Process of Conducting an External Audit: The identification & evaluation of those trends & events that are beyond the control of an organization is called external strategic management audit or external audit, e.g. population shift to sunbelt, increased foreign competition, information technology & computer revolution etc. As compare to Internal Audit, external audit is bit difficult to do so as it cover a lot amount of factors to analyzed. The external audit points out the important opportunities & threats that comes in front of the organization and therefore the management of the organization should develop proper strategies to avail those opportunities and to reduce of avoid the effects of threats.
Process of Conducting an External Audit
Process of external audit contains few steps, which we need to met for getting the required results from our external audit process. More and more managers and employees of the organization should be involved in conducting the process of external audit or external strategic management audit. It is obvious fact that when employees of the organization are involved in the Strategic Management Process, they have better understanding of their work and are more committed to it. The managers & employees of the organization are happy when they are involved in the strategic management process because they understand of the industry, competitors, markets etc.
In order to conduct external Strategic Management audit, the organization needs to collect competitive intelligence & information about economic, social, demographic, cultural, legal, environmental, technological & governmental trends. Certain sources of information are concerned by appointed individuals like newspapers, trade journals, magazines etc. These appointed individuals provide periodic report to the authorized committee of members whose are responsible for conducting external audit. By using this method continuous information is obtained & a number of people are involved in the audit process. Moreover there are certain other potential sources that also provide strategic information like internet, university, corporate & public libraries etc. Customers, suppliers, competitors, distributors etc are also another set of sources for provision of the required information. When all the useful information is collected, then the next step is to assimilation & evaluation of that information. One or more meeting is held by the managers in order to find out the potential opportunities & threats that are faced by the organization. The key external factors are highlighted on the blackboard or flipchart. These key factors are ranked by all the managers on the basis of their importance in such a way that the most important is position on number 1 while the least important one is ranked as 20th. Variation may occur in these factors with the passage of time or with different categories of industry. One major critical success factor is the relationship with the distributors & suppliers. There are some other variables also like market share, world economies, wideness of competing products, foreign affiliates, price competitiveness, population shifts, technological advancements & interest rates etc.
Following are the features that are highlighted by Freund for these key external factors.
- Significant for accomplishing long term & annual objectives
- Can be applied to all competing organizations
- Hierarchical in nature which means some are broader enough to cover the overall organization while others are much narrower in scope that cover the divisional or functional area
At last the finalized key factors are distributed & communicated to all members of the organization which may be in the shape of opportunities or threats.
- Economic Forces:
The attractiveness of different strategies is directly affected by the economic factors. For example, when the interest rates increases then the acquisition cost of capital also increases. Also increase in interest rates decrease the discretionary income which will ultimately decrease the demand for discretionary goods. When the prices of stock increase, the demand of equity as a source of capital also increases for the market development. Moreover raise in the market price results in the expansion of business & consumer wealth. Some of important key economic forces are as follow
- Economic conditions of foreign countries
- Export/import factors
- Income differences by customer/region
- Demand shift for goods & services
- Monetary policies
- Price fluctuations
- Tax rates
- Exportation of capital & labor etc
Price fluctuation means general price fluctuations. Economic factors and buying behaviors of customers are affected by them. Customers are much conscious about the economic changes and react in accordance with the key variable factors changes. Therefore the buying trend of customers I directly affected by the change in price. There is increase in the exportation of labor & capital in the countries. Every year monetary & fiscal policies change. The organizations should focus the economic structure of the countries. The government of the country changes the tax rates with the passage of time which affects the economic forces.
- Social, Demographic, Cultural & Environmental Forces:
All the products, services, customers & markets are virtually affected by social, demographic, cultural & environmental forces. The changes in the social, demographic, cultural & environmental variables throw certain opportunities & threats to the all kinds, sized & nature of organizations. The US today is quite different from what it was in yesterday and even tomorrow it will definitely further changed. Following are some of examples of social, demographic, cultural & environmental forces.
- Population growing older
- Rise in younger population
- Less Caucasian
- The gap between poor & rich widens
- The people with age more than 65 years will increase up to 18.5% of population in 2025 in America
- No racial & ethnic majority exist in 2075 in America
The USA is becoming older with the passage of time and shows racial competition for government money & jobs. There is also growing gap between rich & poor. 76 million baby boomers of America decided to retire in 2011 which increase the worry among younger tax payer & lawmakers about their Medicare, social security & Medicaid. 65 and above aged people are increasing in America from 12.7% of population to 18.5% from 1997 to 2025. After 2075, there will be no ethnic or racial majority in the USA. Tension is created on the issues like immigration and affirmative action in the light of these forecasting. The tourism is regarded as opportunity throughout the world especially in France.
Following are some of key external factors asocial with social, demographic, cultural & environmental forces of external audit process.
- Racial equality
- Government regulation
- Average level of education
- Energy conservation
- Attitudes towards customer services
- Social responsibility
- Value placed on leisure time
- Waste management
- Ozone depletion
- Endangered species
- Political, Legal & Governmental Forces:
Following are the key opportunities & threats of the government regulation.
- Antitrust legislation
- Lobbying efforts
- Tax rates
- Patent laws
Opportunities & threats are always associated with the changes in government regulation. Example includes the antitrust legislation which includes struggle to ban monopolies. Similarly special resolution laws are passed through lobbying efforts which are only beneficial for certain parties along with the laws of increase in the tax rates. Same stories are linked with the patent & intellectual laws.
Following are the impacts of political variables
- Formulation of strategies
- Implementation of strategies
The strategists in the global economy anticipate the political climate, diverse world cultures & legislative skills. Local, state, federal & foreign governments are important regulators, subsidizers, deregulators, customers & employers of the organizations. For small & large scale organization face key threats & opportunities related with the political, legal & governmental forces. Political forecast is an important activity in the external strategic management audit for those organizations which mostly depends on the government contracts & subsidizes. The organizations are much affected by the changes in the antitrust legislation, tax rates, patent laws etc.
There are certain impolite issues that still exist in the America like abortion, genetic engineering, assisted suicide, genetic testing etc. These issues ramify many organizations from computers to pharmaceuticals.
Government regulations have following impacts on political variables.
- Special tariffs
- Government regulation/deregulation
- Political Action Committees (PACs)
- Tax law changes
- Number of patents
- Changes in patent laws
- Voter participation rates
- Technological Forces:
Following are some of revolutionary technological changes that have dramatic affects on the organizations.
- UWB (ultra wideband wireless) communications
- XML (extensible markup language) technologies
- Computer engineering
- Miracle drugs
- Fiber optics
- Satellite networks
- Cloning etc
The operations of transportation, electrical, healthcare & computer related industries are influenced greatly by the superconductivity advancements which enhance the power of electrical products by reducing resistance to current. Internet is major technological revolution that becomes global economic engine which increases the productivity of the organizations throughout the world. The XML language of programming comprise of “tags” which enables an organization to take strategic decision for exposing their information to the world in the shape of inventories, catalogs, an invoice, price, zip code etc. Similarly ultra-wideband wireless communications changes the working of organizations throughout the world by revolutionizing the communication aspect throughout the world.
In there are many opportunities & threats that are associated with the advancement in the technology & therefore the organizations should cover all these important opportunities & threats.
- Competitive Forces:
For successful Strategy Formulation, the information about the competitors should be collected and evaluated. Almost in all industries there is high level of competition. For this purpose the organization needs to the following aspects of their competitors.
These aspects are explained deeply from the following points.
- The strengths & weaknesses of the competitors
- The objectives & strategies of the competitors
- The response of competitors to external variables like social, cultural etc
- The positioning of products & services of organization relative to its competitors
- The vulnerability of competitors to the alternative strategies of the organization
- The nature of distributor & supplier relationship
- Ranking of profit & sales of competitors over time
- Substitute products or services threat etc
The useful information about competitors should be collected & evaluated in order to formulate effective strategy by the organization. It is much difficult to identify competitors in many industries. Also the multinational companies do not show the profit & sales information of their divisional units for competitive purposes. There are different sources of getting information on the competitors like internet, publications etc. For collecting & maintain information on competitors, most of organizations maintain competitive intelligence programs that keeps records of the information about the current activities of the competitors specifically as well as generally.
Key External Forces in the External Audit
There are a number of key external forces that play a vital role in the external audit. Following are the five main categories of key external audit.
- Economic Forces
- Social, Demographic, Cultural & Environmental Forces
- Political, Legal & Governmental Forces
- Technological Forces
- Competitive Forces
External events & trends seriously influence all the products, services, organizations & markets in the world. The consumer demand for both consumer & industrial products & services is affected by changes in the external forces. External forces influence the kinds of products developed, Market Segmentation Strategies & nature of positioning, the kinds of services offered and the selection of businesses to sell or acquire. Suppliers & distributors both are directly affected by the external forces. Identification & evaluation of external opportunities & threats makes an organization to prepare clear mission, to formulate strategies to accomplish long term objectives & to establish policies to accomplish annual objectives. The development of will & capacity by organizations makes the today’s business environment much more complex and competitive. There is competitive trend of foreign companies in the local marketplace which are more willing to learn, adapt, invent & innovate. Furthermore new technological revolution in the business world has changed the structure & functioning of the old concepts.
The Nature of an External Strategic Management Audit
The main objective of external audit is to highlight a number of external opportunities that can be availed by the organization along with the threats that need to be avoided by the organization. In fact the external strategic management audit does not take into account all the possible factors that affect the business organization but rather only important factors are focused that need proper actions. The organization may shows offensive or defensive behavior through developing strategies that can get benefit from the external opportunities while reducing the effects of external threats.