The

External
Assessment

Chapter Three

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 External Audit
External audit
focuses on identifying and evaluating trends
and events beyond the control of a single firm
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

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The Nature of an External Audit
The external audit 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.

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A Comprehensive Strategic-
Management Model

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 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
5. competitive forces

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Relationships Between Key External
Forces and an Organization

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 The Process of Performing an
External Audit

Information should be assimilated and

evaluated

A final list of the most important key

external factors should be communicated

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 Economic Forces
 Shift to service economy  Income differences by region
 Availability of credit and consumer group
 Level of disposable income  Price fluctuations
 Propensity of people to spend  Foreign countries’ economic
 Interest rates conditions
  Monetary and Fiscal policy
Inflation rates
  Stock market trends
GDP trends
  Tax rate variation by country
Consumption patterns and state
 Unemployment trends  European Economic
 Value of the dollar Community (EEC) policies
 Import/Export factors  Organization of Petroleum
 Demand shifts for different Exporting Countries (OPEC)
goods and services policies

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Key Social, Cultural, Demographic, and
Natural Environmental Variables
 Population changes by race,  Attitudes toward retirement
age, and geographic area  Energy conservation
 Regional changes in tastes and  Attitudes toward product
preferences quality
 Number of marriages  Attitudes toward customer
 Number of divorces service
 Number of births  Pollution control
 Number of deaths  Attitudes toward foreign
 Immigration and emigration peoples
rates  Energy conservation
 Social Security programs  Social programs
 Life expectancy rates  Number of churches
 Per capita income  Number of church members
 Social media pervasiveness  Social responsibility issues

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 Political, Governmental, and
Legal Forces
The increasing global interdependence
among economies, markets, governments,
and organizations makes it imperative that
firms consider the possible impact of
political variables on the formulation and
implementation of competitive strategies.

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 Political, Government, and
Legal Variables

 Environmental  USA vs. other country

regulations relationships
 Political conditions in
 Number of patents foreign countries
 Changes in patent laws  Global price of oil
 Equal employment laws changes
 Local, state, and federal
 Level of defense laws
expenditures  Import–export regulations
 Unionization trends  Tariffs
 Antitrust legislation  Local, state, and national
elections

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 Technological Forces
New technologies such as:
the Internet of Things
3D printing
the cloud
mobile devices
biotech
analytics
autotech
robotics and
artificial intelligence
are fueling innovation in many industries, and impacting
strategic-planning decisions.
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 Competitive Forces
An important part of an external audit is
identifying rival firms and determining their
strengths, weaknesses, capabilities,
opportunities, threats, objectives, and
strategies

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 Competitive Forces
Characteristics of the most competitive
companies:
1. Strive to continually increase market share
2. Use the vision/mission as a guide for all decisions
3. Whether it's broke or not, fix it–make it better
4. Continually adapt, innovate, improve
5. Acquisition is essential to growth
6. Hire and retain the best employees and managers
possible
7. Strive to stay cost-competitive on a global basis
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Competitive Intelligence Programs
Competitive intelligence (CI)
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

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 Competitive Intelligence Programs
The three basic objectives of a CI program are:

[Link] provide a general understanding of an industry and

its competitors

[Link] identify areas in which competitors are vulnerable

and to assess the impact strategic actions would have on
competitors

[Link] identify potential moves that a competitor might

make that would endanger a firm's position in the market

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The Five-Forces Model of
Competition

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 The Five-Forces Model of
Competition
1. Identify key aspects or elements of each
competitive force that impact the firm.

2. Evaluate how strong and important each

element is for the firm.

3. Decide whether the collective strength of

the elements is worth the firm entering or
staying in the industry.
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 The Five-Forces Model
Rivalry among competing firms

Most powerful of the five forces

Focus on competitive advantage of

strategies over other firms

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 The Five-Forces Model
Potential Entry of New
Competitors

Barriers to entry are important

Quality, pricing, and marketing can

overcome barriers

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 Barriers to Entry
 Need to gain economies of scale quickly
 Need to gain technology and specialized know-
how
 Lack of experience
 Strong customer loyalty
 Strong brand preferences
 Large capital requirements
 Lack of adequate distribution channels

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 Barriers to Entry
 Government regulatory policies
 Tariffs
 Lack of access to raw materials
 Possession of patents
 Undesirable locations
 Counterattack by entrenched firms
 Potential saturation of the market

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 The Five-Forces Model
Potential development of
substitute products
Pressure increases when:

Prices of substitutes decrease

Consumers' switching costs decrease

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 The Five-Forces Model
Bargaining Power of Suppliers is
increased when (there are):
Few suppliers
Few substitutes
Costs of switching raw materials is high
Backward integration is gaining control or
ownership of suppliers

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 The Five-Forces Model
Bargaining power of consumers
Customers being concentrated or
buying in volume affects intensity of
competition
Consumer power is higher where
products are standard or
undifferentiated

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Forecasting Tools and Techniques
Forecasts

educated assumptions about future

trends and events

no forecast is perfect

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 Industry Analysis: The External Factor
Evaluation (EFE) Matrix

Summarize and evaluate these factors:

Economic  Political
Social  Governmental
Cultural  Legal
Demographic  Technological
Environmental  Competitive

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