Strategic Management Chapter 7: External Audit
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Questions and Answers

In an EFE Matrix, opportunities often receive higher weights than threats, but can threats also receive high weights?

  • Yes, only if opportunities are not present
  • No, threats are always weighted lower
  • No, opportunities always receive higher weights
  • Yes, if they are particularly severe or threatening (correct)

    • Regardless of the number of key opportunities and threats included in an External Factor Evaluation Matrix, the highest possible total weighted score for an organization is 4.0.

    False

    What are the five steps needed to develop an EFE Matrix?

    The EFE Matrix can be developed in five steps: 1) list key external factors as identified in the external-audit process with a total of 20 factors, including both opportunities and threats that affect the firm and its industry; 2) assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important) - the sum of all weights assigned to the factors must equal 1.0; 3) assign a 1 to 4 rating to each key external factor to indicate how effectively the firm's current strategies respond to the factor, where 4 = the response is superior, 3 = the response is above average, 2 = the response is average, and 1 = the response is poor; 4) multiply each factor's weight by its rating to determine a weighted score; and 5) sum the weighted scores for each variable to determine the total weighted score for the organization.

    One difference between a Competitive Profile Matrix (CPM) and an External Factor Evaluation (EFE) is that

    <p>CPM includes both internal and external issues</p> Signup and view all the answers

    According to Michael Porter, name the five forces that determine the nature of competitiveness in a given industry.

    <ol> <li>Rivalry among competing firms, 2) Potential entry of new competitors, 3) Potential development of substitute products, 4) Bargaining power of suppliers, &amp; 5) Bargaining power of consumers.</li> </ol> Signup and view all the answers

    What is the systematic and ethical process for gathering and analyzing information about the competition's activities called?

    <p>Competitive intelligence</p> Signup and view all the answers

    Which of the following is NOT a published source of external strategic information?

    <p>Customer surveys</p> Signup and view all the answers

    Which of the following is NOT a basic mission of a competitive intelligence program?

    <p>Identifying industry executives who could be hired by the firm</p> Signup and view all the answers

    Corporate intelligence is another term for a systematic and ethical process for gathering and analyzing information about competitors.

    <p>False</p> Signup and view all the answers

    Define Competitive Intelligence (CI) and list three ways that CI can be gathered.

    <p>Competitive Intelligence as a systematic and ethical process for gathering and analyzing information about the competition's activities and general business trends. Ways to gather CI: 1) hire top executives from rival firms, 2) reverse engineer rival firms' products, 3) use surveys and interviews of customers, suppliers, and distributors.</p> Signup and view all the answers

    What are educated assumptions about future trends and events called?

    <p>Forecasts</p> Signup and view all the answers

    Without reasonable assumptions, the strategy-formulation process could not proceed effectively.

    <p>True</p> Signup and view all the answers

    Major competitors' strengths may represent key threats.

    <p>True</p> Signup and view all the answers

    What does a total weighted score of 4.0 in an External Factor Evaluation (EFE) Matrix indicate?

    <p>An organization is responding in an outstanding way to existing opportunities and threats in its industry.</p> Signup and view all the answers

    A characteristic that describes the most competitive companies is adopting the adage, 'Whether it's broke or not, fix it'; in other words, continually strive to improve everything about the firm.

    <p>True</p> Signup and view all the answers

    Erosion of the U.S. manufacturing base is reflected in the sharp increase in labor union membership in the last decade.

    <p>False</p> Signup and view all the answers

    Wisconsin recently passed a law eliminating most collective-bargaining rights for the state's public-employee unions.

    <p>True</p> Signup and view all the answers

    Wisconsin recently passed a law strengthening collective-bargaining rights for the state's public-employee unions.

    <p>False</p> Signup and view all the answers

    The increase in high-tech manufacturing base in the United States is reflected in the sharp increase in labor union membership in the last decade.

    <p>False</p> Signup and view all the answers

    What are the five major types of external forces that should be examined as part of an external audit?

    <p>economic forces, social, cultural, demographic and natural environment forces, political, governmental and legal forces, technological forces, competitive forces</p> Signup and view all the answers

    Discuss the Industrial Organization (I/O) approach in relation to competitive advantage.

    <p>External factors are more crucial than internal factors in achieving competitive advantage according to the I/O approach.</p> Signup and view all the answers

    How have new technologies been impacting strategic-planning decisions?

    <p>New technologies like IoT, 3D printing, mobile devices, analytics, etc., have led to innovation and improved decision-making in various industries.</p> Signup and view all the answers

    Intensity of competition ________ in lower-return industries.

    <p>is highest</p> Signup and view all the answers

    What is NOT one of Michael Porter's five competitive forces?

    <p>Bargaining power of unions</p> Signup and view all the answers

    According to Porter, what is usually the most powerful of the five competitive forces?

    <p>Rivalry among competing firms</p> Signup and view all the answers

    Whenever new firms can easily enter a particular industry, the intensity of competitiveness among firms tends to

    <p>increase</p> Signup and view all the answers

    If suppliers are unreliable or too costly, which of these strategies may be appropriate?

    <p>Backward integration</p> Signup and view all the answers

    When the products being purchased are standard or undifferentiated, it results in ________ bargaining power of consumers.

    <p>higher</p> Signup and view all the answers

    A ________ integration strategy is used by firms to gain control or ownership of suppliers.

    <p>backward</p> Signup and view all the answers

    According to Michael Porter, five competitive forces define the nature of competitiveness in a given industry: 1) rivalry among competing firms, 2) potential entry of new competitors, 3) potential development of substitute products, 4) bargaining power of suppliers, and 5) bargaining power of consumers.

    <p>True</p> Signup and view all the answers

    Bargaining power of consumers is usually the most powerful of Porter's five competitive forces.

    <p>False</p> Signup and view all the answers

    Significant barriers to entry are not always sufficient to keep some new firms from entering industries with higher-quality products, lower prices, and substantial marketing resources.

    <p>True</p> Signup and view all the answers

    Laser eye surgery would be considered a substitute product for eyeglasses and contact lenses.

    <p>True</p> Signup and view all the answers

    In recent times, which of the following has largely refrained from protectionist measures?

    <p>The United States</p> Signup and view all the answers

    All of the following are political, governmental, and legal variables that can represent key opportunities or threats to organizations EXCEPT

    <p>Population changes by race, age, sex, and level of affluence</p> Signup and view all the answers

    Competition in virtually all industries is

    <p>Intense</p> Signup and view all the answers

    Which of the following is NOT a characteristic that describes the most competitive companies in America?

    <p>Divestiture is essential to growth</p> Signup and view all the answers

    To perform an external audit, a company first must

    <p>Gather competitive intelligence and information about external trends.</p> Signup and view all the answers

    A weak dollar means

    <p>Higher exports and lower imports</p> Signup and view all the answers

    The process of performing an external audit needs to include

    <p>As many managers and employees as possible.</p> Signup and view all the answers

    The five major categories of variables known as external forces are: economic forces, social, cultural, demographic, and natural environment forces, political, governmental, and legal forces, technological forces and competitive forces.

    <p>True</p> Signup and view all the answers

    To perform an external audit, a company first must gather competitive intelligence and information about economic, social, cultural, demographic, environmental, political, governmental, legal, and technological trends.

    <p>True</p> Signup and view all the answers

    Collecting and evaluating information on competitors is essential for successful

    <p>Strategy formulation.</p> Signup and view all the answers

    External audits attempt to identify key variables that offer ________ responses.

    <p>Actionable</p> Signup and view all the answers

    The I/O approach to competitive advantage advocates that internal factors are more important than external factors in a firm achieving competitive advantage.

    <p>False</p> Signup and view all the answers

    Industry analysis is also referred to as external strategic management audit.

    <p>True</p> Signup and view all the answers

    Economic factors do not have much impact on the attractiveness of strategies.

    <p>False</p> Signup and view all the answers

    A low value of the dollar means lower exports and higher imports.

    <p>False</p> Signup and view all the answers

    An external audit focuses on identifying and evaluating trends and events within the control of management.

    <p>False</p> Signup and view all the answers

    There are benefits to the U.S. economy resulting from a low value of the U.S. Dollar.

    <p>True</p> Signup and view all the answers

    The aim of an external audit is to develop an exhaustive list of every possible factor that could influence the business.

    <p>False</p> Signup and view all the answers

    External audits attempt to identify key variables that offer actionable responses.

    <p>True</p> Signup and view all the answers

    The United States is getting older and less white.

    <p>True</p> Signup and view all the answers

    It is predicted that, by 2050, over 20 percent of the population in the United States will be 65 years or older.

    <p>True</p> Signup and view all the answers

    As many managers and employees as possible should be involved in the process of performing an external audit.

    <p>True</p> Signup and view all the answers

    External audits attempt to identify key variables that offer highly intuitive responses.

    <p>False</p> Signup and view all the answers

    It is predicted that, by 2050, over 25 percent of the population in the United States will be 65 years or older.

    <p>False</p> Signup and view all the answers

    Remaining solely domestic is an increasingly safe strategy for U.S. companies.

    <p>False</p> Signup and view all the answers

    Discuss the process of performing an external audit.

    <p>To perform an external audit, a company first must gather competitive intelligence and information about economic, social, cultural, demographic, environmental, political, governmental, legal and technological trends.</p> Signup and view all the answers

    U.S. households are making more and more purchases online.

    <p>True</p> Signup and view all the answers

    By 2075, the United States will have no racial or ethnic majority.

    <p>True</p> Signup and view all the answers

    In general, what happens to American goods in overseas markets when there is a strong dollar?

    <p>They are more expensive.</p> Signup and view all the answers

    There are now more American households consisting of married couples with children than of people living alone or with unrelated people.

    <p>False</p> Signup and view all the answers

    It is predicted that the United States will have no racial or ethnic majorities by the year

    <p>2075</p> Signup and view all the answers

    The historical trend of people moving from the Northeast and Midwest to the Sunbelt and West has dramatically increased.

    <p>False</p> Signup and view all the answers

    The United States' population is

    <p>Getting older and less white</p> Signup and view all the answers

    Match the following states with their characteristics:

    <p>Arkansas = State with the highest union membership rate Colorado = State with the highest union membership rate New Hampshire = State with the highest union membership rate New York = State with the highest union membership rate North Carolina = State with the highest union membership rate</p> Signup and view all the answers

    By 2050, the Census Bureau projects that the number of Americans age 100 and older will dramatically decrease.

    <p>False</p> Signup and view all the answers

    The trend toward an older America is bad news for furniture producers, hotels, airlines and home builders.

    <p>False</p> Signup and view all the answers

    Political issues and stances impact strategic decisions.

    <p>True</p> Signup and view all the answers

    Political forecasts can be the most important part of an external audit for firms that depend heavily on government contracts.

    <p>True</p> Signup and view all the answers

    Protectionism is used by various countries around the world to safeguard their domestic industries.

    <p>True</p> Signup and view all the answers

    India is increasing tariffs on foreign steel.

    <p>True</p> Signup and view all the answers

    The United States has been more active than other nations in protectionist measures and has engaged in many 'Buy American' policies.

    <p>False</p> Signup and view all the answers

    According to I/O theorists, which of the following contributes LEAST to firm's performance?

    <p>Internal resources</p> Signup and view all the answers

    Study Notes

    External Audit and Competitive Advantage

    • To perform an external audit, a company must gather competitive intelligence and information about external trends, including economic, social, cultural, demographic, environmental, political, governmental, legal, and technological trends.
    • The process of performing an external audit involves collecting and evaluating information on competitors, identifying key variables that offer actionable responses, and prioritizing opportunities and threats.

    Importance of External Audit

    • External audits are essential for successful strategy formulation, as they help companies identify key opportunities and threats.
    • External audits attempt to identify key variables that offer actionable responses, rather than exhaustive lists of every possible factor.

    External Forces

    • There are five major categories of external forces: economic, social, cultural, demographic, and natural environment; political, governmental, and legal; technological; and competitive.
    • Economic forces, such as inflation, interest rates, and exchange rates, affect the attractiveness of strategies.
    • Social, cultural, demographic, and natural environment forces, such as population growth, age distribution, and environmental concerns, impact the company's operations.
    • Political, governmental, and legal forces, such as government policies, regulations, and laws, influence the company's strategy.
    • Technological forces, such as advancements in technology, impact the company's operations and competitiveness.
    • Competitive forces, such as competition from other companies, affect the company's market position.
    • The United States is getting older and less white.
    • It is predicted that, by 2050, over 20 percent of the population in the United States will be 65 years or older.
    • Hawaii, California, and New Mexico already have no majority race or ethnic group.
    • By 2075, the United States will have no racial or ethnic majority.
    • A weak dollar means higher exports and lower imports.
    • There are benefits to the U.S. economy resulting from a low value of the U.S. dollar.
    • Trade constraints can make it harder for global economic growth.

    Competitive Advantage

    • The I/O approach to competitive advantage advocates that external factors are more important than internal factors in a firm achieving competitive advantage.
    • Companies must adapt, innovate, and improve continuously to stay competitive.
    • Competition in virtually all industries is intense.

    Industry Analysis

    • Industry analysis is also referred to as external strategic management audit.
    • Industry analysis involves identifying key opportunities and threats facing the firm.

    External Audit Process

    • The external audit process involves gathering information, assimilating and evaluating the information, and identifying key opportunities and threats.
    • A meeting or series of meetings of managers is needed to collectively identify the most important opportunities and threats facing the firm.
    • A prioritized list of factors must be obtained, and managers can individually rank the factors or place a checkmark by their top 10 factors.### External Forces
    • There are 10 external forces that must be examined in formulating strategies:
      • Economic forces
      • Social, cultural, demographic, and natural environment forces
      • Political, governmental, and legal forces
      • Technological forces
      • Competitive forces
    • Political issues and stances impact strategic decisions
    • Political forecasts can be the most important part of an external audit for firms that depend heavily on government contracts
    • Protectionism is used by various countries to safeguard their domestic industries
    • Examples of economic forces:
      • Level of disposable income
      • Availability of credit
      • Interest rates
      • Value of the dollar in world markets
      • Foreign countries' economic conditions
    • Examples of social, cultural, demographic, and natural environment forces:
      • Immigration and emigration rates
      • Regional changes in tastes and preferences
      • Life expectancy rates
      • Attitudes toward customer service
      • Social responsibility issues

    Competitive Advantage

    • The Industrial Organization (I/O) approach advocates that external factors are more important than internal factors in achieving competitive advantage
    • Proponents of the I/O view contend that organizational performance is primarily determined by industry forces that no single firm can control
    • Competitive advantage is determined by competitive positioning within an industry
    • Effective integration of both external and internal factors is the key to securing and keeping a competitive advantage

    Porter's Five Forces Model

    • Porter's Five Forces Model defines the nature of competitiveness in a given industry:
      • Rivalry among competing firms
      • Potential entry of new competitors
      • Potential development of substitute products
      • Bargaining power of suppliers
      • Bargaining power of consumers
    • Rivalry among competing firms is usually the most powerful of the five competitive forces
    • When the products being purchased are standard or undifferentiated, it results in higher bargaining power of consumers
    • Backward integration is a strategy used by firms to gain control or ownership of suppliers

    Competitive Intelligence

    • Competitive intelligence is a systematic and ethical process for gathering and analyzing information about the competition's activities and general trends
    • Basic missions of a competitive intelligence program:
      • Providing a general understanding of an industry
      • Providing a general understanding of a company's competitors
      • Identifying areas in which competitors are vulnerable
      • Identifying potential moves a competitor might make that would endanger a firm's position in the market
    • Published sources of external strategic information:
      • Periodicals
      • Journals
      • Reports
      • Directories
    • Unpublished sources of external strategic information:
      • Customer surveys
      • Market research
      • Speeches at professional and shareholders' meetings
      • Conversations with stakeholders### Corporate Intelligence and Competitive Analysis
    • Corporate intelligence is a systematic and ethical process for gathering and analyzing information about competitors' activities and general business trends to further a business's own goals.
    • Major competitors' strengths may represent key threats, while weaknesses may represent internal opportunities.
    • Hiring top executives from rival firms is a way companies obtain competitive intelligence.
    • An effective competitive intelligence program allows all areas of a firm to access consistent and verifiable information in making decisions.

    Forecasts and Assumptions

    • Forecasts are educated assumptions about future trends and events.
    • Assumptions are necessary for planning, as they help identify future occurrences that could have a major effect on the firm.
    • Without reasonable assumptions, the strategy-formulation process could not proceed effectively.
    • Firms that have the best information generally make the most accurate assumptions, leading to major competitive advantages.

    External Factor Evaluation (EFE) Matrix

    • The EFE Matrix is used to evaluate a firm's response to existing opportunities and threats in its industry.
    • The first step in designing an EFE Matrix is to identify key external factors, including opportunities and threats.
    • The weights and total weighted scores in an EFE Matrix have different meanings, with weights ranging from 0.0 (not important) to 1.0 (very important), and total weighted scores ranging from 0.0 to 4.0.
    • A total weighted score of 4.0 indicates that an organization is responding in an outstanding way to existing opportunities and threats.

    Competitive Profile Matrix (CPM)

    • The CPM is used to identify 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 a CPM have the same meaning as in an EFE Matrix.
    • Critical success factors in a CPM include both internal and external issues, with ratings referring to strengths and weaknesses (4 = major strength, 3 = minor strength, 2 = minor weakness, and 1 = major weakness).
    • The ratings and total weighted scores for rival firms can be compared to the sample firm in a CPM.

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    Description

    Learn about the external audit process and its importance in strategic management. Understand the steps involved in performing an external audit and its significance in competitive advantage.

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