The Nature of an External Audit

o Purpose: develop a finite (variables that offer actionable responses) list

of opportunities and threats
o Act offensively or defensively to take advantage of opportunities or
minimize impacts of potential threats
o Key External Factors:
Economic factors
Social, cultural, demographic and natural environment forces
Political, governmental and legal forces
Technological forces
Competitive forces
o Changes in external forces:
Changes in customer demand for products and services
Types of products developed
Nature of positioning and market segmentation strategies
Type of services offered
Choice of businesses to acquire or sell
o Identifying and evaluating EO:
Clear mission
Strategies to achieve long-term objectives
Policies to achieve annual objectives
o The Process of Performing an External Audit
GATHERING (Involvement -> understanding and commitment)
Competitive intelligence from the five forces
Continuous stream of timely strategic information and many
individuals in the process (printed, Internet and other sources)
ASSIMILATED AND EVALUATED
Series of meetings to collectively identify and evaluate
Key External Factors should be:
Important to achieving long-term and annual objectives
Measurable
Applicable to all competing firms
Hierarchical in the sense that some will pertain to the
overall company and others will be more narrowly focused
on functional or divisional area
The Industrial Organization (I/O) View
o Advocates that external factors are more important
o Michael Porter contend that organizational performance will be
primarily determined by industry forces
o Competitive advantage is determined by competitive positioning within
an industry
o Firm performance 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
o Effective integration and understanding of both external and internal
factors is the key to securing and keeping a competitive advantage

Economic Forces
o Improved customer service, immediate availability, trouble-free
operation of products and dependable maintenance and repair services
o More willing than ever to pay for good service if it limits inconvenience
o Interest rates; low value of dollar means lower imports and higher
exports, it helps US companies competitiveness in world markets
o Low value of dollar:
Stave off risks of deflation
Reduces trade deficit
Raises foreign sales and profits of domestic firms
Foreign countries lower interest rates and loosen fiscal policy
Stimulates worldwide economic expansion
o Slumping economy worldwide and depressed prices of assets and
slowed migration of people
Social, Cultural, Demographic and Natural Environment Forces
o Racial and ethnic majority
o Lifestyle and consumption, age
Political, Governmental and Legal Forces
Technological Forces
o Revolutionary technological changes and discoveries
o Internet
Changed the very nature of opportunities and threats by altering
the life cycles of products, increasing the speed of distribution,
creating new products and services, erasing limitations of
traditional geographic markets and changing the historical
trade-off between production standardization and flexibility
Chief Information Officer and Chief Technology Officer ensure
that information needed to formulate, implement and evaluate
strategies available when and when it is needed; developing,
maintaining and updating a companys information database
Competitive Forces
o Collecting and evaluating information on competitors
o Multidivisional firms do not provide sales and profit information
o Private firms do not publish any financial or marketing information
o Seven Characteristics of Competitive Companies:
Market share
Understand and remember precisely what business you are in
Whether its broke or not, fix it.
Innovate of evaporate.
Acquisition is essential to growth.
People make a difference.
No substitute for quality and be cost-competitive.
o Competitive Intelligence Programs
Systematic and ethical process for gathering and analyzing
information about the competitions activities and general trends
to further a businesss own goals

More information and knowledge = formulation and

implementation of effective strategies
Hiring top executives of rival firms; computer spies, information
available online may be copied and used by rivals
Misconceptions about business intelligence:
Requires a lot of resources
Violates antitrust laws and is a form of espionage
Unethical business practice
Three Basic Objectives of a CI program:
Provide a general understanding of an industry and its
competitors
Identify areas in which competitors are vulnerable and to
assess the impact strategic actions would have on
competitors
Identify potential moves that a competitor might make
that would endanger a firms position in the market
Important for formulation, implementation, evaluation; assess
consistent and verifiable information in decision-making
Competitive Analysis planning ,collecting data, analyzing data,
facilitating the process and disseminating intelligence
What, where and who
CI is not espionage because 95% of the information a company
needs to make is available and accessible to the public.
o Market Commonality and Resource Similarity
Competitors offer similar products and services ; can be
geographic areas or segments
Market commonality number and significance of markets
that a firm competes with rivals
Resources similarity type and amount of a firms internal
resources are comparable to a rival
Competitive Analysis: Porters Five-Forces Model
o Intensity of competition highest in lower-return industries
o Five Forces:
Rivalry among competing firms
Potential entry of new competitors
Potential development of substitute products
Bargaining power of suppliers
Bargaining power of consumers
Three Steps in Using Porters Five-Forces Model
Identify key elements of each competitive force that could
impact the firm
Evaluate how strong and important these factors are
Decide whether the collective strength of the elements is
worth the firm entering or staying in the industry
o Rivalry Among Competing Firms
Usually the most powerful; strategies can be successful if they
would be able to provide competitive advantage over rival firms

Free-flowing information; easy price comparisons; consumer can

win
High intensity of rivalry: switch brands easily, high number of
competitors, more equal in size and capability, decrease
demand, increase barriers for leaving
Competition intensifies industry profits decline making it
unattractive
Potential Entry of New Competitors
Easily enter intensity of competition increases
Need to gain economies of scale quickly, need to gain
technology and specialized know-how the lack of experience,
strong customer loyalty, strong brand preference, large capital
requirements, lack of adequate distribution channels,
government regulatory policies, tariffs, lack of access to raw
material etc.
New Firms: high quality products, lower prices and substantial
marketing resources
Strategists job:
Identify potential new firms entering the market
Monitor the new rival firms strategies
Counterattack as needed
Capitalize on existing strengths and opportunities
Deter new entrants:
Lowering prices
Extending warranties
Adding features
Offering financing specials
Potential Development of Substitute Products
Put a ceiling on price that can be charged before consumers will
switch to the substitute product
Substitute products pressure increase as relative price of
substitute products declines and consumers switching costs
decrease
Competitive strength of substitute products: measure by market
share, plans for increased capacity and market penetration
Bargaining Power of Suppliers
Large number of suppliers when there are only a few goods
substitute raw materials
Cost of switching raw materials is especially costly
Reasonable prices, improved quality, development of new
services, JIT deliveries and reduced inventory costs, enhancing
long-term profitability
Backward integration to gain control of suppliers (unreliable,
costly or not meeting demands)
More economical to use outside suppliers
Forging strategic partnerships:
Reduce inventory and logistics costs

 Speed and availability of next-generation components

Enhance the quality of the parts and components being
supplied and reduce defect rates
Squeeze out important cost savings