Chap 3 Fred R David

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The External Assessment or External Audit is a very essential part of the Strategic Management Process. Due to the turbulent situation around the globe, it is very much necessary for organizations to conduct an effective and efficient External Audit. The purpose of external audit is to develop a list of possible opportunities and threats that an organization can face in its outer/external environment. 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 process of performing an external audit should include as many managers and employees as possible. This creates understanding and commitment from organizational members. There are a few external forces that an organization should take into account while making strategies. These forces can be divided into five categories: * Economic Forces:

Economic factors have a direct impact on the potential attractiveness of various strategies. For example, as interest rates rise, funds needed for capital expansion becomes costly or unavailable. In such cases, the organization’s strategies should be amended in such a way to get hold of any such Economic change that can overall affect the working of an organization. Some other key economic factors are Inflation rates, GDP trend, Stock market trends, Currency valuation, Monetary policies, Fiscal policies, Tax rates, Government Budget Deficits, and Price fluctuations etc. State Corruption can also lead to economic downfall and can act as a potential threat to organizations. For instance, in Russia, political bureaucracy demoralizes economic progress and entrepreneurship. Russian businesspersons who do not favour local government are targeted with extensive taxes, tariffs, fines, and intrusive inspections. So far, Russia is not considered the suitable place for business due to political corruption.

* Social, Cultural, Demographic, and Environmental Forces: Social, Cultural, Demographic, and Environmental changes are directly related to almost all products, services, markets, and customers. Every organization is challenged by the opportunities and threats arising from these changes. Changes in social, cultural, demographic, and environmental aspects of any country shapes the way they live, work, produce, and consume. New trends are creating new kinds of consumers and similarly new type of products and services are required. For example; people in US are now increasing with households having people living alone or unrelated people are living together. Similarly, people are moving towards fast growing states in order to gain more in terms of money. This type of information can be essential for successful strategy formulation, including where to locate new plants and distribution centres and where to focus marketing efforts.

* Political, Governmental, and Legal Forces:
In every country, there are organizations that rely on government contracts or subsidies. For such organizations, political forecast can be most important part of an external audit. For example, changes in taxation policy, patent laws, or lobbying activities can badly affect any organization. In such cases, companies may have to alter or abandon strategies due to political or government actions. Therefore, companies should examine the potential threats that can come through these sources, and should utilize the opportunities in the best possible ways to achieve organizational goals effectively and efficiently. Some of the political, governmental, and legal variables which an organization should take into consideration while doing external audit are changes in tax laws, changes in patent laws, number of patents, number of protests against government, level of defense expenditure, fiscal and monetary policies, lobbying activities, and national elections etc....
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