EXTERNAL ASSESSMENT:The Nature of an External Audit, Economic Forces

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Strategic Management MGT603

Lesson 7

EXTERNAL ASSESSMENT

Objectives:

This lecture examines the tools and concepts needed to conduct an external strategic-management audit.

The Nature of an External Audit

Economic Forces

External Assessment:

Prediction is very difficult, especially about the future.

Neils Bohr

External Strategic Management Audit Is also called:

1. Environmental scanning

2. Industry analysis

In this lecture we will examine the tools and concepts needed to conduct an external strategic-management

audit (sometimes called environmental scanning or industry analysis). An external audit focuses on identifying and

evaluating trends and events beyond the control of a single firm, such as increased foreign competition,

population shifts to the Sunbelt, an aging society, information technology, and the computer revolution. An

external audit 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. This

chapter presents a practical framework for gathering, assimilating, and analyzing external information.

Key External Forces

External forces can be divided into five broad categories:

Economic forces;

Social, cultural, demographic, and environmental forces;

Political, governmental, and legal forces;

Technological forces; and

Competitive forces.

Relationships among these forces and an organization are depicted in Figure External trends and events

significantly affect all products, services, markets, and organizations in the world.

Relationships between Key External Forces and an Organization are shown in the above figure.

Changes in external forces translate into changes in consumer demand for both industrial and consumer

products and services. External forces affect the types of products developed, the nature of positioning and

market segmentation strategies, the types of services offered, and the choice of businesses to acquire or sell.

External forces directly affect both suppliers and distributors. Identifying and evaluating external

opportunities and threats enables organizations to develop a clear mission, to design strategies to achieve

long-term objectives, and to develop policies to achieve annual objectives.

Strategic Management MGT603

The increasing complexity of business today is evidenced by more countries' developing the capacity and

will to compete aggressively in world markets. Foreign businesses and countries are willing to learn, adapt,

innovate, and invent to compete successfully in the marketplace. There are more competitive new

technologies in Europe and the Far East today than ever before. American businesses can no longer beat

foreign competitors with ease.

The Nature of an External Audit

The purpose of an external audit is to develop a finite list of opportunities that could benefit a firm and

threats that should be avoided. As the term finite suggests, the external audit is not aimed at developing an

exhaustive list of every possible factor that could influence the business; rather, it 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. Figure below illustrates how the external audit fits into the strategic-

management process.

A Comprehensive Strategic-Management Model

The Process of Performing an External Audit

The process of performing an external audit must involve as many managers and employees as possible. As

emphasized in earlier discussions, involvement in the strategic-management process can lead to

understanding and commitment from organizational members. Individuals appreciate having the

opportunity to contribute ideas and to gain a better understanding of their firm's industry, competitors, and

markets.

To perform an external audit, a company first must gather competitive intelligence and information about

social, cultural, demographic, environmental, economic, political, legal, governmental, and technological

trends. Individuals can be asked to monitor various sources of information such as key magazines, trade

journals, and newspapers. These persons can submit periodic scanning reports to a committee of managers

charged with performing the external audit. This approach provides a continuous stream of timely strategic

information and involves many individuals in the external-audit process. The Internet provides another

source for gathering strategic information, as do corporate, university, and public libraries. Suppliers,

distributors, salespersons, customers, and competitors represent other sources of vital information.

Strategic Management MGT603

Once information is gathered, it should be assimilated and evaluated. A meeting or series of meetings of

managers is needed to collectively identify the most important opportunities and threats facing the firm.

These key external factors should be listed on flip charts or a blackboard. A prioritized list of these factors

could be obtained by requesting all managers to rank the factors identified, from 1 for the most important

opportunity/threat to 20 for the least important opportunity/threat. These key external factors can vary

over time and by industry. Relationships with suppliers or distributors are often a critical success factor.

Other variables commonly used include market share, breadth of competing products, world economies,

foreign affiliates, proprietary and key account advantages, price competitiveness, technological

advancements, population shifts, interest rates, and pollution abatement.

Freund emphasized that these key external factors should be:

Important to achieving long-term and annual objectives,

Measurable,

Applicable to all competing firms, and

Hierarchical in the sense that some will pertain to the overall company and others will be more

narrowly focused on functional or divisional areas.

A final list of the most important key external factors should be communicated and distributed widely in

the organization. Both opportunities and threats can be key external factors.

Economic Forces

Economic factors have a direct impact on the potential attractiveness of various strategies. For example, as

interest rates rise, then funds needed for capital expansion become more costly or unavailable. Also, as

interest rates rise, discretionary income declines, and the demand for discretionary goods falls. As stock

prices increase, the desirability of equity as a source of capital for market development increases. Also, as

the market rises, consumer and business wealth expands. A summary of economic variables that often

represent opportunities and threats for organizations is provided in Table given below.

Key Economic Variables to Be Monitored

Shift to a service economy in

the United States

Import/export factors

Availability of credit

Demand shifts for different categories of

Level of disposable income

goods and services

Propensity of people to spend

Income differences by region and

consumer groups

Interest rates

Price fluctuations

Inflation rates

Money market rates

Exportation of labor and capital from

the United States

Federal government budget

Monetary policies

deficits

Gross domestic product trend

Fiscal policies

Consumption patterns

Tax rates

European Economic Community (ECC)

Unemployment trends

policies

Worker productivity levels

Organization of Petroleum Exporting

Value of the dollar in world

Countries (OPEC) policies

markets

Coalitions

Lesser

Developed

Stock market trends

Countries (LDC) policies

Foreign countries' economic

conditions

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