External Assessment and Audit

The External Assessment

• It develops a finite list of opportunities that benefit a firm and threats to avoid.
• Aims to identify key variables offering actionable responses.
• It is a systematic process of examining a business's external environment to identify opportunities and threats.
• The primary goal is understanding how external factors influence an organization's ability to achieve its strategic objectives.
• Also known as environmental analysis, it identifies and analyzes factors outside an organization that could impact performance.
• External factors include economic, social, technological, and competitive trends.

External Audit

• It verifies a company's financial statements with an independent auditor.
• It ensures compliance with accounting standards and regulatory requirements.
• Involves a systematic assessment of external factors impacting an organization's strategy.
• Economic, social, political, technological, and competitive forces are considered to identify opportunities and threats.
• Provides an opinion on the fairness of a company’s financial statements.

External Auditing Process

• Gathering Information:
  • Involves analyzing competitors' strengths, weaknesses, strategies, and market share.
  • Including Porter's Five Forces (rivalry, new entrants, substitutes, suppliers, and buyers).
  • Gathering data on economic, social, cultural, demographic, environmental, political, legal, and technological trends.
• Identifying Opportunities and Threats:
  • Includes recognizing potential growth and expansion areas based on external trends and market conditions.
  • Determines challenges and risks that could negatively impact the organization.
• Prioritizing Key Factors:
  • Requires managers to individually rank identified opportunities and threats from most to least important.
  • Necessitates facilitating discussions and meetings to reach a consensus on critical factors.
• Communicating Findings: Includes sharing the prioritized list of opportunities and threats with stakeholders.
• Developing Strategies:
  • Consists of using gathered information to formulate strategic plans.
  • To address the identified opportunities and threats.

Tools and Techniques for External Assessment

• PESTEL Analysis: Examines political, economic, social, technological, environmental, and legal factors.
• Porter's Five Forces: Analyzes industry rivalry, potential new entrants, substitute products, supplier power, and buyer power.
• External Factor Evaluation Matrix (EFEM): Is a tool used to evaluate the external environment and identify opportunities and threats.
• Competitive Profile Matrix (CPM): Compares a company's strengths and weaknesses against competitors.

Key External Forces

• Divided into five broad categories:
  • Economic
  • Social
  • Cultural
  • Demographical
  • Environmental
  • Political
  • Governmental
  • Legal
  • Technological
  • Competitive forces

Economic Forces

• Encompasses macroeconomic factors like inflation, interest rates, and unemployment.
• Has a major impact a company’s operations, competitiveness, and profitability.
• Inflation: Rising prices can erode consumer purchasing power and impact demand for goods and services.
• Interest Rates: Changes influence borrowing costs and affect business investment decisions and consumer spending habits.
• Economic Growth/Recession: Growth creates opportunities, while recessions lead to reduced demand and lower profits.
• Exchange Rates: Fluctuations affect the cost of imports, competitiveness of exports, and impact international businesses.
• Government Policies: Fiscal and monetary policies, including tax rates, government spending, and regulations, impact businesses.
• Consumer Spending: Consumer confidence and disposable income levels directly influence demand for goods services.
• Global Economic Trends: Conditions such as trade wars, pandemics, and geopolitical instability create uncertainty impacting businesses.

Social, Cultural, Demographic, and Natural Environment Forces

• It significantly influences an organizations chances, impacting its strategic decisions and overall success.
• Involves values, beliefs, customs, and lifestyles shaping consumer behavior and preferences.
• Examples include: changing attitudes towards sustainability, rise of social media, evolving family structure and shifting consumer preferences.
• Relates to population characteristics such as age, gender, income, education, and occupation.
• These are trends shaping how people live, work, produce, and consume.
• Examples: aging population, urbanization trends, ethnic demographics, and shifts in income distribution.
• Involves ecological factors, like climate change, resource availability, and environmental regulations.
• Examples: climate change impacts, resource scarcity, , pollution levels, and environmental regulations.

Some Key Social, Cultural, Demographic, and Environmental Variables

• Childbearing rates
• Number of special-interest groups
• Number of marriages
• Number of births
• Number of deaths
• Sex roles
• Immigration and emigration rates
• Social Security programs
• Social programs
• Attitudes toward government
• Attitudes toward retirement
• Attitudes toward leisure time
• Attitudes toward product quality
• Attitudes toward customer service
• Pollution control
• Attitude toward foreign peoples
• Energy conservation
• Lifestyles
• Traffic congestion
• Attitudes toward authority

Political Forces

• Encompasses government policies, political stability, and the political climate that influences business operations.
• Government policies like tax, trade restrictions, and regulations impact a company's costs, operations, and profitability.
• A stable political environment fosters predictability, while instability leads to uncertainty and disruption.
• Foreign trade policies involve tariffs, quotas, and trade agreements affecting international operations and competitiveness.
• Emerging political issues and trends such as environmental or social movements, can influence consumer behavior and business decisions.
• Businesses need to adapt their strategies and remain informed of political developments.

Governmental Forces

• Focus on the role of government in shaping the business environment, including regulations, oversight, and enforcement.
• Regulations regarding environmental protection, labor laws, or industry standards impact operational costs and processes.
• Government agencies that oversee regulatory compliance and influence risk management.
• Businesses relying on government contracts or subsidies need to anticipate changes in government policies and funding.
• To remain compliant and navigate regulatory landscapes businesses need an understanding of governmental forces .

Legal Forces

• Encompasses laws and legal frameworks governing business activities, including contract, intellectual property, and consumer protection law.
• Contract law provides legal frameworks for contracts and agreements that are crucial for partnerships and transactions.
• Intellectual property laws protecting patents, trademarks, and copyrights are essential for innovation.
• Impacts to marketing, product development, and customer relations is a result of consumer protection laws.
• Laws concerning employment practices effect human resource management.
• Businesses must ensure legal compliance, and understand how legal frameworks shape their competitive landscape.

Some Political, Governmental, and Legal Variables

• Government regulations or deregulatiions
• Special tariffs
• Import and export regulations
• Government fiscal and monetary policy
• Number, severity, and location of government protests
• Environmental Protection laws
• Level of defense expenditures
• Legislation on equal employment
• Number of patent
• Changes in tax laws
• Political action committees
• Voter participation rates
• Changes in Patent laws
• Political conditions in foreign countries
• Size of government budgets
• World oil, currency, and labor markets
• Location and severity of terrorist activities

Technological Forces

• Encompasses innovation and advancements in technologies that significantly impact strategic management .
• This influences how businesses operate, compete, and adapt to changing market conditions.
• New Technologies: Advancements create new models forcing companies to adapt or risk obsolescence.
• Digital marketing, e-commerce, and social media transform how companies reach customers and conduct sales.
• Enable faster and are the reason for efficient communication , collaboration, and data sharing technologies, for example the internet.
• Innovation: Leads to disruptive changes, requiring companies to develop new strategies to stay competitive.
• Cybersecurity: Brings about the need to protect systems which impacts security strategies.

Examples of Technological Forces (1/3)

• Artificial Intelligence (AI): Automates tasks, analyze data, personalize experiences which impact product development, marketing, and customer service strategies.
• Internet of Things (IoT): Permits devices to collect and transmit data which enables real-time monitoring, predictive maintenance, and new business models.
• Cloud Computing: Offers flexibility, scalability, and cost savings, impacting IT infrastructure and data storage strategies.
• Big Data Analytics: Can help companies gain insights into customer behavior which informs strategic decisions.
• Augmented Reality (AR) and Virtual Reality (VR): Can great immersive experiences to enhance training and provide new ways to interact with products and services.

Examples of Technological Forces (2/3)

• Technology Strategy:
  • Companies need to develop a strategy that aligns with their overall business goals.
  • Leveraging to achieve competitive advantage.
• Adaptability and Agility: Rapid change requires companies to be adaptable and agile.
• Innovation Management:
  • effectively manage their innovation processes,
  • identify and evaluate new technologies
  • develop strategies to commercialize them.

Examples of Technological Forces (3/3)

• Collaboration and Partnerships: To be able to access new technologies and expertise, companies may need to collaborate with technology.
• Resource Allocation: Support technology investments, research and development, and talent acquisition
• Ethical Considerations: As technology becomes pervasive, companies need to consider the ethical implications of their decisions.

Competitive Intelligence (CI)

• It involves ethically gathering/analyzing info about the competition to further a business's own goals.
• It is a systematic and ethical process.
• Knowledge allows firms to formulate and implement effective strategies.
• Competitor weaknesses can represent potential opportunities.
• Major competitor strengths major threats.
• Provides a general understanding of an industry and its competitors.
• Identifies areas in which competitors are vulnerable.
• Its purpose to assess the impact that strategic actions would have on competitors.
• It will identify potential moves that a competitor might make and that would endanger a firm position.

Competitive Forces

• Are analyzed through Porter's Five Forces, which help organizations assess their industry's attractiveness.
• The following forces includes the threat:
  • New entrants
  • Bargaining power of suppliers and buyers
  • Substitute products
  • Rivalry among existing competitors

Seven characteristics that describe most competitive companies:

• Understand and remember what business you are in
• Innovate and make necessary improvement
• Acquisition is essential to growth
• If it's broke or not, fix it
• There is substitute for quality
• The value/threat for failing to cost-competitive

Cooperation Among Competitors

• Agreements between competitors are even becoming more popular.
• Firms must contribute a distinctive to succeed technology distribution, basic research or manufacturing capacity.
• A major risk is that unintended transfers skills or technology may occur at organizational levels.
• Firms often give away rival when operating under cooperative agreements.
• Information not covered often gets treated tighter formal agreement are needed!

Market Commonality

• Refers to the degree to which two firms operate in markets.
• Describes the extent to which firms compete, offering similar services.

Resource Similarity

• Alike a firm is about their competitor.

Competitive Analysis

• Porter’s five forces is used to help with developing strategies in mini industries.
• Defines the intensity of competition among firms.

According to Porter, the nature of competitiveness in a given industry can be composed of 5 forces:

• Rivalry firms
• Potential entry
• Development of substitutes
• Bargaining power of suppliers
• Bargaining power of consumers

Rivalry Among Competing Firms

• Usually the most powerful of the 5 forces.
• The firm can provide advantages.
• Has a relation to lower price and enhances the quality with warranties.
• How much firms put on pressure to limit the profit.

Potential Entry of New Competitors

• The way new competitor enter industry.
• Can easily enter market so poses a threat.

Barriers to entry Can Include:

• The need to gain economies of scale quickly,
• The need to gain technology specialized know-how.
• The lack experience
• Strong brand
• Possession of patents
• Large capital
• High government regular policies

Potential Development of Substitute Products

• It offer similar benefits to product some from a different industry.
• Less competitions among current firms so potential higher profit.

Bargaining Power of Suppliers

• When a large number of suppliers means bargaining affects intensity
• Mutual benefits to assist each other with improve quality.
• Increase profitability by development of services like just in time deliveries

Bargaining power of consumers

• The way customer offer extra service to increase service offer in power market for loyal customers.
• If purchase is stand consumers Can contract deals of selling price.
• Consumers can inexpensively switch brands if they feel one.

Increasing Bargaining Power

• Important of the consumer.
• Sellers are struggling.
• If they are discretion to make purchase.

Sources Of External Information

• Information is available organizations.
• customer survey
• markets speeches, interview, documents
• Internet has made to gather firms easier

Forecasting tools and techniques

• Forecast are educated assumptions related to future trends.
• Forecasting is complex based factors.
• Selected forecasting tools and are examined as essential.

Managers Often

• Most organization must develop with their own projections.
• Forecast annually
• Origination forecast their customer loyalty in local area.

Forecasting tools

• Forecasting quantitative and qualitative
• Quantitative historical are when and are key variable can be estimated
• Qualitative forecasts the expert instincts of and will interpret business
• Planning impossible with a assumption best estimate to managers impact.

The External Factor Evaluation

• Matrix management tools the evaluate organization external with threats.

Competitive Profile Matrix (CPM)

• Help organization with strength weakness to excel their competitors.
• The contribution is contribute brand and quality and service success