Lecture 3: The External Audit (Chap 7) Flashcards
What is External Audit?
It focuses on identifying & evaluating trends & events beyond the control of a single firm.
It reveals key opportunities & threats confronting an org. so that managers can formulate strategies to take advantage of the opportunities & avoid or reduce the impact of threats.
What is the aim of external audit?
It’s aimed at identifying key variables that offer actionable responses.
Firms are able to respond either offensively or defensively to the factors by formulating strategies that take advantage of the external opportunities or that minimize the impact of potential threats.
What are the 5 key external forces/ factors?
- economic forces
- social, cultural, demographic, and natural environment forces
- political, governmental and legal forces
- technological forces
- competitive forces
Who is involved in the process of performing an external audit?
It involves as many managers & employees as possible. This leads to an understanding & commitment from the org. members as a whole.
What is the process of performing an external audit?
- Gather competitive intelligence & info about those external forces/ factors.
- Info should be assimilated & evaluated. (collectively identify opportunities & threats among the members of org.)
- A final list of the most important key external factors should be communicated. (arranged based on priority)
What is the view of Industrial Organization (IO)?
Advocates external factors are more important than internal factors in a firm for gaining & sustaining competitive advantage.
The firm’s performance is based on external factors:
- economies of scale
- barriers to market entry
- product differentiation
- the economy
- level of competitiveness
What is the role of Chief Information Officer (CIO)?
He manages firm’s relationship w/ its shareholders. Conveys info and messages.
What is the role of Chief Technology Officer (CTO)?
He acts more of a technician, focusing on technical issues.
What do CIO and CTO do for the firm?
They work together to ensure that info is needed to formulate, implement, and evaluate strategies is available where and when it’s needed.
What is competitive forces?
Identifying rival firms & determining their strengths, weaknesses, capabilities, opportunities, threats, objectives & strategies.
What are some of the characteristics of the most competitive companies?
- strive to continually increase market share
- use the vision/ mission statement as a guide for all decision
- fix a problem to improve it
- continually adapt, innovate & improve
- acquisition is essential to growth
- hire & retain the best employees & managers possible
- strive to stay cost-competitive on a global basis
What is competitive intelligence (CI)?
It is a systematic & ethical process for gathering & analyzing info about the competition’s activities & general business trends to further a business’s own goals.
3 basis objectives of a Competitive Intelligence (CI) Program
- Provide a general understanding of an industry & its competitors.
- Identify areas in which competitors are vulnerable & to assess the impact strategic actions would have on competitors.
- Identify potential moves that a competitor might make that would endanger a firm’s position in the market.
What are the 5 forces model?
- Rivalry among competing firms
- most powerful of the 5 forces
- focuses on competitive advantage of strategies over other firms
- the more the rivalry, the stronger the competition. industry profits decreases. - Potential entry of new competitors
- barriers to entry are important
- quality, pricing & marketing can overcome such barriers
- when new firms enter more easily, competition intensifies - Potential development of substitute products
- pressure increases when price of substitutes decreases and consumers’ switching costs decreases - Bargaining power of the suppliers
- increased when there’re fewer suppliers, fewer substitutes, cost of switching raw materials is high
- backward integration is gaining control or ownership of the suppliers - Bargaining power of the consumers
- customers being concentrated or buying in volume affects intensity of competition
- consumer power is higher where products are standard or undifferentiated
What are the conditions where consumers gain bargaining power?
- buyers can inexpensively switch
- buyers are particularly important
- sellers are struggling in the face of falling consumer demand
- buyers are informed about sellers’ products, prices & costs
- buyers have discretion in whether & when they purchase the product
