BUS 310 - Chapter 3 (MTA PREP)

What is an External Audit? And It’s purpose?

An external audit (1) focuses on identifying and evaluating trends and events beyond the control of a single firm. (2) 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.

The purpose of an external audit: (1) aimed at identifying key variables that offer actionable responses.

(2) Firms should be able to respond either offensively or defensively to the opportunities or threats by formulating certain strategies.

The AQCD test?

1. Actionable (i.e., meaningful and helpful in deciding what actions or strategies a firm should consider pursuing);

2. Quantitative (i.e., include percentages, ratios, dollars, and numbers to the extent possible);

3. Comparative (i.e., reveals changes over time), and

4. Divisional (relates to the firm’s products and/or regions).

What are economic forces?

Economic factors have a direct impact on the potential attractiveness of various strategies. An example of an economic variable is “value of the dollar,” which can have a significant effect on financial results of companies with global operations.

Economic categories:

Interest rates

Inflation rates

G D P trends

Unemployment trends

Value of the dollar

Price fluctuations

Stock market trends

What are SCDE forces?

SCDE impacts strategic decisions on virtually all products, services, markets, and customers. These forces are shaping the way people live, work, produce, and consume.

Key variables of SCDE:

Population changes by race, age, and geographic area

Number of marriages

Number of divorces

Number of births

Number of deaths

Life expectancy rates

Energy conservation

Political, Governmental, and Legal Forces

Politics, governments, and legislators can and often do impact strategic decisions. Federal, state, local, and foreign governments are major regulators, deregulators, subsidizers, employers, and customers of organizations. can represent major opportunities or threats for both small and large organizations.

Political, Government, and Legal Variables:

Natural environmental regulations

Protectionist actions by countries

Changes in patent laws

Import-export regulations

What are technological forces?

A variety of new technologies such as the Internet of Things, (3D) printing, predictive analytics, quantum computing, robotics, and artificial intelligence are fueling innovation in many industries and impacting strategic-planning decisions. Businesses are using mobile technologies and applications to better determine customer trends and are employing advanced analytics to make enhanced strategy decisions.

Online retail also impacted many local stores, and the technological advances impacted manufacturing labor market.

Technological advancements impact firms in countless ways, such as the following:

1. They can dramatically affect organizations’ products, services, markets, suppliers, distributors, competitors, customers, manufacturing processes, marketing practices, and competitive position.

2. They can create new competitive advantages that are more powerful than existing advantages.

Many firms now have a Chief Information Officer (C I O) and a Chief Technology Officer (C T O) who work together to ensure that information needed to formulate, implement, and evaluate strategies is available where and when it is needed.

What are competitive forces? And competitive intelligence?

An important part of an external audit is identifying rival firms and determining their strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies.

Competitive intelligence:

is a systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’s own goals (SCIP website).

Various legal and ethical ways to obtain competitive intelligence include the following:

Reverse-engineer rival firms’ products.

Use surveys and interviews of customers, suppliers, and distributors of rival firms.

Search online databases.

Contact government agencies for public information about rival firms.

Hire top executives from rival firms.

What is Porter’s Five Force Model?

1. Rivalry among Competing Firms: It is the most powerful of the five forces, and it is the only factor affected by changes in the other four factors. The strategies pursued by one firm can be successful by focusing on the competitive advantage of strategies over other firms.

Conditions that cause high rivalry among competing firms:

1. When the number of competing firms is high.

2. When competing firms are of similar size.

3. When competing firms have similar capabilities.

4. When demand for the industry’s products is changing rapidly.

5. When price cuts are common in the industry.

2. Potential Entry of New Competitors: Whenever new firms can easily enter a particular industry, existing firms are likely to face threats of reduced market share. In such industries, a firm’s strategies should deter new firms from entering the market to avoid further saturation of the market.

Barriers to Entry:

Need to gain economies of scale quickly

Lack of experience

Strong customer loyalty

Strong brand preferences

Large capital requirements

Tariffs

Lack of access to raw materials

Possession of patents

Undesirable locations

Example: The automotive oil-change industry, for example, has relatively low barriers to entry; whereas the smartphone industry has much higher barriers to entry.

3. Potential Development of Substitute Products:

firms are in close competition with producers of substitute products in other industries. Examples are beer, wine, and liquor; public transportation and car, bike, and taxi/ Uber, etc.

4. Bargaining Power of Suppliers: Suppliers can increase input prices, intensifying industry competition, especially when substitutes are limited, switching costs are high, the industry isn't a major customer, or there are few suppliers. Backward integration can counter this power.

The main reasons for bargaining power of suppliers are:

1) few suppliers are available.

2) Few alternatives for these suppliers.

3) costs of switching to raw materials is high.

In more and more industries, sellers are forging strategic partnerships with select suppliers in an effort to:

(1) reduce inventory and logistics costs,

(2) accelerate the availability of next-generation components,

(3) reduce defect rates, and

(4) squeeze out important cost savings for both themselves and their suppliers.

5. Bargaining Power of Consumers: the ability of buyers to drive down prices for products offered by companies in a given industry. They have bargaining power because (1) Customers being concentrated or buying in volume affects intensity of competition, (2) Consumer power is higher where products are standard or undifferentiated.

Conditions Where Consumers Gain Bargaining Power:

If buyers can inexpensively switch

If buyers are particularly important

If sellers are struggling in the face of falling consumer demand

If buyers are informed about sellers' products, prices, and costs

If buyers have discretion in whether and when they purchase the product.