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David TIF Ch03 PDF
David TIF Ch03 PDF
CHAPTER 3
The External Assessment
True/False
Introduction
Ans: T Page: 82
2. An external audit focuses on identifying and evaluating trends and events within
the control of management.
Ans: F Page: 82
3. The aim of an external audit is to develop an exhaustive list of every possible factor
that could influence the business.
Ans: F Page: 83
4. External audits attempt to identify key variables that offer actionable responses.
Ans: T Page 83
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.
Ans: F Page: 83
Ans: T Page: 83
Ans: T Page: 84
44
Ans: F Page: 84
Ans: F Page: 85
Economic Forces
Ans: T Page: 85
11. Economic factors do not have much impact on the attractiveness of strategies.
Ans: F Page: 85
Ans: F Page: 85
13. Motor vehicle firms in the United States are vulnerable when the value of the dollar
falls.
Ans: F Page: 86
14. A low value of the dollar means lower exports and higher imports.
Ans: F Page: 86
15. In 2005, the Yen rose to a five-year high against the dollar.
Ans: T Page 86
16. The economic standard of living varies little between cities and countries.
Ans: F Page 86
17. The cost of living in London is greater than the cost of living in New York City.
Ans: T Page 87
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18. The cost of living in Boston is greater than the cost of living in New York City.
Ans: F Page 87
19. According to the Wall Street Journal, the political bureaucracy in Russia has been
able to stimulate economic progress, free enterprise, and entrepreneurship.
Ans: F Page 87
20. Russian businesses are more likely to fall victim to illegal actions by officials and
policemen than by criminals.
Ans: T Page 87
Ans: T Page: 88
22. It is predicted that, by 2025, over 18% of the population in the United States will be
over 65 years old.
Ans: T Page 88
23. Recent consumption trends in the United States indicate that wine consumption is
increasing at 5% while beer consumption is increasing at 10%.
Ans: F Page 88
24. Hispanics are expected to become a larger minority group in the United States than
African Americans by 2021.
Ans: T Page: 88
25. In the United States, the population has been moving from the south and west to the
Northeast and Midwest.
Ans: F Page: 89
26. In 2003, China replaced Mexico as the largest exporter to the United States.
Ans: T Page 89
46
27. Political, governmental, and legal factors are considered key threats for most small
and large organizations.
Ans: F Page 90
28. Political forecasts can be the most important part of an external audit for firms that
depend heavily on government contracts.
Ans: T Page: 83
29. Within the European Union (EU), tax rates have been standardized to end
competitive tax breaks among member countries.
Ans: F page 90
Technological Forces
30. 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.
Ans: T Page: 93
31. In practice, critical technology decisions are too often delegated to lower
organizational levels or are made without an understanding of their strategic
implications.
Ans: T Page: 94
Competitive Forces
Ans: T Page: 96
Ans: T Page: 96
47
34. Corporate intelligence can be defined as a systematic and ethical process for
gathering and analyzing information about the competitions activities and general
business trends to further a businesss own goals.
Ans: F Page 96
Ans: F Page: 96
36. According to Business Week, there are less than 500 corporate spies now actively
engaged in intelligence activities.
Ans F: Page 96
37. According to Business Week, and 9 out of 10 large companies have employees
dedicated solely to gathering competitive intelligence.
Ans: T Page: 96
38. An effective CI program allows all areas of a firm to access consistent and verifiable
information in making decisions.
Ans: T Page: 97
Ans: T Page: 97
Ans: F Page 98
41. Learning from the partner is a major reason why U.S. firms enter into cooperative
agreements.
Ans: F Page: 99
42. Market commonality is the extent to which the type and amount of a firms internal
resources are comparable to a rival.
Ans: F page 99
48
43. 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.
44. The first step for using Porters Five-Forces Model is to evaluate the relative
strength of each competitive force.
45. Bargaining power of consumers is usually the most powerful of Porters five
competitive forces.
46. 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.
47. Laser eye surgery would be considered a substitute product for eyeglasses and
contact lenses.
49. The bargaining power of consumers can be the most important force impacting
competitive advantage.
50. Forecasts are educated assumptions about future trends and events.
51. 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.
52. Quantitative forecasts become less accurate as historical relationships become less
stable.
53. Linear regression is based on the assumption that the future will be different from
the past.
55. Without reasonable assumptions, the strategy-formulation process could not proceed
effectively.
57. A global strategy seeks to meet the needs of customers worldwide with the lowest
cost at the highest value.
58. Rampant corruption and the absence of a legal system are risks that still restrain
firms from initiating business with China.
61. 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.
62. 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.
63. Both a Competitive Profile Matrix and an EFE Matrix have the same meaning in the
weights, ratings and total weighted scores.
64. The critical success factors in a Competitive Profile Matrix are often the same as
those in an EFE Matrix.
Multiple Choice
The Nature of an External Audit
Ans: b Page: 83
51
66. 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.
Ans: c Page: 83
Ans: b Page: 83
Ans: c Page: 84
69. 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.
Ans: c Page: 84
52
70. 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
Ans: c Page: 84
71. 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
Ans: d Page: 84
Economic Forces
Ans: b Page: 85
73. What happens to the demand for discretionary goods when interest rates rise?
a. rises
b. declines
c. stays the same
d. first rises then declines
e. no way to tell
Ans: d Page: 85
53
74. What effect do trends in the dollars 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
Ans: c Page: 86
75. In general, what happens to American goods in overseas markets when there is a
strong dollar?
a. less expensive
b. more attractive
c. cheaper
d. more expensive
e. desirable
Ans: d Page: 86
Ans: a Page: 87
77. In 2004, which country had the most foreign investment in Russia?
a. United States
b. Netherlands
c. United Kingdom
d. Germany
e. Cyprus
Ans: e Page: 87
54
78. 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
Ans: a Page: 88
Ans: c Page: 88
Ans: e Page: 88
Ans: b Page: 89
55
82. What are assembly plants on the Mexican side of the border called?
a. Maquiladoras
b. Assembladoras
c. Veskels
d. XMLs
e. Tijuana
Ans: a Page: 89
Ans: b Page: 89
84. 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
Ans: b Page: 90
Ans: e Page: 90
56
86. Which country voted no to the European Unions proposed constitution in mid
2005?
a. Germany
b. Portugal
c. France
d. The Czech Republic
e. Greece
Ans: c Page: 90
87. The term that refers to the EUs effort to end competitive tax breaks among
member countries is
a. double taxation.
b. taxation bias.
c. equity taxation.
d. tax reconciliation.
e. tax harmonization.
Ans: e Page: 90
Technological Forces
88. Technological advancements can create new ______ advantages that are more
powerful than existing advantages.
a. economic
b. social
c. environmental
d. competitive
e. comparative
Ans: d Page: 93
Ans: b Page: 94
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Competitive Forces
Ans: c Page: 95
91. In 2004, which company had the dominant market share in the beverages industry?
a. PepsiCo
b. Coca-Cola Enterprises
c. Anheuser-Busch
d. Pepsi Bottling Group
e. Molson Brewing
Ans: a Page 95
92. 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 its broke or not, fix it
Ans: a Page: 96
93. A systematic and ethical process for gathering and analyzing information about the
competitions activities and general trends to further a business own goals is called
a. unethical business practice.
b. artificial intelligence.
c. competitive intelligence.
d. information sharing.
e. competitive advantage.
Ans: c Page: 96
58
Ans: c Page: 97
Ans: e Page: 97
96. Keeping strategies secret from employees and stakeholders can do all of the
following except:
a. inhibit employee and stakeholder communication.
b. inhibit employee and stakeholder understanding.
c. inhibit employee and stakeholder commitment.
d. provide competitive advantage to competitors.
e. forego valuable employee or stakeholder input.
97. Learning from the partner is a major reason why ______ firms enter into
cooperative agreements.
a. Asian
b. American
c. African
d. European
e. Mexican
Ans: a Page: 92
59
Ans: c Page: 99
100. 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
101. Whenever new firms can easily enter a particular industry, the intensity of
competitiveness among firms
a. stays the same.
b. increases.
c. decreases.
d. neutralizes.
e. fluctuates.
102. 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
103. 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. not necessary
104. Because of the Internet, barriers to personal and business success are
a. being eliminated.
b. being built.
c. acting like glass walls.
d. significantly enhanced.
e. lower.
105. What are educated assumptions about future trends and events?
a. Guesses
b. Forecasts
c. Facts
d. Statistics
e. Predictions
110. All of these are risks that still restrain firms from initiating business with China
except:
a. absence of a legal system.
b. severe human rights violations.
c. freedom of press and religion.
d. rampant corruption.
e. little respect for patents, copyrights, brands and logos.
112. What is the range for a firms 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
Essay Questions
114. 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.
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. Relationships
among these forces and an organization are depicted in Figure 3-2.
Page: 83
Page: 83-84
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, rather than the firms internal functional
decisions made. Research findings suggest that approximately 20 percent of a
firms profitability can be explained by the industry, whereas 36 percent of the
variance in profitability is attributed to the firms internal factors. Effective
integration of both external and internal factors is the key to securing and keeping
a competitive advantage.
Page: 84-85
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117. Identify five key economic variables that could represent major opportunities or
threats to a bank in your town or city.
Student answers will vary. However, they should look at economic, social/cultural,
political/legal, technological and competitive factors. Refer to Table 3-1 on page 85.
Page: 85-86
118. List three opportunities and three threats that could represent key factors facing your
college or university.
Student answers will vary. However, they should look at economic, social/cultural,
political/legal, technological and competitive factors.
Page: 85-92
119. Explain how the Internet is changing businesses around the world.
The Internet is acting as a national and even global economic engine that is spurring
productivity. The Internet is saving companies billions of dollars in distribution and
transaction costs from direct sales to self-service systems. 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.
Page: 93
120. 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.
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
firms position in the market. An effective CI program allows all areas of a firm to
access consistent and verifiable information in making decisions.
Page: 97
65
121. 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?
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.
Page: 99-103
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 companys
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.
Page: 104-105
123. Discuss the opportunities and threats China presents to an international firm
interested in doing business with China.
U.S. firms increasingly are doing business in China as market reforms create a more
businesslike arena daily. Risks that still restrain firms from initiating business with
China include the following: (1) poor infrastructure, (2) disregard for the natural
environment, (3) absence of a legal system, (4) rampant corruption, (5) lack of
freedom of press, speech and religion, (6) severe human-rights violations, (7) little
respect for patents, copyrights, brands and logos, (8) counterfeiting, fraud and
pirating of products, (9) little respect for legal contracts and (10) no generally
accepted accounting principles.
Both the European community and the U.S. have approved Chinas membership in
the WTO. This action integrated the worlds most populated country into the global
trading order. Some key changes resulting from this action are as follows: (1)
foreign companies can take increased stakes in mobile phone companies; (2) tariffs
on high-tech products will be phased out and eliminated by 2005; (3) import tariffs
on automobiles will drop to 25 percent by mid-2006 from 90 percent today; (4)
foreign banks may conduct domestic currency business with Chinese firms; (5)
foreign banks may do business anywhere in China by 2006; (6) foreign firms will be
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allowed a 49 percent stake in securities joint ventures by 2004; (7) foreign insurance
firms may own operations in China; and (8) retail oil distribution will open in China
by 2004.
Page: 107-109
124. List five steps that comprise an effective framework for conducting an EFE Matrix.
Explain the details involved in performing any one of the steps.
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 10 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 to 1.0; 3) assign a 1 to 4 rating to
each key external factor to indicate how effectively the firms 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
factors 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.
Page: 109-111