Strategic Management

Dr. Karim Kobeissi

Chapter 3: The External Audit

The Nature of an External Audit

The purpose of an external audit is to develop a finite list of
opportunities that could benefit a firm and threats that
should be avoided. As the term finite suggests, the external
audit is not aimed at developing an exhaustive list of every
possible factor that could influence the business; rather, it is
aimed at identifying key variables that offer actionable
responses. Firms should be able to respond either offensively
or defensively to the factors by formulating strategies that
take advantage of external opportunities or that minimize
the impact of potential threats. The external audit stage of
the strategic management process is revealed in the next
slide.

A Comprehensive StrategicManagement Model

The Process of Performing an External

Audit
The process of performing an external audit must involve
as many managers and employees as possible.
To perform an external audit, a company must first (1)
gather competitive information about economic,
social,

cultural,

demographic,

environmental,

political, governmental, legal, and technological

trends. Individuals can be asked to monitor various
sources of vital information, such as the internet,
suppliers, distributors, salespersons, customers, and
competitors.

The Process of Performing an External

Audit (con)
Once information is gathered, it should be
assimilated and evaluated to (2) collectively
identify the most important opportunities and
threats facing the firm. These key external
factors forces- should be:
a) Important to achieving long-term and annual
objectives
b) Measurable
c) Applicable to all competing firms
d) Hierarchical in the sense that some will affect
the overall company while others will narrowly
be focused on divisional or functional areas.

The Process of Performing an

External Audit
Important to achieving long-term
and annual objectives

key
External
Forces

Measurable

Applicable to all competing firms

Hierarchical

Major External Forces

External forces can be broken down into
five broad categories:
1) Economic forces
2) Social, cultural, and demographic forces
3) Political, governmental and legal forces
4) Technological forces
5) Competitive forces

Economic Forces

An important part of the external audit is the identification and

interpretation of the main economic forces:
- Economic cycles
- Evolution of the Gross Domestic Product (the total value of goods

produced and services provided in a country during one year)

- Interest rate
- Monetary policy
- Unemployment rate
- Inflation rate
- Disposable income (income remaining after deduction of taxes

and social security charges, available to be spent or saved as

one wishes)

Social, Cultural, and Demographic Forces

An important part of the external audit is

the identification and interpretation of the
main social cultural, and demographic
forces:
- World population (7.2 billion in 2013 8
billion in 2028 9 billion in 2054)
- Life time (older population)
- Distribution of revenues (growing gap
between rich and poor)
- Changing lifestyles
- Consumerism

Political, Governmental and Legal Forces

The

increasing

between

global

interdependence

economies,

markets,

governments and organizations, makes it

imperative that companies consider the
possible

impact

governmental

and

of

the

legal

political,
(laws

on

monopolies, government stability, fiscal

policy, labor law , safety standards ...)

Technological Forces

Technological forces represent major opportunities and threats

that must be considered in formulating strategies. In fact,
technological advancements have changed the very nature
of opportunities and threats by:
- Changing manufacturing and distribution processes
- Changing marketing practices
- Creating new markets
- Result in a proliferation of new and improved products
- Changing the relative competitive cost positions in an
industry
- Rendering existing products obsolete
- Reducing or eliminating cost barriers between businesses
- Changing values and expectations of customers.
- creating new competitive advantages that are more
powerful than existing advantages changing competitive
positions

Technological Forces

The main technological forces that have dramatic impacts

on business:
- Public and private investments in technology
- Rate of obsolescence of technological products
- Transfer of information through information technology
- Usage

rate

internet ...).

of

technological

products

(mobile,

Example of the Impact of Wireless Technology on

Different Industries

AirlinesMany airlines now offer wireless technology in flight.

AutomotiveVehicles are becoming wireless.
BankingVisa sends text message alerts after unusual transactions.
EducationMany secondary (and even college) students may use smart
phones for math because research shows this to be greatly helpful.
EnergySmart meters now provide power on demand in your home or
business.
Health CarePatients use mobile devices to monitor their own health,
such as calories consumed.
HotelsDays Inn sends daily specials and coupons to hotel guests via
text messages.
Market ResearchCell phone respondents provide more honest
answers, perhaps because they are away from eavesdropping ears.
PoliticsPresident Obama won the election partly by mobilizing
Facebook and MySpace users, revolutionizing political campaigns.
Obama announced his vice presidential selection of Joe Biden by a text
message.
PublishingeBooks are increasingly available.

Competitive Forces

An important part of the external audit is to

identify the competitors and determine their:
Strengths & Weaknesses
Capacities
Riposte to all external variables
Goals
Strategies
Vulnerability to our alternative strategies

Competitive Forces - Competitive

Intelligence Programs
Competitive intelligence is a systematic process
for gathering and analyzing information about
the competitions activities and general
business trends to further a businesss own
goals. Good competitive intelligence in
business, as in the military, is one of the keys
to success. The more information and
knowledge a firm can obtain about its
competitors, the more likely it is that it can
formulate and implement effective strategies.
Major competitors weaknesses can represent
external opportunities; major competitors
strengths may represent key threats.

Competitive Forces- Porters Five-Forces

Model
Porters Five-Forces Model of competitive analysis is a
widely used approach for developing strategies in many
industries

(Strategic

Business

Unit

strategy).

The

intensity of competition among firms varies widely

across industries. In fact, according to Porter, 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 consumers

Porters Five-Forces Model of Competition

The Industrial Enterprises Approach

Industrial companies assume that their

performance is primarily affected by the

external factors (of the industry) more
than their internal factors (of the firm);
hence the exceptional importance they
attach

to

the

external

formulating their strategies.

audit

when

The External Factor Evaluation (EFE) Matrix

An External Factor Evaluation (EFE) Matrix allows
strategists to summarize and evaluate economic,
social, cultural, demographic, environmental,
political, governmental, legal, technological, and
competitive information. The EFE Matrix can be
developed in five steps:
Step 1- List key external factors as identified in
the external-audit process. Include a total of 15
to 20 factors, 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.

The External Factor Evaluation (EFE) Matrix

Step 2- Assign to each factor a weight that

ranges from 0.0 (not important) to 1 (very
important). The weight indicates the relative
importance of that factor to being successful
in the firms 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.

The External Factor Evaluation (EFE) Matrix

Step 3- Assign a rating between 1 and 4 to each key
external factor to indicate how effectively the firms
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 firms strategies. Ratings are thus companybased, whereas the weights in Step 2 are industrybased. It is important to note that both threats and
opportunities can receive a 1, 2, 3, or 4.

The External Factor Evaluation (EFE) Matrix

Step 4- Multiply each factors weight by its

rating to determine a weighted score.
Step 5- Sum the weighted scores for each
variable to determine the total weighted
score for the organization.

The External Factor Evaluation (EFE) Matrix

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 firms 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 firms strategies
are not capitalizing on opportunities or avoiding
external threats.

EFE Matrix for a Local Ten-Theatre Cinema Complex

Note that the most important factor to being successful in

this business is Trend toward healthy eating eroding
concession sales as indicated by the 0.12 weight. Also
note that the local cinema is doing excellent in regard to
handling two factors, TDB University is expanding 6
percent annually and Trend toward healthy eating
eroding concession sales. Perhaps the cinema is placing
flyers on campus and also adding yogurt and healthy
drinks to its concession menu. Note that you may have a
1, 2, 3, or 4 anywhere down the Rating column. Note also
that the factors are stated in quantitative terms to the
extent possible, rather than being stated in vague terms.
Quantify the factors as much as possible in constructing
an EFE Matrix. Finally, note that the total weighted score
of 2.58 is above the average (midpoint) of 2.5, so this
cinema business is doing pretty well, taking advantage of
the external opportunities and avoiding the threats facing
the firm. There is definitely room for improvement,