External Audit & Assessment

• An external assessment aims to identify opportunities and threats to the company
• The purpose of external audit is to develop a finite list of opportunities and threats
• Identifying key actionable variables informs the business's strategic decisions

External Audit Defined

• An independent auditor verifies a company's financial statements
• External audits ensures compliance with accounting standards and regulatory requirements
• Provides an opinion on the fairness of financial statements

External Assessment Defined

• A.k.a environmental analysis
• Part of strategic management
• Used to identify and analyze factors outside the organization
• These factors could affect performance, like economic, social, technological, and competitive trends
• The overall goal is understanding how external factors influence an organization's ability to achieve strategic objectives

Key External Forces & Relationships

• Key external forces include: competitors, suppliers, distributors, creditors, customers, employees, communities, managers, stockholders, labor unions, government, trade associations, special interest groups, products, services, markets, and the natural environment
• Assessment of those forces reveals Opportunities and Threats

Process of Performing an External Audit

• This Process involves a systematic assessment of external factors.
• Factors include economic, social, political, technological, and competitive forces,
• All with the goal to inform strategic decision-making.

Gathering Information

• Competitive Intelligence: Analyze competitors' strengths, weaknesses, strategies, and market share.
• External Factors: Collects data on economic, social, cultural, demographic, environmental, political, legal, and technological trends.
• Industry Analysis: Understands the industry's dynamics, including Porter's Five Forces (rivalry, new entrants, substitutes, suppliers, and buyers).

Identifying Opportunities and Threats

• Opportunity Identification: Recognizes potential areas for growth and expansion based on external trends and market conditions.
• Threat Identification: Determines potential challenges and risks that could negatively impact the organization.

Prioritizing Key Factors

• Ranking Factors: Managers should individually rank the identified opportunities and threats, from most to least important.
• Consensus Building: Facilitate discussions and meetings to reach a consensus on the most critical factors.

Communicating findings

• Present Findings: Share the prioritized list of opportunities and threats with stakeholders.
• Develop Strategies: Use the information gathered to formulate strategic plans that 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): A tool to evaluate the external environment and identify opportunities and threats.
• Competitive Profile Matrix (CPM): A tool comparing a company's strengths and weaknesses against those of its competitors.

The Industrial Organization (I/O) View

• Proposed by Michael Porter
• Organizational performance is determined by industry forces.
• Emphasizes the importance of understanding and analyzing the external environment, including industry structure, competitive forces, and market trends.
• Industry characteristics influence a firm's profitability and competitive advantage: Number of competitors, barriers to entry, and the power of suppliers and customers

Key External Forces

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

Economic Forces

• Macroeconomic factors have significant impact a company's operations, competitiveness, and profitability: Inflation, interest rates, and unemployment
• Inflation: Rising prices can erode consumer purchasing power, impacting demand, potentially Higher costs for businesses.
• Interest Rates: Changes influence borrowing costs, affecting business investment decisions and consumer spending habits.
• Unemployment: impacts decreased consumer spending and lower overall economic activity.
• Economic Growth/Recession: affects opportunities for businesses, recessions can lead to reduced demand and lower profits.
• Exchange Rates: impact the cost of imported goods and the competitiveness of exports,
• Government Policies: Fiscal and monetary policies affect have a signinficant impact
• Consumer Spending: Consumer confidence and disposable income levels influences demand.
• Global Economic Trends: Global economic conditions, such as trade wars, pandemics, and geopolitical instability, affects all businesses operating internationally.

Natural Environment Forces

• External forces that influence business performance, strategic decisions, and overall success.
• Trends are shaping the way people live, produce and consume.
• Social and Cultural Forces: Shapes consumer behavior and preferences. examples: Attitudes towards sustainability, the rise of social media influence and evolving family structures
• Demographic Forces: Population characteristics. examples: An aging population, urbanization trends and shifts in distribution
• Natural Environment Forces: Ecological climate change, resource availability, environmental regulations, resource scarcity, and pollution levels.

Political, Governmental, and Legal Forces

• Crucial external factors that impact an organization's operations and strategies
• Government policies: Tax policies and trade restrictions.
• Political stability: A stable environment fosters predictability and confidence for businesses.
• Foreign trade policies: Tariffs, quotas, and trade agreements affect international operations.
• Political issues and trends influences consumer behavior. example: Environmental concerns or social movements
• Government regulations affect operational costs and processes: Environmental protection, labor laws, or industry standards
• Government contracts and subsidies influence government policies and funding:
• Legal frameworks for contracts and agreements: Essential for business transactions and partnerships
• Intellectual property must be protected: Laws protecting patents, trademarks, and copyrights
• Consumer protection affects marketing, product development, and customer relations: Laws related to consumer rights and safety can impact marketing,
• Employment law affects human resource management: Laws concerning employment practices, discrimination, and worker rights

Political, Governmental and Legal Variables

• Variables include government regulations, number of patents, special tariffs, changes in tax laws, etc

Technological Forces

• innovation and advancements in technology
• Impact strategic management
• Influence business operations
• Businesses must adapt to changing market conditions

Impact on Business Operations and Strategies re: Technological Forces

• new technology: Creates new products, services, and business models
• Production and Logistics: Technologies like automation, robotics, and AI: Revolutionize production processes to improve efficiency and reduce costs, impacting supply chain strategies.
• Marketing and Sales: Social media platforms have transformed companies reach customers
• Information and Communication: The internet, mobile apps enabling data sharing, collaboration, and communication
• Innovation: Can require developing new strategies to combat
• Cybersecurity: Security strategies are impacted due to the rise in cyber threats.

Examples of Technologies

• Artificial Intelligence (AI): Can Impact product development, marketing, and customer service strategies.
• Internet of Things (IoT): Enables predictive maintenance and real-time monitoring
• Cloud Computing: Offers flexibility impacts IT infrastructure and data storage strategies:
• Big Data Analytics: Helps make strategic decisions by gaining insight into trends
• Augmented Reality (AR) and Virtual Reality (VR): Enhance training.

Strategic Implications re: Technological Forces

• Companies develop a technology strategy that aligns businesses goals to achieve a competitive advantage
• Adaptability and Agility: Businesses must be adaptable and agile
• Have effective innovate processes to commercialize products

Additional Tech Considerations

• Collaboration with technology providers
• Businesses must allocate capital to support technology
• Businesses need to consider the ethical implications of technology choices.

Competitive Intelligence

• Systematic and ethical gathering information about competition
• Includes analysis the competition’s and trends
• Essential elements for success
• The more knowledge a firm can obtain about its competitors increases effective implementation
• Company weaknesses and strengths may impact: Opportunities or threats

Three Missions for Competitive Intelligence

• Provide a general understanding of industry and its competition
• Identify area where competition is vulnerable
• Pinpoint moves that competitors would want to endanger one's position.

Competitive Forces

• Asseses effectiveness and helps form strategies
• The "five forces" model
  • Threat of new entrants
  • Bargaining power of suppliers and buyers
  • Threat of substitution
  • Rivalry among existing competitors.

Seven Characteristics of Competitive Companies

• Precise understanding of the business
• Never stop fixing
• Innovate or evaporate
• Acquisitions are essential to groth
• People make a difference
• There is no substitute for quality

Cooperation Amongst Competitors

• For collaboration: both firms contribute something distinctive
• A major risk: transfer of info
• Info exchanged must be Tighter formal

Market Commonality

• The degree to which two or more firms in related markets
• Influences competitive dyamics
• Offers products to the customer

Resource Similarity

• Compares resources.

Porters Five-Forces Model

• A competitive analysis tool
• Strategies within industries are developed
• There is a variation for competition

Characteristics Related to Competitiveness

• Rivalry among competing firms
• Potential entries is new
• Substitues
• Bargaining Power

Rivalry

• Powerful strategy
• Must consider impact of the five points below
  • Retaliating
  • Lowering prices
  • Enhancing Quality
  • Warraties or Features

Competitive Intensity

• Extent firms put on pressure
• Rivalry steals market share

New Competitors

• Must consider barrier
• Easy entrants result in increased competitive force

New Entrants

• Barrier include
  • Gains on a short term basis
  • Lack
  • Cost
  • No channels

New Products

• From other industries
• Lowers the stakes
• Reduces ability to earn

Many Factors to consider

• Plastics vs papers
• Medical
• Prices as well

Bargaining Power

• Depends on industry with substitute or lack of.
• JIT enhanced
• Considers long term profitability for all concerned

Customers

• Affect competition
• Power over price
• Standardizing

Customer Circumstances Leading to Great Power

• Substitutes
• Falling Demand
• Knowledge

Sources of Info

• Gather or Evaluate.

Types of Sources

• Wealth must be available
• Surveys
• Internet. (Most common)

Forecasting Tools

• Educated Assumptios
• Tech
• Changes
• New Products
• Social and Econimic
• Tools help the organization with a forecast

There are two types of Forecasts

• Quantitative/Qualitative

Quantitative

• Historical availability
• Relationships among variables.

Qualitative

• Use experience and instincts

Planning

• Would mean no impact is done

EFE Matrix

• Analysis is key

CPM

- Tool compares main competitors.
- Factors such as strength and success