CH-3-4 External Assessment – Strategic Management: A Competitive Advantage Approach, Concepts and Cases : Book Guide

This Document Contains Chapters 3 to 4 Chapter 3 - External Assessment Overview Chapter 3 describes how to perform an external strategic management audit, including what variables to access, where to find information, how to assimilate external information so that it may provide a foundation for formulating strategies. Chapter 3 describes how to develop a Competitive Profile Matrix and an External Factor Evaluation Matrix, two widely utilized strategic planning tools. Chapter 3 also reveals special, free sources of external strategic information on the Internet. Learning Objectives: 1. Discuss the nature and role of labor unions in the USA as a corporate strategic issue. 2. Describe how to conduct an external strategic-management audit. 3. Discuss 10 major external forces that affect organizations: economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive. 4. Describe key sources of external information. 5. Discuss important forecasting tools used in strategic management. 6. Discuss the importance of monitoring external trends and events. 7. Explain how to develop an EFE Matrix. 8. Explain how to develop a Competitive Profile Matrix. 9. Discuss the importance of gathering competitive intelligence. 10. Discuss market commonality and resource similarity in relation to competitive analysis. Teaching Tips 1. Make certain that students realize that 1) all external factors are EXTERNAL meaning the firm has no control over the issue, and 2) external opportunities must not include STRATEGIES. Too often students will mix internal factors in with the external and/or will include strategies as opportunities. 2. Remind students of the Edward Deming quote – “In God We Trust, All Others Bring the Data.” Reason: Some students will opt to avoid the research and fact gathering process so essential in case analysis, and alternatively will simply include vague platitudes, which are useless for a firm in formulating strategies. Tell students that “Too much is at stake in strategic planning to give only vague statements such as “unemployment rates are high” or “the firm’s liquidity is low.” The firm’s survival may be at stake. Vague statements offer no insight for a firm in formulating strategies. Words such as increase/decrease/expand/high/low must be avoided; instead use specific #’s whenever possible; and make sure the factors selected are “actionable.” 3. Make sure students understand the difference between weights and ratings in an EFEM and CPM. Make sure they realize the weights and ratings are “not mere guesses,” but rather are to be based on their understanding of the company and industry. Make sure students realize that NO FIRM CAN PURSUE EVERY STRATEGY THAT WILL BENEFIT THE FIRM, SO PRIORITIZATION (ASSIGNING WEIGHTS AND RATINGS) IS VERY IMPORTANT IN STRATEGIC PLANNING. Regarding weights, point out to students that 0.08 is mathematically 33% more important than 0.06, so even small differences can become very important due to the need to allocate scare resources. Tell students never to use the word GUESS in this course, but rather use the term ESTIMATE based on their research. 4. Bring up in class the Internet “Sources of External Information” provided in Table 3-10, and put in the PEP stock symbol for PepsiCo, so students can see first hand the wealth of free external information available at those websites for a company such as PepsiCo or their assigned case company. 5. Also in that section titled “Sources of External Information,” there is mention of the Michigan State University website and the S&P Industry Surveys website. Contact the reference librarian at your college/university and ask if the library has a subscription to that S&P site. If yes, great, and bring that website up in class, because it is loaded with excellent, free, external information for 25 different industries. 6. The EFE Matrix in Table 3-10 for the “local ten-theater cinema complex” will serve as a running example in other chapters to come, so definitely go over that example. Point out the use of $’s, #’s, %’s in the factor list, as well as the Ratings which (remind students) can be 1, 2, 3, or 4 anywhere in that column – because a factor can be a threat for example and the firm may be doing a great job combating that threat = rating of 4. This is going to be in contrast to the IFE Matrix in the next chapter where the ratings are 4 or 3 for strengths and 2 or 1 for weaknesses, since by definition if the firm is weak on a factor, then the rating should be 1 or 2, i.e., lowering the total weighted score. 7. In developing a CPM, remind students that there is only a single weight column, since it is a single industry. Also in a CPM, avoid assigning the same rating to two or more firms since the purpose of the matrix is to differentiate between firms. 8. At the end of Chapter 3, direct student attention to the “Special Note to Students” because this is important information as the team prepares and ultimately delivers their oral case analysis presentation later in the course. 9. Regarding the end-of-chapter review questions, consider assigning them all one day in class giving each student a question or two, and letting them tell the class the answer, with you commenting on their answers. Many professors find this to be a fun day in class and it goes pretty quickly. 10. Several of the end-of-chapter Assurance of Learning Exercises make excellent homework or classwork assignments to be completed as an individual or as a group of students. Several exercises focus on the PepsiCo Cohesion Case, and several focus on your college/university. Many professors usually select one from each venue. Answers to End-of-Chapter Review Questions 1. Should firms take stances on contentious social issues? Discuss. Answer: There are pros and cons. A pro is that the firm can win over thousands of customers, but a con is that the firm can lose thousands of customers. Social issues and stances do matter for business, especially in today’s world of instant tweeting and emailing. For example, Starbucks' recent support of same-sex marriage in its home state of Washington was praised by a number of prominent rights activists. Maine, Maryland and Minnesota, as well as Washington voted in same-sex marriage in the November 2012 elections. Other states such as New York and California already allow same-sex marriage. But the Seattle-based coffee chain's outspoken opponents, such as the National Organization for Marriage (NOM), has vowed to make Starbucks (along with other companies that support same-sex marriage) pay a “price” for this stance. “Middle Eastern countries are hostile to lesbian, gay, bisexual and transgender (LGBT) rights. So for example, in Qatar, in the Middle East, we’ve begun working to make sure that there’s some price to be paid for this,” Brian Brown of the NOM said. “These are not countries that look kindly on same-sex marriage. And this is where Starbucks wants to expand, as well as India.” In essence, should firms should weigh the pros and cons of taking stances on contentious social issues. In general, it is best not to take stands on contentious social issues unless a compelling reason warrants such action. Being an activist is definitely a risky strategy because firms are comprised of, and need the support of, large groups of people who have different opinions/beliefs. 2. Should firms take stances on political issues? Answer: There are pros and cons. A pro is that the firm can win over thousands of customers, but a con is that the firm can lose thousands of customers. Political stances do matter for business, especially in today’s world of instant tweeting and emailing. For example, to openly and actively endorse various political candidates can alienate customers/employees who support the other party’s candidate(s). In essence, should firms should weigh the pros and cons of taking stances on political issues. In general, it is best not to take stands on political issues, unless a compelling reason warrants such action. Being an activist is definitely a risky strategy, because firms are comprised of, and need the support of, large groups of people who have different opinions/beliefs. 3. Describe union membership trends in the USA. What are implications for strategic planning in firms such as Boeing or Heinz or Caterpillar? Answer: According to the U.S. Bureau of Labor Statistics, the union membership rate (the percent of wage and salary workers who were members of a union) in the USA was 11.8 percent in 2011, down slightly from 11.9 percent the prior year. The number of wage and salary workers belonging to unions, at 14.8 million, also showed little movement over the year. By comparison, in 1983, the union membership rate was 20.1 percent and there were 17.7 million union workers. Highlights from the Bureau’s 2011 data are as follows: • Public-sector workers had a union membership rate (37.0%) more than five times higher than that of private-sector workers (6.9%). • Workers in education, training, and library occupations had the highest unionization rate, at 36.8%, while the lowest rate occurred in sales and related occupations (3.0%). • Black workers were more likely to be union members than were white, Asian, or Hispanic workers. • Among states, New York continued to have the highest union membership rate (24.1%) and North Carolina again had the lowest rate (2.9%). Boeing recently built a manufacturing plant in Charleston, South Carolina because SC is basically a nonunion state. Heinz and Caterpillar also look to build new manufacturing plants in nonunion states. Sometimes, if the only choice is to locate in a heavily unionized state, then firms will locate offshore, but Europe is much more unionized than the USA. 4. List some legal/ethical ways to gather competitive intelligence. List some illegal/unethical ways. Answer: Various legal and ethical ways to obtain competitive intelligence include the following: ● Hire top executives from rival firms ● Reverse engineer rival firms’ products ● Utilize surveys and interviews of customers, suppliers, and distributors ● Conduct drive by and on-site visits to rival firm operations ● Search on-line databases ● Contact government agencies for public information about rival firms ● Systematically monitor relevant trade publications, magazines, and newspapers ● Include gathering competitive intelligence in the job description of salespersons Some illegal/unethical ways include bribery, wire tapping, conducting job interviews with no intent of hiring but rather simply to gain information, lying, sabotage, coercing, and stealing. 5. As value of the dollar rises, USA firms doing business abroad see their profits fall, so some firms raise prices of their products to offset the decrease in profits. What are some risks of raising price? Answer: Trends in the dollar’s value have significant and unequal effects on companies in different industries and in different locations. A low value of the dollar means lower imports and higher exports, which helps U.S. companies’ competitiveness in world markets. Manufacturers in many domestic industries actually benefit because of a weak dollar, which forces foreign rivals to raise prices and extinguish discounts. Domestic firms with big overseas sales, such as McDonald’s, greatly benefit from a weak dollar. The value of the dollar changes some every day, but generally in 2012-2013 the value of the dollar was strong and thus profits of USA companies with a lot of revenue from abroad were lowered on average six to seven percent. Why the lowered profits? Because, for example, 100 euros earned in Europe, when translated back to U.S. dollars for reporting purposes, the 100 euros is worth maybe $75. To combat this “loss,” some companies try to raise prices in their European or Mexican stores, but that carries a risk of alienating shoppers, angering retailers, and giving local competitors a price edge. Some advantages of a strong dollar however are that companies with substantial outside USA operations, see their overseas expenses, such as salaries paid in euros, become cheaper. Another advantage of a strong dollar is that it gives American companies greater firepower for international acquisitions. Another advantage of a strong dollar is that companies that import benefit from greater buying power, since their dollars now go further overseas. 6. In your opinion, what are the four major external threats facing PetSmart, and the four major opportunities? Realizing the importance of quantification in stating key factors, how could your factors be quantified? Identify specific estimates (#’s) for your factors. Answer: External Threats: 1) PetSmart’s major competitor is privately-held Petco, which has over 1,000 stores in the USA, aims to beat PetSmart prices by 10%. 2) Petco has a new smartphone app to attract and keep customers. 3) Pet ownership is declining 4% annually in the USA. 4) The U.S. unemployment rates has increased back to 8%, reducing average disposable income for pets External Opportunities: 1) Canada’s GDP is 6% compared to the USA’s 3%. 2) No large pet store chains operate much in Canada. 3) Veterinary services are not offered by Petco or other pet store chains. 4) A rival pet store chain, PetsPlus, has become available for sale. 7. Explain how Facebook, Twitter, and MySpace can represent a major threat or opportunity for a company. Answer: Technological forces represent major opportunities and threats that must be considered in formulating strategies. Social networking sites such as Facebook, Twitter, and MySpace provide opportunities for many companies in terms of broadening exposure to a wider market, but overlooking these technological trends or waiting to long to act on them may represent a threat to a company’s survival. Bad news can spread very fast on social network sites, representing a major threat to firms. Good news can also spread very fast, representing a major opportunity to firms. 8. Rate the five websites provided under the “Sources of External Information” section of the chapter from best to worst for finding information about a company. Answer: Student answers will vary based on level of analysis and the type of information being sought. I use all five sites regularly. I like for example that financial statements and profile information can be cut and pasted from the www.money.msn.com site. This is not true at the www.finance.yahoo.com site. Rating the five websites provided under the "Sources of External Information" section of the chapter from best to worst for finding information about a company involves considering various factors such as reliability, comprehensiveness, usability, and relevance of the information provided. 1. SEC EDGAR Database: The SEC EDGAR Database is often considered the best source for accessing a wide range of official filings and disclosures made by publicly traded companies. It provides comprehensive and up-to-date information, including annual reports, quarterly filings, and other regulatory documents required by the Securities and Exchange Commission. Its reliability and extensive coverage make it an invaluable resource for in-depth company research. 2. Yahoo Finance: Yahoo Finance is a popular financial website that offers a wealth of information on publicly traded companies, including stock quotes, financial statements, analyst recommendations, and news updates. Its user-friendly interface and diverse range of data make it a valuable tool for investors, analysts, and researchers seeking information about companies and their performance in the financial markets. 3. Google Finance: Similar to Yahoo Finance, Google Finance provides a wide range of financial data and news related to publicly traded companies. While it offers many of the same features as Yahoo Finance, some users may prefer its clean and intuitive interface for quickly accessing key financial metrics and market updates. 4. Hoover's Online: Hoover's Online is a business information database that provides company profiles, industry analysis, and competitive intelligence reports. While it offers valuable insights into companies and industries, its coverage may be limited compared to other sources, particularly for smaller or private companies. Additionally, access to certain features may require a subscription or payment. 5. ThomasNet: ThomasNet is an industrial sourcing platform that provides information on suppliers, products, and services across various industries. While it may be useful for researching companies within specific sectors, its focus on industrial and manufacturing-related information may limit its relevance for broader company research purposes. Additionally, its coverage of non-industrial sectors may be limited. In summary, the SEC EDGAR Database is rated as the best source for accessing comprehensive and reliable information about a company, followed by Yahoo Finance and Google Finance. While Hoover's Online and ThomasNet offer valuable insights, their coverage and relevance may vary depending on the specific research needs and industry focus. 9. If your Competitive Profile Matrix has three firms and they all end up with the same Total Weighted Score, would the analysis still be useful? Why. Answer: Yes. The CPM reveals the relative strengths and weaknesses among rival firms across ten or more strategic factors. This rating information can be essential to help formulate strategies. The aim is not to arrive at a single number, but rather to assimilate and evaluate information in a meaningful way that aids in decision-making. If the total weighted scores by chance end up the same, there is no problem, but that situation would suggest a very competitive industry and very price sensitive products/services. 10. Describe the “process of performing an external audit” in an organization doing strategic planning for the first time. Answer: The process of performing an external audit should involve as many managers and employees as possible. A company must first gather competitive intelligence and information about economic, social, cultural, demographic, environmental, political, governmental, legal, and technological trends. Individuals should be asked to monitor various sources of information, such as key magazines, journals, and newspapers. These persons can submit periodic scanning reports to a committee of managers charged with performing the external audit. Once the information is gathered, it should be assimilated and evaluated. A meeting or series of meetings is needed to collectively identify the most important opportunities and threats facing the firm. Factors should be ranked and prioritized. A final list of the most important key external factors should be communicated and distributed in the organization. Strategies will be derived from matching these key external factors with key internal factors. 11. The global recession forced thousands of firms into bankruptcy. Does this fact alone confirm that “external factors are more important than internal factors” in strategic planning? Discuss. Answer: No. However, proponents of the Industrial Organization (I/O) view contend that external industry factors are more important than internal factors in a firm achieving competitive advantage. The global economic recession’s impact on both strong and weak firms added credence to this notion, since thousands of internally strong firms liquidated. However, it is not a question of whether external or internal factors are more important in gaining and maintaining competitive advantage. Effective integration and understanding of both external and internal factors and “matching” those key factors using matrices such as the SWOT introduced in Chapter 6 is the key to gaining and sustaining a competitive advantage. 12. Do the advantages of a low value of the dollar offset the disadvantages for (1) a firm that derives 60 percent of its revenues from foreign countries and (2) a firm that derives 10 percent of its revenues from foreign countries? Justify your answer. Answer: A key advantage of a weak U.S. dollar is that it raises the revenues and profits of firms that do business outside the United States. Therefore, a weak U.S. dollar will create more profit for the firm that derives 60 percent of its revenue from foreign countries, in comparison to the firm that derives 10 percent of its revenue from foreign countries. However, neither firm should overlook the disadvantages of a weak dollar, including the potential for inflation, an increase in oil prices, and stock prices falling in the long run. (See the Answer to Question 5) 13. The migration of people has slowed from (1) region to region across the United States, from (2) city to suburb worldwide, and from (3) country to country across the globe. What are the strategic implications of these trends for companies? Answer: The housing market is especially affected by these trends. Since people are not moving/relocating as much as in years past, there is lessened demand for new or used homes. The housing market is recovering in 2013, but slowly. The major migration of people in the USA is to coastal counties all along the Pacific, Gulf, and Atlantic coasts. 14. Governments worldwide are turning to “nationalization of companies” to cope with economic recession. What are the strategic implications of this trend for firms that compete with these nationalized firms? Answer: Competing with subsidized or nationalized companies is oftentimes more difficult than competing against private firms because government-backed firms have formal backing of their host country. When companies accept government bailouts, they are forced to comply with constraints and priorities set by political leaders. One implication of this trend is that domestic firms are less likely to begin or maintain operations in countries where nationalization of host firms is a threat. 15. Governments worldwide are turning to “protectionism” to cope with economic problems, imposing tariffs and subsidies on foreign goods and restrictions/incentives on their own firms to keep jobs at home. What are the strategic implications of this trend for international commerce? Answer: An increasing number of countries utilize protective tariffs to allow companies within these countries to prosper. However, many economists say that protectionist trade constraints make it harder for a country’s economy to grow, restricts imports, and also invites retaliation from other countries that may do the same to “protect” their firms. Protectionism hurts international commerce. 16. Compare and contrast the duties and responsibilities of a CIO with a CTO in a large firm. Answer: A Chief Information Officer (CIO) manages the firm’s relationship with stakeholders, particularly external stakeholders such as suppliers, distributors, and creditors. The Chief Technology Officer (CTO) is more an internal technician, focusing on technical issues such as data acquisition, data processing, decision-support systems, and software and hardware acquisition. The CIO and CTO work together to ensure that information needed to formulate, implement, and evaluate strategies is available when it is needed. 17. What are the three basic objectives of a competitive intelligence program? Answer: The three basic objectives of a competitive intelligence (CI) program are: 1) To provide a general understanding of an industry and its competitors; 2) To identify areas in which competitors are vulnerable and to assess the impact strategic actions would have on competitors; and 3) To identify potential moves that a competitor might make that would endanger a firm’s position in the market. 18. Distinguish between market commonality and resource similarity. Apply these concepts to two rival firms that you are familiar with. Answer: Researchers use the terms “market commonality” and “resource similarity” to study rivalry among competitors. Market commonality can be defined as the number and significance of markets that a firm competes in with rivals. Resource similarity is the extent to which the type and amount of a firm’s internal resources are comparable to a rival. Responses for applying these concepts to two rival firms will vary based on the firms selected. Students should investigate market commonality and resource similarity issues while looking for areas of potential competitive advantage along each firm’s value chain. 19. Let’s say you work for McDonald’s and you applied Porter’s Five-Forces Model to study the fast-food industry. Would information in your analysis provide factors more readily to an EFE Matrix, a CPM, or to neither matrix? Justify your answer. Answer: Either matrix can be used successfully to study the fast-food industry. All five forces exhibited in Porter’s model strongly impact competitiveness and rivalry in the fast-food industry. For example, it is easy for small, rival firms to enter the market, and there are countless substitute products and suppliers. In an EFEM, the key external factors are grouped into opportunities and threats, whereas the critical success factors in the CPM include both internal and external issues; therefore, the ratings refer to strengths and weaknesses in a CPM. 20. Explain why it is important for ratings in an EFE Matrix to be 1, 2, 3, or 4 for any opportunity or threat. Answer: Ratings in an EFE Matrix are based on effectiveness of a firm’s strategies in regards to the particular factor. A rating of 4 means the firm’s response is superior, a 3 above average, a 2 average, and a rating of 1 means the firm’s strategic response to the external factor is poor. Even though a factor may be a huge threat as indicated by a high weight, the firm may be doing a great job handling that threat, thus receiving a rating of 4. In contrast, even though some factor may represent a huge opportunity for the firm, if the firm is doing a poor job capitalizing on that opportunity, then the rating would be 1. So, in contrast to an IFEM to be presented in the next chapter, you should have 1, 2, 3, 4 anywhere up and down the rating column in an EFEM. 21. Why is inclusion of about 20 factors recommended in the EFE Matrix, rather than about 10 factors or about 40 factors? Answer: No firm can do everything that will benefit them. Prioritization is a key aspect of strategic planning, including in selection of key external factors. About 40 total would dilute the significance of the most important factors. About 10 would leave too much information on the table. The set of external factors will ultimately be matched with internal factors to yield alternative strategies, so 40 would be overwhelming and 10 would likely exclude some vital information. Because threats and opportunities are weighted, going above 20 factors would dilute the importance of key factors. 22. In developing an EFE Matrix, would it be advantageous to arrange your opportunities according to the highest weight, and do likewise for your threats? Explain. Answer: Yes. Arranging factors according to importance would help the firm organize, evaluate and utilize external factors in the strategic planning process. It is not essential that the EFEM be structured in this manner, but it definitely would be helpful for an analyst. 23. In developing an EFE Matrix, would it be best to have 10 opportunities and 10 threats, or would 17 opportunities (or threats) be fine with 3 of the other to achieve a total of 20 factors as desired? Answer: The EFE Matrix can include any combination of opportunities and threats for analysis. The key is to include the 20 most important factors rather than necessarily to limit the number of opportunities or threats. The number 20 is not magic, but it is most commonly used as appropriate given scarce resources and the need for prioritization in strategic planning. 24. Could/should critical success factors in a CPM include external factors? Explain. Answer: The critical success factors in a CPM can include both internal and external issues, and the ratings refer to strengths and weaknesses, revealing how well the firm’s are performing on the respective factors. For example, customer loyalty is oftentimes included and that factor is arguably external since the firm cannot control customer loyalty. 25. Explain how to conduct an external strategic-management audit. Answer: The process of performing an external audit should involve as many managers and employees as possible. First, gather competitive intelligence and economic, social, political, technological, and demographic information. Then, assimilate and evaluate this information using a series of meetings. Determine the 20 most important external factors. Prepare both a CPM and an EFEM. 26. Identify a recent economic, social, political, or technological trend that significantly affects the local Pizza Hut. Answer: Economic — The USA unemployment rate has stabilized at 8%. Social — Hispanics now comprise 26% of the USA population. Political — State and local governments’ budgets declined 7% last year. Technological — Use of social media websites is growing 12% annually in business. 27. Discuss the following statement: Major opportunities and threats usually result from an interaction among key environmental trends rather than from a single external event or factor. Answer: This is a TRUE statement that reveals how complex the external audit part of strategy formulation can be. There are an infinite number of interactions among key external factors. 28. Identify two industries experiencing rapid technological changes and three industries that are experiencing little technological change. How does the need for technological forecasting differ in these industries? Why? Answer: The computer industry, communications industry, and aerospace industry are experiencing rapid technological change. Three industries that are experiencing little technological change are the forest products industry, the shipping industry, and the dairy industry. 29. Use Porter’s Five-Forces Model to evaluate competitiveness within the U.S. banking industry. Answer: Porter identifies five competitive forces that determine the intensity of competition in an industry and the total value of profits created in a particular industry. The five forces are 1) new entrants, 2) substitute products or services, 3) bargaining power of suppliers, 4) bargaining power of buyers, and 5) rivalry among existing firms. A key to selecting appropriate generic strategies is to analyze these competitive forces in terms of trends, opportunities, and threats facing the firm. For example in the banking industry, it is easy for small firms to enter the market, and there are many substitute products offered by eBay, Amazon, etc., and rivalry is intense as banks are in close proximity to each other. The supplier force is least impactful in the banking industry. 30. How does the external audit affect other components of the strategic-management process? Answer: In countless ways, external audit results can and often do affect all other components of the strategic-management model. For example, a rival firm could enter your market area and thus require your firm to alter its objectives and lower pricing, etc. 31. As the owner of a small business, explain how you would organize a strategic-information scanning system. How would you organize such a system in a large organization? Answer: In both small and large organizations, strategists could assign specific publications and web sites to particular individuals who could then monitor their assigned source and regularly report strategic information to a coordinator. Also, managers in both small and large businesses could effectively use on-line databases. Sales representatives from both small and large firms should be utilized to gather field strategic information. 32. Construct an EFE Matrix for an organization of your choice. Answer: There are several examples in the chapter. An EFE Matrix allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information. Students should follow these guidelines and develop an EFEM perhaps for where they currently work or desire to work. There are five steps in developing an EFE Matrix as illustrated in Table 3-12. ● List key external factors as identified in the external-audit process. Include a total of 20 factors from both the opportunities and threats. ● Assign to each factor a weight from .0 (not important) to 1.0 (very important). These weights show the relative importance. The total of all the weights should equal 1.0. ● Assign a 1-4 rating to each factor to indicate how effectively the firm’s current response strategy: 1 = the response is poor, 2 = the response is average, 3 = the response is above average, and 4 = the response is superior. ● Multiply each factor’s weight by its rating to get a weighted score. ● Sum the weighted scores for each variable to determine the total weighted score for the organization. 33. What is your forecast for interest rates and the stock market in the next several months? As the stock market moves up, do interest rates always move down? Why? What are the strategic implications of these trends? Answer: As the stock market goes up, interest rates usually go down, as investors find stocks more attractive than certificates of deposit as investment opportunities when stock prices rise. But lately interest rates have remained low even as stock prices have risen sharply. A primary strategic implication of this relationship concerns the relative attractiveness of stock versus debt as a source of capital to finance strategy implementation. As stock prices move up and interest rates hold steady, stock becomes more attractive as a source of capital. 34. Let’s say your boss develops an EFE Matrix that includes 62 factors. How would you suggest reducing the number of factors to 20? Answer: Let a group of knowledgeable individuals in the organization evaluate the relative importance of each factor by assigning a 1 = not important, 2 = somewhat important, and 3 = very important. Then add the ratings each factor receives. The 20 factors with the highest sum score should be included in the EFE Matrix. Another way is to ask those individuals to simply put a check mark by their top 20 factors; then take up the responses and add the check marks to determine the prioritization. 35. Discuss the ethics of gathering competitive intelligence. Answer: Gathering competitive intelligence information is an essential activity to do, it is not corporate espionage; all the information needed is available by ethical means, mostly accessible through the Internet, but also from sales representatives, suppliers, distributors, and even customers. Firms owe it to all their stakeholders to gather competitive intelligence and to perform this activity systematically and ethically. There is no need to steal or bribe or coerce. 36. Discuss the ethics of cooperating with rival firms. Answer: This activity is both ethical and for many firms essential in order to spread risks across firms and share competencies for the greater good. There are many win-win examples of this being done, such as the recent Microsoft/Dell collaboration. The norms of personal ethics serve as a foundation for business ethics and provide a basis for cooperating with rival firms. Engaging in unethical practices, even with rival firms, will jeopardize a firm’s credibility and respect in the industry. 37. Do you agree with I/O theorists that external factors are more important than internal factors in a firm achieving competitive advantage? Explain both your and their position. Answer: Although I/O theorists suggest that industry factors are more important than internal factors, research findings suggest that only 20% of a firm’s profitability can be explained by industry factors and 36% explained by internal factors. Regardless, it is not a question of whether external or internal factors are more important. Rather, effective integration (matching) and understanding of both external and internal factors is the key to securing and keeping a competitive advantage. 38. Define, compare, and contrast the weights versus ratings in an EFE Matrix. Answer: The weight in an EFE Matrix indicates the relative importance of that factor to being successful in the firm’s industry. The rating indicates how effectively the firm’s current strategies respond to each key external factor. Thus, the weight allows more important factors to receive more consideration, while the rating evaluates how well the firm handles each factor. Weights are industry-based; ratings are company-based. 39. Develop a Competitive Profile Matrix for your university. Include six factors. Answer: A template is provided below. University 1: University 2: Critical Success Factors Weight Rating Score Rating Score Tuition costs Quality of faculty Academic reputation Average class size Campus landscaping Athletic programs Quality of students Graduate programs Location of campus Campus culture Totals 1.0 40. List 10 external areas that give rise to opportunities and threats. Answer: The ten external areas are economic, social, cultural, demographic, natural environment, political, government, legal, technological, and competitive. Answers to the End-of-Chapter Assurance of Learning Exercises ASSURANCE OF LEARNING EXERCISE 3A: COMPETITIVE INTELLIGENCE (CI) CERTIFICATION Answer: This is an excellent exercise that provides students with a deeper understanding of competitive intelligence (CI) certification. 1. Strategic & Competitive Intelligence Professionals – Formerly the Society of Competitive Intelligence Professionals, SCIP is a global nonprofit membership organization for everyone involved in creating and managing business knowledge. Its mission is to enhance the success of members through leadership, education, advocacy, and networking. SCIP provides education and networking opportunities for business professionals working in the rapidly growing field of competitive intelligence. Many SCIP members have backgrounds in market research, strategic analysis, or science and technology. 2. The Journal of Competitive Intelligence and Management – Contains peer-reviewed articles on competitive intelligence 3. The Institute for Competitive Intelligence - The Institute for Competitive Intelligence was founded to provide international training programs to Competitive Intelligence professionals seeking certification in Competitive Intelligence. The Institute provides education through intensive, practical learning, where participants can choose to study complete certificate programs or attend specific workshops. The Institute also offers individual in-house training to companies. 4. The Fuld-Gilad-Herring Academy of Competitive Intelligence - The Fuld-Gilad-Herring Academy of Competitive Intelligence (ACI) is an educational institution dedicated to training managers and companies in better managing risks and anticipating new market opportunities though the use of superior competitive intelligence, market intelligence, marketing intelligence and strategic intelligence. It is the only institution to offer an accredited Competitive Intelligence Professional (CIP™) certificate program - a complete intelligence program - from basics to advanced analysis - developed and led by the leading thinkers and educators in the field. ACI has been recognized for its expertise in competitive intelligence by: Business Week, CNBC The Economist, Fast Company, Forbes, Fortune, FNN, The New York Times, United Nations and The Wall Street Journal. 5. Competitive Intelligence Ethics: Navigating the Gray Zone - This book provides a complete overview of the issues surrounding competitive intelligence ethics with outstanding contributions from some of the world's most respected and experienced corporate, consulting, and academic competitive intelligence professionals. Competitive Intelligence Ethics includes over 30 examples of actual corporate ethics guidelines and implementation steps that can be applied to any organization. ASSURANCE OF LEARNING EXERCISE 3B: DEVELOP DIVISIONAL PEPSICO EFE MATRICES Answer: PAB = PepsiCo Americas Beverage PAF = PepsiCo Americas Foods This exercise asks students to develop two EFEM’s: one for PAB and one for PAF. Recall from the Cohesion Case that PAF includes: LAF = Latin America Foods QFNA = Quaker Foods North America. FLNA = Frito-Lay North America Therefore, basically this exercise desires an EFEM for PepsiCo’s 1) Snacks vs. 2) Beverages segments. EFEM for PAB (PepsiCo Americas Beverages) Note that O3 and T7 are the same. Some factors can be an opportunity in one sense and a threat in another sense. Note the use of #’s, consistent with the Edward Deming quote: In God We Trust; All Others Bring the Data. Specific are essential for taking effective action upon the key underlying external factors. Conclusion: PAB’s 2.65 total weighted score indicates that the segment has some external problems and is not capitalizing on some key external factors. Note that the PAB segment receives only two ratings of 4, but no ratings of 1, so the segment is performing average in many categories. EFEM for PAF (PepsiCo Americas Foods) Note that O6 and T5 are the same. Some factors can be an opportunity in one sense and a threat in another sense. Conclusion: Note that PAF’s 2.35 total weighted score indicates that the segment has major external problems and is not capitalizing on key external factors. Note the segment receives two ratings of 4 but three ratings of 1. The ratings of 1 are primarily due to PepsiCo showing no interest in acquiring either Mondelez or Snyders-Lance. ASSURANCE OF LEARNING EXERCISE 3C: DEVELOP AN EFE MATRIX FOR PEPSICO Answer: From Exercise 1B, the following are possible external opportunities/threats taken directly from the PepsiCo Cohesion Case. Conclusion: Note that PepsiCo’s 2.31 total weighted score indicates that the firm has major external problems and is not capitalizing on key external factors. Note the firm receives no ratings of 4. ASSURANCE OF LEARNING EXERCISE 3D: PERFORM AN EXTERNAL ASSESSMENT Answer: This exercise gives students the opportunity to apply strategic management concepts to a local company, perhaps a business where they presently work. Performing an external strategic assessment provides vital information about competitors as well as demographic, political, technological, and economic trends and events that could dramatically impact the business’ overall vision/mission/strategies. ASSURANCE OF LEARNING EXERCISE 3E: DEVELOP AN EFE MATRIX FOR YOUR UNIVERSITY Answer: An example is provided below. Note that this college is doing excellent enrolling minority students but is doing poorly in delivering online programs especially for international students. Emphasize to students that the ratings can be 1, 2, 3, or 4 for any opportunity OR threat, because the firm could be doing excellent regarding any external factor – (unlike the IFEM in the next chapter where weaknesses by definition receive a rating of 1 or 2, and strengths a 3 or 4). Conclusion: The university has some major external problems, as indicated by the relatively low 2.60 total score. The university’s very weak response to the opportunity to “develop and deliver online courses,” coupled with their weak response to the “decline in state funding” are particularly worrisome going forward. ASSURANCE OF LEARNING EXERCISE 3F: COMPARING PETSMART WITH PETCO ANIMAL SUPPLIES Answer: The largest USA specialty retailer of pet food and supplies, PetSmart (stock symbol = PETM) has about 1,225 stores in the USA and Canada. PETM offers products that range from pig ears to iguana harnesses, and are sold under national brands and PetSmart's own private labels. Stores provide in-store boarding facilities, grooming services, obedience training, and veterinary services. A competitive advantage of PetSmart is that it is 20% owned by a medical firm that provides vet services in 800 of its stores. Another competitive advantage is its more extensive offerings of organic pet food such as grain-free Innova Prime dog food made from chicken, peas and turkey for $52.99 for a 25- pound bag. PetSmart also sells 33-pound bags of Blue Buffalo Life Protection foods, some made with free-range lamb, for $51.99 – compared to a 30-pound bag of Pedigree dog food is $19.99. The second largest USA specialty retailer of pet food and supplies, PETCO Animal Supplies Stores, has 1,150 stores in all 50 states and the District of Columbia. PETCO is the only pet store to cover the entire USA market. Like PetSmart, PETCO sells thousands of pet-related products for dogs, cats, fish, reptiles, birds, and other small animals. PETCO Animal Supplies is owned by Texas Pacific Group and Leonard Green & Partners, which took it private in a deal worth $1.8 billion. A competitive advantage of PETCO vs. PetSmart is that the firm is privately-held by a venture capitalist firm. Another competitive advantage is the firm’s overall excellent site locations for its stores. ASSURANCE OF LEARNING EXERCISE 3G: DEVELOP A COMPETITIVE PROFILE MATRIX FOR PEPSICO Answer: PepsiCo Coca-Cola Dr Pepper Critical Success Factors Weight Rating Score Rating Score Rating Score Management Experience 0.05 3 0.15 4 0.20 2 0.10 Financial Position 0.10 3 0.30 4 0.40 2 0.20 Global Expansion 0.15 3 0.60 4 0.60 2 0.30 Organizational Structure 0.05 2 0.10 3 0.15 4 0.20 Breadth of Product Line 0.15 4 0.60 2 0.30 2 0.30 Brand Awareness 0.10 4 0.40 3 0.30 2 0.20 Location of Facilities 0.05 3 0.15 4 0.20 2 0.10 Technological Advantages 0.15 3 0.60 4 0.60 2 0.30 Advertising 0.05 4 0.20 3 0.15 2 0.10 Market Share 0.05 3 0.15 4 0.20 2 0.10 Distribution 0.05 4 0.20 3 0.15 2 0.10 Social Responsibility 0.05 3 0.15 4 0.20 2 0.05 TOTAL 1.00 3.60 3.45 2.05 Conclusion: PepsiCo’s 3.60 total weighted score reveals that PepsiCo is actually stronger than Coca-Cola by a small margin, largely due to PepsiCo being diversified heavily into snack foods, whereas Coca-Cola is 100% beverage. Key factors in the analysis where PepsiCo has an edge are “breath of product line,” “advertising,” and “distribution.” ASSURANCE OF LEARNING EXERCISE 3H: DEVELOP A COMPETITIVE PROFILE MATRIX FOR OUR UNIVERSITY Answer: Students could utilize the following matrix to develop a CPM for their institution as compared to two rival institutions. Remind students to avoid giving the same rating to two institutions. Also remind students that even small differences in the assigned weights can reveal priorities which are a key aspect of strategic planning at all stages. University 1: University 2: University 3: Critical Success Factors Weight Rating WS Rating WS Rating WS Tuition costs Quality of faculty Academic reputation Average class size Campus facilities Athletic programs Quality of students Graduate programs Location of campus Campus culture Totals 1.00 Chapter 4 - Internal Assessment Overview Chapter 4 explains how to conduct an effective internal strategic management audit to provide an excellent foundation for formulating strategies. Key aspects of the basic business functions (management, marketing, finance, production/operations, R&D, and MIS) are reviewed along with value chain analysis, benchmarking, breakeven analysis, and cost/benefit analysis. Chapter 4 explains how to develop an Internal Factor Evaluation (IFE) Matrix, an important strategic planning tool. Learning Objectives: 1. Explain how the nature and role of chief marketing officer has changed. 2. Be able to work out breakeven analysis business problems. 3. Describe how to perform an internal strategic-management audit. 4. Discuss the resource-based view (RBV) in strategic management. 5. Discuss key interrelationships among the functional areas of business. 6. Identify the basic functions or activities that make up management, marketing, finance and accounting, production and operations, research and development, and management information systems. 7. Explain how to determine and prioritize a firm’s internal strengths and weaknesses. 8. Explain the importance of financial ratio analysis. 9. Discuss the nature and role of management information systems in strategic management. 10. Develop an Internal Factor Evaluation (IFE) matrix. 11. Explain cost/benefit analysis, value chain analysis, and benchmarking as strategic-management tools. Teaching Tips 1. Ask by show of hands (although you have the information recorded on a class roster sheet), who in the class is a Management major, and then ask the same for each BBA major. Why? Because this chapter offers a quick synopsis of key material in those majors. Ask students to capitalize on there area of expertise in performing their strategic management case analysis. 2. Regarding the financial ratios presented, show students where they can retrieve those ratios on the Internet, i.e., at the websites presented in the chapter. 3. Breakeven analysis has become an increasingly important strategic planning concept, especially for thousands of start-up businesses and entrepreneurs. Therefore, definitely go through the end-of-chapter review questions and exercises that deal with breakeven. This edition gives a formula and example problems that can be utilized in class to apply breakeven. 4. The IFE Matrix in Table 4-9 for the “local ten-theater cinema complex” will serve as a running example in other chapters to come, so definitely go over that example. Point out the use of $’s, #’s, %’s in the factor list, as well as the Ratings which (remind students) are 4 or 3 for strengths and 2 or 1 for weaknesses. 5. At the end of Chapter 4, direct student attention to the “Special Note to Students” because this is important information as the team prepares and ultimately delivers their oral case analysis presentation later in the course. 6. Regarding the end-of-chapter review questions, consider assigning them all one day in class giving each student a question or two, and letting them tell the class the answer, with you commenting on their answers. I have found this to be a fun day in class and it goes pretty quickly. 7. Several of the end-of-chapter Assurance of Learning Exercises make excellent homework or classwork assignments to be completed as an individual or as a group of students. Several exercises focus on the PepsiCo Cohesion Case, and several focus on your college/university. I usually select one from each venue. Answers to End-of-Chapter Review Questions 1. Marketing is becoming much more technical as are the duties and responsibilities of chief marketing officers (CMO’s). Give four examples of increasing technical aspects of marketing. Answer: a) Managing the firm’s website. b) Performing data mining (business analytics) to facilitate decision-making. c) Developing, administering, and analyzing surveys to assess customer tendencies and desires. d) Adjusting prices across countries in conjunction with changes in the value of the dollar. 2. S&P companies are on average today paying out 31 percent of their earnings in the form of dividends, but that is down from 52 percent of earnings in some years. What are the pro’s and con’s of reinvesting earnings as opposed to paying dividends? Answer: Pro’s of reinvesting earnings: 1. Can spur growth of the company. 2. Can enable the firm to acquire other firms. 3. Can enable the firm to fund multiple strategies. Pro’s of paying out dividends: 1. Can keep shareholders happy. 2. Can attract more shareholders. 3. Can raise a firm’s stock price. 3. Is a capacity utilization rate of 50 percent good? Why? Answer: A rate of 50% would be terrible because that would indicate that the production machinery in a manufacturing plant would be running/operating only 50% of the time. This would be like an airplane staying grounded 50% of the time = not good for business. 4. If Priceline.com increases its advertising expenses by 30 percent while keeping its price and variable costs the same, does that mean the company’s breakeven point will increase 30 percent? Show this calculation for a hypothetical firm. Answer: YES, on rare occasions. NO, unless the only fixed cost is advertising, which is rarely the case, so the answer is almost always NO. 5. What are the limitations of breakeven analysis? Answer: Wikipedia gives a good answer, as follows: • BE is only a supply side (i.e. costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at various prices. • BE assumes that fixed costs (FC) are constant. Although this is true in the short run, an increase in the scale of production is likely to cause fixed costs to rise. • BE assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales (i.e., linearity). • BE assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period). • In multi-product companies, BE assumes that the relative proportions of each product sold and produced are constant (i.e., the sales mix is constant). 6. In the Joy’s Daycare BE example in the chapter, how would a $1,000 annual advertising expenditure impact the business break-even point? Answer: It would raise the BE point from 8 children to 20 children. BE = 1,600/4 = 400 units (children in June). Since there are 20 days in June, Joy must watch 400/20 = 20 children every day to breakeven, up from 8 children. See Table 4-7 in the chapter. Table 4-7 – Applying Breakeven Analysis for Joy’s Day Care Seeing a need for childcare in her town, Joy is considering opening her own daycare service. Joy’s Day Care needs to be affordable, so Joy would like to care for each child for $12 a day. But Joy also wants to make money. Joy needs to know how many children she will have to watch per day to make money. Joy gathered the following information about new potential new business. a. The month of June has 20 workdays, Monday through Friday for four weeks. b. Insurance and rent on her business will be $200 and $400 respectively per month. c. Expenses per student per day will be snacks (2 @ $1.00) + meals (2 @ $3.00). Joy’s Analysis Breakeven = Operating Expenses ÷ ($12.00 - $8.00) Break-even = $600 ÷ $4.00 Break-even = 150 units (children) in June. Since there are 20 days in June, Joy must watch 150 ÷ 20 = 7.5 kids, or 8 children every day to make a profit. 7. Explain Cost/Benefit analysis. Answer: Cost/benefit analysis involves assessing the costs, benefits, and risks associated with marketing decisions. The three steps required to perform a cost/benefit analysis are: (1) compute the total costs associated with a decision, (2) estimate the total benefits from the decision, and (3) compare the total costs with the total benefits. An opportunity becomes more attractive to the extent that expected benefits exceed total costs. 8. Explain why “communication” may be the most important word in Management. What do you think is the most important word in Marketing? In Finance? In Accounting? Answer: The process of performing an internal audit provides significant opportunity for participants to understand how their jobs, departments, and divisions fit into the whole organization. Performing an internal audit thus is an excellent vehicle or forum for improving the process of communication in the organization. Excellent communication leads to excellent understanding of what the firm is doing and why, and what is in it for employees and managers. This leads to excellent commitment, a vital ingredient for strategy implementation. The most important words for Marketing, Finance, and Accounting. Examples may include “pricing” for Marketing, “financing” for Finance, and “ethics” for Accounting. 9. Discuss how the nature of advertisements have changed in the last few years. Answer: Growth of traditional advertising outlets such as newspapers, magazines, television, and radio have slowed dramatically, and there has been significant growth in Internet advertising. Advertising on social media sites such as Facebook, Twitter, YouTube, and LinkedIn has become important for many companies. Companies are even beginning to advertise to readers of e-books. Ads in general are also shorter in length, and targeted more effectively to customers. Companies increasingly are utilizing business analytics (data mining) to link the price being charged for ads to tangible, measurable results in sales. 10. Rate the seven websites in Table 4-5 from best to worst for finding comparative financial ratio information about a company. Answer: Student answers will vary based on level of analysis and the type of information being sought. I use all five sites regularly. I like for example that financial statements and profile information can be cut and pasted from the www.money.msn.com site. This is not true at the www.finance.yahoo.com site. All five sites provide financial ratios using different formats, so rarely in this course do students need to hand-calculate ratios. Rating the seven websites listed in Table 4-5 from best to worst for finding comparative financial ratio information about a company involves considering several factors such as the accuracy of data, ease of navigation, comprehensiveness of ratios provided, and reliability of sources. 1. Yahoo Finance: Yahoo Finance is often considered one of the best sources for accessing comparative financial ratio information about a company. It provides a wide range of financial ratios, including liquidity, profitability, solvency, and efficiency ratios, for easy comparison with industry benchmarks and competitors. Its user-friendly interface and comprehensive coverage make it a valuable tool for financial analysis. 2. Google Finance: Google Finance also offers comparative financial ratio information for companies, although its coverage and depth may be slightly less extensive compared to Yahoo Finance. Nonetheless, it provides essential ratios and key financial metrics that can aid in assessing a company's financial performance and position relative to peers. 3. MSN Money: MSN Money provides financial ratio information along with stock quotes, news, and analysis for investors. While its ratio coverage may be adequate for basic analysis, it may not offer the same level of depth and customization options as Yahoo Finance or Google Finance. 4. Morningstar: Morningstar is known for its in-depth financial analysis and research reports on companies and investments. While it offers financial ratio information, its primary focus may be on investment analysis rather than comparative financial analysis specifically. Nonetheless, it can still be a valuable resource for obtaining detailed financial insights. 5. CNN Money: CNN Money provides a range of financial news and information, including basic financial ratios for companies. However, its coverage and depth of ratio analysis may be limited compared to dedicated financial websites like Yahoo Finance or Google Finance. 6. Bloomberg: Bloomberg is a comprehensive financial platform that offers extensive data and analysis on companies, markets, and economies. While it provides financial ratio information, its interface and navigation may be more complex for users who are not familiar with the platform, and accessing detailed ratio analysis may require a subscription. 7. Hoover's Online: Hoover's Online offers company profiles and industry analysis but may have limited coverage and depth when it comes to comparative financial ratio information. Its focus may be more on qualitative factors and competitive intelligence rather than detailed financial analysis. In summary, Yahoo Finance and Google Finance are rated as the top sources for finding comparative financial ratio information about a company, followed by MSN Money and Morningstar. CNN Money, Bloomberg, and Hoover's Online are also valuable resources but may offer less comprehensive coverage or require more familiarity with their platforms for accessing detailed financial ratio analysis. 11. Explain why it is best not to have more than 30 percent of the factors in an IFE Matrix be financial ratios. Answer: In developing an IFE Matrix, it is important to not have than 30 percent of the key factors to be financial ratios, because financial ratios are the result of many factors, so it is difficult to know what particular strategies should be considered based on a financial ratio. For example, a firm would have no insight on whether to sell in India or China to take advantage of a high ROI ratio. A much better factor is that the firm’s sales in India increased 14% vs. 4% in China. 12. List three firms you are familiar with and give a distinctive competence for each firm. Answer: Answers will vary for each student. Examples of firms with distinctive competencies include Maytag, which is known for excellent product quality; Proctor & Gamble, known for superb marketing; and 3M, known for innovative research & development. Identifying distinctive competences for three firms involves recognizing unique capabilities or strengths that set each company apart from its competitors: 1. Apple Inc.: One distinctive competence of Apple is its design innovation and user experience. Apple products are known for their sleek design, intuitive interfaces, and seamless integration across devices. This focus on user-centric design has enabled Apple to differentiate itself in the highly competitive technology industry and build a loyal customer base that values both aesthetics and functionality. 2. Tesla, Inc.: Tesla's distinctive competence lies in its electric vehicle (EV) technology and sustainable energy initiatives. Tesla has pioneered advancements in battery technology, electric drivetrains, and autonomous driving systems, positioning itself as a leader in the transition towards sustainable transportation. Additionally, Tesla's vertically integrated approach, including its Gigafactories for battery production, gives it a competitive edge in the EV market. 3. Amazon.com, Inc.: Amazon's distinctive competence revolves around its logistics and supply chain capabilities. Amazon has built one of the most sophisticated distribution networks in the world, enabling fast and efficient delivery of a wide range of products to customers globally. Its investment in technology, such as robotics and machine learning, has further optimized its operations and enhanced customer satisfaction through initiatives like Prime membership and same-day delivery options. Each of these firms has leveraged its distinctive competence to achieve competitive advantage in its respective industry, driving growth, innovation, and customer value. 13. Give some key reasons why prioritizing strengths and weaknesses is essential. Answer: Prioritization is key throughout the strategic planning process, because no firm has sufficient resources to do everything that can benefit the firm. Key internal factors must be prioritized so that the firm’s most important strengths and weaknesses can be determined collectively as needed to decide among numerous beneficial strategies. Performing an internal audit provides great opportunity for participants to understand how their jobs, departments, and divisions fit into the whole organization. 14. Why may it be easier in performing an internal assessment to develop a list of 80 strengths/weaknesses than to decide on the top 20 to use in formulating strategies. Answer: Developing a list of 20 strengths and weaknesses can be difficult when it involves managers representing various organizational interests and points of view. The judgments required to compile such a list will impact strategy formulation, implementation, and evaluation. Simply put, some departments and divisions/segments will receive greater resources than others based on the factors selected, and more specifically the prioritization of factors. Eighty random factors would be easy to develop since managers from all areas would have their interests covered. It is essential to include managers from all areas of the business in the prioritization of internal factors since formulation of selection of strategies will be based on the most important factors. 15. Think of an organization you are very familiar with. List three resources of that entity that are empirical indicators. Answer: Empirical indicators are resources that are rare, hard to imitate, and not easily substitutable. Student examples should encompass at least one of these three characteristics when identifying resources that enable a firm to implement strategies that lead to a sustainable competitive advantage. For example for ExxonMobil Corp., ownership of oil wells, and ownership of drilling rights, and contractual agreements with various distributors could all be empirical indicator resources. 16. Think of an organization you are very familiar with. Rate that entity’s organizational culture on the 15 example dimensions listed in Table 4-2. Answer: Organizations selected will vary by student. Some example cultural products listed in Table 4-2 include: strong work ethic, high ethical beliefs, formal/informal dress, socializing outside of work, and being health-conscious or having a wellness program. These and other cultural aspects can be rated on a 1-5 scale, where 1 is a weak component of the firm’s culture and 5 is a strong component of the firm’s culture. 1. Innovation and Risk-taking: Evaluate the organization's willingness to embrace innovation and take calculated risks in pursuing new ideas and initiatives. Rate it based on its track record of innovation, support for experimentation, and tolerance for failure. 2. Attention to Detail: Assess the organization's emphasis on precision, accuracy, and thoroughness in its work processes and operations. Consider factors such as quality control measures, attention to compliance and regulatory requirements, and focus on minimizing errors. 3. Outcome Orientation: Rate the organization's focus on achieving results and delivering outcomes. Consider its performance-driven culture, emphasis on setting and achieving goals, and accountability for outcomes at all levels of the organization. 4. People Orientation: Evaluate the organization's emphasis on people and relationships. Consider factors such as employee development initiatives, focus on teamwork and collaboration, and efforts to create a positive work environment conducive to employee well-being and satisfaction. 5. Team Orientation: Assess the organization's emphasis on teamwork and collaboration. Consider its structures, processes, and incentives for promoting cross-functional collaboration, sharing of knowledge and expertise, and collective problem-solving. 6. Aggressiveness: Evaluate the organization's competitive stance and assertiveness in pursuing its goals and objectives. Consider its approach to market competition, negotiation tactics, and willingness to challenge industry norms and conventions. 7. Stability: Assess the organization's degree of stability and predictability in its operations and environment. Consider factors such as long-term planning, risk management strategies, and resistance to change or disruption. 8. Innovation: Evaluate the organization's ability to innovate and adapt to changing market conditions and technological advancements. Consider its investment in research and development, openness to new ideas, and agility in responding to market trends and customer preferences. 9. Attention to Detail: Assess the organization's commitment to excellence and precision in its work processes and outputs. Consider its quality control measures, attention to accuracy and thoroughness, and focus on continuous improvement. 10. Outcome Orientation: Rate the organization's focus on achieving tangible results and outcomes. Consider its performance metrics, goal-setting processes, and accountability mechanisms for tracking and evaluating performance. 17. If you and a partner were going to visit a foreign country where you have never been before, how much planning would you do ahead of time? What benefit would you expect that planning to provide? Answer: I would do extensive planning, so that we could use our time wisely in the country, seeing and doing all that we could while there. Potential benefits from planning for the trip may include anticipating and preparing for potential issues related to weather and travel, establishing objectives on what to do and see, devising strategies to make the trip cost effective, developing policies and guidelines on behavior and activities, and setting goals (priorities) that are important to the student. Some students may indicate that extensive planning is not necessary and may curb spontaneity. 18. Even though planning is considered the foundation of management, why do you think it is commonly the task that managers neglect most? Answer: Various reasons listed and described back in the Chapter 1 include: Lack of knowledge or experience in planning. Poor reward structures. Firefighting. Considered to be a waste of time. Too expensive. Laziness. Content with success. Fear of failure. Overconfidence. Prior bad experience. Self-interest. Fear of the unknown. Honest difference of opinion. Suspicion. 19. Are you more organized than the person sitting beside you in class? If not, what problems could that present in terms of your performance and rank in the class? How analogous is this situation to rival companies? Answer: Being well-organized means that you utilize time efficiently and effectively, rather than wasting time. Being well organized in class thus usually translates into excellent performance in the course. When rival firms are in close proximity to each other, as your fellow students are in the class, being well organized becomes even more important. Regarding teamwork in class or in a business, the purpose of organizing is to achieve coordinated effort by defining task and authority relationships. The three activities within the organizing function can be applied to business as well as the classroom: 1) work specialization, 2) combining jobs to form departments, and 3) delegating authority. 20. List the three ways that financial ratios should be compared/utilized. Which of the three comparisons do you feel is most important? Why? Answer: Three questions that should be raised when conducting a financial ratio analysis are: (1) How has each ratio changed over time? (2) How does each ratio compare to industry norms? (3) How does each ratio compare with key competitors? Financial ratio analysis should be conducted on three separate fronts to get the full picture, so no one area is more important than the others. 21. Illustrate how value chain activities can become core competencies and eventually distinctive competencies. Give an example for an organization you are familiar with. Answer: Identify where low-cost advantages or disadvantages exist anywhere along the value chain from raw material to customer service activities. Identify your firm’s own strengths and weaknesses as compared to competitors’ value chain analyses. Take action to strengthen competitive advantages turning them into distinctive competencies, and improve competitive disadvantages in an effort to turn them into core competencies. An example of this is Wal-Mart, which has built powerful value advantages by focusing on exceptionally tight inventory control, volume purchasing, and low pricing. 22. In an IFEM, would it be advantageous to list your strengths, and then your weaknesses, in order of increasing “weight”? Why? Answer: Yes. Arranging factors according to importance would help the firm organize, evaluate and utilize internal factors in the strategic planning process. It is not essential that the IFEM be structured in this manner, but it definitely would be helpful for an analyst. 23. In an IFEM, a critic may say there is no significant difference between a “weight” of 0.08 and 0.06. How would you respond? Answer: On the surface, the weight of an IFEM factor may appear to be insignificant. However, a factor’s weight can become significant when it is combined with a rating and converted into a weighted score. For example, the 0.08 factor may receive a rating of 4 (major strength), whereas the 0.06 factor may receive a rating of 1 (major weakness). The weighted score of the 0.08 factor will be 0.32, whereas the weighted score of the 0.06 factor will be a much lower 0.06. In addition, it is important to note that 0.08 is 33% higher (more important) than 0.06. 24. List six desirable characteristics of advertisements in recessionary times. Answer: Nine desirable characteristics of advertisements in recessionary times are presented in Table 4-4 and include: 1. Take direct aim at competitors. 2. Be less lavish and glamorous. 3. Be short and sweet. 4. Embody a “feel good mood”. 5. Be more pervasive such as on buses, elevators, and cell phones. 6. Appear less on Web sites as banner ads. 7. Use red. 8. Emphasize low prices and value more than ever. 9. More than ever, emphasize how the product/service will make life better. 25. Why are so many firms raising their dividend payout amounts? Answer: Companies are making money and stock prices are high, so the thought is to reward their shareholders by raising the dividend. Firms in 2012 especially raised dividends since the federal government anticipated increasing taxes on dividends in 2013. 26. When someone says dividends paid are double taxed, what are they referring to? Answer: Dividends are subject to corporate taxation followed by private income taxation. The company first pays corporate tax on its revenue, before the dividend is paid out to the shareholder. Once the shareholder receives the dividend, he/she pays taxes on that dollar amount. So in essence that dollar amount was taxed at the corporate level and the individual level. 27. Draw a breakeven chart to illustrate a drop in labor costs. Answer: A drop in labor costs constitutes a decrease in variable costs, which would result in a decrease in a firm’s breakeven point. See the diagram below for an illustration: 28. Draw a breakeven chart to illustrate an increase in advertising expenses. Answer: An increase in advertising expenses constitutes an increase in fixed costs, which would result in an increase in a firm’s breakeven point. See the diagram below for an illustration: 29. Draw a breakeven chart to illustrate closing stores. Answer: Closing stores constitutes a decrease in fixed costs, which would result in a decrease in a firm’s breakeven point. See the diagram below for an illustration: 30. Draw a breakeven chart to illustrate lowering price. Answer: Lowering price constitutes a decrease in total revenue, which would result in an increase in a firm’s breakeven point. See the diagram below for an illustration: 31. Explain why prioritizing the relative importance of strengths and weaknesses to include in an IFE Matrix is an important strategic-management activity. Answer: No firm has sufficient resources to do everything that can benefit the firm, so prioritization is vital at all stages of strategic management. No more than 20 factors should be included in an IFE Matrix because too many strategies cannot be effectively pursued simultaneously. Including more than 20 factors dilutes the importance of the most significant factors. 32. How can delegation of authority contribute to effective strategic management? Answer: Delegation of authority is an effective way to involve lower-level and middle-level managers in the strategy-formulation process. Delegation can also be important in strategy implementation to help motivate managers, because those persons being delegated to may actually be closer to customers/suppliers/distributors and thus can make more effective decisions. 33. Which of the three basic functions of finance/accounting do you feel is most important in a small electronics manufacturing concern? Justify your position. Answer: According to James Van Horne, the three basic functions of finance are the investment decision, the financing decision, and the dividend decision. In a small electronics manufacturing concern, the investment decision would be most important, because the firm probably does not pay dividends, and likely does not have common stock, but does have to allocate available resources among projects/regions. 34. Do you think aggregate R&D expenditures for American firms will increase or decrease next year? Why? Answer: Technological advancements are shortening the product life cycle in nearly all industries, so products of all types are becoming obsolete more quickly than ever, thus requiring greater R&D expenditures to gain competitive advantages. Aggregate R&D expenditures will surely increase, but some firms are very successful as late movers (fast followers) rather than being first movers that spend more on R&D. 35. Explain how you would motivate managers and employees to implement a major new strategy. Answer: There is a need to demonstrate clearly how the new strategy will benefit managers and employees of the organization. Articulate effectively why the new strategy is needed, given competitors’ strategies, products, and services. Involve employees and managers in formulating strategies to the extent possible. Involve as many managers as possible in discussions about how to effectively implement the strategy. The process is more important than the plan. 36. Why do you think production/operations managers are often not directly involved in strategy-formulation activities? Why can this be a major organizational weakness? Answer: There is an unfortunate stigma in many organizations that production/operations managers do not need to be involved in strategy-formulation decisions; they only implement strategies. This attitude can represent a major weakness in any organization, because more than 80 percent of company assets are generally tied up in production/operations facilities, materials, plants, equipment, inventory, and machines. Production managers’ input into strategy-formulation activities can help assure that cost-effective strategies are selected for implementation. 37. Give two examples of staffing strengths and weaknesses of an organization with which you are familiar. Answer: Staffing activities include hiring, training, testing, wage and salary administration, employee benefits, union/management relations, and employee development. The Brown Company has high employee morale and an excellent ESOP plan, but the firm also has too few women in upper management and too few minorities as well. 38. Would you ever pay out dividends when your firm’s annual net profit is negative? Why? What effect could this have on a firm’s strategies? Answer: YES. It may be a one-year accounting anomaly that caused the negative profit rather than a projected trend of poor performance. For the following reasons, dividends are sometimes paid even when a firm’s annual net profit is negative: •Paying cash dividends is customary. Failure to do so could trigger a huge stock price drop. •Dividends represent a sales point for investment bankers. Some institutions can only buy dividend-paying stocks. •Shareholders often demand dividends, even in companies with great opportunities for reinvesting all available funds. 39. If a firm has zero debt in its capital structure, is that always an organizational strength? Why or why not? Answer: Whenever an organization’s return on investment or profit margin exceeds the cost of debt, it may be advisable to use debt to finance growth and expansion. Thus, it is not always an organizational strength to have zero debt in a firm’s capital structure. As an individual, if you were sure you could make 15 percent on monies invested, then you would probably obtain a substantial amount of debt at 4 percent to invest at that higher level. 40. Describe the production/operations system in a police department. Answer: The production function of a business consists of all those activities that transform inputs into goods and services. For a police department, the inputs would include labor, capital, machines, and facilities. The outputs could include a lower crime rate, law and order in the community, and smooth traffic flows. A police department, like any organization, should pursue strategies to capitalize on production system strengths and to overcome weaknesses. 41. After conducting an internal audit, a firm discovers a total of 100 strengths and 100 weaknesses. What procedures could be then used to determine the most important of these? Why is it important to reduce the total number of key factors? Answer: Let a group of knowledgeable individuals in the organization evaluate the relative importance of each factor by assigning a 1 = not important, 2 = somewhat important, and 3 = very important. Then add the ratings each factor receives. The 20 factors with the highest sum score should be included in the IFE Matrix. Another way is to ask those individuals to simply put a check mark by their top 20 factors; then take up the responses and add the check marks to determine the prioritization. 42. Why do you believe cultural products affect all the functions of business? Answer: Cultural products permeate every activity in an organization. People become attached to cultural products and often resist changes in rites, rituals, values, beliefs, and norms. Whether people work in marketing, manufacturing, personnel, or finance/accounting, they likely feel strongly about a firm’s culture. 43. Do you think cultural products affect strategy formulation, implementation, or evaluation the most? Why? Answer: Cultural products likely affect strategy implementation most, but, too often, consideration of cultural products is limited in formulation and evaluation activities. 44. Identify cultural products at your college or university. Do these products, viewed collectively or separately, represent a strength or weakness for the organization? Answer: Some colleges are dorm-based and some are commuter-based. Some have small class sizes and extensive faculty-student interaction and some have large, auditorium size classes with minimal faculty-student interaction. Answers will vary considerably across colleges and universities. Identifying cultural products at our college or university involves recognizing various aspects such as academic programs, extracurricular activities, student organizations, traditions, and campus events that contribute to the overall culture and identity of the institution. Collectively, these cultural products represent both strengths and weaknesses for the organization: Strengths: 1. Diverse Academic Programs: A wide range of academic programs catering to different interests and disciplines contribute to the institution's strength. It attracts a diverse student body and enhances the educational experience by providing opportunities for interdisciplinary learning and specialization. 2. Vibrant Student Life: Extracurricular activities, student organizations, and campus events foster a vibrant student community and promote student engagement and leadership development. These cultural products create a sense of belonging, camaraderie, and school spirit among students, enhancing their overall college experience. 3. Rich Tradition and Heritage: Traditions and heritage unique to the institution reflect its history, values, and identity. They serve as symbols of pride and unity, connecting current students, faculty, staff, and alumni across generations. These cultural products instill a sense of loyalty and allegiance to the institution, contributing to its long-term sustainability and reputation. Weaknesses: 1. Resource Allocation: While cultural products add value to the college experience, they may also strain resources, both financial and human. Balancing the diverse needs and interests of students, faculty, and staff with limited resources can be challenging, leading to potential inefficiencies or inequities in resource allocation. 2. Inclusivity and Diversity: While diversity is often considered a strength, cultural products must ensure inclusivity and representation of all members of the college community. Failure to address diversity and inclusion issues can undermine the institution's reputation and hinder its ability to attract and retain a diverse student body and faculty. 3. Adaptability to Change: Cultural products that are deeply entrenched in tradition may resist change or innovation, hindering the institution's ability to adapt to evolving needs and trends in higher education. Maintaining a balance between preserving tradition and embracing innovation is essential for the institution's long-term viability and relevance. In conclusion, cultural products at our college or university collectively represent both strengths and weaknesses. Recognizing and leveraging strengths while addressing weaknesses through strategic initiatives and continuous improvement efforts are essential for enhancing the institution's overall competitiveness and sustainability. 45. Explain the difference between data and information in terms of each being useful to strategists. Answer: Data becomes information when it is assimilated and used by individuals for some purpose. 46. What are the most important characteristics of an effective management information system (MIS)? Answer: An MIS utilizes hardware, software, models for analysis, and one or more databases. The system must be economical, widely understood, practical, and updated regularly. 47. Do you agree or disagree with RBV theorists that internal resources are more important than external factors for a firm in achieving and sustaining competitive advantage? Explain your and their position. Answer: While internal factors are certainly important, one cannot say with any degree of certainty that either internal or external factors will always or even consistently be more important than the other in seeking competitive advantage. Strategists must understand that both internal and external factors, and the relationships between them, are important. The RBV suggests that the mix, type, amount, and nature of a firm’s internal resources should be considered first and foremost in devising strategies that lead to sustainable competitive advantage. The RBV recognizes that a firm should identify and exploit its unique resources and capabilities. While this is certainly true, external factors will also play a key role in a firm’s success. Firms should utilize internal strengths to take advantage of external opportunities. 48. Define and discuss “empirical indicators.” Answer: Empirical indicators refer to the characteristics of resources that enable a firm to implement strategies that improve its efficiency and effectiveness and ultimately lead to a sustainable competitive advantage. The three empirical indicators for a resource to be valuable are that the resource should be 1) rare, 2) hard to imitate, and 3) not easily substitutable. 49. Define and discuss the “spam” problem in the United States. Answer: Spam is unwanted, unsolicited, and undesirable electronic mail messages. Because of the vast number of spam email messages sent, many companies now have hardware and software designed to protect against spam. 50. Define and explain value chain analysis (VCA). Answer: Value chain analysis refers to the process whereby a firm determines the costs associated with organizational activities from purchasing raw materials to manufacturing products to marketing those products. The analysis seeks to identify where advantages and disadvantages exist along the value chain from raw material to customer service as compared to rival firms. VCA can enable a firm to gain and sustain competitive advantages. 51. List five financial ratios that may be used by your university to monitor operations. Answer: Different type organizations have unique ratios that they monitor in addition to traditional ratios. For example, universities may monitor #faculty/#students, $tuition revenues/#students, and #online courses/total # courses. Universities can also monitor current ratio, quick ratio, debt-to-total assets ratio, accounts receivable turnover, average collection period, and operating profit margin. 52. Explain benchmarking. Answer: Benchmarking is an analytical tool used to determine whether a firm’s value-chain activities are competitive compared to rivals. It entails measuring costs of value chain activities across an industry to determine “best practices” among competing firms for the purpose of duplicating or improving upon those best practices. Answers to the End-of-Chapter Assurance of Learning Exercises ASSURANCE OF LEARNING EXERCISE 4A: APPLY BREAKEVEN ANALYSIS Answer: Breakeven Quantity = Total Fixed Costs (TFC) / Price per unit (P) - Variable Costs per unit (VC) Total Fixed Costs (TFC): $100 million Price per unit (P): $3 million Variable costs per unit (VC): $2 million 1. Breakeven Quantity = $100 million / ($3 million - $2 million) = 100 planes 2. Since the company makes $1 million on each plane (P – VC), after the FC are covered at 100 planes, then the company needs to produce 99 more planes to make a $99 million profit, so the answer is 199 planes. 3. Since the company makes $1 million on each plane (P – VC), after the FC are covered at 100 planes, then if the company produces 200 planes, it will make a profit of $100 million. Note: This problem assumes that capacity utilization is sufficiently low for the additional planes to be produced with no corresponding increase in fixed costs. Obviously at some point of producing additional airplanes, fixed costs must be increased. ASSURANCE OF LEARNING EXERCISE 4B: COMPARING PRICELINE.COM WITH EXPEDIA.COM Answer: The priceline.com web site has larger print, but fewer icons and less information on their home page as compared to expedia.com Both web sites however are comparable in terms of icons with both offering Hotels, Cruises, Flights, Cars, and Vacation Packages. Both sites offer Last Minute Deals. Only Expedia offers an icon for Things To Do. Overall, the expedia.com site is better than the priceline.com because there are more specific deals provided on the home page. The downside of expedia.com is a bit smaller print, but most customers will opt for more info since the smaller print is not that much smaller. In conclusion, both of these web sites are excellent, and both are very functional, and as you would expect, there is great similarity between the two, as both are popular Internet-based travel businesses. ASSURANCE OF LEARNING EXERCISE 4C: PERFORM A FINANCIAL RATIO ANALYSIS FOR PEPSICO Answer: ASSURANCE OF LEARNING EXERCISE 4D: CONSTRUCTING AN IFE MATRIX FOR PEPSICO Answer: From Exercise 1B, the following are possible internal strengths/weaknesses taken directly from the PepsiCo Cohesion Case. Make sure students see the difference in internal vs. external factors. Note the need to be as specific as possible in stating each factor. Ask students to keep this information for use in later exercises. Remind students that: PAB = PepsiCo Americas Beverage PAF = PepsiCo Americas Foods LAF = Latin America Foods AMEA = Asia, Middle East, & Africa QFNA = Quaker Foods North America. FLNA = Frito-Lay North America Conclusion: PepsiCo is doing pretty good internally as indicated by the 2.94 relatively high score, but there are areas for improvement as indicated by the seven ratings of 1. ASSURANCE OF LEARNING EXERCISE 4E: CONSTRUCT AN IFE MATRIX FOR YOUR UNIVERSITY Answer: An example is given below. Note that the most highly weighted factor, i.e., the most important in the industry, is the demand for nursing and business students, and the university is doing pretty well as indicated by a rating of 3. But note also that the university has some major weaknesses, especially in terms of crime on campus and old athletic facilities. Conclusion: The university has many areas for improvement as indicated by the five ratings of 1 and the overall score of 2.51 on a 1 to 4 scale. Solution Manual for Strategic Management: A Competitive Advantage Approach, Concepts and Cases Fred R. David, Forest R. David 9780133444797, 9780135173947, 9780134167848, 9780135199978