An external strategic management audit involves analyzing opportunities and threats in a company's external environment. The document discusses Porter's Five Forces model for conducting an external audit. It involves gathering information on economic, social, cultural, political, and technological trends to identify key opportunities and threats. Managers then evaluate this information to develop a list of most important external factors for the company. The final list is then communicated throughout the organization. Porter's Five Forces model analyzes competitive rivalry, potential for new entrants, bargaining powers of suppliers and customers, and threat of substitutes to determine an industry's weaknesses and strengths. While it provides insights into competition and where opportunities exist, its limitations include not considering other business factors and not providing quantitative analysis.

1. External Strategic
Management Audit

2. Review the process of doing environmental
scanning.

3. External Audit
• focuses on identifying and evaluating trends and events beyond
the control of a single firm, such as increased foreign
competition, population shifts, consumer fear of traveling, and
stock market volatility.
• 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.
• 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.

4. The Process of
Performing an
External Audit
1. A company first must gather
competitive intelligence and
information about economic, social,
cultural, demographic, environmental,
political, governmental, legal, and
technological trends.

5. ● Economic Forces - are factors such as monetary and fiscal policies, interest rate,
employment, inflation rate, demographic changes, political changes, energy,
security, and natural disasters.
● Social, cultural, demographic, and environmental forces – are religious beliefs,
strata, age, level of education, infrastructure, among others.
● Political, governmental, and legal forces – are current and impending legislation,
political stability and changes, freedom of speech, protection and discrimination
laws are factors affecting business operation and activities.
● Technological Forces - can create new markets, result in a proliferation of new and
improved products, change the relative competitive cost positions in an industry,
and render existing products and services obsolete.
● Competitive Forces - Identifying major competitors is not always easy because
many firms have divisions that compete in different industries.

6. The Process of
Performing an
External Audit
2. 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.
● key external factors should be
listed on flip charts or a
chalkboard.

7. The Process of
Performing an
External Audit
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.

8. The Process of
Performing an
External Audit
3. A final list of the most important key
external factors should be communicated
and distributed widely in the organization.

9. 2) Choose a tool used in environmental
scanning and be prepared to discuss the
process of using this tool.

10. is a model that identifies and analyzes five competitive forces that shape every
industry and helps determine an industry's weaknesses and strengths.
Rivalry among
competing firms
01 02
03 04
Porter's Five Forces
Potential of New
Entrants of new
competitors
Bargaining Power of
Suppliers
Bargaining Power of
Customers
Potential development of
substitute products
05

11. is a model that identifies and analyzes five competitive forces that shape every
industry and helps determine an industry's weaknesses and strengths.
Rivalry among competing firms
01
Porter's Five Forces
• The larger the number of competitors, along with the number of
equivalent products and services they offer, the lesser the power
of a company.
• Suppliers and buyers seek out a company's competition if they
are able to offer a better deal or lower prices.
• Conversely, when competitive rivalry is low, a company has
greater power to charge higher prices and set the terms of deals
to achieve higher sales and profits.

12. is a model that identifies and analyzes five competitive forces that shape every
industry and helps determine an industry's weaknesses and strengths.
02
Porter's Five Forces
Potential of New Entrants of new
competitors
• The less time and money it costs for a competitor to enter a
company's market and be an effective competitor, the more an
established company's position could be significantly weakened.
• An industry with strong barriers to entry is ideal for existing
companies within that industry since the company would be
able to charge higher prices and negotiate better terms.

13. is a model that identifies and analyzes five competitive forces that shape every
industry and helps determine an industry's weaknesses and strengths.
03
Porter's Five Forces
Bargaining Power of Suppliers
• It is affected by the number of suppliers of key inputs of a good or
service, how unique these inputs are, and how much it would cost a
company to switch to another supplier.
• The fewer suppliers to an industry, the more a company would
depend on a supplier.
• As a result, the supplier has more power and can drive up input
costs and push for other advantages in trade. On the other hand,
when there are many suppliers or low switching costs between rival
suppliers, a company can keep its input costs lower and enhance its
profits.

14. is a model that identifies and analyzes five competitive forces that shape every
industry and helps determine an industry's weaknesses and strengths.
04
Porter's Five Forces
Bargaining Power of Customers
• The ability that customers have to drive prices lower or their level
of power.
• It is affected by how many buyers or customers a company has,
how significant each customer is, and how much it would cost a
company to find new customers or markets for its output.
• A smaller and more powerful client base means that each
customer has more power to negotiate for lower prices and better
deals.

15. is a model that identifies and analyzes five competitive forces that shape every
industry and helps determine an industry's weaknesses and strengths.
Porter's Five Forces
Potential development of
substitute products
05
• Substitute goods or services that can be used in place of a
company's products or services pose a threat.
• Companies that produce goods or services for which there
are no close substitutes will have more power to increase
prices and lock in favorable terms.
• When close substitutes are available, customers will have the
option to forgo buying a company's product, and a
company's power can be weakened.

16. What are the strengths and limitations of
Porter's Five Forces?

17. 1) Helps to Estimate the Competition in
the Industry
2) Showcase where the Strengths and
Threats Exist
3) Identify which Entities Holding the
Power
4) Display Opportunities to Expand the
Business
5) Assist to Understand the Corporate
Risk
6) Helpful in Making Corporate Strategy
and Vision
Strengths Limitations
1) Limitation on the Composition
2) Unavailability of Quantitative
Dimensions
3) Impractical to use on Large
Companies
4) Can Be Used as Starting Point for the
Analysis
5) Not Applicable for All Industries
Universally
6) Not Consider Business Risk Factors

18. Strengths
1) Helps to Estimate the Competition in the Industry
- help to measure the threat of new entrants, the threat of substitution,
supplier bargaining power, and buyer bargaining power.
- support the company to understand the current competition of the industry
to adjust the corporate strategy accordingly.
2) Showcase where the Strengths and Threats Exist
- provide the output of understanding the supplier and buyer forces with risk
of new entrants and substitute products.
- enable the senior management to find out where does the company’s
strengths place in and where does the threat exist.
- able to take precautionary actions for the threats while enhancing the
strengths more.
3) Identify which Entities Holding the Power
- provide insights into which are entities hold more power and less power.
- enable the companies to make decisions on the best strategies to handle
these entities.

19. 4) Display Opportunities to Expand the Business
- will help the company to make decisions on whether to proceed with
verticle integration to acquire suppliers and buyers to reduce their power
expand the business.
5) Assist to Understand the Corporate Risk
- provide valuable insights into the power of suppliers, power of consumers,
and power of competitors.
- All of this information will help the company to understand the corporate
risk of the business, and make responses to those risks.
6) Helpful in Making Corporate Strategy and Vision
- helps the company to make strategic decisions by looking across all
of the business to determine how best possible to create the most value.
Strengths

20. Limitations
1) Limitation on the Composition
- only concentrate on the power of suppliers, power of consumers,
substitution, and new competition but other technological factors and
business strategies that impact the company are not considered.
- Also, external forces such as government policies, taxation policies, cross-
border business risk, environmental impact, etc. are not considered.
2) Unavailability of Quantitative Dimensions
- does not provide a quantitative idea of the depth and impact of the five
forces described.
- no quantitative idea of which forces out of the five are most important
and least important.
3) Impractical to use on Large Companies
- this framework is meant to analyze a company in a single industry.

21. Limitations
4) Can Be Used as Starting Point for the Analysis
- cannot alone provide an in-detail investigation of the company.
5) Not Applicable for All Industries Universally
- cannot be used for some industries.
- companies conducting activities like R&D will not have much benefit from
this.
6) Not Consider Business Risk Factors
- major factors in determining the business risk of the company such as
foreign exchange instabilities, natural catastrophes, methods of financing,
legal constraints, fast technological evolutions, fluctuations in interest rates,
etc. not considered.

22. The end. Thank you.
Submitted to: