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
Competitors
Suppliers
Economic Forces, Distributors
Creditors
Social, Cultural, Customers
Demographic, Employees
And Environmental Communities Organization’s
Forces. Managers Opportunities
Political, Legal, Stockholders And
And Gov’t Forces Labor Unions Threats
Governments
Technological Trade Assoc
Forces Products, Service
Competitive Forces Market
Natural Enviro.
Spec Interest Group
 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, gov’tal,
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 product’s 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
The Five-Forces Model of Competition
 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 firm’s
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 firm’s
strategies.
• Rating = company based; weighing = industry
weight.
 Multiplying and Summing
• Multiply each factor’s 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
End Chapter 3