External Environment and Internal Strategic Audit Analysis

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Part 1

Analysis of external environment

Introduction

An organisation’s environment consists of a set of interest groups and actors, such as the shareholders, owners, customers, managers, competitors, suppliers and industry regulators. They directly or indirectly affect the organisation’s operation. This section critically evaluates how firms may seek to analyse their external environment.

While reviewing policy options, firms have to consider external environment threats, opportunities and competitive advantage. Much of the need to analyse the external environment is prompted by opportunities and uncertainties presented by the external environment (Voiculet et al. 2010). In the contemporary business environment, this has been pushed by e-commerce. For instance, Amazon.com based its strategy on online books sales for close to a year before Barnes & Noble had even considered the use of websites. Accordingly, Barnes & Noble witnessed tremendous success with its bookstore concept despite the lost opportunities in using e-commerce in its early attempt. Despite committing some US$100 million to compete against Amazon.com, Barnes & Noble’s Barnesandnoble.com managed to sell only 15 percent of books online compared to Amazon.com’s 75 percent. In such a case, proper analysis of its external environment could have given Barnes & Noble due advantage ahead of Amazon.

Essentially therefore, the external environment is infinite and comprises everything that is outside the organisation, and which influence the organisation either directly or indirectly (See Figure 1). The external organisation can be better understood through analysis of its domain with external sectors, or selected field of operation (Gupta 2009; Anon n.d.). For instance, Barnes & Noble had overlooked a critical component of its domain when the book selling environment had changed by e-commerce started to gain shape. This gave Amazon huge competitive advantage.

Figure SEQ Figure * ARABIC 1: External environment (Gupta 2009).

Analysis of the competitive environment would therefore have required Barnes & Noble to explore the features and extent of competitive forces and in return positioning them to attain sustainable competitive advantage over Amazon.com. The competitive forces in the external environment include the competitive forces and organisation confronted including, suppliers, industry, customers, products, and potential entrants (Grundy 2006). In such as case, organisations can use Porter’s 5 Forces model to analyse their competitive environment. The model enables organisations to understand the strength of their existing competitive position.

Figure SEQ Figure * ARABIC 2: Porter’s 5 Forces Analysis

The model proposes 4 factors for determining an organisation’s competitive advantage. These include the bargaining power of suppliers, bargaining power of customers, threat of substitutes and threat of new entrants (See Figure 1). In using the Porter’s Five Forces model, organisations can analyse their entry competitors, or how easy or convenient it is for new competitors to begin competing and the barriers they need to place (Grundy 2006). For instance, Barnes & Noble could have discovered the potential of Amazon.com to enter the industry since there was no barrier placed in online retail.

Organisations also get to understand the threat of substitutes how easy it is for their products to be substituted or replicated with other products (Grundy 2006). Barnes & Noble overlooked the idea that online sales could substitute its physical book delivery service. Firms also get to understand the bargaining power of buyers, or the strength of the position of buyers and how they can work collaboratively to order larger volumes. Hence, firms get to understand the level of concentration of customers and standardization of the products. It also becomes aware of its buyers.

Using Porter’s Five Forces model, organisations also get to understand the supplier’s bargaining power, or the strength of the position of sellers and whether the supplier has monopoly or many potential suppliers. Firms also get to understand the rivalry existing among the existing competitors, or whether there is a strong competition between the players.

Conclusion

Overall, effective running of an organisation requires harmonising the external environment of the organisation and the internal environment. The external organisation can be understood better through analysis of its domain with external sectors, or selected field of operation. This is achieved by using Porters Five Forces model to assess the competitive forces, which consist of the external environment factors, such as suppliers, industry, customers, products, and potential entrants.

Part 2

Internal strategic audit

Introduction

Internal strategic audit is a process of independent evaluation, directed at examining and assessing a firm’s internal control system’s adequacy, effectiveness and efficiency, in addition to the quality performance of its key operational areas. Performing internal audit allows organizations to understand their strengths and weaknesses in a variety of ways (Pinto et al. 2014). This section identifies how an internal strategic audit can result in better understanding of an organisation’s strengths and weaknesses.

Strategic audit allow the management to take a critical view of the environment in which they operate as well as the organisation itself. It allows an organization to assess the qualities that enable it to attain the organizational goals and objectives. The list of possible strengths and weaknesses is significant in initiating strategic thinking and focusing on areas where the firm is adding or losing value (Duncan et al. 1998).

An organisation is also able to understand the weaknesses and strengths it has compared to competitors and the type of internal strategies its needs to set up to achieve a competitive edge. According to the resource-based theory, the key to achieving sustained competitive advantage is adopting strategies that are valuable and yet cannot be replicated (Aldehayyat et al. 2011).

Internal strategic audit also enables an organisation to understand the source of its competitive advantage. Once the strategic strengths and weaknesses have been transformed in terms of capabilities and resources, the capacity to create competitive advantage is attained using systematic categorisation (Duncan et al. 1998).

The strategic strengths and weaknesses allow businesses to evaluate the competitively relevant capabilities and resources in respect to the likely broad strategies that are the business’ most competitive means to attaining competitive edge (Anon 2009).

An organization also becomes better placed to understand its beneficial aspects or capabilities, such as process capabilities, human competencies and financial resources. It also gets to understand certain aspects that prevent it from attaining its goals and organizational growth. This makes it easy to minimize and eliminate these weaknesses (Clardy 2013).

It enables an organization to determine its ‘strategic advantage factors’, which consist of the competitive advantage within the functional areas of an industry, such as research and development, marketing, human resources, management structure operations management and production.

Auditing each functional areas of the organization also enables it to identify its core competencies in executing particular task thus developing a profile of its skills, resources and capabilities. These can be leveraged to improve performance (Arasa & K’Obonyo 2012).

With the available data on, the internal audit goes forth to identify the strengths and weaknesses by assessing the attributes of strategic factors essential for success or using comparative assessment based on different standards such as through historical comparison, where past results are compared with the present ones, or comparing the performance with that of the competitors (Clardy 2013).

Conclusion

In sum, internal strategic audits consists of an independent evaluation, directed at examining and assessing a firm’s internal control system’s adequacy, effectiveness and efficiency, in addition to the quality performance of its key operational areas. It allows the management to take a critical view of the environment in which they operate, as well as the organisation itself. An organization is also able to assess the qualities that enable it attain the organizational goals and objectives.

Reference List

Aldehayyat, J &, Twaissi, N & Jordan, M 2011, “Strategic Planning and Corporate Performance Relationship in Small Business Firms: Evidence from a Middle East Country Context,” International Journal of Business and Management Vol. 6, No. 8, pp.255-260

Anon 2009, Strategic analysis and choice, viewed 24 June 2014, <https://www.icsa.org.uk/assets/files/pdfs/BusinessPractice_and_IQS_docs/studytexts/stratandoppsmanagement2/e_SOM_5thEd_StudyText_Chapter3.pdf>

Anon n.d., The External Environment, chapter 4, viewed 24 June 2014, http://www.swlearning.com/management/daft/Pepperdine/ch04_032402097x.pdf

Arasa, R & K’Obonyo, P 2012, “The Relationship between Strategic Planning and Firm Performance,” International Journal of Humanities and Social Science Vol. 2 No. 22, pp.201-209

Clardy, A 2013, “Strengths vs. Strong Position: Rethinking the Nature of SWOT Analysis,” Modern Management Science & Engineering vol. 1, no. 1, pp.11-107

Duncan, J, Ginter, P & Swayne, L 1998, “Competitive advantage and internal organizational assessment,” ‘ Academy al Managemsnl Executive, vol. 12, no. 3, pp.7-12

Gupta, A 2009, Organisation’s External Environmental, viewed 24 June 2014, http://practical-management.com/Organization-Development/Organization-s-External-Environment.html

Grundy, T 2006, “Rethinking and reinventing Michael Porter’s five forces model”, Strategic Change vol. 15 no. 5, pp.213-229

Pinto, J, Pereira, A, Imoniana, J & Reinaldo, M 2014, “Role of internal audit in managerial practice in organisations,” African Journal of Business Management, vol. 8 no. 2, p.68-79

Voiculet, A, Belu, N, Elena, D & RIzeam C 2010, The impact of external environment on organizational development strategy, MPRA Paper No. 26303, 2010