 external audit

focuses on identifying and evaluating trends and events beyond the control of a single firm.
 external audit
reveals key opportunities and threats confronting an organization, so manager can formulate
strategies to take advantage of the opportunities and avoid or reduce the impac of threats.
 trends beyond the control of a single firm
what do increased foreign competition, population shifts to coastal areas, an ageing society, and
taxing internet sales represent?
 to develop a finite list of opportunities that could benefit a firm as well as threats to be avoided
what is the purpose of an external audit?
 actionable responses (from the external audit)
firms should be able to respond offensively or defensively to the factors by formulating strategies to
take advantage of external opportunities or that minimize ipacts of potential threats. What is this
called?
 external forces
this is categorized into 5 broad categories:
-economic forces
-social, cultural, demographic, and environment forces
-technological forces
-political, governmental, and legal forces
-competitive forces
 external trends and events
rising food prices... people in African countries learning about online services... are considered what?
 external factors in strategic planning
1. specific
2. actionable (strategic implications)
3. stated as external trends, events, or facts
rather than as strategies. this is what?
 Brazil's GDP is 6.8%
which is deemed an actionable factor?
-the stock market is volatile.
-Brazil's GDP is 6.8 %
-Chipotle is adding 100 new stores.
 external forces
affects both suppliers and distributors.
 Alibaba and Samsung
2 companies exemplify the complexity of business today with more countries developing the capacity
and will to compete in world markets.
 Process of performing an external audit
1. (indentifying) gather competitive intelligence and information about economic, social cultural,
demographic, environmental, political and governmental, legal and technological trends.
2. assimilate and evaluate the info
3.(determine) in a meeting, prioritize the factors by ranking them 1 to 20 (20 is least important)
 sources of competitive intelligence
magazines, trade journals, and newspapers
 sources of competitive intelligence
suppliers, distributors, salespersons, customers, and competitors are sources of
___________________
 industrial organization (I/O)
this view of strategic planning advocates that external (industry) factors are more important than
internal ones for gaining and sustaining a competitive advantage.
 Michael Porter
this proponent of the I/O view contends that org. performance will be primarily determined by industry
force, such as falling gas prices.
 Porter's Five Forces Model
this model is an example of the I/O perspective
 Competitive Positioning
according to I/O advocates, competitive advantage is determined largely by ----------in an industry?
 external factors (I/O view)
economies of scale, barriers to market entry, product differentiation, the economy, and levels of
competitiveness are what?
 the I/O view
this has enhanced the understanding of strategic management.
 effective integration and understanding both external and internal factors
what is a key to securing and keeping a competitive advantage?
 matching key opportunities and threats with key internal strengths and weaknesses
this is the basis for successful strategy formulation.
 economic
which force would high unemployment be?
 economic
which force would rising commodity prices be?
 the value of the dollar
(high dollar makes it cheap for Americans to travel abroad, but expensive for foreigners to
travel to US, thus hurting US Tourism
this is an example of an economic variable
 increases, expands.
interest rates, stock prices, and discretionary income rises. As stock prices increase, the desirability
of equity as a source of capital ________. When the market rises, consumer and business wealth
__________.
 US Trade deficit
a high dollar makes US goods more expensive in overseas markets. this worsens __________.

 Agriculture and Petroleum

these two industries are hurt by the dollar's rise against the currencies of Mexico, Brazil, Venezuela,
and Australia.
 strong US dollar
-companies with substantial outside US operations see their overseas expenses become cheaper

-gives US companies greater control for international acquisitions

-companies importing goods have greater buying power becaue their dollars now go further overseas.
these are advantages of what?

 social, cultural, demographic, and environmental

the US is becoming less white and older is an example of which forces?
 healthcare, financial services, travel, and leisure.
older americans are interested in what?
 slow or cease opening stores.
retail shoppers are increasingly buying online, this prompts chains to do what?
 knowing where to locate new plants and distribution centers and where to focus marketing
efforts
why is knowing trends of where people move to is a key opportunity for firms and thus essential for
successful strategy formulation?
 quantified, actionable
in strategic planning and case analysis, relevant social, cultural, demographic, and environmental
factors for a particular business must be _______ and __________ to be useful
 protectionism
various countries worldwide are resorting to _________ to safeguard their own industries.
 Russia
which country has the most protectionist measures in place?
 mobile tech and applications
businesses are increasingly using __________ and ___________ to determine customer trends
 Chief Technology Officer (CTO)
Chief Information Officer (CIO)
these two positions within a firm work together to ensure that info needed to formulate, implement,
and evaluate strategies is available where and when it is needed.
 Cheif Information Officer (CIO)
this position in a firm manages the firm's relationship with stakeholders
 Chief Technology Officer (CTO)
this position in a firm is more of a technician, focusing on issues such as data acquisition, data
processing, decision-support systems, and software and hardware acquisition.

 Technological Factors
these factors can create new markets, result in a proliferation of new and improved products, change
the relative competitive cost positions in an industry, and render existing products and services
obselete.
 technological forces
elimination of cost barriers, shorter production runs, shortages in technical skills, and changing values
among employees, managers, and customers are which forces?
 description of most competitive companies
-strive to stay cost-competitve on a global basis
-strive to grow through acquistion whenever possible
-continually adapt, innovate, and improve
-continually increase market share
-use vision/mission as a guide for all decisions
this is a description of the most ___________________________
 competitive intelligence
a systematic and ethical process for gathering and analyzing info about the competition's activities
and general business trends to further a business's own goals
 external opportunities, threats
major competitor's weaknesses can represent ___________. Major competitor's strengths may
represent key ___________.
 legal and ethical ways to obtain competitive intellegence.
1. hire top executives from rival firms.
2. reverse engineer rival firm's products.
3. use surveys and interviews
4. search online databases
5. conduct on site visits to rival firms
6. contact gov. agencies for public info.
7. systematically monitor relevant trade publications, magazines, and newspapers
 a competitive intelligence program
this is a __________.

1.provides a general understanding of an industry and its competitors

2. identifies areas in which rivals are vulnerable and to assess impact strategic actions would have on
competitors
3. to identify potential moves that a competitor might make that would endanger a firm's position in
the market
 all members of an organization.
who are the valuable intelligence agents in a firm?
 characteristics of a successful C.I. program
-flixible
-usefulness
-timeliness
-cross-functional cooperation.
these describe what?

 95%
how much information a company needs to make strategic decisions is availble to the public?
 sources of competitive intelligence
trade journals, want ads, newspaper articles, government filings, as well as customers, suppliers,
distributors, competitors themselves, and the Internet.
 lower-return
intensity of competition is highest in ____________ industries.
 Porter's Five Forces
1. rivalry among competing firms
2. potential entry of new competitors
3. potential bargaining power of suppliers
4. potential development of subsitute products.
5. bargaining power of consumers.
 Rivalry among competing firms
which of porter's five forces is usually the most powerful?
 decline
as rivalry among competing firms intensifies, industry profits _________
 marketing, production
when rival firms sense weakness, typically they will intensify both ___________ and _____________
to capitalize on the opportunity.
 barriers to entry
the need to gain economies of scale quickly, the need to gain technology and specialized know-how,
the lack of experience, strong customer loyalty, strong brand preferences, large captial requirements,
lack of adequate distribution channels, gov regulatory policies, tariffs, counters by entrenched firms.
all represent ___________
Despite numerous barriers to entry, new firms sometimes enter industries with higher-
qualityproducts, lower prices, and substantial marketing resource
 lowering prices or extending warranties.
an action to deter new entrants is?
 subsititute products
the presence of ______________ puts a ceiling on the prie that can be charged before consumer will
switch to the ____________
 Price ceilings
--------equate to profit ceilings and more intense competition among rivals.
Competitive pressures arising from substitute products increase as the relative price of substitute
products declines and as consumers’ costs of switching decrease
The competitive strength of substitute products is best measured by the inroads into the market share
those products obtain,as well as those firms’ plans for increased capacity and market penetration
 backward integration
firms generally can negotiate more favorable terms with suppliers when _________ ____________ is
a commonly used strategy among rival firms in an industry
 forged strategic partnerships with select suppliers
1. reduction of inventory and logistics cost
2. accelerated availability of next-generation components
3. enhanced quality of the parts and components being supplied and reduce defect rates
4. squeeze out important cost savings for them and their suppliers
this effort is because of ?

 bargaining power of consumers

__________ is higher when the products being purchased are standard or undifferentiated.
 published sources
strategic info in the form of trade journals, periodicals, newspapers, books, and manuals.
 unpublished sources
strategic info in the form of surveys, market research, speeches, interviews, and conversations with
stakeholders
 forecasts
educated assumptions about future trends and events
 changing social values, tech innovation, cultural changes, unforseen events.
why is forecasting complex?
 assumptions
________ are made on facts, figures, trends, and research.
 assumptions
planning would be impossible without __________
 business analytics
_________ is an M.I.S. technique that involves using software to mine huge volumes of data to help
exectives make decision.
 business analytics
sometimes called "predictive analytics, machine learning, or data mining," this software enables a
researcher to assess and use the aggregate experiences of an org.
 risk management endevour.
every business is basically a ___________
 business analytics.
_________ enables a compay to benefit from measuring and managing risk.
 competitive advantage
as more and more products become commoditized or indistinguishable, __________ more and more
hinges on improvements to business processes
 Netflix
which company has used business analytics to mount a comeback?
 external factor evaluation matrix (EFE)
an ____________________ allows strategists to summarize economic, social, cultural, demographic,
environmentla, political, gov, legal, tech, and competitive info
 responding in an outstanding way
in an EFE matrix, a total weighted score of 4.0 indicates that________

1. the org. is responding outstanding way

2. the org. is responding in a poor way
3. the org. is responding in the worst way
4. the org. is responding in an average way

 is not capitalizing on opportunities or avoiding external threats.

in an EFE matrix, a total score of 1.0 indicate the firm's strategies are____________
1. capitalizing on opportunities and avoiding threats
2. is not capitalizing on opportunites or avoiding external threats.
3. is capitalizing on opportunities but avoiding external threats
4. is not capitalizing on opportunities and is not avoiding threats
 Competitive Profile Matrix
_______ identifies a firm's major competitors and its particular strengths and weaknesses in relation
to a sample firm's strategic position.
 major strength, major weakness
on a CPM (competitive profile matrix), a rating of 4 = ___________ and a rating of 1 = ___________
 CPM and EFE
__________ and ___________ are excellent strategic planning tools for assimilating and prioritizing
info to enhance decision making
 gain and sustain a competitive advantage.

1. establish a clear vision and mission

2. collect and analyze data from matrices to establish a strategic plan
3. establish structure and allocate resources (implement strategy)
4. take corrective actions and adapt to change

these steps allow a company to _______________

 An external audit audit sometimes called environmental scanning or industry analysis

 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
 Changes in external forces translate into changes in consumer demand for both industrial
and consumer products and services.
 To perform an external audit, a company first must gather competitive intelligence and information about
economic, social, cultural, demographic, environmental, political, governmental,
legal, and technological trends. Individuals can be asked to monitor various sources of information, such as key
magazines, trade journals, and newspapers—and use online sources such
as those listed later in this chapter in Table 7-8. These persons can submit periodic scanning
reports to the person(s) who coordinate the external audit. After information is gathered, it should be assimilated
and evaluated. A meeting or series
of meetings of managers is needed to collectively identify the most important opportunities and
threats facing the firm. A prioritized list of these factors must be obtained by requesting that all
managers individually rank the factors identified, from 1 (for the most important opportunity/
threat) to 20 (for the least important opportunity/threat). Instead of ranking factors, managers
could simply place a checkmark by their most important “top 10 factors.” Then, by summing the
rankings, or the number of checkmarks, a prioritized list of factors is revealed. Prioritization is
absolutely essential in strategic planning because no organization can do everything that would
benefit the firm; tough choices among good choices have to be made.
 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, marketing practices, and competitive position.
3. They can create new markets, result in a proliferation of new and improved products,
change the relative competitive cost positions in an 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.
 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 replaced by “Whether it’s
broke or not, fix it;” in other words, continually strive to improve everything about the
firm.
4. Continually adapt, innovate, improve—especially when the 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.
 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 distributors.
• Conduct drive-by and on-site visits to rival firm operations.
• Search online databases.
• Contact government agencies for public information about rival firms.
• Systematically monitor relevant trade publications, magazines, and newspapers.
 Information gathering from employees, managers, suppliers, distributors, customers, creditors, and consultants
also can make the difference between having superior or just average intelligence and overall competitiveness.
 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 assess the impact strategic actions would have on competitors, and (3) to identify potential
moves that a competitor might make that would endanger a firm’s position in the market. 10
Competitive information is equally applicable for strategy formulation, implementation, and
evaluation decisions
 According to Porter,
a Harvard Business School professor, the nature of competitiveness in a given industry can be
viewed as a composite of five forces:
1. Rivalry among competing firms
2. Potential entry of new competitors
3. Potential development of substitute products
4. Bargaining power of suppliers
5. Bargaining power of customers
 Rivalry also increases when
consumers can switch brands easily; when barriers to leaving the market are high; when fixed
costs are high; when the product is perishable; when consumer demand is growing slowly or
declines such that rivals have excess capacity or inventory; when the products being sold are
commodities (not easily differentiated, such as gasoline); when rival firms are diverse in strategies, origins, and
culture; and when mergers and acquisitions are common in the industry. As
rivalry among competing firms intensifies, industry profits decline, in some cases to the point
where an industry becomes inherently unattractive. When rival firms sense weakness, typically
they will intensify both marketing and production efforts to capitalize on the “opportunity.”
Table 7-7 summarizes conditions that cause high rivalry among competing firms.
 When customers are concentrated or large in number or buy in volume, their bargaining
power represents a major force affecting the intensity of competition in an industry
 The bargaining power of consumers can be the most important force affecting competitive
advantage. Consumers gain increasing bargaining power under the following circumstances:
1. If they can inexpensively switch to competing brands or substitutes
2. If they are particularly important to the seller
3. If sellers are struggling in the face of falling consumer demand
4. If they are informed about sellers’ products, prices, and costs
5. If they have discretion in whether and when they purchase the product12
 An External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate
economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive
information, illustrated earlier in Figure 7-2. The EFE Matrix can be
developed in five steps:
1. List 20 key external factors as identified in the external-audit process, including both
opportunities and threats that affect the firm and its industry. List the opportunities first and
then the threats. Be as specific as possible, using percentages, ratios, and comparative numbers whenever possible. Recall
that Edward Deming said, “In God we trust. Everyone else
bring data.” In addition, utilize “actionable” factors as defined earlier in this chapter.
2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The weight indicates the
relative importance of that factor to being successful in the
firm’s industry. Opportunities often receive higher weights than threats, but threats can
receive high weights if they are especially severe or threatening. Appropriate weights can
be determined by comparing successful with unsuccessful competitors or by discussing the
factor and reaching a group consensus. The sum of all weights assigned to the factors must
equal 1.0.
3. Assign a rating between 1 and 4 to each key external factor to indicate how effectively
the firm’s current strategies respond to the factor, where 4 = the response is superior, 3 =
the response is above average, 2 = the response is average, and 1 = the response is poor.
Ratings are based on effectiveness of the firm’s strategies. Ratings are thus company-based,
whereas the weights in Step 2 are industry-based. It is important to note that both threats
and opportunities can receive a 1, 2, 3, or 4.
4. Multiply each factor’s weight by its rating to determine a weighted score.
5. Sum the weighted scores for each variable to determine the total weighted score for the
organization.
Regardless of the number of key opportunities and threats included in an EFE Matrix,
the highest possible total weighted score for an organization is 4.0 and the lowest possible
total weighted score is 1.0. The average total weighted score is 2.5. A total weighted score of
4.0 indicates that an organization is responding in an outstanding way to existing opportunities and threats in its industry. In
other words, the firm’s strategies effectively take advantage
of existing opportunities and minimize the potential adverse effects of external threats. A total
score of 1.0 indicates that the firm’s strategies are not capitalizing on opportunities or avoiding
external threats.
 The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and its particular strengths and weaknesses in
relation to a sample firm’s strategic position. The weights and total weighted scores in both a CPM and an EFE have the
same meaning. However, critical success factors in a CPM include both internal and external issues; therefore, the ratings
refer to strengths and weaknesses, 4=major strength, 3 5=minor strength, 2= minor weakness, and 1= major weakness. The
critical success factors in a CPM are not grouped. into opportunities and threats as they are in an EFE. In a CPM, the ratings
and total weighted
 scores for rival firms can be compared to the sample firm. This comparative analysis provides
important internal strategic information. Avoid assigning the same rating to firms included in
your CPM analysis.
 This chapter reveals that quantified, organized,prioritized, actionable external information is a key ingredient for making
decisions that culminate in a winning strategic plan
 The External Factor Evaluation Matrix and Competitive Profile Matrix presented in this chapter are excellent strategic-
planning tools for assimilating and prioritizing information to enhance decision making
 Business analytics is an MIS technique that involves using software to mine huge volumes of
data to help executives make decisions. Sometimes called predictive analytics, machine learning, or data mining,

Porter’s Rivalry Intensity Increased

If the industry consists of numerous competitors, then Porter rivalry will be more intense. Whereas if the competitors are
of equal size or market share, then the intensity of rivalry will increase. The intensity of rivalry will be high if
industry growth is slow. If the industry’s fixed costs are high, then competitive rivalry will be intense. Additionally, rivalry
will be intense if the industry’s products are undifferentiated or are commodities. If brand loyalty is insignificant and
consumer switching costs are low, then this will intensify industry rivalry. Industry rivalry will be intense if competitors are
strategically diverse – which means that they position themselves differently from other competitors. Then an industry with
excess production capacity will have greater rivalry among competitors. And finally, high exit barriers – costs or losses
incurred as a result of ceasing operations – will cause intensity of rivalry among industry firms to increase.

Porter’s Rivalry Intensity Decreased

And of course, if the opposite is true for any of these factors, the intensity of Porter rivalry among competitors will be low.
For example, the following indicates that the Porter intensity of rivalry among existing firms is low:

 A small number of firms in the industry

 A clear market leader
 Fast industry growth
 Low fixed costs
 Highly differentiated products
 Prevalent brand loyalties
 High consumer switching costs
 No excess production capacity
 Lack of strategic diversity among competitors
 Low exit barriers