The company audit

9.4 The company audit

Many books that introduce the concept of the company audit using a SWOT (strengths, weakness, opportunities, threats) and PEST (political, economic, social, technical) analysis usually fail to suggest methods by which the results could be assessed and measured. Often the reason for this is that it suggests a degree of ambiguity in the models outside the scope of the text. Any form of assessment (and this is especially true in strategic management) has with it a degree of ambiguity. This ambiguity should be translated into some form of risk measurement.

Decision-making is about risk assessment. Almost every decision we make has an element of risk attached to it, some of which is bounded by experience, intuition or a true risk assessment. Risk assessment is difficult, and often not well judged. Consider an individual’s fear of flying. It is well known that we are more at risk in the taxi driving us to the airport than we are in the hands of the airlines, yet for many otherwise rational individuals the fear persists. We make more risky yet rational assumptions about the environment in which we work. Our analysis for simple tasks, such as arriving at work on time, is often rational but more risky. Many people will catch a train that gets them into the office 5 minutes before the daily deadline although, knowing the vagaries of the UK transport system, an error of margin of 5 minutes on a train journey of, say, 45 minutes is probably cutting it fine. A risk aversion approach would be to catch the earlier train in order to reduce the risk and the margin for error. The reasons we don’t do this are many (crowded trains, time between service, lift to station etc.). It would also be true to say that life would be unmanageable if we operated at all times by a total risk-aversion philosophy. The risk of the train to work being late could be moderately high, but the impact on lifestyle or career quite low. However, on an interview day we will catch the earlier train. Under these circumstances, we try to minimise the risk.

We therefore do have an appreciation of the chance or level of risk and the impact that risk will have. These two variables, level and impact, become the axes on a risk analysis chart. It is not a trivial task to quantify this risk. In general, the best we can do is to assess the level of risk as low (L), medium (M) or high (H), and similarly assess its impact as L, M or H (see Chapter 14 for more details on risk assessment). Suffice to say at this stage that should any element in an audit or SWOT or PEST analysis throw up a great many Ms and Hs in the analysis, further work is needed.

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The new business idea

At their simplest, SWOT and PEST analyses provide an opportunity to list all the issues that affect the organisation.

Consider Case 2. Here we list some of the business factors involved:

1 Strengths 䊉 new idea

䊉 requires little specialist equipement 䊉 profit/unit very attractive; could become a cash cow for the

company.

2 Weaknesses 䊉 undercapitalised

䊉 partners have no business track record 䊉 why would buyers take the risk?

3 Opportunities 䊉 key market segments not currently addressed

䊉 initial potential customers well known to business 䊉 partner with a market leader to shelter company and product

growth 䊉 other ideas ready to explore.

4 Threats 䊉 current market leaders will adopt the idea

䊉 other start-up companies with similar ideas might exist 䊉 current market changes very quickly; only have 12 months to

market.

The two (albeit basic) tools of SWOT and PEST analysis, used in conjunction with an external audit, can provide a comprehensive review and evaluation of the organisation’s business environment.

Below are some of the elements considered in an external audit of a media company. As an example, the macro economic environment has some further detail included.

1 Macro economic environment

(a) Government policies – UK offers 100 per cent capital allowances

write-off in the first year for any qualifying film costing up to £15 million. If a film costs more than £15 million, the production costs can

be written off over 3 years.

Managing in the Media

(b) Social/cultural – demographics (age distribution, potential audience),

location of population, wealth distribution, social attitudes (say, towards health) or other elements within.

(c) Political/legal/fiscal – in this particular area one would look at the

nationals, internationals (EU), government buying and multinationals. All of these elements will have an impact on the behaviour of the business.

(d) Economic – what is the current stability of the economic environ-

ment in which the business is functioning? Is it stable? Is it going through a boom cycle? Depression? What fluctuations, interest rate, price control, credit controls, tax rates will have an impact on the business to date? For example, government tax breaks introduced in 1997 meant that British films could write off 100 per cent production costs.

(e) Technological – most commentators on the film and television

industry suggest that it is one of the most technically driven industries there is. In fact, one of the major criticisms of some of the programmes in recent years has been that it is all technology driven with no content.

2 Market environment

(a) Total market profile – for example the segment size and potential

growth. (b) Market characteristics – trends in buyer behaviour and development

in products related to technology or customer behaviour. (c) Buying characteristics – customer profile. (d) Features of products available.

3 Competitive environment (a) Competitor market shares. (b) Marketing skills. (c) Marketing mix. (d) Product features, prices and conditions.

4 Distribution methods – method and extent of promotion.

5 Industry structure.

6 Industry practices.

7 Barriers to entry and industry profitability. Most of the above has been elegantly presented in Michael Porter’s five

forces model. Porter 6 suggests:

To establish a strategic agenda for dealing with these contending currents and growing despite them a company must understand how

Strategic management

they work in the industry and how they direct the company in a particular situation.

He goes on to say: The essence of strategy formulation is coping with competition.