External Audit

Dr. Abdullah M. Al-Ansi

 External Audit

 Identify
Also & juga
called: Evaluate factors
disebut beyond the control of a single firm.
sebagai:
 The
–Environmental
purpose of anscanning/
external pemindaian lingkungan
audit is to develop a finite list of
opportunities
 –Industry that could/benefit
analysis Analisisa firm as well as threats that should be
Industri
avoided.
 Identify & Evaluate factors beyond the control of a single firm.
 Firms should be able to respond either offensively or defensively to the
External factors.
 The purpose of an external audit is to develop a finite list of opportunities
that could benefit a firm as well as threats that should be avoided.
 Key External Forces

Five (5) broad categories:

1.Economic forces
2.Social, cultural, demographic, & environmental forces
3.Political, governmental, and legal forces
4.Technological factors
5.Competitive forces
 Key External Forces & the Organization

Competitors
Suppliers
Distributors
Creditors
Key
Customers
External Opportunities
Forces Employees
&
Communities Threats
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
 Performing an External Audit
 Involvement as many managers and employees as possible.
 Gathering competitive intelligence and information about economic, social,
cultural, demographic, environmental, political, governmental, legal, and
technological trends.

Sources of information include:

–Internet
–Libraries (corporate, university, public)
–Suppliers
–Distributors
–Customers
–Competition
Performing an External Audit

Key factors:
–Vary over time
–Vary by industry

Variables include:
 –Market share
 –Breadth of competing products
 –World economies
 –Foreign affiliates
 –Proprietary account advantages
 –Price competitiveness
 –Technological advancements
 –Interest rates
 –Pollution abatement
 Key External Factors

Key External Factors:

1. Oriented to long-term & annual objectives.
2. Measurable
3. Applicable to all competing firms
4. Hierarchical
• Overall company
• Divisional or functional areas
 External Forces

Ten External Forces That Affect Organizations:

1. Economic Forces
2. Social Forces
3. Cultural Forces
4. Demographic Forces
5. Natural Environment Forces
6. Political Forces
7. Governmental Forces
8. Legal Forces
9. Technological Forces
10. Competitive Forces
 Economic Forces
Availability of credit
Level of disposable income
Propensity of people to spend
Interest rates
Inflation rates
Gross domestic product trends
Consumption patterns
Unemployment trends
Value of Currency
Import/export factors
Demand shifts for different goods and services
Income differences by region and consumer groups
Price fluctuations
Foreign countries’ economic conditions
Monetary and fiscal policies
Stock market trends
Tax rate variation by country and state
European Economic Community (EEC) policies
(OPEC) policies
Change in Dollar Value
 Social, Cultural, Demographic &
Environmental Forces

Population changes by race, age, and Ethical concerns

geographic area

Regional changes in tastes and preferences Attitudes toward retirement

Number of marriages, Divorce, Birth and Death Attitudes toward customer service

Immigration and emigration rates Pollution control

Social Security programs Attitudes toward foreign peoples

Life expectancy rates Number of Morgues or churches

Per capita income Social responsibility issues

Social media pervasiveness Energy conservation

 Political, Governmental, and Legal Forces

Environmental regulations Country’s relationships

Number of patents /Registration New Political conditions in foreign countries

Co.
Equal employment laws Global price of oil changes

Level of defense expenditures Local, state, and federal laws

Unionization trends Import–export regulations

Antitrust legislations Local, state, and national elections

 Technological Forces

A variety of new technologies such as:

 Internet of Things
 3D printing, the cloud
 Mobile devices
 Biotech, analytics, auto-tech, robotics, and
 Artificial intelligence

These technologies are fueling innovation in many industries, and

impacting strategic-planning decisions.
 Technological Forces

Internet changes the nature of opportunities and threats:

Alters life cycle of products
Increases speed of distribution
Creates new products and services
Eases limitations of geographic markets
Alters economies of scale
Changes entry barriers
 Competitive Forces
 Collection and evaluation of information on competitors is essential for
successful strategy formulation.
 An important part of an external audit is identifying rival firms and
determining their:
 Strengths
 Weaknesses,
 Capabilities
 Opportunities
 Threats,
 Objectives, and
 Strategies.
 Competitive Forces

7 Characteristics of most Competitive U.S. Firms:

 Market share matters
 Understand what business you are in
 Broke or not, fix it
 Innovate or evaporate
 Acquisition is essential to growth
 People make a difference
 No substitute for quality
 Objectives of a CI program

 to provide a general understanding of an industry and its competitors

 to identify areas in which competitors are vulnerable
 to assess the impact strategic actions would have on competitors, and
 to identify potential moves that a competitor might make that would
endanger a firm’s position in the market.
 The Five-Forces Model of Competition

Potential development
of substitute products

Bargaining power Rivalry among Bargaining power

of suppliers competing firms of consumers

Potential entry of new

competitors

Copyright 2007 Prentice Hall Ch 3 -18

 Industry Analysis

Summarize & Evaluate

Economic Demographic Governmental

Social Environmental Technological

Cultural Political Competitive

 The External Factor Evaluation (EFE) Matrix

Five-Step process:
• List key external factors (10-20)
• Opportunities & threats Assign weight to each (0 to 1.0)
• Sum of all weights = 1.0 (not important to very important)
 Assign 1-4 rating to each factor
 Multiply each factor’s weight by its rating
 Sum the weighted scores for each
 Determines the total weighted score for the organization.
 Highest possible weighted score for the organization is 4.0; the lowest,
1.0. Average = 2.5
EFE Matrix (Opportunities)
EFE (Threats)
 The Competitive Profile Matrix

 Identifies firm’s major competitors and their strengths &

weaknesses in relation to a sample firm’s strategic position
 Major weakness – major strength
Example CPM
 Gateway Apple Dell
CSF’s Wt Rating Wt’d
Score
Ratin
g
Wt’d
Score
Rating Wt’d
Score

Market share 0.15 3 0.45 2 0.30 4 0.60

Inventory sys 0.08 2 0.16 2 0.16 4 0.32
Fin. position 0.10 2 0.20 3 0.30 3 0.30
Prod. Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distr 0.10 3 0.30 2 0.20 3 0.30
Global Exp. 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15

Copyright 2007 Prentice Hall Ch 3 -25

 Gateway Apple Dell
CSF’s (cont’d) Wt Rating Wt’d
Score
Ratin
g
Wt’d
Score
Rating Wt’d
Score

Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12

E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Serv 0.10 3 0.30 2 0.20 4 0.40
Price
0.02 4 0.08 1 0.02 3 0.06
competitive
Mgt. 0.01 2 0.02 4 0.04 2 0.02
experience

Total 1.00 2.83 2.47 3.49

Copyright 2007 Prentice Hall Ch 3 -26

 Home Work
 Use your case study to analysis:
 Types of Strategies
 Vision and Mission
 Internal Audit
 External Audit
 Generation and Selection
 Implementation
 Execution
 Monitoring
 Social Responsibilities, Ethics and Sustainability