External Audit
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Transcript of External Audit
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17th Nov 2013 Mumbai
The External Assessment
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17th Nov 2013 Mumbai
The Nature of the External Audit
The Industrial Organization (I/O) View
Social, Cultural, Demographic & Environmental Forces
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Political, Governmental, and Legal Forces
Technological Forces
Competitive Forces
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Porters Five-Forces Model
Sources of External Information
Forecasting Tools & Techniques
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Global Challenge
The External Factor Evaluation (EFE) Matrix
Competitive Profile Matrix (CPM)
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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
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External Strategic Management Audit
-- Environmental Scanning
-- Industry Analysis
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Identify & Evaluate factors beyond the control of a single firmq Increased foreign competitionq Population shiftsq Information technology
External Strategic Management Audit
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Purpose of External Auditq Identify
n Opportunitiesn Threats
External Strategic Management Audit
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Key External Forces
Economic forces
Social, cultural, demographic & environmental forces
Political, governmental & legal forces
Technological forces
Competitive forces
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CompetitorsSuppliers
DistributorsCreditors
CustomersEmployees
CommunitiesManagers
StockholdersLabor Unions
Special Interest GroupsProductsServices
KeyExternalForces
Opportunities&
Threats
Key External Forces & the Organization
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Gather competitive intelligence
n Socialn Culturaln Demographicn Environmentaln Economicn Political, legal governmental n Technological
External Audit
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External Audit Sources of Information
Internet
Libraries
Suppliers
Distributors
Customers
Competition
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Performing External Audit
-- Key Factorsn Vary over timen Vary by industry
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Performing External Audit --Variables
Market share
Breadth of competing products
World economies
Foreign affiliates
Proprietary account advantages
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Performing External Audit --Variables
Price competitiveness
Technological advancements
Interest rates
Pollution abatement
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Performing External Audit
ExternalFactors
Measurable
Long-term orientation
Applicable to competing firms
Hierarchical
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Industrial Organization (I/O) View
-- Industry factors more important than internal factors
n Performance determined by industry forces
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Economies of Scale
Industry Properties
Barriers to market entry
Product differentiation
Level of competitiveness
I/O Perspective Firm Performance
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Economic Forces
Availability of credit
Level of disposable income
Interest rtes
Inflation rates
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Economic Forces
Money market rates
Fed Govt deficits
GDP trend
Consumption patterns
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Key Economic Variables
Balance of Payment in world markets
Worker productivity levels
Stock market trends
Foreign economic conditions
Unemployment trends
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Key Economic Variables
Income differences by region/customer
Demand shifts for goods/services
Price fluctuations
Exportation of labor and capital
Import/Export factors
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Key Economic Variables
Tax rates
Fiscal policies
OPEC policies
ECC policies
Monetary policies
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Social, Cultural, Demographic & Environmental Forces
Major Impact
Products
Services
Markets
Customers
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Social, Cultural, Demographic & Environmental Forces
U.S. Facts
Aging population
Less Caucasian
Widening gap between rich & poor
2025 = 18.5% population >65 years
2075 = no ethnic or racial majority
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n Services: 65 per cent n Industry: 18 per cent n Agriculture: 17 per cent n 60% of Population less than 25 year s
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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
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Social, Cultural, Demographic & Environmental Forces
Facts
World population > 6.5 billion
Indias population 1.32 Billion
U.S. population < 300 million
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Social, Cultural, Demographic & Environmental Forces
Population characteristics require global strategies
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Global trends
Chinas labor rates less than Mexico
China provides more site location incentives than Mexico
Social, Cultural, Demographic & Environmental Forces
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Social, Cultural, Demographic & Environmental Forces
More educated consumers
Aging population
Minorities more influential
Local rather than federal solutions
21st Century Trends
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Key Social, Cultural, Demographic & Environmental Variables
Number of marriages & divorces
Number of special interest groups
Number of births & deaths
Immigration & emigration rates
Childbearing rates
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Actuarial rates
Monitor KeyVariables
Per capita income
Attitudes toward business
Avg. disposable income
Social, Cultural, Demographic & Environmental Forces
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Consumer behavior
Monitor KeyVariables
Ethical concerns
Attitudes toward saving
Racial equality
Social, Cultural, Demographic & Environmental Forces
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Avg. educational level
Monitor KeyVariables
Governmental regulation
Attitudes toward customer service
Attitudes toward quality
Social, Cultural, Demographic & Environmental Forces
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Energy conservation
Monitor KeyVariables
Social responsibility
Leisure time values
Recycling
Social, Cultural, Demographic & Environmental Forces
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Waste management
Monitor KeyVariables
Air & water pollution
Ozone depletion
Endangered species
Social, Cultural, Demographic & Environmental Forces
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Political, Government & Legal Forces
Key opportunities & threatsn Antitrust legislationn Tax ratesn Lobbying effortsn Patent laws
Government Regulation
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Political, Government & Legal Forces
Political variables impact q Formulation of strategiesq Implementation of strategies
Increasing Global Interdependence
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Political, Government & Legal Forces
Strategists in a global economy --q Forecast political climatesq Legalistic skillsq Diverse world cultures
Increasing Global Interdependence
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Political, Government & Legal Forces
n Worldwide trend toward similarconsumption patterns
n Global buyers and sellersn E-commercen Technology for instant currency transfers
Globalization of Industry
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Key Political, Governmental, & Legal Variables
Special tariffs
Tax law changes
PACs
Voter participation rates
Regulation/deregulation
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Key Political, Governmental, & Legal Variables (contd)
Environmental protection laws
Changes in patent laws
Equal employment legislation
Government subsidies
Number of patents
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Key Political, Governmental, & Legal Variables (contd)
Import/export regulations
Global relationships
Political conditions
Location and severity of terrorist activity
Anti-trust enforcement
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Technological Forces
Major Impact
Internet
Communications
Semiconductors
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Technological Forces
Significance of IT
Chief Information Officer (CIO)
Chief Technology Officer (CTO)
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Technological Forces
Essential for nearly every strategic decision
Technology-based issues
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Competitive Forces
Collection & evaluation of data on competitors is essential for successful strategy formulation
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Competitive Forces
Competition on virtually all industries can be described as intense.
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Competitive Forces
Strengths
Weaknesses
Capabilities
Opportunities
Threats
Objectives
Strategies
Identifying Rival Firms
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Key Questions Concerning Competitors
Their objectives and strategies
Their weaknesses
Their responses to external variables
Their vulnerability to our alternative strategies
Their strengths
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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
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Key Questions Concerning Competitors (contd)
The threat of substitute products/services
Nature of supplier & distributor relationships
Should we keep our strategies secret fromemployees and stakeholders?
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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
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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:
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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
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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
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The Five-Forces Model
n Most powerful of the five forcesn Focus on competitive advantage of
strategies
Rivalry Among Competing Firms
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The Five-Forces Model
n Barriers to entry are importantn Quality, pricing, and marketing can
overcome barriers
Potential Entry of New Competitors
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The Five-Forces Model
n Pressures increase when consumers switching costs decrease
n Firms plans for increased capacity & market penetration
Potential Development of Substitute Products
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The Five-Forces Model
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
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The Five-Forces Model
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
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The Global Challenge
Faced by Indian. Firms --
Gain & maintain exports to other nations
Defend domestic markets against imported goods
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The Global Challenge
Simultaneously globally competitive & nationally responsive
Multinational Corporations (MNCs)
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The Global Challenge
Worldwide integration of:
Strategy formulation
Strategy implementation
Strategy evaluation
Globalization
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The Global Challenge
Similar consumption patterns
Global buyers and sellers
E-commerce
Instant transmission of money & information
Globalization of Industries
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Industry Analysis: The External Factor Evaluation (EFE) Matrix
CompetitivePoliticalCultural
TechnologicalEnvironmentalSocial
GovernmentalDemographicEconomic
Summarize & Evaluate
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0.1530.055. The average income for PC worker has declined from $40K/yr to $30k/yr
0.1010.104. China entered WTO; lowered taxes for importing PCs
0.1020.053. Internet use growing rapidly
0.3030.102. Cost of PC component parts expected to decrease 10% - 2004
0.3030.101. Global PC market expected to grow 20% in 2004
Opportunities
Wtd ScoreRatingWeightKey External Factors
EFE Gateway Computers
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0.0510.101. Intense rivalry in industry
0.1010.10Threats
0.0510.058. 30% of Chinese population can afford a PC; only 10% of homes have a PC
0.1530.057. U.S. (& world) economies recovering
0.1020.056. Modernization of business firms and government agencies
Opportunities (contd)
Wtd ScoreRatingWeightKey External Factors
EFE Gateway Computers (2003) (contd)
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0.1530.056. Birth rate in U.S. declining annually
0.2040.055. Demand exceeds supply of experienced PC workers
0.1530.054. Palm & PDA becoming substitutes
0.0510.053. Different countries have different regs and infrastructure for PCs
0.2020.102. Severe price cutting in PC industry
Threats (contd)
Wtd ScoreRatingWeightKey External Factors
EFE Gateway Computers (2003) (contd)
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2.401.00Total
0.1530.058. PC firms diversifying into consumer electronics
0.1020.057. U.s. consumers and businesses delaying purchase of PCs
Threats (contd)
Wtd ScoreRatingWeightKey External Factors
EFE Gateway Computers (2003) (contd)
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Total weighted score of 4.0n Organization response is outstanding to threats
and weaknesses
Industry Analysis EFE
Total weighted score of 1.0n Firms strategies not capitalizing on opportunities
or avoiding threats
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Industry Analysis EFE
Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.
Important --
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Industry Analysis: Competitive Profile Matrix (CPM)
Identifies firms major competitors and their strengths & weaknesses in relation to a sample firms strategic positions
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0.1530.1530.1530.05Org. Structure
0.6040.3020.4530.15Global Exp.
0.3030.2020.3030.10Sales Distr
0.0840.0630.0630.02Cons. Loyalty
0.2430.3240.2430.08Prod. Quality
0.3030.3030.2020.10Fin position
0.3240.1620.1620.08Inventory sys
0.6040.3020.4530.15Market share
Wtd Score
RatingWtd Score
RatingWtd Score
RatingWtCSFsDellAppleGateway
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3.492.472.831.00Total
0.0220.0440.0220.01Mgt. experience
0.0630.0210.0840.02Price competitive
0.4040.2020.3030.10Customer Serv
0.3030.3030.3030.10E-commerce
0.1230.1230.1230.04Prod. Capacity
Wtd Score
RatingWtd Score
RatingWtd Score
RatingWtCSFs (contd)
DellAppleGateway
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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 --