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.

Strategic and Philosophical Importance of Business Vision and Mission Statements

Every organization has a unique purpose and reason for being. This uniqueness should be reflected in vision and mission statements. The nature of a business vision and mission can represent either a competitive advantage or disadvantage for the firm. An organization achieves  a heightened sense of purpose when strategists, managers, and employees develop and communicate a clear business vision and mission. Drucker says that developing a clear clear business vision and mission is the "first responsibility of strategists."

A good mission statement reveals an organization's customers; products or services; markets; technology; concern for survival, growth, and profitability; philosophy; self-concept; concern for public image; and concern for employees. these nine basic components serve as a practical framework for evaluating and writing mission statements. As the first step in strategic management, the vision and mission statements provide direction for all planning activities.

Well-designed vision and mission statements are essential for formulating, implementing, and evaluating strategy. Developing and communicating a clear business vision and mission are the most commonly overlooked tasks in strategic management. Without clear statements of vision and mission, a firm's short-term actions can be counterproductive to long-term interests. Vision and mission statements always should be subject to revision, but, if carefully prepared, they will require infrequent major changes. Organizations usually reexamine their vision and mission statements annually. Effective mission statements stand the test of time.

Vision and mission statements are essential tools for strategists, a fact illustrated in a short story told by Porsche former CEO Peter Schultz:

Three people were at work on a constructions site. All were doing the same job, but when each was aksed what his job was, the answers varied: "Breaking rocks," the first replied; "Earning a living," responded the second; "Helping to build a cathedral," said the third. Few of us can build cathedrals. But to the extent we can see the cathedral in whatever cause we are following, the job seems more worthwhile. Good strategists and a clear mission help us find those cathedrals in what otherwise could be dismal issues and empty causes.