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This lecture examines the tools and concepts needed to conduct an external strategic-management audit.
. The Nature of an External Audit
. Economic Forces

External Assessment:

Prediction is very difficult, especially about the future.
Neils Bohr

External Strategic Management Audit Is also called:
Environmental scanning
Industry analysis
In this lecture we will examine the tools and concepts needed to conduct an external strategic-management
audit (sometimes called environmental scanning or industry analysis). An 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 the Sunbelt, an aging society, information technology, and the computer revolution. An
external audit reveals key opportunities and threats confronting an organization so that managers can
formulate strategies to take advantage of the opportunities and avoid or reduce the impact of threats. This
chapter presents a practical framework for gathering, assimilating, and analyzing external information.

Key External Forces

External forces
can be divided into five broad categories:
. Economic forces;
. Social, cultural, demographic, and environmental forces;
. Political, governmental, and legal forces;
. Technological forces; and
. Competitive forces.
Relationships among these forces and an organization are depicted in Figure External trends and events
significantly affect all products, services, markets, and organizations in the world.
Relationships between Key External Forces and an Organization are shown in the above figure.
Changes in external forces translate into changes in consumer demand for both industrial and consumer
products and services. External forces affect the types of products developed, the nature of positioning and
market segmentation strategies, the types of services offered, and the choice of businesses to acquire or sell.
External forces directly affect both suppliers and distributors. Identifying and evaluating external
opportunities and threats enables organizations to develop a clear mission, to design strategies to achieve
long-term objectives, and to develop policies to achieve annual objectives.

The increasing complexity of business today is evidenced by more countries' developing the capacity and
will to compete aggressively in world markets. Foreign businesses and countries are willing to learn, adapt,
innovate, and invent to compete successfully in the marketplace. There are more competitive new
technologies in Europe and the Far East today than ever before. American businesses can no longer beat
foreign competitors with ease.

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. Figure below illustrates how the external audit fits into the strategicmanagement

A Comprehensive Strategic-Management Model
The Process of Performing an External Audit

The process of performing an external audit must involve as many managers and employees as possible. As
emphasized in earlier discussions, involvement in the strategic-management process can lead to
understanding and commitment from organizational members. Individuals appreciate having the
opportunity to contribute ideas and to gain a better understanding of their firm's industry, competitors, and
To perform an external audit, a company first must gather competitive intelligence and information about
social, cultural, demographic, environmental, economic, political, legal, governmental, and technological
trends. Individuals can be asked to monitor various sources of information such as key magazines, trade
journals, and newspapers. These persons can submit periodic scanning reports to a committee of managers
charged with performing the external audit. This approach provides a continuous stream of timely strategic
information and involves many individuals in the external-audit process. The Internet provides another
source for gathering strategic information, as do corporate, university, and public libraries. Suppliers,
distributors, salespersons, customers, and competitors represent other sources of vital information.

Once 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.
These key external factors should be listed on flip charts or a blackboard. A prioritized list of these factors
could be obtained by requesting all managers to rank the factors identified, from 1 for the most important
opportunity/threat to 20 for the least important opportunity/threat. These key external factors can vary
over time and by industry. Relationships with suppliers or distributors are often a critical success factor.
Other variables commonly used include market share, breadth of competing products, world economies,
foreign affiliates, proprietary and key account advantages, price competitiveness, technological
advancements, population shifts, interest rates, and pollution abatement.
Freund emphasized that these key external factors should be:
. Important to achieving long-term and annual objectives,
. Measurable,
. Applicable to all competing firms, and
. Hierarchical in the sense that some will pertain to the overall company and others will be more
narrowly focused on functional or divisional areas.
A final list of the most important key external factors should be communicated and distributed widely in
the organization. Both opportunities and threats can be key external factors.

Economic Forces

Economic factors have a direct impact on the potential attractiveness of various strategies. For example, as
interest rates rise, then funds needed for capital expansion become more costly or unavailable. Also, as
interest rates rise, discretionary income declines, and the demand for discretionary goods falls. As stock
prices increase, the desirability of equity as a source of capital for market development increases. Also, as
the market rises, consumer and business wealth expands. A summary of economic variables that often
represent opportunities and threats for organizations is provided in Table given below.

Key Economic Variables to Be Monitored
Shift to a service economy in
the United States
Availability of credit
Level of disposable income
Propensity of people to spend
Interest rates
Inflation rates
Money market rates
Federal government budget
Gross domestic product trend
Consumption patterns
Unemployment trends
Worker productivity levels
Value of the dollar in world
Stock market trends
Foreign countries' economic
Import/export factors
Demand shifts for different categories of
goods and services
Income differences by region and
consumer groups
Price fluctuations
Exportation of labor and capital from
the United States
Monetary policies
Fiscal policies
Tax rates
European Economic Community (ECC)
Organization of Petroleum Exporting
Countries (OPEC) policies
Coalitions of Lesser Developed
Countries (LDC) policies

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