Chapter 3

“External Audit”
 External Audit
• External factors include all those factors which
are beyond control of firm
• External audit reveals key opportunities and
threats confronting organization
• It is not identification of all possible factors but
only variable factors that provide actionable
research
• Organization adopts offensive or defensive
strategies to meet both opportunities and threats
 External forces influence
• External audit helps to determine, objectives
and strategies
• It affects relationship between firm and its
various stakeholders
 Relation of External Forces
•Competitors
•Economic forces •Suppliers
•Social, cultural, •Distributors
demographic and •Creditors
environmental •Customers
forces •Employees
•Political, legal and •Communities An
governmental •Managers organizations
forces •Stockholders opportunities
•Technological •Labor unions and threats
forces •Governments
•Competitive •Trade
forces associations
•Special interest
groups
 Process of External Audit
Communicate and
distribute

List down from most

to least important
Assimilate and
evaluate
information
Information
gathering

Involvement of
employees
Industrial /organizational (I/O) view
• External (industrial) forces are more important
then internal forces for competitive advantage
• Competitive advantage is determined by
competitive position in business
• Firms performance depends on industrial
priorities
 External forces
• Economic forces
• Social, cultural, demographic, and
environmental forces
• Political, legal, and governmental forces
• Technological forces
• Competitive forces
 Competitive Intelligence Program(CIP)
• Systematic and ethical process of gathering and
analyzing information about competitors and business
trends and using these information for further
business goals
• Competitors strength can be threat for business and
vice versa
• CIP is flexibility, usefulness, timeliness, and cross
functional cooperation
• Who all are part of competitive intelligence
program……..???
 CIP Purpose
1. General understanding of industry and
competitors
2. Areas where competitors are vulnerable and
impact strategies actions would have on
competitors
3. Identify potential move that a competitors
might make that would endanger firm’s
position in market
 Competitive analysis/Porter’s five forces
Model
Potential
development of
substantial
products

Bargaining power Rivalry among Bargaining power

of suppliers competing firms of consumers

Potential entry of
new competitors
 Porter’s five forces model
• Rivalry among competing firms
– Firms with better competitive strategy survive
– Change in one competitor’s strategy leads to strategic changes in
other firms
• Potential entry of new competitors
– Easy market entry increases competition
– Strategists should foresee competitors moves, plans, and
counterattack using existing strengths and opportunities
• Potential development of substitute products
– Presence of substitutes increases competition
– Puts ceiling on prices of products
 Porter’s five forces model
• Bargaining power of suppliers
• Here suppliers decide terms of trade
• Backward integration is solution
• Bargaining power of customers
• Customers lead the business
External Factors Evaluation(EFE) Matrix
• List down key external factors, include both
opportunities and threats, list opportunities first,
use % ratios and comparative numbers
• Assign weights to each factor
• Assign rating
• Determine weight score by multiplying weight
and rating
• Sum weighted score to find weighted score of
organization
Copyright 2007 Prentice Hall
Copyright 2007 Prentice Hall
 Competitive profile matrix(CPM)
• Find firms major competitors and particularly
strengths and weaknesses
• It includes both internal and external issues
• It doesn’t divide success factors in strengths
and weakness
• For exercise see page127,table3-8
 Gateway Apple Dell
CSF’s Wt Rating Wt’d
Score
Ratin
g
Wt’d
Score
Rating Wt’d
Score

Market share 0.15 3 0.45 2 0.30 4 0.60

Inventory sys 0.08 2 0.16 2 0.16 4 0.32
Fin. position 0.10 2 0.20 3 0.30 3 0.30
Prod. Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distr 0.10 3 0.30 2 0.20 3 0.30
Global Exp. 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15

Copyright 2007 Prentice Hall

 Gateway Apple Dell
CSF’s (cont’d) Wt Rating Wt’d
Score
Ratin
g
Wt’d
Score
Rating Wt’d
Score

Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12

E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Serv 0.10 3 0.30 2 0.20 4 0.40
Price
0.02 4 0.08 1 0.02 3 0.06
competitive
Mgt. 0.01 2 0.02 4 0.04 2 0.02
experience

Total 1.00 2.83 2.47 3.49

Copyright 2007 Prentice Hall