External Assessment in Strategic Management

Strategic management isn't just about looking inwards; it's crucially about understanding the world outside your organization. This is where external assessment in strategic management comes into play. It's a vital process for identifying key opportunities to seize and threats to avoid, allowing organizations to develop robust strategies for long-term success.

What is External Assessment in Strategic Management?

An external assessment, also known as an external audit, environmental scanning, or industry analysis, is the process of identifying and evaluating trends and events beyond the control of a single firm. Think of it as looking outward to understand the landscape your business operates in.

The primary purpose of an external audit is to develop a finite, actionable list of opportunities that can benefit a firm and threats that should be avoided. It's not about cataloging every single factor, but rather pinpointing key variables that demand a strategic response. These insights enable firms to formulate strategies that capitalize on opportunities or minimize the impact of potential threats.

The External Audit Process: How to Conduct It Effectively

Performing a thorough external audit requires a systematic approach and broad involvement within the organization.

Key Steps in Conducting an External Audit

1. Involve Managers and Employees: The process should involve as many managers and employees as possible. This fosters understanding and commitment, allowing individuals to contribute ideas and gain insight into the industry, competitors, and markets.
2. Gather Competitive Intelligence: Collect information on economic, social, cultural, demographic, environmental, political, governmental, legal, and technological trends. This can involve monitoring key magazines, trade journals, newspapers, and online sources.
3. Utilize Diverse Information Sources: Beyond traditional media, leverage the Internet, corporate, university, and public libraries. Suppliers, distributors, salespersons, customers, and even competitors are invaluable sources of vital information.
4. Assimilate and Evaluate Information: Once gathered, information must be assimilated and evaluated. This often involves meetings where managers collectively identify the most important opportunities and threats.
5. Prioritize Key Factors: Since no organization can address every single factor, prioritizing key external opportunities and threats is absolutely essential. This ensures resources are focused on the most impactful areas.

The Industrial Organization (I/O) View of Strategic Management

The Industrial Organization (I/O) view of strategic planning emphasizes that external (industry) factors are often more important than internal ones for gaining and sustaining competitive advantage. Proponents like Michael Porter argue that organizational performance is primarily determined by industry forces. This perspective highlights the importance of competitive positioning within an industry and understanding key external factor relationships.

While the I/O view enhances our understanding, it's crucial to remember that effective integration and understanding of both external and internal factors are key to securing and maintaining a competitive advantage.

Ten Key External Forces Affecting Organizations

External forces can be broadly categorized into ten areas, each presenting significant opportunities and threats that must be quantitatively assessed and made actionable.

1. Economic Forces in Strategic Management

Economic factors directly impact the potential attractiveness of various strategies. Key variables to monitor include:

• Availability of credit
• Level of disposable income
• Propensity of people to spend
• Interest rates and inflation rates
• Consumption patterns and unemployment trends
• Import/export factors and price fluctuations
• Monetary and fiscal policies, including tax rates and international economic policies (e.g., European Economic Community policies)

2. Social, Cultural, Demographic, and Natural Environment Forces

These forces significantly shape consumer behavior, markets, and product demand. Important variables include:

• Population changes (by race, age, geographic area)
• Regional changes in tastes and preferences
• Changes in household structures (e.g., number of marriages, divorces, births, deaths, people living alone)
• Per capita income and attitudes toward retirement, product quality, customer service, investing, and saving
• Social responsibility issues, recycling, waste management, and air pollution
• Lifestyles, including the increasing shift towards online purchases and mobile technology usage

3. Political, Governmental, and Legal Forces

Political conditions and legal frameworks can profoundly impact strategic decisions, especially for firms relying on government contracts or subsidies. Variables include:

• Environmental regulations and changes in patent laws
• Political conditions in foreign countries and import–export regulations
• Government regulations or deregulations
• Government fiscal and monetary policy changes
• Lobbying activities and the size of government budgets

4. Technological Forces in Business Strategy

Technological advancements are fueling innovation and dramatically impacting strategic planning. Examples include:

• New Technologies: Internet of Things, 3D printing, cloud computing, mobile devices, biotech, analytics, robotics, and artificial intelligence.
• Impact on Business: Mobile technologies for customer trends, advanced analytics for enhanced strategy decisions.
• Internet's Influence: Alters product life cycles, increases distribution speed, creates new products/services, erases geographic market limitations, changes economies of scale, redefines industry relationships with stakeholders.
• Online Reputation: Monitoring online reviews and social media (Facebook, Instagram) is essential to protect sales and brand image.
• Emerging Roles: Chief Information Officer (CIO) and Chief Technology Officer (CTO) roles reflect the growing importance of information technology (IT) in strategic management, ensuring data availability for strategy formulation, implementation, and evaluation.

Technological forces create major opportunities and threats, fostering new markets, new products, changing cost positions, and rendering existing offerings obsolete. No industry is immune.

5. Competitive Forces: Understanding Rivalry

Identifying and evaluating rival firms is crucial. This involves understanding their strengths, weaknesses, capabilities, objectives, and strategies. Key questions include:

• What are major competitors' strengths, weaknesses, objectives, and strategies?
• How will they respond to industry trends?
• How vulnerable are they to our strategies, and vice versa?
• How are our products/services positioned relative to competitors?
• What are the dynamics of new firms entering or old firms leaving the industry?
• What is the nature of supplier and distributor relationships?
• To what extent could substitute products or services be a threat?

Porter's Five-Forces Model: A Framework for Competitive Analysis

Michael Porter's Five-Forces Model is a widely used approach for understanding the intensity of competition and developing strategies within an industry. It views competitiveness as a composite of five forces:

1. Rivalry Among Competing Firms: This is often the most powerful force. Strategies by one firm are met with countermoves (e.g., lowering prices, enhancing quality, increasing advertising). Rivalry intensifies with more competitors, similar size/capability, declining demand, price cutting, easy brand switching, high exit barriers, high fixed costs, perishable products, slow growth, commoditized products, and diverse rival strategies.
2. Potential Entry of New Competitors: Ease of entry increases competition. Barriers include economies of scale, technology/know-how, lack of experience, strong customer loyalty, brand preferences, capital requirements, distribution channels, government policies, tariffs, access to raw materials, patents, undesirable locations, and potential saturation. Firms fortify positions to deter new entrants.
3. Potential Development of Substitute Products: Substitute products (e.g., plastic vs. glass containers) place a ceiling on prices, leading to intense competition. Competitive pressure increases as substitute prices decline and switching costs decrease.
4. Bargaining Power of Suppliers: Affects intensity of competition, especially with many suppliers, few good substitute raw materials, or high switching costs. Strategic partnerships with suppliers are common to reduce costs, speed availability, enhance quality, and reduce defects.
5. Bargaining Power of Consumers: High when customers are concentrated, buy in volume, or can easily switch brands/substitutes. Consumers gain power if they are important to the seller, if sellers are struggling, if they are well-informed about products/prices, or if they have discretion on purchase timing.

Sources of External Information

A wealth of strategic information is available from various sources:

• Published Sources: Periodicals, journals, reports, government documents, abstracts, books, directories, newspapers, and manuals. The Internet has significantly enhanced access to this information.
• Unpublished Sources: Customer surveys, market research, speeches at professional and shareholders’ meetings, television programs, interviews, and conversations with stakeholders (suppliers, distributors, salespersons, customers, competitors).
• Grey Literature: Important primary source materials not available through usual publication systems, such as conference proceedings, data exchange, environmental impact statements, market research reports, online documents, and working papers.

Forecasting Tools and Techniques for Strategic Management

Forecasts are educated assumptions about future trends and events, crucial for identifying key external opportunities and threats. Since planning is impossible without assumptions, strategists must make reasonable assumptions based on available information, not wild guesses.

Types of Forecasting Techniques

• Quantitative Techniques: Most appropriate when historical data are available and relationships among variables are expected to remain stable (e.g., linear regression). Less accurate as historical relationships become less stable.
• Qualitative Techniques: Used when historical data is scarce or relationships are volatile. These rely on expert judgment and subjective assessments.

No forecast is perfect, highlighting the need for strategists to study underlying bases for published forecasts and develop their own internal projections. Accurate forecasts provide major competitive advantages.

Business Analytics: Leveraging Data for Strategic Decisions

Business Analytics, also known as predictive analytics, machine learning, or data mining, uses software to analyze vast volumes of data. This technique helps executives make informed decisions by assessing an organization's aggregate experience. Data mining can reveal insights from interactions with customers, suppliers, distributors, employees, and rivals, generating predictive models.

Business analytics is essential for:

• Risk Management: Measuring and managing business risks.
• Competitive Advantage: Providing proprietary business intelligence, such as understanding customer behavior (who chooses your firm, who defects, and why).
• Process Improvement: Identifying areas where competitors are weak, allowing targeted marketing and sales activities.
• Learning from Experience: Enabling firms to make current and future decisions based on prior information.

Conclusion: The Importance of External Assessment

Increasing turbulence in global markets and industries underscores the vital role of the external audit in the strategic-management process. Organizations that fail to mobilize and empower their teams to identify, monitor, forecast, and evaluate key external forces risk missing opportunities, pursuing ineffective strategies, and facing organizational demise. A systematic and effective external audit system, particularly for multinational firms, is a cornerstone of successful strategic management.

Frequently Asked Questions about External Assessment

Why is an external assessment important in strategic management?

An external assessment helps organizations identify and evaluate opportunities and threats that exist outside their direct control. By understanding these factors, firms can develop strategies to capitalize on favorable conditions and mitigate risks, leading to a stronger competitive position and long-term success.

What are the main categories of external forces to consider?

The main categories of external forces include economic, social, cultural, demographic, natural environment, political, governmental, legal, technological, and competitive forces. Each category contains specific variables that can significantly impact an organization's strategic choices.

How does Porter's Five-Forces Model relate to external assessment?

Porter's Five-Forces Model is a key framework within external assessment, specifically for analyzing competitive forces within an industry. It helps strategists understand the intensity of competition by examining rivalry among existing firms, the threat of new entrants, the threat of substitute products, and the bargaining power of suppliers and buyers.

What role does technology play in external assessment?

Technology is both an external force to be assessed and a tool for assessment. Technological advancements create new opportunities and threats (e.g., AI, IoT). Additionally, information technology, including business analytics and data mining, provides powerful tools for gathering, assimilating, and evaluating external information more effectively.

How can a company ensure its external assessment is effective?

To ensure an effective external assessment, a company should involve a broad range of managers and employees, gather competitive intelligence from diverse sources (published, unpublished, grey literature), assimilate and evaluate information collectively, and critically prioritize key actionable opportunities and threats. Making reasonable, educated assumptions about future trends is also vital.