveys • Dun’s Business Rankings • Standard & Poor’s Industry Surveys • Industry Week • Forbes, Fortune, Business Week

  50. Competitive Forces 7 Characteristics of most competitive U.S. firms: • Market share matters • Understand what business you are in • Broke or not, fix it • Innovate or evaporate

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