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Chapter 3 The External Assessment



1) To perform an external audit, a company first must 1. 2. 3. 4. 5.



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. E) all of the above



2) The process of performing an external audit needs to include 1. 2. 3. 4. 5.



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.



3) Collecting and evaluating information on competitors is essential for successful 1. 2. 3. 4. 5.



A) internal analysis. B) strategy evaluation. C) strategy formulation. D) strategy implementation. E) strategy correction.



4) External audits attempt to identify key variables that offer ________ responses. 1. 2. 3. 4. 5.



A) actionable B) authoritative C) profitable D) strategic E) terminal



5) The process of performing an external audit should involve 1. 2. 3. 4. 5.



A) key representatives from each stakeholder group. B) as many stakeholders as possible. C) only strategists. D) primarily strategists. E) as many managers and employees as possible.



6) Industry analysis is also referred to as external strategic management audit. Answer: TRUE



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



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



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



10) As many managers and employees as possible should be involved in the process of performing an external audit. Answer: TRUE



11) External audits attempt to identify key variables that offer highly intuitive responses. Answer: FALSE



12) External audits attempt to identify key variables that offer intuitive responses. Answer: FALSE



13) 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. A prioritized list of these factors must be obtained. All managers could individually rank the factors identified, from 1 (for the most important opportunity/threat)



to 20 (for the least important opportunity/threat) or managers could simply place a checkmark by their most important "top 10 factors." Then, by summing the rankings, or the number of checkmarks, a prioritized list of factors is revealed.



14) The Industrial Organization (I/O) approach to competitive advantage advocates that external factors are ________ internal factors in a firm achieving competitive advantage. 1. 2. 3. 4. 5.



A) less important than B) equally important as C) more important than D) more common than E) less common than



15) According to I/O theorists, which of the following contributes LEAST to firm's performance? 1. 2. 3. 4. 5.



A) Economies of scale B) Barriers to market entry C) Product differentiation D) Internal resources E) Level of competitiveness



16) In general, what happens to American goods in overseas markets when there is a strong dollar? 1. 2. 3. 4. 5.



A) They are less expensive. B) They are more attractive. C) They are cheaper. D) They are more expensive. E) They are desirable.



17) It is predicted that the United States will have no racial or ethnic majorities by the year 2035. 2036. 2037. 2038. 2039.



A) 2035. B) 2045. C) 2055. D) 2065. E) 2075.



18) The United States' population is 1. 2. 3. 4. 5.



A) getting younger and less white. B) getting younger and more white. C) getting older and less white. D) getting older and more white. E) remaining stable as to age and racial make up.



19) The world population is expected to grow to an estimated ________ billion in 2054. 1. 2. 3. 4. 5.



A) 6 B) 7 C) 8 D) 9 E) 10



20) Hawaii, California, and ________ already have no majority race or ethnic group. 1. 2. 3. 4. 5.



A) New York B) New Jersey C) New Hampshire D) New Mexico E) all of the above



21) Who are the world's longest-living people? 1. 2. 3. 4. 5.



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



22) The historical trend of people moving from ________ has dramatically slowed. 1. 2. 3. 4. 5.



A) the Northeast to the Sunbelt B) the West to the Midwest C) the Northeast to the Midwest D) the Sunbelt to the West E) the West to the Northeast



23) Which state has the highest union membership rate? 1. 2. 3. 4. 5.



A) Arkansas B) Colorado C) New Hampshire D) New York E) North Carolina



24) When an industry relies heavily on government contracts, which forecasts can be the most important part of an external audit? 1. 2. 3. 4. 5.



A) Economic B) Political C) Technological D) Competitive E) Multinational



25) Changes in which of the following can significantly affect firms? 1. 2. 3. 4. 5.



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



26) Many economists say the current rash of trade constraints will make it ________ for global economic growth. 1. 2. 3. 4. 5.



A) easier B) impossible C) harder D) more likely E) less time-consuming



27) In recent times, ________ perhaps has instituted the most protectionist measures by raising tariffs on most imports and subsidizing its own exports. 1. 2. 3. 4. 5.



A) Russia B) The United States C) The European Union D) India E) Switzerland



28) In recent times, which of the following has largely refrained from protectionist measures? 1. 2. 3. 4. 5.



A) The European Union B) The United States C) India D) Russia E) India and Russia



29) All of the following are political, governmental, and legal variables that can represent key opportunities or threats to organizations EXCEPT 1. 2. 3. 4. 5.



A) tariffs. B) environmental regulations. C) level of defense expenditures. D) legislation on equal employment. E) population changes by race, age, sex, and level of affluence.



30) Competition in virtually all industries is 1. 2. 3. 4. 5.



A) nonexistent. B) intense. C) never cutthroat. D) easily avoidable. E) insignificant.



31) Which of the following is NOT a characteristic that describes the most competitive companies in America? 1. 2. 3. 4. 5.



A) Divestiture is essential to growth. B) Hire and retain the best employees and managers possible. C) Continually adapt, innovate, improve—especially when the firm is successful. D) Strive to stay cost-competitive on a global basis. E) Whether it's broke or not, fix it.



32) A weak dollar means 1. 2. 3. 4. 5.



A) lower exports and higher imports. B) lower exports and lower imports. C) lower exports and no effect on imports. D) higher exports and higher imports. E) higher exports and lower imports.



33) The five major categories of variables known as external forces are: 1) economic forces, 2) social, cultural, demographic, and natural environment forces, 3) political, governmental, and legal forces, 4) technological forces and 5) competitive forces. Answer: TRUE



34) 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. Answer: TRUE



35) 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



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



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



38) There are benefits to the U.S. economy resulting from a low value of the U.S. Dollar. Answer: TRUE



39) The United States is getting older and less white. Answer: TRUE



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



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



42) Remaining solely domestic is an increasingly safe strategy for U.S. companies. Answer: FALSE



43) U.S. households are making more and more purchases online. Answer: TRUE



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



45) There are now more American households consisting of married couples with children than of people living alone or with unrelated people. Answer: FALSE



46) The historical trend of people moving from the Northeast and Midwest to the Sunbelt and West has dramatically increased. Answer: FALSE



47) By 2050, the Census Bureau projects that the number of Americans age 100 and older will dramatically decrease. Answer: FALSE



48) The trend toward an older America is bad news for furniture producers, hotels, airlines and home builders. Answer: FALSE



49) Political issues and stances impact strategic decisions. Answer: TRUE



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



51) Protectionism is used by various countries around the world to safeguard their domestic industries. Answer: TRUE



52) India is increasing tariffs on foreign steel. Answer: TRUE



53) The United States has been more active than other nations in protectionist measures and has engaged in many "Buy American" policies. Answer: FALSE



54) Walgreens and CVS pharmacies are located generally across the street from each other and battle each other every day on price and customer service. Answer: TRUE



55) 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. Answer: TRUE



56) Erosion of the U.S. manufacturing base is reflected in the sharp increase in labor union membership in the last decade. Answer: FALSE



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



58) Wisconsin recently passed a law strengthening collective-bargaining rights for the state's public-employee unions. Answer: FALSE



59) 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. Answer: FALSE



60) 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 natural environment 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, availability of credit, interest rates, value of the dollar in world markets, & foreign countries' economic conditions; 2) immigration and emigration rates, regional changes in tastes and preferences, life expectancy rates, attitudes toward customer service, & social responsibility issues; 3) equal employment laws, unionization trends, antitrust legislation, tariffs, & political conditions in foreign countries; 4) technological advancements that could create new markets, result in a proliferation of new and improved products, change the relative competitive cost positions in an industry, render existing products and services obsolete, and/or create new competitive advantages that are more powerful than existing advantages; & 5) potential moves a competitor could



make, changes to the strengths or weaknesses of competitors, & vulnerability of competitors to a firm's alternative strategies.



61) Discuss the Industrial Organization (I/O) approach in relation to competitive advantage. Answer: The I/O approach to competitive advantage advocates that external factors are more 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 that no single firm can control. I/O theorists contend that external factors—such as economies of scale, barriers to market entry, product differentiation, the economy, and level of competitiveness—are more important than internal resources, capabilities, structure, and operations. Competitive advantage is determined largely by competitive positioning within an industry, according to I/O advocates. The authors contend that effective integration of both external and internal factors is the key to securing and keeping a competitive advantage.



62) Explain how new technologies have been impacting strategic-planning decisions. Answer: A variety of new technologies such as the Internet of Things, 3D printing, the cloud, mobile devices, biotech, analytics, autotech, robotics, and artificial intelligence are fueling innovation in many industries. Businesses are using mobile technologies and applications to better determine customer trends and are employing advanced data analytics to make enhanced strategy decisions. The vast increase in the amount of data coming from mobile devices is driving the development of advanced analytics applications. Technology is rapidly changing the competitive landscape in banking, and many other industries characterized by brick-and-mortar stores. The total number of bank branch locations has dropped below 90,000, the lowest total number in the United States in a decade.



63) Intensity of competition ________ in lower-return industries. 1. 2. 3. 4. 5.



A) is lowest B) is nonexistent C) is highest D) is not important E) fluctuates



64) What is NOT one of Michael Porter's five competitive forces? 1. 2. 3. 4. 5.



A) Potential entry of new competitors B) Rivalry among competing firms C) Bargaining power of unions D) Bargaining power of suppliers E) Bargaining power of consumers



65) According to Porter, what is usually the most powerful of the five competitive forces? 1. 2. 3. 4. 5.



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



66) Whenever new firms can easily enter a particular industry, the intensity of competitiveness among firms tends to 1. 2. 3. 4. 5.



A) stay the same. B) increase. C) decrease. D) neutralize. E) become irrelevant.



67) If suppliers are unreliable or too costly, which of these strategies may be appropriate? 1. 2. 3. 4. 5.



A) Horizontal integration B) Backward integration C) Market penetration D) Forward integration E) Concentric diversification



68) When the products being purchased are standard or undifferentiated, it results in ________ bargaining power of consumers. 1. 2. 3. 4. 5.



A) marginalized B) lower C) higher D) negative E) negligible



69) A ________ integration strategy is used by firms to gain control or ownership of suppliers. 1. 2. 3. 4. 5.



A) backward B) forward C) horizontal D) vertical E) vortexed



70) 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. Answer: TRUE



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



72) 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



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



74) A forward integration strategy is used by firms to gain control or ownership of suppliers. Answer: FALSE



75) According to Michael Porter, what are the forces that together define the nature of competitiveness in a given industry. Discuss the one force that is usually the most powerful. Answer: According to Porter, the nature of competitiveness in a given industry can be viewed as a composite of five forces: 1) Rivalry among competing firms, 2) Potential entry of new competitors, 3) Potential development of substitute products, 4) Bargaining power of suppliers, & 5) Bargaining power of consumers. Rivalry among competing firms is usually the most powerful of the five competitive forces. The strategies pursued by one firm can be successful only to the extent that they provide competitive advantage over the strategies pursued by rival firms. Changes in strategy by one firm may be met with retaliatory countermoves, such as lowering prices, enhancing quality, adding features, providing services, extending warranties, and increasing advertising. The intensity of rivalry among competing firms tends to increase as the number of competitors increases, as competitors become more equal in size and capability, as demand for the industry's products declines, and as price cutting becomes common. Rivalry also increases when consumers can switch brands easily; when barriers to leaving the market are high; when fixed costs are high; when the product is perishable; when consumer demand is growing slowly or declines such that rivals have excess capacity or inventory; when the products being sold are commodities (not easily differentiated, such as gasoline); when rival firms are diverse in strategies, origins, and culture; and when mergers and acquisitions are common in the industry. As rivalry among competing firms intensifies, industry profits decline, in some cases to the point where an industry becomes inherently unattractive.



76) According to Michael Porter, the nature of competitiveness in a given industry can be viewed as a composite of five forces. Name these forces. Answer: 1) Rivalry among competing firms, 2) Potential entry of new competitors, 3) Potential development of substitute products, 4) Bargaining power of suppliers, & 5) Bargaining power of consumers.



77) A systematic and ethical process for gathering and analyzing information about the competition's activities and general trends to further a business' own goals is called 1. 2. 3. 4. 5.



A) unethical business practices. B) artificial intelligence. C) competitive intelligence. D) industrial espionage. E) competitive advantage.



78) ________ is NOT a basic mission of a competitive intelligence program. 1. 2. 3. 4.



A) Providing a general understanding of an industry B) Providing a general understanding of a company's competitors C) Identifying industry executives who could be hired by the firm D) Identifying areas in which competitors are vulnerable and assessing the impact strategic actions would have on competitors 5. E) Identifying potential moves a competitor might make that would endanger a firm's position in the market



79) The investor relations pages of a company website ________ information about a firm. 1. 2. 3. 4. 5.



A) is a good place to start to find B) is not a reliable source of C) is only acceptable as a last resort for D) should not be used as the first place to look for E) is a waste of time when searching for



80) Unpublished sources of external strategic information include all of the following EXCEPT 1. 2. 3. 4. 5.



A) abstracts. B) customer surveys. C) market research. D) speeches at professional and shareholders' meetings. E) conversations with stakeholders.



81) Which of the following is NOT a published source of external strategic information? 1. 2. 3. 4. 5.



A) Periodicals B) Customer surveys C) Journals D) Reports E) Directories



82) Standard & Poor's NetAdvantage does not provide online access to 1. 2. 3. 4. 5.



A) Standard & Poor's Industry Surveys. B) Mergent's (formerly Moody's/FISOnline) Manuals. C) stock reports. D) The Outlook. E) mutual fund reports.



83) Corporate intelligence is the name for 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



84) Major competitors' weaknesses can represent internal opportunities. Answer: FALSE



85) Major competitors' strengths may represent key threats. Answer: TRUE



86) Major competitors' strengths are areas of concern but do not represent key threats to a firm. Answer: FALSE



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



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



89) The Fuld & Co. website explains that the term competitive intelligence is a polite way of referring to corporate espionage. Answer: FALSE



90) Intelligence gathering is an unethical business practice. Answer: FALSE



91) Define Competitive Intelligence (CI) and list three ways that CI can be gathered. Answer: Competitive Intelligence as formally defined by the Society of Competitive Intelligence Professionals (SCIP), is 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 (SCIP website). Students should also list three of the following: 1) hire top executives from rival firms, 2) reverse engineer rival firms' products, 3) use surveys and interviews of customers, suppliers, and distributors, 4) conduct drive-by and on-site visits to rival firm operations, 5) search online databases, 6) contact government agencies for public information about rival firms, 6) systematically monitor relevant trade publications, magazines, and newspapers.



92) What are educated assumptions about future trends and events called? 1. 2. 3. 4. 5.



A) Wild guesses B) Forecasts C) Facts D) Statistics E) Premonitions



93) Without assumptions, planning would be 1. 2. 3. 4. 5.



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



94) Forecasts are educated assumptions about future trends and events. Answer: TRUE



95) Assumptions have no place in planning. Answer: FALSE



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



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



98) Organizations never develop their own projections. Answer: FALSE



99) Wild guesses should never be made in formulating strategies. Answer: TRUE



100) 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.



101) A total weighted score of ________ in an External Factor Evaluation (EFE) Matrix indicates that an organization is responding in an outstanding way to existing opportunities and threats in its industry. 1. 2. 3. 4. 5.



A) 0 B) 0 C) 0 D) 10.0 E) 100.0



102) What is the first step in designing an External Factor Evaluation (EFE) Matrix? 1. 2. 3. 4. 5.



A) Identifying key external factors 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



103) What is the range for a firm's total weighted score in an External Factor Evaluation Matrix? 1. 2. 3. 4. 5.



A) 0 to 4 B) 0 to 5 C) 1 to 4 D) 1 to 5 E) 0 to 10



104) When using External Factor Evaluation (EFE) Matrix, what is done after multiplying each factor's weight by its rating to determine a weighted score? 1. A) Identifying key external factors 2. B) Summing the weighted score for each competitor 3. C) Summing the weighted scores for each variable to determine the total weighted score for the organization 4. D) Drawing the horizontal and vertical lines for the matrix 5. E) Determining the preferred strategic factors



105) 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



106) 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



107) 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 lowest possible total weighted score is 0.0. Answer: FALSE



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



109) One difference between a Competitive Profile Matrix (CPM) and an External Factor Evaluation (EFE) is that 1. 2. 3. 4.



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. 5. E) CPM is only used in small firms.



110) The weights and total weighted scores in a Competitive Profile Matrix (CPM) have the same meaning the weights and total weighted scores in a 1. 2. 3. 4. 5.



A) Comprehensive Profile Analysis (CPA). B) Dynamic Trends Analytical Framework. C) Porter's Five Forces Model. D) External Factor Evaluation (EFE). E) Evaluative Forces Matrix (EFM).



111) The critical success factors in a Competitive Profile Matrix and EFE Matrix include 1. 2. 3. 4. 5.



A) internal but not external issues. B) external but not internal issues. C) both internal and external issues. D) neither internal or external issues. E) only non-quantifiable data.



112) What is the range for a firm's total weighted score in a Competitive Profile Matrix (CPM)? 1. 2. 3. 4. 5.



A) 0 to 4 B) 0 to 5 C) 1 to 4 D) 1 to 5 E) 0 to 10



113) The weights and total weighted scores in both a Competitive Profile Matrix (CPM) and an External Factor Evaluation (EFE) Matrix have the same meaning. Answer: TRUE



114) The critical success factors in a Competitive Profile Matrix (CPM) and an External Factor Evaluation (EFE) Matrix include both internal and external issues. Answer: FALSE



115) Describe the Competitive Profile Matrix (CPM) noting similarities to, and differences from, the External Factor Evaluation (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 an 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, where 4 = major strength, 3 = minor strength, 2 = minor weakness, and 1 = major weakness. The critical success factors in a CPM are not grouped into opportunities and threats as they are in an EFE. In a CPM, the ratings and total weighted scores for rival firms can be compared to the sample firm.



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