TOPIC:

“External Assessment and Conducting external strategic management assessment/audit”

Chapter Objectives:
At the end our discussion, you are all expected to do the following:

1. Describe how to conduct an external strategic management audit.

2. Discuss major external forces that effect organization, economic, social culture, and
demographic, environmental and political governmental, legal technological and
Competitive.
3. Describe key sources of external information .
4. Discuss the importance of monitoring external trends and events.
5. Describe the trend toward cooperation among competitors.
External Assessment

An external audit focuses on identifying and evaluating trends and events beyond the control of
a single firm. 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. The purpose external assessment is to develop a finite list of
opportunities that could benefit a firm and threats that should be avoided. Finite mean it is aimed
at identifying key variables that offer actionable responses 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 topic
presents a practical framework for gathering, assimilating, and analyzing external information.

An external audit focuses around recognizing and assessing pattern sand occasions outside the
ability to control of a solitary firm, for example, expanded unfamiliar rivalry, populace
movements, a maturing society, buyer dread of voyaging, and financial exchange volatility. An
outside review uncovers key chances and dangers defying an association so directors can detail
procedures to make the most of the chances and maintain a strategic distance from or decrease
the effect of dangers. An audit of management performance with regard to external strategies
helps you identify problem areas and lets you correct strategic approaches that are not effective.
An assessment of the external environment shows you where change has happened and where
your strategic management no longer matches the demands of the marketplace. You can improve
business performance by periodically conducting such an audit.

THE NATURE OF AN EXTERNAL AUDIT

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. It is aimed at identifying key variables that offer actionable
responses. o Firms should be able to respond to the factors by formulating strategies that take
advantage of external opportunities or that minimize the impact of potential threats. The purpose
of an 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.

Key External Forces

Key External Forces External forces can be divided into five broad
categories:
1 economic forces
2 social, cultural, demographic, and environmental forces
3 political, governmental, and legal forces
4 technological forces
5 competitive forces.
Relationships among these forces and an organization are depicted in external trends and events
significantly affect all products, services markets, and organizations in the world. 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 type 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 enable organizations to develop a clear mission, to design strategies to achieve long-term
objectives, and to develop policies to achieve annual objectives. The increasing complexity of
business today is evidenced by more countries developing the capacity and will to compete
aggressively in world markets. Foreignbusinesses and countries are willing to learn, adapt,
innovate, and invent to compete successfully in the marketplace.

The process of performing an external audit must involve as many managers and employees as
possible. Involvement in the strategic-management process can lead to understanding and
commitment from organizational members. a company first must gather competitive intelligence
and information about economic, social, cultural, demographic, environmental, political,
governmental, technological trends. legal, and Individuals can be asked to monitor various
sources of information, such as key magazines, trade journals, and newspapers. 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.
Social, Cultural, Demographic, and Environmental Forces Social, cultural, demographic, and
environmental changes have a major impact upon virtually all products, services, markets, and
customers. Small, large, for-profit and nonprofit organizations in all industries are being
staggered and challenged by the opportunities and threats arising from changes in social, cultural,
demographic, and environmental variables.

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 chapters, 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 firms’
industry, competitors, and markets.

The Industrial Organization (I/O) View

The Industrial Organization (I/O) View the Industrial Organization (I/O) approach to
competitive advantage advocates that external (industry) factors are more important than internal
factors in a firm achieving competitive advantage. Proponents of the I/O view, such as Michael
Porter, contend that organizational performance will be primarily determined by industry forces.
Porter’s Five Forces Model, presented later in this chapter, is an example of the I/O perspective,
which focuses upon analyzing external forces and industry variables as a basis for getting and
keeping competitive advantage. Competitive advantage is determined largely by competitive
positioning within an industry, according to I/O advocates. Managing strategically from the I/O
perspective entails firms striving to compete in attractive industries, avoiding weak or faltering
industries, and gaining a full understanding of key external factor relationships within that
attractive industry. I/O research was mainly conducted from the 1960s to the 1980s and provided
important contributions to our understanding of how to gain competitive advantage. I/O theorists
contend that the industry in which a firm chooses to compete has a stronger influence on the fi r
m ’s performance than do the internal functional decisions managers make in marketing, finance,
and the like. Firm performance, they contend, is primarily based more on industry properties,
such as economies of scale, barriers to market e n t r y, product differentiation, and level of
competitiveness than on internal resources, capabilities, structure, and operation. In 2000 to 20.0
percent by the year 2050. The aging American population affects the strategic orientation of
nearly all organizations. Apartment complexes for the elderly, with one meal a day,
transportation, and utilities included in the rent, have increased nationwide. Called life care
facilities, these complexes now exceed 2million. Some well-known companies building these
facilities include Marriott, and Hyatt. Individuals age 65 and older in the United States comprise
13percent of the total population; Japan’s elderly population ratio is 17 percent, and Germany’s
is 19 percent. Americans are on the move in a population shift to the South and West (Sunbelt)
and away from the Northeast and Midwest (Frostbelt). The Internal Revenue Service provides
the Census Bureau with massive computer files of demographic data. By comparing individual
address changes from year to year, the Census Bureau publishes extensive information about
population shifts across the country. All of these facts represent major opportunities and threats
for some companies. For example, the four fastest grow in g states in rank order are Arizona,
Nevada, Idaho, Georgia, and Texas, states (Louisiana, Rhode Island, New York, Michigan) and
Washington, D.C lost residents in 2006. In the Northeast, New York, New Jersey, and
Massachusetts continue to lose large numbers of people to other states. In the
Midwest, the big losers of residents annually are Illinois, Michigan, and Ohio. The fastest
growing large metropolitan areas in the United States are Dallas–Fort Worth, Houston, Atlanta,
Phoenix, Las Vegas, and Riverside, California.5 Hard number data related to this information
can represent key opportunities for many firms and thus can be essential for successful strategy
formulation, including where to locate new plants and distribution centers and where to focus
marketing efforts Except for terrorism, no greater threat to business and society exists than
continuous decimation and degradation of our natural environment

Social, Cultural, Demographic, and Natural Environment Forces Social, cultural, demographic,
and environmental changes have a major impact on virtually all products, services, markets, and
customers. Small, large, for-profit, and non-profit organizations in all industries are being
staggered and challenged by the opportunities and threats arising from changes in social, cultural,
demographic, and environmental variables. In every way, the global market is much different
today than it was yesterday, and tomorrow promises even greater changes. Social, cultural,
demographic, and environmental trends are shaping the way people live, work, produce, and
consume. New trends are creating a different type of consumer and, consequently, a need for
different products, different services, and different strategies. There are now more households
with people living alone or with unrelated people than there are households consisting of married
couples with children. Also households are making more and more purchases online. Retail
shoppers are increasingly buying online, resulting in a decline in store traffic among almost all
retail stores, prompting chains to slow or cease store openings. Consumer tastes and trends are
changing as people wander through stores less, opting more and more to use their mobile phones
and computers to research prices and cherry pick promotions. Sales derived from online
purchases are rapidly increasing.

Some important social, cultural, demographic, and environmental variables that represent
opportunities or threats for virtually all organizations are:

- Population changes by race, age, and geographic area,

-Regional changes in tastes and preferences,
-Number of marriages,
-Number of divorces,
-Number of births,
-Number of death

Political, Governmental, and Legal Forces

Political issues and stances do matter for business and do impact strategic decisions, especially
in today's world of instant using social media and emailing.

For industries and firms that depend heavily on government contracts or subsidies, political
forecasts can be the most important part of an external audit. Changes in patent laws, antitrust
legislation, tax rates, and lobbying activities can affect firms significantly. 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.
 State, local, and foreign governments are major regulators, deregulators, subsidizers,
employers, and customers of organizations. Political, governmental, and legal factors, therefore,
can represent key opportunities or threats for both small and large organizations.

Some political, governmental, and legal variables that can represent key opportunities or threats
to organizations are:

- Environmental regulations,
- Changes in patent laws,
- Political conditions in foreign countries,
- Import–export regulations,
- Government regulations or deregulation,
- Government fiscal and monetary policy changes,
- Lobbying activities,
- Size of government budgets.

Technological Forces

A variety of new technologies such as the Internet of Things, 3D printing, the cloud, mobile
devices, biotech, analytic , robotics, and artificial intelligence are fueling innovation in many
industries, and impacting strategic-planning decision. Businesses are using mobile technologies
and applications to better determine customer trends and employing advanced analytic data to
make enhanced strategy decisions. The Internet has 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. The Internet is altering
economies of scale, changing entry barriers, and redefining the relationship between industries
and various suppliers, creditors, customers, and competitors. Monitoring online reviews about
business, large or small, has become a burdensome but an essential task, especially given the
emergence of social-media channels, such as Facebook and Instagram that empower opinionated
customers. Research is clear that benign neglect of a company's online reputation could quickly
hurt sales, especially given the new normal behavior of customers consulting their smartphones
for even the smallest of purchases.

Competitive Forces

An important part of an external audit is identifying rival firms and determining their strengths,
weaknesses, capabilities, opportunities, threats, objectives, and strategies. Collecting and
evaluating information on competitors is essential for successful strategy formulation.
Identifying major competitors is not always easy because many firms have divisions that
compete in different industries. Many multidivisional firms do not provide sales and profit
information on a divisional basis for competitive reasons.

Summary

Increasing turbulence in markets and industries around the world means the external audit has
become an explicit and vital part of the strategic-management process. This chapter provides a
framework for collecting and evaluating economic, social, cultural, demographic, environmental,
political, governmental, legal, technological, and competitive information. Firms that do not
mobilize and empower their managers and employees to identify, monitor, forecast, and evaluate
key external forces may fail to anticipate emerging opportunities and threats and, consequently,
may pursue ineffective strategies, miss opportunities, and invite organizational demise. Firms not
taking advantage of the Internet are technologically falling behind. A major responsibility of
strategists is to ensure development of an effective external audit system. This includes using
information technology to devise a competitive intelligence system that works. The external-
audit approach described in this chapter can be used effectively by any size or type of
organization. Typically, the external-audit process is more informal in small firms, but the need
to understand key trends and events is no less important for these firms.
Name: Score:
Section: Date:

General Directions:
1. Unanswered questions will be marked wrong.
2. Any form of copying and cheating will mark your exam zero.
3. Avoid Erasures.

I. IDENTIFICATION
Supply the correct answers to the questions at hand. Think twice before answering. ( 1
point)

1. Can represent key opportunities or threats for both small and large
organizations include taxes, laws.

2. Factors have a direct impact on the potential attractiveness of various

strategies.

3. Collecting and evaluating information on competitors is essential for

successful strategy formulation.

4. Altering economies of scale, changing entry barriers, and redefining

the relationship between industries and various suppliers, creditors, customers, and competitors.

5. The external audit is not aimed at developing an exhaustive list of

every possible facter that could influence the business.

II. Enumerations
Questions with procedural answers shall be answered in the correct process.

6-7. List of the focuses on identifying and evaluating trends beyond and control of a single

firm. 8-10. Give a 3 key external Factors in external audit.

ANSWERS:

PART 1. IDENTIFICATION:

1. Political Governmental and Legal Forces

2. Economic Forces
3. Competitive Forces
4. Technological Forces
5. The Nature of an External Audit

PART II. ENUREMATIONS

6-7.

OPPURTUNITES
- To take advantage

Threats
- To avoid and reduce

8-10.

-Political Governmental and Legal Forces

-Economic Forces
-Competitive Forces
-Social Cultural, Demographic and Natural Environment Force
- Technological Forces
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