CH.7 FredDavid 16ed

THE EXTERNAL AUDIT
Focuses on identifying and evaluating trends and events beyond

the control of a single firm, such as increased foreign competition,
population shifts to coastal areas of the United States, an aging
External Audit society, and taxing Internet sales. An external audit reveals key
opportunities and threats confronting an organization, so
managers can formulate strategies to take advantage of the
opportunities and avoid or reduce the impact of threats.
KEY
EXTERNAL
FACTORS
KEY
EXTERNAL
FACTORS
When identifying and prioritizing key external
factors in strategic planning, make sure the
factors selected are
(1) Specific (i.e., quantified to the extent
possible);
Important Note
(2) Actionable (i.e., meaningful in terms of
having strategic implications) and
(3) stated as external trends, events, or facts
rather than as strategies the firm could pursue.
The Industrial Organization view of strategic planning advocates
that external (industry) factors are more important than internal
The Industrial ones for gaining and sustaining competitive advantage.
Organization Proponents of the I/O view, such as Michael Porter, contend that
organizational performance will be primarily determined by
(I/O) View industry forces, such as falling gas prices that no single firm can
control.
Ten External Forces
That Affect
Organizations:
Economic Forces
Ten External Forces
That Affect
Organizations:
Economic Forces
Ten External Forces
That Affect
Organizations:
Economic Forces
Ten External Forces
That Affect
Organizations:
Social, Cultural,
Demographic, and
Natural Environment
Forces
Ten External Forces
That Affect
Organizations:
Political, Governmental,
and Legal Forces
Results of technological advancements are varied, as shown in the
following list:
1. They represent major opportunities and threats that must be considered

in formulating strategies.
2. They can dramatically affect organizations’ products, services, markets,
suppliers, distributors, competitors, customers, manufacturing processes,
Ten External Forces marketing practices, and competitive position.
That Affect 3. They can create new markets, result in a proliferation of new and
Organizations: improved products, change the relative competitive cost positions in an
Technological Forces industry, and render existing products and services obsolete.
4. They can reduce or eliminate cost barriers between businesses, create
shorter production runs, create shortages in technical skills, and result in
changing values and expectations of employees, managers, and customers.
5. They can create new competitive advantages that are more powerful
than existing advantages.
Ten External Forces
That Affect
Organizations:
Competitive Forces
Seven characteristics describe the most competitive companies:
1. Strive to continually increase market share.
2. Use the vision/mission as a guide for all decisions.
3. Realize that the adage “If it’s not broke, don’t fix it” has been
Ten External Forces replaced by “Whether it’s broke or not, fix it;” in other words,
That Affect continually strive to improve everything about the firm.
Organizations: 4. Continually adapt, innovate, improve—especially when the
Competitive Forces firm is successful.
5. Strive to grow through acquisition whenever possible.

6. Hire and retain the best employees and managers possible.
7. Strive to stay cost-competitive on a global basis
Competitive intelligence (CI), as formally defined by the Society
of Competitive Intelligence Professionals (SCIP), is a systematic
and ethical process for gathering and analyzing information about
the competition’s activities and general business trends to further
Ten External Forces a business’s own goals (SCIP website). Good competitive
That Affect intelligence in business, as in the military, is one of the keys to
Organizations: success. The more information and knowledge a firm can obtain
Competitive Forces about its competitors, the more likely the firm can formulate and
implement effective strategies. Major competitors’ weaknesses
can represent external opportunities; major competitors’ strengths
may represent key threats.
Various legal and ethical ways to obtain competitive intelligence
include the following:
• Hire top executives from rival firms.
• Reverse engineer rival firms’ products.
• Use surveys and interviews of customers, suppliers, and

Ten External Forces distributors.
That Affect
Organizations: • Conduct drive-by and on-site visits to rival firm operations.
Competitive Forces • Search online databases.
• Contact government agencies for public information about rival
firms.
• Systematically monitor relevant trade publications, magazines,
and newspapers.
The Fuld website explains that competitive intelligence is
not the following:
Is not spying
Is not a crystal ball
Is not a simple Google search
Ten External Forces
Is not one-size-fits-all
That Affect
Organizations: Is not useful if no one is listening
Competitive Forces Is not a job for one, smart person

Is not a fad
Is not driven by software or technology
Is not based on internal assumptions about the market
Is not a spreadsheet
The three basic objectives of a CI program are
(1) to provide a general understanding of an industry and its
competitors,
(2) to identify areas in which competitors are vulnerable and to
Ten External Forces assess the impact strategic actions would have on competitors,
and
That Affect
Organizations: (3) to identify potential moves that a competitor might make that
Competitive Forces would endanger a firm’s position in the market.10
Competitive information is equally applicable for strategy
formulation, implementation, and evaluation decisions. An
effective CI program allows all areas of a firm to access
consistent and verifiable information in making decisions.
Porter’s Five-
Forces Model
Porter’s Five-
Forces Model
DISNEYLAN
D
SHANGHAI
SHANGHAI
DREAM
CENTER
The bargaining power of suppliers affects the intensity of
competition in an industry, especially when there are few
Bargaining suppliers, when there are few good substitute raw materials, or
when the cost of switching raw materials is especially high. It is
Power of often in the best interest of both suppliers and producers to assist
Suppliers each other with reasonable prices, improved quality, development

of new services, just-in-time deliveries, and reduced inventory
costs, thus enhancing long-term profitability for all concerned.
Consumers gain increasing bargaining power under the following
circumstances:
1. If they can inexpensively switch to competing brands or
Bargaining substitutes
2. If they are particularly important to the seller
Power of 3. If sellers are struggling in the face of falling consumer demand
Consumers 4. If they are informed about sellers’ products, prices, and costs
5. If they have discretion in whether and when they purchase the
product
TO BE
EFE MATRIX
CONTINUED …

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THE EXTERNAL AUDIT

Focuses on identifying and evaluating trends and events beyond

1. They represent major opportunities and threats that must be considered

5. Strive to grow through acquisition whenever possible.

• Use surveys and interviews of customers, suppliers, and

Competitive Forces Is not a job for one, smart person

Suppliers each other with reasonable prices, improved quality, development

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