5 Ext Audit

The External Audit
OR
Industry Analysis
COMPETITIVE ADVANTAGE: THE DEBATE
External focus Internal focus
I/O Approach RBV Approach
• Industrial Organization (I/O) • Resource Based View (RBV)
• Industry in which firm operates • Internal resources are more

influences firm performance important in sustaining
competitive advantage
• Industry forces dictate firm
performance (Porter Five • Firm performance is dictated by
forces) a firm’s resources – physical,
human and organizational
• Focus efforts to compete in
attractive industries and • Unique internal resources
avoiding weak or faltering enable a firm to exploit
industries opportunities and neutralize
threats; creating sustainable
competitive advantage
THE INDUSTRIAL ORGANIZATION
(I/O) VIEW
• Firm performance is based more on industry properties

• Economies of scale
• Barriers tot market entry
• Product Differentiation
• The economy
• Level of competitiveness
7-3
KEY EXTERNAL FORCES
• Economic
• Social, cultural, demographic, natural environment forces
• Political, governmental, and legal forces
• Technological
• Competitive forces
Note:
When identifying external factors, the key is to ensure that they are
Actionable i.e they should be meaningful and have strategic
implications
7-4
ECONOMIC FORCES
• Credit Availability • Foreign countries’ economic

• Level of disposable income conditions
• Propensity of people to spend • import/export factors
• interest rates • Demand shifts for goods &
• inflation rates services
• Money market rates • income differences by
regions/groups
• Government budget deficits
• Price fluctuations
• GDP trend
• Monetary policies
• Unemployment trends
• Fiscal policies
• Worker productivity levels
• Tax rates
• Currency value in world markets
• Oil prices
• Stock market trends
SOCIAL, CULTURAL, DEMOGRAPHIC, AND
NATURAL ENVIRONMENTAL FORCES
• Birth rate / marriages / divorces / • Gender roles / Racial equity
deaths
• Average level of education
• Special-interest groups • government regulation
• immigration and emigration rates • attitudes toward retirement / leisure
• Social Security programs time /
• Life expectancy rates • Attitudes toward product quality /
• Per capita income / Disposable customer service
income / buying habits / saving • Pollution control
habits / Investing habits
• Attitudes toward foreign peoples
• Attitudes toward business • Energy conservation
• Lifestyles • Social programs
• Traffic congestion • Religion and following
• inner-city environments • Social responsibility
• Trust in government / attitudes
toward government
7-6
POLITICAL, GOVERNMENT, AND LEGAL VARIABLES
• government regulations or • Government fiscal and monetary
deregulations policy changes
• changes in tax laws • Special local, state, and federal laws
• Special tariffs • Lobbying activities
• Political action committees • Size of government budgets
• Voter participation rates • World oil, currency, and labor
• Patent laws markets
• environmental protection laws • Location and severity of terrorist
• Level of defense expenditures activities
• Legislation on equal employment • Local, state, and national elections
• Level of government subsidies
• Monopoly legislation
• Foreign relationships
• Import-export regulations
7-7
THE FIVE-FORCES MODEL OF COMPETITION
• Porter’s five forces of competition framework
• Profitability of an industry determined by five sources of
competitive pressure
• Three sources of “horizontal” competition:

• Competition from substitutes
• Competition from entrants
• Competition from established rivals
• Two sources of “vertical” competition

• Power of suppliers
• Power of buyers
7-8
WHAT PORTER’S MODEL DOES NOT INCLUDE?
7-11
COMPLEMENTS: THE MISSING LINK?
• Economic theory identifies two types of relationship between

different products: substitutes and complements.
• Presence of substitutes reduces the value of a product

• Complements increase its value
• Eg.
• Without ink cartridges printer is useless
• Value of car depends on the availability of gasoline,

insurance, and repair services
7-12
STATIC FRAMEWORK: IGNORES INTERACTIVE
DECISION MAKING BY RIVAL FIRMS
• Relegates competition to a mediating variable
• That links industry structure with profitability,
7-14
GAME THEORY
• Allows for modeling interactive effects
• Predicts outcome of competitive situations
• And identify optimal strategic choices
• Point to five aspects of strategic behavior through which a firm

• can influence competitive outcomes
• Cooperation
• Deterrence
• Commitment
• Changing the structure of the game being played
• Signaling.
7-15
CHRIST
Deemed to be University
GAME THEORY: THE PRISONER’S DILEMMA
CHRIST
Deemed to be University
THE GAME: SPLIT OR STEAL

● Split v/s Split – 1 million $ each
● Steal v/s Split – 3 million $ v/s Nothing
● Steal v/s Steal – 0 v/s 0
The stakes are:

1 million $ represents one candy.
●
The players with maximum candies in the end are winners.

●

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5 Ext Audit

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The External Audit

• Industry in which firm operates • Internal resources are more

• Firm performance is based more on industry properties

• Credit Availability • Foreign countries’ economic

• Three sources of “horizontal” competition:

• Competition from entrants

• Competition from established rivals

• Two sources of “vertical” competition

• Economic theory identifies two types of relationship between

• Presence of substitutes reduces the value of a product

• Without ink cartridges printer is useless

• Value of car depends on the availability of gasoline,

• Relegates competition to a mediating variable

• That links industry structure with profitability,

• Point to five aspects of strategic behavior through which a firm

• Changing the structure of the game being played

THE GAME: SPLIT OR STEAL

● Steal v/s Split – 3 million $ v/s Nothing

● Steal v/s Steal – 0 v/s 0

The stakes are:

The players with maximum candies in the end are winners.

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