Chapter 3 The External Assessment

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

1. A) get an approval from the Securities and Exchange Commission.

2. B) perform an internal audit.
3. C) gather competitive intelligence and information about external trends.
4. D) hire a consultant to develop a comprehensive strategic plan.
5. E) all of the above

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

1. A) only top level managers, as it is a planning function.

2. B) as many managers and employees as possible.
3. C) primarily front-line supervisors.
4. D) between 15 to 20 managers for it to be valid.
5. E) stockholders and external government agencies.

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

1. A) internal analysis.
2. B) strategy evaluation.
3. C) strategy formulation.
4. D) strategy implementation.
5. E) strategy correction.

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

1. A) actionable
2. B) authoritative
3. C) profitable
4. D) strategic
5. E) terminal

5) The process of performing an external audit should involve

1. A) key representatives from each stakeholder group.

2. B) as many stakeholders as possible.
3. C) only strategists.
4. D) primarily strategists.
5. 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. A) less important than

2. B) equally important as
3. C) more important than
4. D) more common than
5. E) less common than

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

1. A) Economies of scale
2. B) Barriers to market entry
3. C) Product differentiation
4. D) Internal resources
5. E) Level of competitiveness

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

1. A) They are less expensive.

2. B) They are more attractive.
3. C) They are cheaper.
4. D) They are more expensive.
5. E) They are desirable.

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

2035. A) 2035.
2036. B) 2045.
2037. C) 2055.
2038. D) 2065.
2039. E) 2075.
18) The United States' population is

1. A) getting younger and less white.

2. B) getting younger and more white.
3. C) getting older and less white.
4. D) getting older and more white.
5. 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. A) 6
2. B) 7
3. C) 8
4. D) 9
5. E) 10

20) Hawaii, California, and ________ already have no majority race or ethnic group.

1. A) New York
2. B) New Jersey
3. C) New Hampshire
4. D) New Mexico
5. E) all of the above

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

1. A) Americans
2. B) Mexicans
3. C) Indians
4. D) Filipinos
5. E) Japanese

22) The historical trend of people moving from ________ has dramatically slowed.

1. A) the Northeast to the Sunbelt

2. B) the West to the Midwest
3. C) the Northeast to the Midwest
4. D) the Sunbelt to the West
5. E) the West to the Northeast
23) Which state has the highest union membership rate?

1. A) Arkansas
2. B) Colorado
3. C) New Hampshire
4. D) New York
5. 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. A) Economic
2. B) Political
3. C) Technological
4. D) Competitive
5. E) Multinational

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

1. A) Patent laws
2. B) Antitrust legislation
3. C) Tax rates
4. D) Lobbying activities
5. E) All of the above

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

1. A) easier
2. B) impossible
3. C) harder
4. D) more likely
5. 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. A) Russia
2. B) The United States
3. C) The European Union
4. D) India
5. E) Switzerland

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

1. A) The European Union

2. B) The United States
3. C) India
4. D) Russia
5. 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. A) tariffs.
2. B) environmental regulations.
3. C) level of defense expenditures.
4. D) legislation on equal employment.
5. E) population changes by race, age, sex, and level of affluence.

30) Competition in virtually all industries is

1. A) nonexistent.
2. B) intense.
3. C) never cutthroat.
4. D) easily avoidable.
5. E) insignificant.

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

1. A) Divestiture is essential to growth.

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

1. A) lower exports and higher imports.

2. B) lower exports and lower imports.
3. C) lower exports and no effect on imports.
4. D) higher exports and higher imports.
5. 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. A) is lowest
2. B) is nonexistent
3. C) is highest
4. D) is not important
5. E) fluctuates
64) What is NOT one of Michael Porter's five competitive forces?

1. A) Potential entry of new competitors

2. B) Rivalry among competing firms
3. C) Bargaining power of unions
4. D) Bargaining power of suppliers
5. E) Bargaining power of consumers

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

1. A) Potential development of substitute products

2. B) Bargaining power of suppliers
3. C) Bargaining power of consumers
4. D) Rivalry among competing firms
5. 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. A) stay the same.

2. B) increase.
3. C) decrease.
4. D) neutralize.
5. E) become irrelevant.

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

1. A) Horizontal integration
2. B) Backward integration
3. C) Market penetration
4. D) Forward integration
5. E) Concentric diversification

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

1. A) marginalized
2. B) lower
3. C) higher
4. D) negative
5. E) negligible
69) A ________ integration strategy is used by firms to gain control or ownership of
suppliers.

1. A) backward
2. B) forward
3. C) horizontal
4. D) vertical
5. 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. A) unethical business practices.

2. B) artificial intelligence.
3. C) competitive intelligence.
4. D) industrial espionage.
5. E) competitive advantage.
78) ________ is NOT a basic mission of a competitive intelligence program.

1. A) Providing a general understanding of an industry

2. B) Providing a general understanding of a company's competitors
3. C) Identifying industry executives who could be hired by the firm
4. 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. A) is a good place to start to find

2. B) is not a reliable source of
3. C) is only acceptable as a last resort for
4. D) should not be used as the first place to look for
5. E) is a waste of time when searching for

80) Unpublished sources of external strategic information include all of the following
EXCEPT

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

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

1. A) Periodicals
2. B) Customer surveys
3. C) Journals
4. D) Reports
5. E) Directories
82) Standard & Poor's NetAdvantage does not provide online access to

1. A) Standard & Poor's Industry Surveys.

2. B) Mergent's (formerly Moody's/FISOnline) Manuals.
3. C) stock reports.
4. D) The Outlook.
5. 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. A) Wild guesses
2. B) Forecasts
3. C) Facts
4. D) Statistics
5. E) Premonitions

93) Without assumptions, planning would be

1. A) impossible.
2. B) easier.
3. C) difficult.
4. D) inexpensive.
5. 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. A) 0
2. B) 0
3. C) 0
4. D) 10.0
5. E) 100.0

102) What is the first step in designing an External Factor Evaluation (EFE) Matrix?

1. A) Identifying key external factors

2. B) Summing the weighted score for each competitor
3. C) Calculating the sales of each competitor
4. D) Drawing the horizontal and vertical lines for the matrix
5. E) Determining four competitors

103) What is the range for a firm's total weighted score in an External Factor Evaluation
Matrix?

1. A) 0 to 4
2. B) 0 to 5
3. C) 1 to 4
4. D) 1 to 5
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. A) CPM includes both internal and external issues.

2. B) the weights and total weighted scores have different meanings.
3. C) CPM ratings range from 1 to 10.
4. 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. A) Comprehensive Profile Analysis (CPA).

2. B) Dynamic Trends Analytical Framework.
3. C) Porter's Five Forces Model.
4. D) External Factor Evaluation (EFE).
5. E) Evaluative Forces Matrix (EFM).

111) The critical success factors in a Competitive Profile Matrix and EFE Matrix include

1. A) internal but not external issues.

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

112) What is the range for a firm's total weighted score in a Competitive Profile Matrix
(CPM)?

1. A) 0 to 4
2. B) 0 to 5
3. C) 1 to 4
4. D) 1 to 5
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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