The Nature of an External Audit in Strategy Formulation

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 of defensively to the factors by formulating strategies that take advantage of external opportunities or that minimize the impact of potential threats.

Key External Forces

External forces can be divided into five broad categories: (1) economic forces; (2)social, cultural, demographic, and environmental forces; (3) political, governmental, and legal forces; (4) technological forces; and (5) competitive forces. Relationships among these forces and an organization are depicted. External trends and events significantly affect all products, services, markets, and organization in the world.

Changes in External Forces

Changes in external forces translate into changes in consumer demand for both industrial and consumer products and services. External forces affect the types products developed, the nature of positioning and market segmentation strategies, the type 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 competitive new technologies in Europe and the Far East today than ever  before. U.S. businesses can no longer beat foreign competitors with ease.