Chapter 3

The External Audit

The Nature of An External Audit

The purpose of external audit is to develop
a finite list of opportunities that could
benefit a firm and threats that should be
avoided.
Identify key variables that offer actionable
responses.

KEY EXTERNAL FORCES

Economic Forces,
Social, Cultural,
Demographic,
And Environmental
Forces.
Political, Legal,
And Govt Forces
Technological
Forces
Competitive Forces

Competitors
Suppliers
Distributors
Creditors
Customers
Employees
Communities
Managers
Stockholders
Labor Unions
Governments
Trade Assoc
Products, Service
Market
Natural Enviro.
Spec Interest Group

Organizations
Opportunities
And
Threats

The Process of Performing An

External Audit
Involve as many managers and employees as
possible.
Gather competitive intelligence and information
about social, cultural, demographic,
environmental, economic, political, legal, govtal,
and technological trends.
Managers and employees identify opportunities
and threats.

Economic Forces
Economic Factors have direct impact on the
potential attractiveness of various strategies.
Availability of credit, level of disposable
income, Interest rate, inflation, Economies
of scale, GDP, Unemployment, Govt
Budget Defisit, Consumption pattern, Stock
market trends, etc.

Social, Cultural, Demographic,

and Environmental Forces

Population
Childbearing rates
Number of Marriage
Number of divorce
Pollution Control
Average level of Education
Energy Conservation
Etc (see page 112)

Political, Governmental, and

Legal Forces
Represent opportunities and threats for both
small and large organization.
Some variables: Government regulation, tax
laws, environmental protection laws, special
tariffs.
etc

Technological Forces
Technological advances dramatically can affect
organization products, services, market, suppliers,
distributors, competitors, customers, marketing
practices, and competitive positions.
Technological advances can affect products life
cycle.
Technological advances affect the process of
production.

Competitive Forces
What are the major competitors strengths?
What are the major competitors
weaknesses?
What are the major competitors objective
and strategies
Etc
(please see page 118)

Sources of External Information

Indexes
Internet

Competitive Analysis: Porters

Five Forces Model
Rivalry among competitive firms
Potential entry of new competitor
Potential development of substitute
products.
Bargaining power of suppliers
Bargaining power of consumers

The intensity Rivalry increases

when

Increase the number of competitors

Competitors have equal ability
Demand of product decreases
Price cutting become common
Barrier to leave market high
Fixed cost high
When product is perishable
When rivals have diverse strategies
When industry profit decreases

Potential Entry of New

Competitors
Barriers:
Economic of scale
Technology
Lack of experience
Lack of distribution channel
Government regulatory
Tariff
Access to raw materials
Patent
Etc.

Potential Development of
Substitute Products
Competitive pressure arising from substitute
products increase as the relative price of
substitute product declines and as
consumers switching cost decrease.

Bargaining Power of Suppliers

Competition intensifies when:
Large number of suppliers
A few substitute of raw materials
The cost of switching materials is costly

Bargaining Power of Consumers

Competition intensifies when:

Large customers
Concentrated customers
Buy in volume
Standardized or undifferentiated products

External Factor Evaluation

Listing
Weighing
Rating
Multiplying
Sum weighed score

Listing
List key external factors as identified in the
process of external-audit factor.
Include a total of 10 to 20 factors, including
both opportunities and threats affecting the
firm and its industry.
Be as specific as possible using %, ratios,
comparative numbers

Weighing
Assign 0.0 for not important and 1.0 for
very important factors.
The sum of all weights assigned to the
factors must equal to 1.0

Rating
Assign a 1 to 4 rating to each critical success
factor to indicate how effectively the firms
current strategies respond to the factor.
4 = superior response; 3 = above average
response; 2 = average response; 1 = poor response.
Ratings are base on effectiveness of the firms
strategies.
Rating = company based; weighing = industry
weight.

Multiplying and Summing

Multiply each factors weight.
Summing the weighted score

Meaning of Weighted Score

Score 1.00 to 4.00; Average 2.5
Total of 4.0 indicates that an organization is
responding in outstanding way to existing
opportunities and threats.
Total of 1.0 indicates that the organization
strategies are not capitalizing on
opportunities or avoiding external threats

EFE MATRIX