Strategic Management: Concepts and Cases, 13e (David)

Chapter 3 The External Assessment

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

Answer: TRUE

2) An external audit focuses on identifying and evaluating trends and events within the control of
management.
Answer: FALSE

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

4) External audits attempt to identify key variables that offer actionable responses.
Answer: TRUE

5) Five major categories of external variables are: 1) economic forces, 2) social and cultural
forces, 3) political, governmental and legal forces, 4) technological forces and 5) demographic
forces.
Answer: FALSE

6) As many managers and employees as possible should be involved in the process of

performing an external audit.
Answer: TRUE

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

8) Freund argues that key external factors must not be hierarchical.

Answer: FALSE

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

10) An economic trend in America is the increasing numbers of two-income households.

Answer: TRUE

11) Economic factors do not have much impact on the attractiveness of strategies.
Answer: FALSE

12) An increase in interest rates is directly related to an increase in discretionary income and an
increase in the demand for discretionary goods.

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Answer: FALSE

13) Motor vehicle firms in the United States are vulnerable when the value of the dollar falls.
Answer: FALSE

14) A low value of the dollar means lower exports and higher imports.
Answer: FALSE

15) The low value of the dollar benefits the U.S. economy in many ways.
Answer: TRUE

16) The United States is getting older and less Caucasian.

Answer: TRUE

17) It is predicted that, by 2025, over 18% of the population in the United States will be 65 years
or older.
Answer: TRUE

18) The average age of the residents in Maine makes it one of the five youngest states.
Answer: FALSE

19) The average age of the residents in Texas makes it one of the five youngest states.
Answer: TRUE

20) By 2075, the United States will have no racial or ethnic majority.
Answer: TRUE

21) Recent consumption trends in the United States indicate that wine consumption is increasing
at 5% while beer consumption is increasing at 10%.
Answer: FALSE

22) In the United States, the population has been moving from the South and West to the
Northeast and Midwest.
Answer: FALSE

23) More Americans are moving than staying in place.

Answer: FALSE

24) The worldwide recession is reducing international immigration.

Answer: TRUE

25) Apartment complexes for the elderly have increased across the United States.
Answer: TRUE

26) Political, governmental, and legal factors can represent key threats or opportunities for most
small and large organizations.

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Answer: TRUE

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

28) In the face of a deepening global recession, countries worldwide are resorting to
protectionism to safeguard their own industries.
Answer: TRUE

29) Governments are extremely unlikely to take control of companies, even those considered
vital to the nation's financial stability.
Answer: FALSE

30) Political relations between Japan and China have deteriorated considerably in recent years.
Answer: FALSE

31) The Internet is changing the very nature of many industries by altering product life cycles
and changing the historical trade-off between production standardization and flexibility.
Answer: TRUE

32) In practice, critical technology decisions are too often delegated to lower organizational
levels or are made without an understanding of their strategic implications.
Answer: TRUE

33) Pepsi Bottling is the top beverage company in the U.S.

Answer: FALSE

34) A characteristic that describes the most competitive companies in America is "whether it's
broke or not, fix it – make it better; not just products, but the whole company if necessary."
Answer: TRUE

35) "Innovate or evaporate; particularly in technology-driven businesses, nothing quite recedes

like success," is a characteristic that describes the most competitive companies in America.
Answer: TRUE

36) Corporate intelligence can be defined as a systematic and ethical process for gathering and
analyzing information about the competition's activities and general business trends to further a
business's own goals.
Answer: FALSE

37) Internal opportunities can be represented by major competitors' weaknesses.

Answer: FALSE

38) Major competitors' strengths may represent key threats.

Answer: TRUE

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39) Hiring top executives from rival firms is a way companies obtain competitive intelligence.
Answer: TRUE

40) An effective CI program allows all areas of a firm to access consistent and verifiable
information in making decisions.
Answer: TRUE

41) Competitive intelligence is not considered corporate espionage because 95 percent of the
information a company needs to make strategic decisions is available and accessible to the
public.
Answer: TRUE

42) Running a competitive intelligence program requires lots of people, computers, and other
resources.
Answer: FALSE

43) Intelligence gathering is an unethical business practice.

Answer: FALSE

44) Market commonality is the extent to which the type and amount of a firm's internal resources
are comparable to a rival.
Answer: FALSE

45) According to Michael Porter, five competitive forces create vital opportunities and threats to
organizations: 1) new entrants, 2) substitute products or services, 3) bargaining power of
suppliers, 4) bargaining power of buyers, and 5) rivalry among existing firms.
Answer: TRUE

46) The first step for using Porter's Five-Forces Model is to evaluate the relative strength of each
competitive force.
Answer: FALSE

47) Bargaining power of consumers is usually the most powerful of Porter's five competitive
forces.
Answer: FALSE

48) 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.
Answer: TRUE

49) Laser eye surgery would be considered a substitute product for eyeglasses and contact lenses.
Answer: TRUE

50) Forward integration is used by firms to gain control or ownership of suppliers.

Answer: FALSE

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51) The bargaining power of consumers can be the most important force impacting competitive
advantage.
Answer: TRUE

52) Forecasts are educated assumptions about future trends and events.
Answer: TRUE
53) Qualitative forecasts are most appropriate when historical data are available and when the
relationships among key variables are expected to remain the same in the future.
Answer: FALSE

54) Quantitative forecasts become less accurate as historical relationships become less stable.
Answer: TRUE

55) Linear regression is based on the assumption that the future will be different from the past.
Answer: FALSE

56) Linear regression is a popular technique for qualitative forecasts.

Answer: FALSE

57) Without reasonable assumptions, the strategy-formulation process could not proceed
effectively.
Answer: TRUE

58) While some forecasts might not be perfect, they are never wildly inaccurate.
Answer: FALSE

59) Some sources that forecast external variables are publications and websites.
Answer: TRUE

60) Organizations never develop their own projections.

Answer: FALSE

61) Assumptions should never be part of the planning process.

Answer: FALSE

62) A total weighted score of 1.0 for an EFE Matrix indicates that the firm is responding in an
outstanding way to existing opportunities and threats in its industry.
Answer: FALSE

63) In an EFE Matrix, opportunities often receive higher weights than threats, but threats too can
receive high weights if they are especially severe or threatening.
Answer: TRUE

64) 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, and the

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lowest possible total weighted score is 0.0.
Answer: FALSE

65) A Competitive Profile Matrix allows strategists to summarize and evaluate economic, social,
cultural, demographic, environmental, political, governmental, legal, technological, and
competitive information.
Answer: FALSE

66) The weights and total weighted scores in both a Competitive Profile Matrix and an EFE
Matrix have the same meaning.
Answer: TRUE

67) The critical success factors in a Competitive Profile Matrix are often the same as those in an
EFE Matrix.
Answer: FALSE

68) ________ is not part of an external audit.

A) Analyzing competitors
B) Analyzing financial ratios
C) Analyzing available technologies
D) Studying the political environment
E) Analyzing social, cultural, demographic and geographic forces
Answer: B

69) Identifying and evaluating key social, political, economic, technological and competitive
trends and events comprise
A) developing an effective mission statement.
B) conducting an internal audit.
C) performing an external audit.
D) formulating strategy.
E) implementing strategy.
Answer: C

70) The process of performing an external audit needs to include

A) only top level managers, as it is a planning function.
B) as many managers and employees as possible.
C) primarily front-line supervisors.
D) between 15 to 20 managers for it to be valid.
E) stockholders and external government agencies.
Answer: B

71) To perform an external audit, a company first must

A) get an approval from the Securities and Exchange Commission.
B) perform an internal audit.
C) gather competitive intelligence and information about external trends.
D) hire a consultant to develop a comprehensive strategic plan.

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E) all of the above
Answer: C

72) Freund emphasizes that key external factors should be all of these except:
A) important to achieving long-term and annual objectives.
B) measurable.
C) relatively few in number.
D) applicable to all competing firms.
E) hierarchical in the sense that some will pertain to the overall company while others will be
more narrowly focused.
Answer: C

73) The I/O approach to competitive advantage advocates that external factors are ________
internal factors in a firm achieving competitive advantage.
A) less important than
B) as important as
C) more important than
D) more common than
E) less common than
Answer: C

74) According to I/O theorists, which of the following contributes least to firm performance?
A) Economies of scale
B) Barriers to market entry
C) Product differentiation
D) Internal resources
E) Level of competitiveness
Answer: D

75) Which type of trend is exemplified by the increasing number of two-income households in
America?
A) Social
B) Economic
C) Cultural
D) Technological
E) Historical
Answer: B

76) What happens when interest rates rise?

A) Discretionary income increases
B) The demand for discretionary goods increases
C) Discretionary income is unchanged
D) The demand for discretionary goods decreases
E) discretionary income increases and the demand for discretionary goods decreases
Answer: D

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77) What effect do trends in the dollar's value have on companies in different industries and in
different locations?
A) Significant and equal
B) Marginal and equal
C) Significant and unequal
D) Insignificant and unequal
E) No significant impact
Answer: C

78) In general, what happens to American goods in overseas markets when there is a strong
dollar?
A) They are less expensive.
B) They are more attractive.
C) They are cheaper.
D) They are more expensive.
E) They are desirable.
Answer: D

79) It is predicted that the United States will have how many racial or ethnic majorities by the
year 2075?
A) None
B) One
C) Two
D) Three
E) Five
Answer: A

80) Which of the states below has the youngest average population?
A) Florida
B) Utah
C) West Virginia
D) Maine
E) Pennsylvania
Answer: B

81) Which of the states below has the oldest average population?
A) Idaho
B) Texas
C) Alaska
D) Maine
E) California
Answer: D

82) Hawaii, California, and ________ already have no majority race or ethnic group.
A) New York

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B) New Jersey
C) New Hampshire
D) New Mexico
E) all of the above
Answer: D

83) Who are the world's longest-living people?

A) Americans
B) Mexicans
C) Indians
D) Filipinos
E) Japanese
Answer: E

84) Americans were on the move in a population shift to _______, but the recession and housing
bust nationwide has slowed migration throughout the United States.
A) the Frostbelt
B) the South and West
C) the Northeast and Midwest
D) the Midwest and South
E) Canada
Answer: B

85) Japan's elderly population ratio is _______ percent.

A) 13
B) 17
C) 19
D) 22
E) 65
Answer: B

86) When an industry relies heavily on government contracts, which forecasts can be the most
important part of an external audit?
A) Economic
B) Political
C) Technological
D) Competitive
E) Multinational
Answer: B

87) Changes in which of the following can significantly affect firms?

A) Patent laws
B) Antitrust legislation
C) Tax rates
D) Lobbying activities
E) All of the above

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Answer: E

88) Many economists say the current rash of trade constraints will make it ________ for global
economic growth to recover from the global recession.
A) easier
B) impossible
C) harder
D) more likely
E) less difficult
Answer: C

89) ________ perhaps has instituted the most protectionist measures in recent months by raising
tariffs on most imports and subsidizing its own exports.
A) Russia
B) The United States
C) The EU
D) India
E) Switzerland
Answer: A

90) Who is Japan's largest trading partner?

A) Mexico
B) China
C) U.S.
D) U.K.
E) Germany
Answer: B

91) All of the following are political, governmental, and legal variables that can represent key
opportunities or threats to organizations except:
A) special tariffs.
B) environmental protection laws.
C) world oil, currency, and labor markets.
D) legislation on equal employment.
E) population changes by race, age, sex, and level of affluence.
Answer: E

92) Technological advancements can create new ________ advantages that are more powerful
than existing advantages.
A) economic
B) social
C) environmental
D) competitive
E) comparative
Answer: D

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93) Which of the following sectors of the economy would be most impacted by technological
developments?
A) Forestry
B) Pharmaceuticals
C) Textiles
D) Metals
E) Paper
Answer: B

94) Collecting and evaluating information on competitors is essential for successful

A) internal analysis.
B) strategy evaluation.
C) strategy formulation.
D) strategy implementation.
E) strategy management.
Answer: C

95) In 2008, which company had the dominant market share in the beverages industry?
A) Schweppes
B) Coca-Cola
C) Anheuser-Busch
D) Pepsi Bottling
E) Molson Coors Brewing
Answer: B

96) Which of the following is not a characteristic that describes the most competitive companies
in America?
A) Divestiture is essential to growth.
B) People make a difference.
C) Innovate or evaporate.
D) There is no substitute for quality and no greater threat than failing to be cost-competitive on a
global basis.
E) Whether it's broke or not, fix it.
Answer: A

97) A systematic and ethical process for gathering and analyzing information about the
competition's activities and general trends to further a business's own goals is called
A) unethical business practice.
B) artificial intelligence.
C) competitive intelligence.
D) information sharing.
E) competitive advantage.
Answer: C

98) ________ is not a basic mission of a competitive intelligence program.

A) To provide a general understanding of an industry

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B) To provide a general understanding of a company's competitors
C) To identify industry executives who could be hired by the firm
D) To identify areas where competitors are vulnerable and to assess the impact strategic actions
would have on competitors
E) To identify potential moves a competitor might make that would endanger a firm's position in
the market
Answer: C

99) Which statement about business intelligence is least accurate?

A) Intelligence gathering is an unethical business practice.
B) Running an intelligence program requires many people.
C) Running an intelligence program requires many computers and other resources.
D) Collecting intelligence about competitors violates antitrust laws.
E) Business intelligence is not equal to espionage.
Answer: E

100) The responsibilities of a director of competitive analysis include all of the following except:
A) researching special issues.
B) disseminating information on a timely basis.
C) recognizing what information is important and who needs to know.
D) corporate espionage.
E) analyzing data.
Answer: D

101) Market commonality can be defined as

A) the number and significance of markets that a firm competes in with rivals.
B) the number and significance of points in common a firm has with its rivals.
C) the extent to which the type of a firm's internal resources are comparable to a rival.
D) the extent to which the amount of a firm's internal resources are comparable to a rival.
E) none of the above
Answer: A

102) Intensity of competition ________ in lower-return industries.

A) is lowest
B) is non-existent
C) is highest
D) is not important
E) fluctuates
Answer: C

103) What is not one of Michael Porter's five competitive forces?

A) New entrants
B) Rivalry among existing firms
C) Bargaining power of unions
D) Bargaining power of suppliers
E) Bargaining power of buyers

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Answer: C

104) According to Porter, what is usually the most powerful of the five competitive forces?
A) Potential development of substitute products
B) Bargaining power of suppliers
C) Bargaining power of consumers
D) Rivalry among competing firms
E) Potential entry of new competitors
Answer: D

105) Whenever new firms can easily enter a particular industry, the intensity of competitiveness
among firms tends to
A) stay the same.
B) increase.
C) decrease.
D) neutralize.
E) fluctuate.
Answer: B

106) If suppliers are unreliable or too costly, which of these strategies may be appropriate?
A) Horizontal integration
B) Backward integration
C) Market penetration
D) Forward integration
E) Concentric diversification
Answer: B

107) What level of bargaining power do consumers have when the products being purchased are
standard or undifferentiated?
A) Marginal
B) Low
C) High
D) Negative
E) Negligible
Answer: C

108) The Internet has made it _______ for firms to gather, assimilate, and evaluate information.
A) easier
B) harder
C) more expensive
D) less clear-cut
E) more time-consuming
Answer: A

109) What are educated assumptions about future trends and events called?
A) Guesses

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B) Forecasts
C) Facts
D) Statistics
E) Premonitions
Answer: B

110) Without assumptions, planning would be

A) impossible.
B) easier.
C) difficult.
D) inexpensive.
E) intuitive.
Answer: A

111) Unpublished sources of external strategic information include all of the following except:
A) abstracts.
B) customer surveys.
C) market research.
D) speeches at professional and shareholders' meetings.
E) conversations with stakeholders.
Answer: A

112) Which of the following is not a published source of external strategic information?
A) periodicals
B) television programs
C) journals
D) reports
E) directories
Answer: B

113) Standard and Poor's Industry Surveys include all of the following sections except:
A) Historic Environment.
B) Industry Trends.
C) How to Analyze a Company.
D) Glossary of Industry Information.
E) Comparative Company Financial Analysis.
Answer: A

114) A total weighted score of _______ in an EFE Matrix indicates that the firm's strategies are
not capitalizing on opportunities or avoiding external threats.
A) 0.0
B) 1.0
C) 2.5
D) 3.3
E) 4.0
Answer: B

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115) What is the first step in designing an EFE Matrix?
A) Identifying key external factors in the industry
B) Summing the weighted score for each competitor
C) Calculating the sales of each competitor
D) Drawing the horizontal and vertical lines for the matrix
E) Determining four competitors
Answer: A

116) What is the range for a firm's total weighted score in an External Factor Evaluation Matrix?
A) 0 to 5
B) 0 to 4
C) 1 to 5
D) 1 to 4
E) 0 to 10
Answer: D

117) One difference between CPM and EFE is that

A) CPM includes both internal and external issues.
B) the weights and total weighted scores have different meanings.
C) CPM ratings range from 1 to 10.
D) CPM is performed only for the company, whereas EFE is performed for both the company
and its competitors.
E) CPM is only used in small firms.
Answer: A

118) What are the five major types of external forces that should be examined as part of an
external audit? Give an example of each type of force.
Answer: External forces can be divided into five broad categories: 1) economic forces, 2) social,
cultural, demographic and environmental forces, 3) political, governmental and legal forces, 4)
technological forces and 5) competitive forces. Examples of each are as follows: 1) level of
disposable income, 2) immigration and emigration rates, 3) voter participation rates, 4)
technological advancements, and 5) potential moves a competitor could make.

119) Discuss the process of performing an external audit.

Answer: 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. Once information is gathered, it should be
assimilated and evaluated. A meeting or series of meetings of managers is needed to collectively
identify the most important opportunities and threats facing the firm. These key external factors
should be listed on flip charts or a blackboard. A prioritized list of these factors could be
obtained by requesting that all managers to rank the factors identified, from 1 for the most
important opportunity/threat to 20 for the least important opportunity/threat.

120) Discuss the I/O approach in relation to competitive advantage.

Answer: The I/O approach to competitive advantage advocates that external factors are more

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important than internal factors in a firm achieving competitive advantage. Proponents of the I/O
view contend that organizational performance will be primarily determined by industry forces,
rather than the firm's internal functional decisions made. Effective integration of both external
and internal factors is the key to securing and keeping a competitive advantage.

121) Identify five key economic variables that could represent major opportunities or threats to a
bank in your town or city.
Answer: Student answers will vary. They might include interest rates, inflation rates, money
market rates, availability of credit, and level of disposable income. Refer to Table 3-1 on page 64
for a more comprehensive list.

122) List three opportunities and three threats that could represent key factors facing your
college or university.
Answer: Student answers will vary. However, they should look at economic, social/cultural,
political/legal, technological and competitive factors. Lists for all categories of external forces
are found in tables in the chapter.

123) Explain how the Internet is changing businesses around the world.
Answer: The Internet is changing the very nature of opportunities and threats by altering the life
cycles of products, increasing the speed of distribution, creating new products and services,
erasing limitations of traditional geographic markets and changing the historical trade-off
between production standardization and flexibility. It is also altering economies of scale,
changing entry barriers and redefining the relationship between industries and various suppliers,
creditors, customers and competitors. An emerging consensus holds that technology management
is one of the key responsibilities of strategists.

124) Agree or disagree with and discuss the following statement: "Corporate intelligence is not
corporate espionage because 95 percent of the information a company needs to make strategic
decisions is available and accessible to the public."
Answer: Agree. Firms need an effective competitive intelligence (CI) program. The three basic
missions of a 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 a competitor
might make that would endanger a firm's position in the market. An effective CI program allows
all areas of a firm to access consistent and verifiable information in making decisions. Marriott
and Motorola, two U.S. companies that do a particularly good job of gathering competitive
intelligence, agree that all the information you could wish for can be collected without resorting
to unethical tactics.

125) According to Michael Porter, what are the five competitive forces that create vital
opportunities and threats for organizations? Which force do you feel is most important in the
computer industry today? Why?
Answer: The first one is rivalry among competing firms. The second is potential entry of new
competitors. The third is potential development of substitute products. The fourth is bargaining
power of suppliers. The last one is bargaining power of consumers. The rest of the response will
vary by student.

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126) Discuss the following statement: "Planning would be impossible without assumptions."
Answer: By identifying future occurrences that could have a major effect on the firm and by
making reasonable assumptions about those factors, strategists can carry the strategic-
management process forward. Assumptions are needed only for future trends and events that are
most likely to have a significant effect on the company's business. Assumptions can serve as
checkpoints on the validity of strategies. If future occurrences deviate significantly from
assumptions, strategists know that corrective actions may be needed. Without reasonable
assumptions, the strategy-formulation process could not proceed effectively. Firms that have the
best information generally make the most accurate assumptions, which can lead to major
competitive advantages.

127) List five steps that comprise an effective framework for conducting an EFE Matrix. Explain
the details involved in performing any one of the steps.
Answer: 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 from 15 to 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.

128) What is a CPM and how is it different from a EFE Matrix?

Answer: The Competitive Profile Matrix (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 EFE have the same meaning. However, critical
success factors in a CPM include both internal and external issues; therefore, the ratings refer to
strengths and weaknesses. Differences between the CPM and EFE include:
1) The critical success factors in a CPM are broader.
2) The critical success factors in a CPM are not grouped into opportunities and threats as they are
in an EFE.
3) In a CPM, the ratings and total weighted scores for rival firms can be compared to the sample
firm.

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