Chapter 7 - The External Audit Overview Chapter 7 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 7 describes how to develop a Competitive Profile Matrix and an External Factor Evaluation Matrix, two widely utilized strategic planning tools. Chapter 7 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” discussed under “Technological Forces” page 236. Students should be able to see first-hand the wealth of free external information available on websites for a company such as Adidas AG 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 7-8 for the “Local 10-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 7, 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 class work assignments to be completed as an individual or as a group of students. Answers to End-of-Chapter Review Questions 1. Michelin has been very successful in the last decade. In your opinion, what strategy changes would Michelin need in 2014? Answer: Michelin has been a very competitive company in the tire market. It has recently developed several new products to increase energy efficiency and for high performance sports cars (e.g. the Ferrari 458 Speciale and the Porsche 918 Spyder) that will require that the company pursue a market penetration strategy in order to gain a foothold in each of these market segments and to increase market share as the segments grow. When looking at Michelin’s efforts to develop and commercialize these products in conjunction with its focus on increasing durability while using fewer raw materials it is evident that Michelin will be required to continue to invest heavily in product development/R&D activities while continuing to improve operations processes. 2. Of the many competitors it has, which firm do you think worries Michelin most about? Why? Prepare a CPM that includes Michelin and the rival firm you identified. Answer: As is shown below it is Bridgestone is Michelin’s primary competitor with relative strengths in market penetration, market share, and name recognition. 3. A political debate raging in the United States concerns sales taxes on the Internet. Most states do not collect a sales tax. Brick and mortar businesses think this is unfair. How does the situation in Europe compare to the United States in terms of sales tax on items purchased online? What is the strategic implication for companies? Answer: Students should analyze the implications of the Political and Legal factors affecting consumers and on line advertising. Depending on which European countries, students’ answers may vary. Comparison of Sales Tax on Online Purchases: Europe: • VAT System: In Europe, Value Added Tax (VAT) is applied uniformly across most countries, including on online purchases. Companies are required to collect VAT on goods and services sold online, regardless of where the buyer or seller is located within the EU. • Cross-Border Sales: The VAT system requires sellers to apply the VAT rate of the buyer's country, which can be complex but ensures fairness and consistency. United States: • Sales Tax Variability: In the U.S., sales tax is imposed at the state level, leading to a patchwork system. Some states collect sales tax on online purchases, while others do not, creating inconsistencies and competitive imbalances. • Recent Changes: Following the 2018 Supreme Court ruling in South Dakota v. Wayfair Inc., states can now mandate online retailers to collect sales tax even if they don't have a physical presence in the state. Strategic Implications for Companies: 1. Compliance Costs: U.S. companies must navigate varying state regulations, increasing administrative and compliance costs compared to the more standardized VAT system in Europe. 2. Competitive Pricing: The absence of consistent online sales tax in the U.S. can create pricing advantages for online retailers versus brick-and-mortar stores. Companies need to strategize around these competitive disparities. 3. Global Strategy: Understanding VAT compliance in Europe is crucial for U.S. companies expanding internationally. Effective management of VAT obligations can influence market entry strategies and pricing models. 4. Technology Investments: To manage sales tax compliance effectively, companies might invest in sophisticated tax management software to handle varying state requirements in the U.S. and VAT across different European countries. 4. The size of American labor unions has fallen sharply in the last decade due in large part to erosion of the U.S. manufacturing base. How does the situation in Europe compare to the United States in this regard? What is the strategic implication for companies? Answer: Students should examine the Political, Government and Legal forces of both countries. Governments are under pressure to project jobs at home and maintain the nation’s industrial base. Local, state, and federal laws; regulatory agencies and special interest groups can have major impact on organizations. Students could refer to Table 7-5, page 237. Comparison of Labor Union Size: Europe: • High Union Density: Labor unions are more prevalent, with strong representation in both public and private sectors. • Robust Labor Protections: European countries have comprehensive labor laws supporting collective bargaining and union influence. United States: • Decline in Membership: Union membership has significantly decreased, particularly in manufacturing, due to factors like globalization and automation. • Less Labor Protection: U.S. labor laws offer less support for union activities, contributing to a weaker union presence. Strategic Implications for Companies: 1. Operational Flexibility: U.S. firms may benefit from increased flexibility due to fewer union constraints, whereas European companies must navigate more rigid labor relations frameworks. 2. Cost Management: Higher labor costs in Europe due to strong union negotiations can impact profitability. U.S. companies may face lower labor costs but should focus on positive employee relations to prevent issues. 3. Global Strategy: Multinational companies must adapt their labor strategies to regional differences, ensuring compliance with European labor regulations while leveraging operational flexibility in the U.S. 5. List four major reasons why some countries in Europe are struggling economically as compared to countries in Asia. What is the strategic implication for companies? Answer: Students’ answers may vary, students could choose the key reasons from the followings: • Economic forces • Social • Demographic • Political, legal and government • Technological Reasons for Economic Struggles in Europe: 1. Aging Population: Europe faces a declining workforce and increased pension costs. 2. High Debt Levels: Many European countries have high public debt, limiting fiscal flexibility. 3. Rigid Labor Markets: Strict labor regulations can hinder business flexibility and growth. 4. Economic Disparities: Uneven economic development among EU countries creates instability. Strategic Implication for Companies: 1. Investment Focus: Companies might find more growth opportunities in dynamic Asian markets with younger populations and lower debt levels. 2. Cost Management: Firms must adapt to Europe’s high operational costs and regulatory environment, potentially seeking more cost-effective strategies in Asia. 3. Market Expansion: Understanding economic conditions can guide strategic decisions on market entry and resource allocation across regions. 6. Does the Arab Spring that is unfolding in the Middle East represent more of an opportunity or threat to companies? Explain. Answer: Depending on the type of industries, it could be a threat or opportunity to some companies. The Arab Spring represents both opportunities and threats to companies: 1. Opportunity: It opens new markets and investment opportunities in emerging democracies seeking economic development and reforms. 2. Threat: It introduces political instability and uncertainty, which can disrupt business operations and increase risks. Companies must navigate these dynamics carefully, balancing the potential for growth with the need for risk management. 7. Identify two companies that you think would have a 1.5 total weighted score on their EFE Matrix. Why? Identify two companies that you think would have a 3.5 total weighted score on their EFE Matrix. Why? Answer: Students will have different answers, however, students should know how to compute the External Factor Evaluation (EFE) Matrix; as found in pages 244-245. 1.5 Total Weighted Score: 1. Kodak: Struggles with adapting to digital transformation and has faced declining market relevance. 2. Sears: Faces challenges due to outdated business models and declining sales in a competitive retail environment. 3.5 Total Weighted Score: 1. Apple: Strong in innovation, brand strength, and market positioning, capitalizing on emerging tech trends. 2. Amazon: Highly effective in leveraging e-commerce growth, supply chain optimization, and global expansion strategies. 8. Summarize what Chapter 7 says at the end regarding competitive advantage whenever someone is presenting an EFE Matrix and CPM as part of a case analysis or strategic plan. Answer: It has to be prescriptive rather than descriptive; highlighting how the suggestions could enable the firm to gain competitive advantage(s) and able to subdue its rival firms. 9. List the 10 key external forces that give rise to opportunities and threats. Give a specific example of each force for your college or university. Answer: Students’ answers may vary; however, they should list the following ten factors: 1) Economic Forces 2) Social Forces 3) Cultural Forces 4) Demographic Forces 5) Natural Environmental Forces 6) Political Forces 7) Governmental Forces 8) Legal Forces 9) Technological Forces 10) Competitive Forces 1. Economic Conditions: Recession impacts student enrollment and funding. • Example: Reduced state funding due to economic downturns. 2. Technological Advances: New online learning platforms offer growth opportunities. • Example: Adoption of advanced virtual classrooms and learning tools. 3. Political and Legal Factors: Changes in education policy affect funding and regulations. • Example: New government regulations on student loan interest rates. 4. Social Trends: Increasing demand for flexible learning options. • Example: Growing interest in online and hybrid degree programs. 5. Demographic Changes: Shifts in student demographics influence program offerings. • Example: Rising number of non-traditional students needing evening classes. 6. Competitive Landscape: Increased competition from other institutions. • Example: New universities or online programs offering similar degrees. 7. Globalization: International partnerships and student exchanges. • Example: Collaboration with foreign universities for joint degrees. 8. Environmental Factors: Sustainability initiatives and campus eco-friendliness. • Example: Implementation of green campus programs and energy-efficient buildings. 9. Market Demand: Demand for new and relevant academic programs. • Example: Launching new technology or data science programs in response to industry needs. 10. Funding Availability: Changes in funding sources and grants. • Example: New grants for research or scholarships affecting financial stability. 10. Give four reasons why you agree or do not agree with I/O theorists. Answer: In agreement with I/O theorists, the four reasons are: 1. Competitiveness of industry more important than firm’s internal factors 2. Competitive advantage is due largely to competitive positioning in the industry 3. Michael Porter’s Five-Forces Model is an example of I/O theory 4. Understanding of key external factors is important for firms striving to compete effectively. Four reasons for disagreeing with I/O theorist: 1. Understanding both external and internal environment is equally important 2. Effective integration and understanding both internal and external environment – key to competitive advantage 3. Matching key external opportunities / threats with key external strengths/ weaknesses are crucial for successful strategy formulation 4. External factor is not more important than internal factor or vice versa however, SWOT analysis is the key for competitive advantage. 11. Regarding economic variables, list in order of importance six specific factors that you feel most greatly impact your college or university. Answer: Students may choose the six specific factors from “Key Economic Variables to be Monitored”. These are: 1) Availability of credit 2) Level of disposable income 3) Propensity of people to spend 4) Interest rates 5) Inflation rates 6) Money market rates 7) Federal government budget deficits 8) Gross domestic product trend 9) Consumption patterns 10) Unemployment trends 11) Worker productivity levels 12) Value for the dollar in world markets 13) Stock market trends 14) Foreign countries’ economic conditions 15) Import/export factors 16) Demand shifts for different categories of goods and services 17) Income difference by region and consumer groups 18) Price fluctuations 19) Monetary policies 20) Fiscal policies 21) Tax rates 1. State Funding: Major source of revenue affecting budgets and program offerings. 2. Tuition Rates: Directly impacts enrollment numbers and financial accessibility. 3. Endowment Performance: Provides additional financial support and stability. 4. Federal Grants and Loans: Affects student financial aid and overall enrollment. 5. Economic Downturns: Can reduce donations and affect students' ability to afford education. 6. Local Economic Conditions: Influences regional partnerships and community support. 12. Explain why U.S.-based firms such as McDonald’s greatly benefit from a weak dollar. Answer: Being U.S. domestic firm with big overseas sales, a weak US dollar helps McDonald’s in the following ways: • Leads to more exports of McDonald’s goods • Leads to lower prices – as foreign rivals are forced to increase prices and reduce discounts • Makes US goods cheaper to consumers • Combats deflation by pushing up prices of imports • Encourages foreign countries to lower interest rates • Raises the revenues and profits • Reduces U.S. trade deficit 13. Regarding social, cultural, demographic, and natural environment variables, list in order of importance six specific factors that you feel most greatly impact your college or university. Answer: Students’ answer may vary, however, they should be based on “Key Social, Cultural, Demographic, and Natural Environment Variables,” Table 7-3, Page 233. 1. Student Demographics: Changes in age, ethnicity, and socioeconomic background influence program demand and support services. 2. Cultural Trends: Evolving cultural values and interests impact curriculum development and campus inclusivity. 3. Population Growth: Affects enrollment numbers and infrastructure needs. 4. Social Attitudes: Shifts in attitudes towards higher education can influence applications and public perception. 5. Environmental Sustainability: Increasing focus on eco-friendly practices affects campus operations and student expectations. 6. Community Engagement: Local community involvement and support impact partnerships and student recruitment. 14. Regarding political, governmental, and legal variables, list in order of importance six specific factors that you feel most greatly impact your college or university. Answer: Student answers do vary; See Table: 7-5; Page 237 “Some Political, Governmental, and Legal Variables.” 1) Government regulations or deregulations. 2) Changes in tax laws 3) Special tariffs 4) Political action committees 5) Voter participation rates 6) Number, severity, and location of government protests 7) Number of patents 8) Changes in patent laws 9) Environmental protection laws 10) Level of defence expenditures 11) Legislation on equal employment 12) Level of government subsidies 13) Antitrust legislation 14) Sino-American relationships 15) Russian-American relationships 16) European-American relationships 17) African-American relationships 18) Import-export regulations 19) Government fiscal and monetary policy changes 20) Political conditions in foreign countries 21) Special local, state, and federal laws 22) Lobbying activities 23) Size of government budgets 24) World oil, currency, and labor markets 25) Location and severity of terrorist activities 26) Local, state, and national elections 1. State and Federal Funding Policies: Directly affects budget and financial stability. 2. Regulations on Student Loans and Financial Aid: Influences student affordability and enrollment. 3. Accreditation Standards: Ensures quality and eligibility for funding and degrees. 4. Labor and Employment Laws: Impacts faculty and staff hiring practices and compensation. 5. Health and Safety Regulations: Affects campus operations and student welfare. 6. Education Policy Changes: Influences curriculum requirements and institutional priorities. 15. Explain how wireless technology is impacting four industries. Answer: Students’ answers may vary, examples are: • Restaurants and Cafes – Many outlets now provide wireless connection for consumers and consumers are able to access the net without charge while dining at the outlet. • Government – Singapore e-government allows citizens of Singapore to access Government related information on the go online. • Entertainment – Singapore uses a website, MobTV.com, to upload past Singapore shows allowing consumers to watch them online at a price. • Marketing – Budget airline company Jetstar Asia sends text messages to various consumers to inform them of weekly promotions. 1. Healthcare: Enables remote patient monitoring and telemedicine, improving access to care. 2. Retail: Facilitates mobile payments and inventory management, enhancing customer experience and operational efficiency. 3. Manufacturing: Supports IoT devices and real-time data analysis, optimizing production and maintenance processes. 4. Transportation: Powers navigation systems and ride-sharing apps, improving logistics and mobility. 16. Discuss the pros and cons of gathering and assimilating competitive intelligence. Answer: To develop competitive advantages, firms must gather and assimilate competitive intelligence. The more information and knowledge a firm can obtain about its competitors, the more likely it is that it can formulate and implement effective strategies. On the negative aspects, firms which do not practice ethical competitive intelligence may bribe, wiretape, and computer break-ins of their competitors. 17. Using Porter’s Five-Forces Model, explain competitiveness for a local fast food restaurant. Answer: Students’ answers may vary. Using Porter’s Five Forces Model, a local fast food restaurant, “Popeye” may employ these competitiveness: 1. Potential Development of Substitute Products – As Popeye’s only sell a variety of fried food, they can easily lose the market to other competing fast food restaurants such as McDonald’s. 2. Bargaining Power of Suppliers – Competitiveness would be rather low for the suppliers as there is a large number of suppliers in Singapore. 3. Rivalry Among Competing Firms – Popeye’s greatest competition in Singapore here is Kentucky Fried Chicken (KFC), which has outlets at every district of Singapore. This is in comparison to Popeye’s which only has 5 outlets in Singapore. More so, KFC has gained greater publicity and recognition over the years. 4. Bargaining Power of Consumers –Consumers the can inexpensively switch to KFC as they sell similar food. 5. Potential Entry of New Competitors – Popeye’s would face a high level of competitiveness in this aspect as it is very simple for another firm to open and sell a similar product that Popeye’s can offer. 1. Threat of New Entrants: Low barriers to entry increase competition from new fast food outlets. 2. Bargaining Power of Suppliers: Moderate, as many suppliers exist, but quality or cost constraints can affect operations. 3. Bargaining Power of Customers: High, with numerous dining options giving customers leverage to demand better value. 4. Threat of Substitutes: High, with alternatives like healthier food options and different dining experiences available. 5. Industry Rivalry: Intense, due to numerous established competitors and low differentiation between fast food chains. 18. Identify an industry in which “bargaining power of suppliers” is the most important factor among Porter’s variables. Answer: Students’ answers may vary. “Bargaining power of suppliers” is the most important factor for the Airline industry. As prices of oil increases, airlines are unable to increase the price of the tickets too steeply as this will cause customers to use another airline. Thus, the more expensive the oil the lower the profit margin for the airline industry. Pharmaceutical Industry: In this industry, the bargaining power of suppliers is critical due to the limited number of suppliers for essential raw materials and patented drugs. High supplier power can influence drug prices and availability, impacting pharmaceutical companies' profitability and operations. 19. Develop an EFE Matrix for your college or university. Answer: Students should use the material in Page 244; “Industry Analysis: The External Evaluation (EFE) Matrix” in construct one for their college or university. External Factors Evaluation (EFE) Matrix for a University: 1. Opportunities: • Growing Demand for Online Education: +0.3 • Increased Global Student Mobility: +0.2 • Expansion of Research Grants: +0.2 2. Threats: • Decreasing State Funding: -0.3 • Rising Competition from Online Institutions: -0.2 • Economic Downturn Impacting Student Enrollment: -0.2 Weights and Scores: • Opportunities Total: (0.3 × 3) + (0.2 × 2) + (0.2 × 2) = 1.4 • Threats Total: (-0.3 × 3) + (-0.2 × 2) + (-0.2 × 2) = -1.4 Overall EFE Score: 1.4 - 1.4 = 0.0 20. Distinguish between ratings and weights in an EFE Matrix. Answer: The weight is industry-based and indicates the relative importance of that factor to being successful in the firm’s industry. Ratings are company – based; indicating the effectiveness of the firm’s strategies. 21. List 10 external trends or facts pertaining specifically to your country that would impact companies in your city. Answer: Students’ answers will vary between different countries. The key 10 factors which students may list are: • Social • Cultural • Age of Population • Political • Legal • Technological • Competitive • Suppliers • Education • Religion 1. Economic Growth Rates: Influences consumer spending and business expansion. 2. Inflation Rates: Affects purchasing power and operational costs. 3. Interest Rates: Impacts borrowing costs and investment decisions. 4. Regulatory Changes: Alters compliance requirements and operational procedures. 5. Technological Advancements: Drives innovation and competitive advantage. 6. Trade Policies: Affects import/export dynamics and supply chain management. 7. Employment Rates: Influences labor availability and wage levels. 8. Political Stability: Impacts business confidence and investment climate. 9. Environmental Regulations: Affects sustainability practices and compliance costs. 10. Consumer Trends: Shifts in preferences influence product demand and marketing strategies. 22. Develop a CPM for a company that you or your parents have been employed. Answer: Students’ answers vary depending on the type of CPM model. Students should base their answers on pages 245–247, “The Competitive Profile Matrix (CPM).” Competitive Profile Matrix (CPM) for a Company: Company: XYZ Corporation Competitors: ABC Inc., DEF Ltd. Criteria and Weights: 1. Product Quality (0.3): XYZ = 3, ABC = 4, DEF = 2 2. Customer Service (0.2): XYZ = 4, ABC = 3, DEF = 3 3. Market Share (0.2): XYZ = 2, ABC = 4, DEF = 3 4. Innovation (0.15): XYZ = 4, ABC = 3, DEF = 2 5. Pricing (0.15): XYZ = 3, ABC = 2, DEF = 4 Scores: • XYZ: (0.33) + (0.24) + (0.22) + (0.154) + (0.153) = 3.1 • ABC: (0.34) + (0.23) + (0.24) + (0.153) + (0.152) = 3.3 • DEF: (0.32) + (0.23) + (0.23) + (0.152) + (0.154) = 2.7 Summary: XYZ has a competitive score of 3.1, indicating strong performance relative to competitors. 23. Discuss the ethics of gathering competitive intelligence. Answer: Firms should ethically gather published information from trade journals, want ads, newspaper articles, and government filings, as well as customers, suppliers, distributors, competitors themselves, and the Internet. Unethical tactics such as bribery, wiretapping, and computer break-ins should never be used to obtain information. Gathering competitive intelligence should be ethical, focusing on legal and transparent methods like public records and market research. Unethical practices, such as espionage or deception, undermine trust and legality. Ethical intelligence respects confidentiality, avoids misrepresentation, and aligns with legal standards, ensuring fair competition and integrity in business practices. 24. Discuss the ethics of cooperating with rival firms. Answer: Firms should discuss and agree with rival firms on sharing valuable information about price, market, or geography intentions. Any theft of such information without the rival firm’s consent would be unacceptable. Cooperating with rival firms can be ethical when it involves mutually beneficial partnerships like joint ventures or industry alliances that foster innovation and efficiency. However, it becomes unethical if it leads to anti-competitive behavior, such as colluding to fix prices or share confidential information. Ethical cooperation should enhance market value without compromising competitive fairness or regulatory compliance. 25. Contact your college library. Ask if they have the S&P Industry Surveys in hardcopy in the library. If they do, print out the relevant report for a company that you are most familiar with. Answer: Students have to look for the Industry Surveys found in the University’s library. Unfortunately, I can’t make direct contact or print documents. However, you can contact your college library directly by phone or email to inquire about the availability of S&P Industry Surveys. If they have the report, you can request a copy or access it through their digital resources, if available. 26. Your boss develops an EFE Matrix that includes 54 factors. How would you suggest reducing the number of factors to 20? Answer: Students’ suggestions may vary, one suggestion is to politely point out to the boss that 54 factors will definitely be too many for an EFE Matrix. It will be too difficult to compute or monitor. To reduce the EFE Matrix from 54 to 20 factors: 1. Prioritize Factors: Rank the factors by their impact on the organization, focusing on those with the greatest relevance. 2. Group Similar Factors: Combine related factors into broader categories to streamline the matrix. 3. Eliminate Redundancies: Remove duplicate or overlapping factors to simplify the analysis. 4. Focus on Key Trends: Select the most critical factors that directly influence strategic decisions and competitive positioning. 27. List the 10 external areas that give rise to opportunities and threats. Give an example of each for IBM. Answer: Students’ answers may vary, and may consider the following factors: • Competition (new entry) • Suppliers (opened low cost factories in Brazil) ; • Employees (low cost factories in countries where wages are low) • Creditors ( no issues); • Customers (changing consumer trends); • Governments (no issue); • Trade Associations ( no issue); • Special Interests Group (no issue); • Technological (competitors with newer technologies); 1. Economic Conditions: Fluctuations in global economic growth impact IBM’s business investments and revenues. • Example: Economic downturns reducing IT spending. 2. Technological Advances: Emerging technologies create new markets and disrupt existing ones. • Example: Rise of artificial intelligence and cloud computing. 3. Political and Legal Factors: Changes in regulations affect operational practices. • Example: GDPR compliance requirements impacting data management. 4. Competitive Landscape: The actions of rivals shape market dynamics. • Example: Aggressive innovation by companies like Microsoft and Google. 5. Social Trends: Shifts in consumer behavior and preferences influence demand. • Example: Increased focus on remote work solutions and cybersecurity. 6. Globalization: Expanding into new markets offers growth opportunities. • Example: Entry into emerging markets like India and China. 7. Environmental Regulations: Sustainability requirements impact business operations. • Example: Compliance with carbon footprint reduction initiatives. 8. Market Demand: Changes in industry needs affect product offerings. • Example: Growing demand for hybrid cloud solutions. 9. Trade Policies: Tariffs and trade agreements impact global supply chains. • Example: Trade tensions affecting import/export costs. 10. Demographic Changes: Shifts in workforce and consumer demographics impact business strategies. • Example: Growing need for technology solutions tailored to an aging population. 28. Compare the ratings in an EFE Matrix with those in a CPM in terms of meaning and definition. Answer: EFE Matrix considers external factors such as economic, social, cultural, demographic, environment, political, government; legal, technological and competition. On the other hand, CPM identifies a firm’s major competitors and its particular strengths and weaknesses in relation to a firm’s strategic position. The weights and total weighted scores of both have the same meaning. 29. Discuss the I/O view or approach to strategic planning. Answer: In strategic planning, the key to successful competitive advantage is the effective integration and understanding of both external and internal factors. I/O view enhanced our understanding of this aspect of strategic planning. 30. List in order of importance what you feel are the six major advantages of a weak dollar for a U.S.-based firm. Answer: Students’ answers on the order of list may vary. However students should be able to list the six major advantages of a weak dollar for a U.S.-based firm from the “Advantages and Disadvantages of a Weak Dollar for Domestic Firms,” Table 7-2; page 231. 1. Increased Export Competitiveness: U.S. goods become cheaper for foreign buyers, boosting export sales. 2. Higher Profit Margins Abroad: Foreign revenues increase when converted back to U.S. dollars. 3. Enhanced Market Share: Lower prices can attract more international customers. 4. Improved Trade Balance: Higher exports can reduce trade deficits. 5. Increased Investment Attraction: Foreign investors might seek U.S. assets, driving up investment. 6. Cost Benefits on Exported Inputs: Costs for foreign-sourced raw materials may be offset by higher export revenues. 31. List in order of importance what you feel are the six major advantages of a weak euro for a European-based firm headquartered in a country that has the euro as its currency. Answer: Similar to answer to question no. 30, students should be able to list the six major advantages of a weak dollar for a U.S.-based firm from the “Advantages and Disadvantages of a Weak Dollar for Domestic Firms,” Table 7-2; page 231. 1. Increased Export Competitiveness: European goods become cheaper for international buyers, boosting exports. 2. Higher Profit Margins on Foreign Sales: Revenues from exports are higher when converted back to euros. 3. Enhanced Market Share: Lower prices can attract more global customers and increase sales. 4. Improved Trade Balance: Higher export volumes can reduce trade deficits. 5. Attraction of Foreign Investment: Foreign investors may find European assets more appealing due to lower costs. 6. Cost Reduction for Foreign-Sourced Inputs: European firms might benefit from cheaper costs for raw materials if they are priced in euros. 32. Cooperating with competitors is becoming more common. What are the advantages and disadvantages of this for a company? Answer: An important part of external audit is identifying competitors and determining their strengths, weaknesses, capabilities, opportunities, threats, objectives and strategies. These are essential for successful strategy formulation. However, competitors will also know that particular firm which they could use these information to formulate their strategies. 33. Regarding sources of external information, visit the www.finance.yahoo.com website and enter IBM, and click on Headlines, and identify three major new initiatives the company has undertaken. Answer: Students in using the PESTLE model will be able to identify the new initiatives. 1. New Product Launches: Innovations in AI or cloud computing. 2. Strategic Partnerships: Collaborations with other tech firms or research institutions. 3. Acquisitions: Recent acquisitions aimed at expanding IBM's technology portfolio or market reach. 34. Explain the difference between making assumptions and making wild guesses about future opportunities and threats facing business firms. Answer: Assumptions: “is something that you think is true although you have no proof” Wild guesses:” trying to answer something without any facts, out of the ordinary” Making Assumptions involves basing predictions on reasonable, informed expectations derived from current trends and data. Making Wild Guesses, however, relies on speculation without evidence or analysis, lacking a solid foundation. Assumptions are grounded in research and context, while wild guesses are unfounded and often unreliable for strategic planning. 35. Explain how the external assessment would or should be different for non-profit organizations versus corporations. Answer: Non-profit organizations are basically similar to profit organizations except on two factors: they do not pay taxes and do not have shareholders to provide capital. Hence external assessment for non-profit organizations versus corporations is similar. 36. Apply Porter’s Five-Forces Model to IBM. What strategic implications arise in that analysis? Answer: Students should consider the following components of five forces: • Rivalry among competing firms • Potential entry of new competitors • Potential development of substitute products • Bargaining power of suppliers • Bargaining power of consumers 1. Threat of New Entrants: Low due to high barriers like capital and technology requirements, reducing competitive pressure. 2. Bargaining Power of Suppliers: Moderate, as specialized tech components can be sourced from few suppliers, impacting costs. 3. Bargaining Power of Customers: High, with large clients demanding customization and lower prices. 4. Threat of Substitutes: High, with rapid tech advancements offering alternative solutions. 5. Industry Rivalry: Intense, with strong competition from firms like Microsoft and Google. Strategic Implication: IBM should focus on differentiating its offerings and leveraging innovation to maintain its competitive edge. 37. Compare and contrast competitive intelligence programs across several organizations that you are familiar. Answer: Students’ answers vary depending on the companies. Students should be familiar with the section on “Competitive Intelligence Program,” page 238. IBM: Emphasizes advanced data analytics and AI for gathering market insights and anticipating trends. Google: Uses extensive digital analytics and user behavior data to inform strategic decisions and identify opportunities. Microsoft: Leverages internal research teams and external market analysis to stay ahead in technology and software development. Comparison: All use data-driven approaches but vary in methods—IBM focuses on AI, Google on digital behavior, and Microsoft on a combination of internal and external analysis. Answers to the End-of-Chapter Assurance of Learning Exercises ASSURANCE OF LEARNING EXERCISE 7A: MICHELIN AND AFRICA: AN EXTERNAL ASSESSMENT Purpose Michelin is featured in the opening chapter case as a firm that engages in excellent strategic planning. This exercise gives you practice conducting an external strategic management audit to determine if Africa is the new, best place for Michelin to produce and market products and services. For example, considerable underground mining occurs in much of Africa. The new MICHELIN XTXL tire is available in 25-inch for underground mining vehicles. The new tires offer enhanced safety and productivity and are available in sizes 26.5R25 and 29.5R25. Tests indicate that the new tires offer increases of 10 percent in longevity, 20 percent in puncture resistance, and 30 percent in load capacity. Instructions Step 1: Research the business climate in 10 African countries. Step 2: Prepare an EFE Matrix for Michelin based solely on the opportunities and threats that Michelin will face in doing business in the 10 African countries you chose. Step 3: Based on your research, list the 10 African countries you selected in rank order of attractiveness for Michelin to focus efforts upon. Give a one-sentence rationale for each country’s ranking. Teaching Notes Students’ answer may vary but should display a tacit understanding of the environmental scanning. It focuses on identifying and evaluating trends and events beyond the control of a single firm, such as increased competition, population changes, an aging society, consumer trends and stock market volatility. The purpose of doing such an audit is to develop a finite list of opportunities that could benefit the firm and threats that could be avoided. It is not aimed at developing an exhaustive list of every possible factor that could influence the business; rather it is aimed at identifying key variables that offer actionable responses. ASSURANCE OF LEARNING EXERCISE 7B: PREPARING A CPM FOR MICHELIN BASED ON COUNTRIES RATHER THAN COMPANIES Purpose Countries are similar to companies in that they compete with each other for investment dollars and economic development. Instructions Step 1: Revisit the research you collected and analyzed in the above exercise. Step 2: Prepare a CPM that reveals your assessment of 6 African countries in terms of their relative strengths and weaknesses across what you deem to be the most critical success factors. Teaching Notes In answering this number, students should know what constitutes the Competitive Profile Matrix (CPM). CPM identifies a firm’s major competitors and its particular strengths and weaknesses in relation to a sample firm’s strategic position. The weights and total weighted scores in both a CPM and an EFE have the same meaning. However, critical success factors in a CPM include both internal and external issues; therefore, ratings refer to the strengths and weaknesses. In a CPM, the ratings and total weighted scores for rival firms can be compared to the sample firm. ASSURANCE OF LEARNING EXERCISE 7C: DEVELOP DIVISIONAL MICHELIN EFE MATRICES Purpose Michelin has five major geographic divisions: Europe, North America, Asia, South America, Africa/India/Middle-East. The company faces fierce but different competitors in each segment. The external opportunities and threats that Michelin faces are different in each geographic segment, so each segment prepares its own list of key external success factors. This external analysis is critically important in strategic planning because a firm needs to exploit opportunities and avoid or at least mitigate threats. The purpose of this exercise is to develop divisional EFE Matrices that Michelin could use in developing an overall corporate EFE Matrix. Instructions Step 1: Go to Michelin’s website. Review the company’s most recent Annual Report. Step 2: Determine and review Michelin’s major geographic segments. Step 3: Conduct research to determine what you believe are the four major threats and the four major opportunities critical to strategic planning within Michelin’s geographic segments. Review the relevant Standard and Poor’s Industry Survey documents for each segment. Step 4: Develop divisional EFE Matrices for Michelin. Work within a team of students if your instructor so requests but you will need an EFE Matrix for each segment. Step 5: Prioritize the 20 threats and the 20 opportunities developed in the prior step so that corporate Michelin top executives can better develop a corporate EFE Matrix. Step 6: Let’s say Michelin has their operations segmented by Domestic versus Global. Based on your research, prepare an EFE Matrix for Michelin’s domestic operations and another EFE Matrix for Michelin’s Global Operations. Let Europe be Domestic and all other regions be Global. Teaching Notes In this exercise, students should show an understanding of SWOT Analysis and the five steps in EFE Matrix process. In the SWOT Analysis, students will be able to analyze the strengths, weaknesses, opportunities and threats. However, students’ answers may vary. The five steps in EFE Matrix process are: 1. List key identified external factors; a total of about 15-20 factors’ including both opportunities and threats. 2. Assign each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The weight indicates the relative importance of that factor to being successful in the firm’s industry. Opportunities will get higher weights than threats but threats get higher weights if they are severe and threatening. 3. Assign a rating between 1 and 4 to each key external factor to indicate how effectively the firm’s current strategies respond to the factor. 4= superior response; 1= poor response. 4. Multiply each factor’s weight by its rating to determine a weighted score. 5. Sum the weighted scores for each variable to determine the total weighted score for the organization. In considering the above process, students’ answer will vary. ASSURANCE OF LEARNING EXERCISE 7D: DEVELOPING AN EFE MATRIX FOR ADIDAS AG Purpose This exercise will provide practice developing an EFE Matrix. An EFE Matrix summarizes the results of an external audit. This is an important tool widely used by strategists. Instructions Step 1: Join with two other students in class and jointly prepare an EFE Matrix for adidas AG. Refer back to the Cohesion Case and to Exercise 1B, if necessary, to identify external opportunities and threats. Use the information in the Standard and Poor’s Industry Surveys that you copied as part of Assurance of Learning Exercise 1B. Be sure not to include strategies as opportunities, but do include as many monetary amounts, percentages, numbers, and ratios as possible. Step 2: All three-person teams participating in this exercise should record their EFE total weighted scores on the board. Put your initials after your score to identify it as your teams. Step 3: Compare the total weighted scores. Which team’s score came closest to the instructor’s answer? Discuss reasons for variation in the scores reported on the board. Teaching Notes Students’ answer may vary, however, they should show an understanding of the five steps in EFE Matrix process: 1. List key identified external factors; a total of about 15-20 factors’ including both opportunities and threats. 2. Assign each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The weight indicates the relative importance of that factor to being successful in the firm’s industry. Opportunities will get higher weights than threats but threats get higher weights if they are severe and threatening. 3. Assign a rating between 1 and 4 to each key external factor to indicate how effectively the firm’s current strategies respond to the factor. 4= superior response; 1= poor response. 4. Multiply each factor’s weight by its rating to determine a weighted score. 5. Sum the weighted scores for each variable to determine the total weighted score for the organization. ASSURANCE OF LEARNING EXERCISE 7E: THE EXTERNAL ASSESSMENT Purpose This exercise will help you become familiar with important sources of external information available in your college or university library. A key part of preparing an external audit is searching the Internet and examining published sources of information for relevant economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive trends and events. External opportunities and threats must be identified and evaluated before strategies can be formulated effectively. Instructions Step 1: Select an American company or business where you recently purchased a product or previously have worked. Conduct an external audit for this company. Find opportunities and threats in recent issues of newspapers and magazines. Search for information using the Internet. Use the following websites: http://marketwatch.multexinvestor.com; www.hoovers.com; http://moneycentral.msn.com; http://finance.yahoo.com; www.clearstation.com; https://us.etrade.com/e/t/invest/markets Step 2: On a separate sheet of paper, list 10 opportunities and 10 threats that face this company. Be specific in stating each factor. Step 3: Include a bibliography to reveal where you found the information. Step 4: Write a three-page summary of your findings, and submit it to your instructor. Teaching Notes Students’ answer may vary, depending on how they perceive the website. Students should display tacit understanding of the environmental scanning. It focuses on identifying and evaluating trends and events beyond the control of a single firm, such as increased competition, population changes, an aging society, consumer trends and stock market volatility. The purpose of doing such an audit is to develop a finite list of opportunities that could benefit the firm and threats that could be avoided. It is not aimed at developing an exhaustive list of every possible factor that could influence the business; rather it is aimed at identifying key variables that offer actionable responses. ASSURANCE OF LEARNING EXERCISE 7F: DEVELOPING A CPM FOR MICHELIN Purpose Monitoring competitors’ performance and strategies is a key aspect of an external audit. This exercise is designed to give you practice evaluating the competitive position of organizations in a given industry and assimilating that information in the form of a CPM. Instructions Step 1: Gather information about Michelin Corporation. Turn back to the opening chapter boxed insert and review this information. Step 2: On a separate sheet of paper, prepare a CPM that includes Michelin and its two leading competitors: Bridgestone Corporation, and Goodyear Tire and Rubber Company. Step 3: Turn in your CPM for a classwork grade. Teaching Notes 1. Gather information about Michelin. Turn back to the opening chapter boxed insert and review this information. 2. On a separate sheet of paper, prepare a Competitive Profile Matrix that includes its key competitors and its leading competitor. 3. Turn in your Competitive Profile Matrix for a classwork grade. ASSURANCE OF LEARNING EXERCISE 7G: DEVELOPING A CPM FOR ADIDAS AG Purpose Monitoring competitors’ performance and strategies is a key aspect of an external audit. This exercise is designed to give you practice evaluating the competitive position of organizations in a given industry and assimilating that information in the form of a CPM. Instructions Step 1: Gather information from Assurance of Learning Exercise 1B. Also, turn back to the Cohesion Case and review the section on competitors. Step 2: On a separate sheet of paper, prepare a CPM that includes Nike, Puma, Under Armour, and Callaway Golf. Step 3: Turn in your CPM for a classwork grade. Teaching Notes Students should show an understanding of what constitutes the Competitive Profile Matrix (CPM). CPM identifies a firm’s major competitors and its particular strengths and weaknesses in relation to a sample firm’s strategic position. The weights and total weighted scores in both a CPM and an EFE have the same meaning. However, critical success factors in a CPM include both internal and external issues; while ratings refer to the strengths and weaknesses. In a CPM, the ratings and total weighted scores for rival firms can be compared to the sample firm. ASSURANCE OF LEARNING EXERCISE 7H: ANALYZING YOUR COLLEGE OR UNIVERSITY’S EXTERNAL STRATEGIC SITUATION Purpose This exercise is excellent for doing together as a class. Instructions As a class, determine your college or university’s major external opportunities and threats. List 10 opportunities and 10 threats. Then, get everyone in class to rank order their factors with 1 being most important and 10 being least important. Then, gather up everyone’s paper, count the numbers, and in that manner create a prioritized list of the key external opportunities and threats facing your college. Teaching Notes Students’ answers will vary, depending on their rankings. Students will use the SWOT analysis to answer this exercise. Solution Manual for Strategic Management: Concepts and Cases Fred R. David, Forest R. David 9781292016894
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