External Audit – Process Conducting

External Audit 

The identification and evaluation of those trends and 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 and computer revolution etc. As compared to Internal Audit, external audit is a bit difficult to do as it covers a lot of factors to analyze. The external audit points out the important opportunities and threats that come in front of the organization. Therefore the management of the organization should develop proper strategies to avail those opportunities and to reduce or avoid the effects of threats.

More From Business Study Notes:- Internal Audits 

Process of Conducting 

Process of external audit contains few steps, which we need to meet 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 an obvious fact that when employees of the organization are involved in the Strategic Management Process. Then they have a better understanding of their work and are more committed to it. The managers and employees of the organization are happy when they are involved in the strategic management process. Since they understand the industry, competitors, markets etc.

In order to conduct an external Strategic Management audit. The organization needs to collect competitive intelligence and information about economic, social, demographic, cultural, legal, environmental, technological and governmental trends. Certain sources of information are concerned by appointed individuals like newspapers, trade journals, magazines etc. These appointed individuals provide periodic reports to the authorized committee of members who are responsible for conducting external audits. By using this method continuous information is obtained and 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 and 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 assimilate and evaluate that information. One or more meetings are held by the managers in order to find out the potential opportunities and threats that are faced by the organization.

External Key Factors

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 and suppliers. There are some other variables also like market share, world economies, wideness of competing products, foreign affiliates. Along with price competitiveness, population shifts, technological advancements and interest rates etc.

Following are the features that are highlighted by Freund for these key external factors.

• Significant for accomplishing long term and annual objectives
• Measurable
• 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 and communicated. Hence, to all the 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 increase 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, rising market price results in the expansion of business and consumer wealth. Some of the 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 is directly affected by the change in price. There is an increase in the exportation of labor and capital in the countries. Every year monetary and fiscal policies change. The organizations should focus on 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 and Environmental Forces

All the products, services, customers and markets are virtually affected by social, demographic, cultural and environmental forces. These changes in the variables throw certain opportunities and threats to all kinds, sizes and nature of organizations. The US today is quite different from what it was in yesterday and even tomorrow it will definitely further change. Following are some examples of social, demographic, cultural & environmental forces.

• Population growing older
• Rise in younger population
• Less Caucasian
• The gap between poor and 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 and jobs. There is also a growing gap between rich and poor. 76 million baby boomers of America decided to retire in 2011. Although which increased the worry among younger tax payer and lawmakers about their Medicare, social security and 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 forecasts. Tourism is regarded as opportunity throughout the world especially in France.

Following are some of key external factors asocial with social, demographic, cultural and environmental forces of external audit process.

• Racial equality
• Government regulation
• Average level of education
• Energy conservation
• Attitudes towards customer services
• Social responsibility
• Recycling
• Value placed on leisure time
• Waste management
• Ozone depletion
• Endangered species

Political, Legal & Governmental Forces

Following are the key opportunities & threats of government regulation.

• Antitrust legislation
• Lobbying efforts
• Tax rates
• Patent laws

Opportunities and threats are always associated with the changes in government regulation. Example includes the antitrust legislation which includes the 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 and 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 and legislative skills. Local, state, federal and foreign governments are important regulators. As well as subsidizers, deregulators, customers and employers of the organizations. Small and large scale organizations face key threats and opportunities related with the political, legal and governmental forces. Political forecast is an important activity in the external strategic management audit. This for those organizations which mostly depends on the government contracts and 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 effects on the organizations.

• Semiconductors
• Internet
• UWB (ultra wideband wireless) communications
• XML (extensible markup language) technologies
• Robotics
• Computer engineering
• Miracle drugs
• Superconductivity
• Fiber optics
• Lasers
• Satellite networks
• Cloning etc.

The operations of transportation, electrical, healthcare and computer related industries are influenced greatly by the superconductivity advancements. Indeed, which enhance the power of electrical products by reducing resistance to current. The Internet is a major technological revolution that becomes a global economic engine which increases the productivity of organizations throughout the world. The XML language of programming comprises “tags” which enables an organization to make strategic decisions for exposing their information to the world. However, 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. Although, by revolutionizing the communication aspect throughout the world.

There are many opportunities and threats that are associated with the advancement in the technology. Therefore the organizations should cover all these important opportunities and threats.

Competitive Forces

For successful Strategy Formulation, the information about the competitors should be collected and evaluated. Almost in all industries there is a high level of competition. For this purpose the organization needs the following aspects of their competitors.

• Strengths
• Weaknesses
• Objectives
• Capabilities
• Opportunities
• Strategies
• Threats

These aspects are explained deeply from the following points.

• The strengths and weaknesses of the competitors
• The objectives and strategies of the competitors
• The response of competitors to external variables like social, cultural etc.
• The positioning of products and services of organization relative to its competitors
• The vulnerability of competitors to the alternative strategies of the organization
• The nature of distributor and supplier relationship
• Ranking of profit and sales of competitors over time
• Substitute products or services, threat etc.

The useful information about competitors should be collected and 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 and sales information of their divisional units for competitive purposes. There are different sources of getting information on the competitors like the internet, publications etc. For collecting and maintaining information on competitors. Most organizations maintain competitive intelligence programs. Of course that keep 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 and trends seriously influence all the products, services, organizations and markets in the world. The consumer demand for both consumer and industrial products. Although these are affected by changes in the external forces. External forces influence the kinds of products developed, Market Segmentation Strategies and nature of positioning. Also the kinds of services offered and the selection of businesses to sell or acquire. Suppliers and distributors both are directly affected by the external forces. Identification and evaluation of external opportunities and threats makes an organization to prepare a clear mission.

Basically, to formulate strategies to accomplish long term objectives and to establish policies to accomplish annual objectives. The development of will and capacity by organizations makes today’s business environment much more complex and competitive. There is a competitive trend of foreign companies in the local marketplace which are more willing to learn, adapt, invent & innovate. Furthermore, new technological revolutions in the business world have changed the structure and functioning of the old concepts.

More From Business Study Notes:- Market Segmentation Strategies 

The Nature of an External Strategic Management Audit

The main objective of external audit is to highlight a number of external opportunities. So, 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. Subsequently, that affect the business organization but rather only important factors are focused that need proper actions. Thus the organization may show offensive or defensive behavior through developing strategies. Therefore that can get benefit from the external opportunities while reducing the effects of external threats.