MODULE 2 – STRATEGIC MANAGEMENT

2.0 Learning Outcomes and Topics

Intended Learning Outcomes
At the end of the topic, as a student you must be able to:
1. Determine the nature and importance of external and internal audit
2. Identify the components of Porter's Five Model
3. Apply the tools and techniques in Internal and External assessment
4. Create a SWOT analysis.
Module Topics:
2.1 External Assessment
2.1.1 The Nature of External Audit
2.1.2 External Forces
2.1.3 Competitive Analysis: Porter's Five Model
2.1.4 Forecasting Tool and Techniques
2.2 Internal Assessment
2.2.1 The Nature of Internal Audit
2.2.2 Internal Forces
2.2.3 Internal Factor Evaluation(IFE) Matrix

2.1.1 The Nature of an External Audit

The purpose of an external audit is to develop a finite list of opportunities that could benefit a firm and threats that should be avoided. As the term finite
suggests, the external audit is not aimed at developing an exhaustive list of every possible factor that could influence the business; rather, it is aimed at
identifying key variables that offer actionable responses. Firms should be able to respond either offensively or defensively to the factors by formulating
strategies that take advantage of external opportunities or that minimize the impact of potential threats.

Key External Forces

External forces can be divided into five broad categories: (1) economic forces; (2) social, cultural, demographic, and natural environment forces; (3) political,
governmental, and legal forces; (4) technological forces; and (5) competitive forces.

Illustration below shows how the external audit fits into the strategic-management process.

Industrial Organization (I/O) view theorists contend that external factors in general and the industry in which a firm chooses to compete has a stronger
influence on the firm’s performance than do the internal functional decisions managers make in marketing, finance, and the like. Firm performance,
they contend, is primarily based more on industry properties, such as economies of scale, barriers to market entry, product differentiation, the economy, and
level of competitiveness than on internal resources, capabilities, structure, and operations.

2.1.2 External Forces

This topic identifies the various external forces/factors in details that affects business activities.
The external forces is also known as the PESTEL analysis which is divided into six categories:
To effectively capitalize on e-commerce, a number of organizations are establishing two new positions in their firms namely:
1. Chief Information Officer (CIO) - It is more of a manager, managing the overall external audit process.
2. Chief Technology Officer (CTO) - It is more a technician, focusing on technical issues such as data acquisition, data processing, decision-support
systems, and software and hardware acquisition.

It is quite important for the strategists to have an up-to-date information approach in the competitive environment, one of it is to have to have a competitive
intelligence and its program. Competitive intelligence(CI) is a systematic and ethical process for gathering and analyzing information about the
competitor’s activities and general business trends to further a business’s own goals.

There are two considerations in competing namely:

1. Market Commonality can be defined as the number and significance of markets that a firm competes in with rivals.
2. Resource similarity is the extent to which the type and amount of a firm’s internal resources are comparable to a rival.

In the presentation of case analysis the most widely use is the external environment only to Political, Economic, Social, Technological, Environmental and
Legal (PESTEL)

2.1.3 Competitive Analysis: Porter's Five Model

Porter’s Five-Forces Model of competitive analysis is a widely used approach for developing strategies in many industries. The intensity of competition
among firms varies widely across industries. Rivalry among existing firms is severe, new rivals can enter the industry with relative ease, and both suppliers
and customers can exercise considerable bargaining leverage.
Below is the Porter's Five Forces Model:

2.1.4 Forecasting Tools and Techniques

The success of external analysis requires forecasts of information.
Here are some of the Factors that affects Forecasting:
 Technological Innovation
 Cultural Changes
 New Products
 Improved Services
 Stronger Competitors
 Shifts in Governmental Priorities
 Changing Social Values
 Unstable Economic Conditions
 Unforeseen Events

Forecasting Methods can be qualitative and quantitative :

Qualitative Method - Rely on subjective opinions from one or more experts.
Quantitative Method - Rely on data and analytical techniques.

There are several Industry Analysis Forecast Techniques here are the two most commonly used the EFE and CPM.
External Factor Evaluation (EFE) Matrix
It allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and
competitive information.

Example of EFE Matrix:

The Competitive Profile Matrix (CPM)
The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and its particular strengths and weaknesses in relation to a sample firm’s strategic
position. The critical success factors in a CPM include both internal and external issues.

2.2.1 The Nature of Internal Audit

All organizations have strengths and weaknesses in the functional areas of business. No enterprise is equally strong or weak in all areas. San Miguel
Corporation for example is good in production/operations, likewise Jollibee for example is good in advertising/marketing and location
decision/operation, whereas Procter & Gamble is known for superb marketing. Internal strengths/weaknesses, coupled with external opportunities/threats
and a clear statement of mission, provide the basis for establishing objectives and strategies.
Objectives and strategies are established with the intention of capitalizing upon internal strengths and overcoming weaknesses.
Internal forces is very important because it provides a firm strength . A firm’s strengths that cannot be easily matched or imitated by competitors are
called distinctive competencies.
Building competitive advantages involves taking advantage of distinctive competencies. For example, 3M exploits its distinctive competence in research and
development by producing a wide range of innovative products. Strategies are designed in part to improve on a firm’s weaknesses, turning them into
strengths and maybe even into distinctive competencies.

Below is the process of gaining Competitive Advantage in a firm.

Weaknesses ⇒ Strengths ⇒ Distinctive Competencies ⇒ Competitive Advantage
Resource-Based View (RBV) is an approach to competitive advantage contends that internal resources are more important for a firm than external factors
in achieving and sustaining competitive advantage. Internal resources that can be grouped into three all-encompassing categories: physical resources,
human resources, and organizational resources.
Physical resources include all plant and equipment, location, technology, raw materials, machines
Human resources include all employees, training, experience, intelligence, knowledge, skills, abilities; and
Organizational resources include firm structure, planning processes, information systems,
patents, trademarks, copyrights, databases, and so on.
RBV theory asserts that resources are actually what helps a firm exploit opportunities and neutralize threats.
For a resource to be valuable, it must be either
1. rare,
2. hard to imitate, or
3. not easily substitutable.

2.2.2 Internal Forces

Internal Forces are factors within the company that affects business activities and those are the:
1. Management
2. Marketing
3. Production
4. Accounting and Finance
5. Research and Development

Management
Managing the business is the core activity to mobilize towards its direction. The functions of management consist of five basic activities:

Marketing
It can be described as the process of defining, anticipating, creating, and fulfilling customers’ needs and wants for products and services. There are seven
basic functions of marketing: (1) customer analysis, (2) selling products/services, (3) product and service planning, (4) pricing, (5) distribution, (6) marketing
research, and (7) opportunity analysis.
Finance/Accounting
Functions of Finance/Accounting: (According to James Van Horne)
1. Investment Decision (Capital Budgeting)
2. Financing Decision
3. Dividend Decision

Production/Operations
The production/operations function of a business consists of all those activities that transform inputs into goods and services. Production/operations
management deals with inputs, transformations, and outputs that vary across industries and markets. A manufacturing operation transforms or converts
inputs such as raw materials, labor, capital, machines, and facilities into finished goods and services.
Research and Development
Organizations invest in R&D because they believe that such an investment will lead to a superior product or service and will give them competitive
advantages. Research and development expenditures are directed at developing new products before competitors do, at improving product quality, or at
improving manufacturing processes to reduce costs.
Management Information Systems
A management information system’s purpose is to improve the performance of an enterprise by improving the quality of managerial decisions. An effective
information system thus collects, codes, stores, synthesizes, and presents information in such a manner that it answers important operating and strategic
questions. The heart of an information system is a database containing the kinds of records and data important to managers.

2.2.3 Internal Factor Evaluation(IFE) Matrix

IFE summarizes and evaluates the major strengths and weaknesses in the functional areas of a business, and it also provides a basis for identifying and
evaluating relationships among those areas. It is similar to the EFE Matrix and Competitive Profile Matrix

Module 2: Summary
The success of every organization is to understand the value of external and internal environment which is commonly known as the SWOT analysis.
Increasing turbulence in markets and industries around the world means the external audit has become an explicit and vital part of the strategic-
management process. The topics provides a framework for collecting and evaluating economic, social, cultural, demographic, environmental, political,
governmental, legal, technological, and competitive information. Firms that do not mobilize and empower their managers and employees to identify, monitor,
forecast, and evaluate key external forces may fail to anticipate emerging opportunities and threats and, consequently, may pursue ineffective strategies,
miss opportunities, and invite organizational demise. Firms not taking advantage of the Internet are technologically falling behind.

External assessment considers the value of Industrial Organizational View(I/O View) that company has a competitive advantage if they have competitive
intelligence. It comprises the analysis of the organizations threat and opportunities.

Internal assessment considers the value of Resource Based View(RBV) that whatever company resources available better than the others it will provide a
competitive edge that makes the organization unique. It comprises the analysis of the organizations strengths and weaknesses.

Management, marketing, finance/accounting, production/operations, research and development, and management information systems represent the core
operations of most businesses. A strategic-management audit of a firm’s internal operations is vital to organizational health. Many companies still prefer to
be judged solely on their bottom line performance. However, an increasing number of successful organizations are using the internal audit to gain
competitive advantages over rival firms. Systematic methodologies for performing strength-weakness assessments are not well developed in the strategic-
management literature, but it is clear that strategists must identify and evaluate internal strengths and weaknesses in order to effectively formulate and
choose among alternative strategies. The EFE Matrix, Competitive Profile Matrix, IFE Matrix, and clear statements of vision and mission provide the basic
information needed to successfully formulate competitive strategies.