External Audit¶

Purpose and Nature of External Audit¶

External Strategic-Management Audit¶

(Also known as Environmental Scanning or Industry Analysis)

An external audit reveals the key opportunities and threats confronting an organization. The goal is to enable managers to formulate strategies that capitalize on opportunities while mitigating the impact of potential threats.

Focus of External Strategic-Management Audit¶

An external audit identifies and evaluates trends beyond the control of a single firm. These trends could include increased foreign competition, an aging society, stock market volatility, and more.

Purpose of External Audit¶

Opportunity Identification: To develop a list of opportunities that could benefit the firm.
Threat Identification: To identify threats that the firm should avoid or mitigate.
Strategic Formulation: To create strategies that take advantage of external opportunities or minimize the impact of potential threats.

The Process of Performing an External Audit¶

I. Brainstorming and Gathering Information¶

Involve as many managers and employees as possible to gather comprehensive information.
Collect competitive intelligence and data on external factors such as economic, social, cultural, demographic, environmental, political, governmental, legal, and technological trends.

II. Identifying Opportunities and Threats¶

From the gathered information, identify the most critical opportunities and threats facing the organization.
Compile a final list of key external factors that should be communicated and distributed widely within the organization.

III. Prioritized List of Opportunities and Threats¶

Create a prioritized list of opportunities and threats by ranking them. This could involve assigning ranks from 1 (most important) to 20 (least important) to guide strategic decision-making.

Industrial Organization (I/O) View¶

Overview of the I/O View¶

According to the I/O view:

External (industry) factors are deemed more important than internal factors in achieving a firm's competitive advantage.
Organizational performance is primarily influenced by industry forces such as economies of scale, barriers to market entry, product differentiation, the economy, and the level of competitiveness, rather than internal resources, capabilities, structure, and operations.

Competitive Advantage in the I/O View¶

Competitive advantage is largely determined by external factors and the firm's competitive positioning within an industry.
However, effective integration and understanding of both external and internal factors are crucial for securing and maintaining a competitive advantage.
Matching key external opportunities and threats with internal strengths and weaknesses forms the foundation of successful strategy formulation.

Internal Audit vs. External Audit¶

Strengths and Weaknesses (Internal Audit) vs. Opportunities and Threats (External Audit)¶

In strategic management, internal audits focus on identifying a firm's strengths and weaknesses, while external audits focus on uncovering opportunities and threats.

Tools for External Audit¶

EFE Matrix (External Factor Evaluation Matrix): A tool used to assess the impact of external factors on an organization.
CPM Matrix (Competitive Profile Matrix): A tool to compare a firm’s position against its competitors.

Ask Hive Chat

Hive Chat

Hi, I'm Hive Chat, an AI assistant created by CollegeHive.
How can I help you today?

🎶