Chapter 3 - The External Assessment Overview Chapter 3 describes how to perform an external strategic-management audit, including what variables to access, where to find information, how to assimilate external information so that it may provide a foundation for formulating formulating strategies. Chapter 3 describes how to develop a Competitive Profile Matrix and an External Factor Evaluation Matrix, two widely utilized strategic planning tools. Chapter 3 also reveals special, special, free sources of external strategic information on the Internet. It is vital for companies and organizations to identify and prioritize the relative importance of key external opportunities and threats facing the firm, so the firm can deploy assets/resources to exploit the opportunities and avoid or mitigate the threats. Survival of the firm can hinge on this part of strategic planning being done well, so Chapter 3 is very important. important. This part of strategic strategic planning requires that an engineering engineering hunt for the facts be conducted, to avoid a strategic plan being based on vague generalities, which is detrimental both to companies and students performing case analysis.
Learning Objectives The Chapter 1 Learning Objectives presented in the textbook are reiterated below: 1. Describe the nature and purpose of an external assessment in formulating strategies. 2. Identify and discuss 10 external forces that must be examined in formulating strategies: economic, social, cultural, cultural, demographic, environmental, environmental, political, governmental, legal, technological, and competitive. 3. Explain Porter’s Five Forces Model and its relevance in formulating strategies. 4. Describe key sources of information information used for locating vital external information. 5. Discuss forecasting tools and techniques. 6. Explain how to develop and use an External External Factor Evaluation (EFE) (EFE) Matrix. 7. Explain how to develop and use a Competitive Profile Matrix. Matrix.
Teaching Tips 1. Make certain that students realize that 1) external factors factors are EXTERNAL, meaning the firm has no control over the issue, and 2) external opportunities must not include STRATEGIES. Too often students will mix mix internal factors in with the external and/or will include strategies as opportunities. 2. In class (or as an assigned homework activity) make sure students watch the Chapter 3 author videos posted at the www.strategyclub.com website. Also watch watch for Chapter 3
updates at that website. Also, download the free Excel student template template and show students the external assessment part of that template, especially the EFE and CPM matrices. Most students are great great working with Excel and will welcome welcome this template for use in case analysis. 3. Remind students of the Edward Deming quote – quote – “In “In God We Trust, All Others Others Bring the Data.” Reason: Many students Many students will avoid the research and fact gathering work so essential in case analysis, and will include as external ex ternal factors vague platitudes, which are useless for a firm in formulating strategies. Tell students that “Too “Too much is at stake in strategic planning to give only vague statements such as “unemployment rates are low” or “the firm’s liquidity is high.” The firm’s survival survival may be at stake. stake. Vague statements offer no insight for a firm in formulating formulating strategies. Words such as increase/decrease/expand/high/low must be avoided; instead use specific #’s whenever possible; and make sure the factors selected are “actionable.” 4. Make sure students understand the the difference between weights and ratings ratings in an EFEM and CPM. Make sure they realize the weights and ratings are “not mere guesses,” guesses,” but rather must be based on their understanding of the company and industry. Make sure students realize that NO FIRM CAN PURSUE EVERY STRATEGY TH AT WILL BENEFIT THE FIRM, SO PRIORITIZATION (ASSIGNING WEIGHTS AND RATINGS) IS VERY IMPORTANT IMPORTANT IN STRATEGIC STRATEGIC PLANNING. Regarding weights, point out to students that 0.08 is mathematically 33% more important than 0.06, so even small differences can become very important due to the need to allocate scarce scar ce resources. Tell students never to use the word GUESS in this course, but rather use the term ESTIMATE based on their research. 5. Focus on the new Table 3-8 that gives gives “Sources of External Information.” Bring those sources up online in class. class. Put in the HSY stock symbol symbol for Hershey, so students can see first hand the wealth of free external information available at those websites for a company such as Hershey or their assigned case company. 6. Also in that section titled titled “Sources of External Information,” contact the reference librarian at your college/university to determine which of those databases the library has a subscription to. The authors often invite a reference librarian to class and let them go over Table 3-8 in terms of how to use those materials from the library database. Librarians are anxious and happy to help in this regard. Strategic planning is all about gathering specific, number-based information from a variety of sources as a found ation for deciding what strategies are best for a firm to pursue. 7. The EFE Matrix in Table 3-9 for the “local tenten-theater cinema complex” will serve as a running example in other chapters to come, so definitely go over that example. Point out the use of $’s, #’s, %’s in the factor list, as well as the Ratings which (remind students) can be 1, 2, 3, or 4 anywhere in that column – column – because because a factor can be a threat, for example, and the firm may be b e doing a great job combatting comba tting that threat = rating of 4. This is going to be in contrast con trast to the IFE Matrix in the next chapter ch apter where the ratings are
4 or 3 for strengths and 2 or 1 for weaknesses, since by definition if the firm is weak on a factor, then the rating should be 1 or 2, i.e., lowering the total weighted score. 8. In developing a CPM, remind students that there is only a single weight column, since it is a single industry. Also in a CPM, avoid assigning the same rating to two or more firms since the purpose of the matrix is to differentiate between firms. 9. At the end of Chapter 3, direct student attention to the “Implications for Students” section because this is important information as the team prepares and ultimately delivers their oral case analysis presentation later in the course. 10. Regarding the end-of-chapter review questions, consider assigning them all one day in class giving each student a question or two, and letting them tell the class the answer, with you commenting on their answers. Many professors find this to be a fun day in class and it goes pretty quickly. 11. Several of the end-of-chapter Assurance of Learning Exercises make excellent homework or classwork assignments to be completed as an individual or as a group of students. Several exercises focus on the Hershey Cohesion Case, and several focus on your college/university. Many professors usually select one from each venue.
Answers to End-of-Chapter 3 Review Questions 3-1. Define and give an example of business analytics. Why is this technique becoming so widely used in organizations today?
Business analytics is an MIS technique that involves using software to min e huge volumes of data to help executives make decisions. Sometimes called predictive analytics, machine learning, or data mining, this software enables a researcher to assess and use the aggregate experience of an organization, a priceless strategic asset for a firm. The history of a firm’s interaction with its customers, suppliers, distributors, employees, rival firms, and more can all be tapped with data mining to generate predictive models. Leading business analytics companies include IBM and Oracle. Example: Grocery stores have a card that customers use to get discounts, but these cards enable the company to collect and analyze vast amounts of information about their customers. Information is vital for decision making. 3-2. Do CVS and Target take stances on political issues? Is it good for companies to take stands on political issues? Explain.
Answer: There are pros and cons. A pro is that the firm can win over thousands of customers, but a con is that the firm can lose thousands of customers. Political stances do matter for business, especially in today’s world of instant tweeting and emailing. For example, to openly and actively endorse various political candidates can alienate customers/employees who support the other party’s candidate(s). In essence, firms should weigh the pros and cons of taking
stances on political issues. In general, it is best not to take stands on political issues, unless a compelling reason warrants such action. Being an activist is definitely a risky strategy, because firms are comprised of, and need the support of, large groups of people who have different opinions/beliefs. 3-3. Provide a synopsis of IBISWorld and Mergent Online. IBISWorld – provides online USA Industry Reports (NAICS); US Industry iExpert Summaries; and US Business Environment Profiles. A global version of IBIS is also available. Many college libraries subscribe to this excellent database for strategic management students to obtain factual, specific external and internal information to incorporate into their case analysis. Mergent Online – provides online access to Mergent’s (formerly Moody’s/FISOnline) Manuals that includes trend, descriptive, and statistical information on hundreds of public companies and industries. Company income statements and balance sheets are provided. You may cut and paste financial statements pretty easily from this source, while is helpful when developing projected financial statements. 3-4. Mathematically, how much more important is a weight of 0.08 compared to 0.05? Why is this concept important in developing strategic planning matrices?
0.03/0.05 = 0.60 = 60% 3-5. Mathematically, how much more important is a rating of 4 compared to a rating of 3? Why is this concept important in developing strategic planning matrices?
1/3 = 0.33 = 33% 3-6. Describe union membership trends in the USA. What are implications for strategic planning in firms such as Boeing or Heinz or Caterpillar?
Answer: According to the U.S. Bureau of Labor Statistics, the union membership rate (the percent of wage and salary workers who were members of a union) in the USA was 11.8 percent in 2011, down slightly from 11.9 percent the prior year. The number of wage and salary workers belonging to unions, at 14.8 million, also showed little movement over the year. By comparison, in 1983, the union membership rate was 20.1 percent and there were 17.7 million union workers. Highlights from the Bureau’s 2011 data are as follows: * Public-sector workers had a union membership rate (37.0%) more than five times higher than that of private-sector workers (6.9%). * Workers in education, training, and library occupations had the highest unionization rate, at 36.8%, while the lowest rate occurred in sales and related occupations (3.0%).
* Black workers were more likely to be union members than were white, Asian, or Hispanic workers. * Among states, New York continued to have the highest union membership rate (24.1%) and North Carolina again had the lowest rate (2.9%). Boeing recently built a manufacturing plant in Charleston, South Carolina because SC is basically a nonunion state. Heinz and Caterpillar also look to build new manufacturing plants in nonunion states. Sometimes, if the only choice is to locate in a heavily unionized state, then firms will locate offshore, but Europe is much more unionized than the USA. 3-7. List some legal/ethical ways to gather competitive intelligence. List some illegal/unethical ways.
Answer: Various legal and ethical ways to obtain competitive intelligence include the following: Hire top executives from rival firms Reverse engineer rival firms’ products Utilize surveys and interviews of customers, suppliers, and distributors Conduct drive-by and on-site visits to rival firm operations Search online databases Contact government agencies for public information about rival firms Systematically monitor relevant trade publications, magazines, and n ewspapers Include gathering competitive intelligence in the job description of salespersons Some illegal/unethical ways include bribery, wire tapping, conducting job interviews with no intent of hiring but rather simply to gain information, lying, sabotage, coercing, and stealing. 3-8. As value of the dollar rises, USA firms doing business abroad see their profits fall, so some firms raise prices of their products to offset the decrease in profits. What are some risks of raising prices?
Answer: Trends in the dollar’s value have significant and unequal effects on companies in different industries and in different locations. A low value of the dollar means lower imports and higher exports, which helps U.S. companies’ competitiveness in world markets. Manufacturers in many domestic industries actually benefit because of a we ak dollar, which forces foreign rivals to raise prices and extinguish discounts. The value of the dollar changes some every day, but generally in 2014-2015 the value of the dollar was very strong and thus profits of USA companies with a lot of revenue from abroad were lowered on average six to seven percent. Why the lowered profits? Because, for example, 100 euros earned in Europe, when translated back to U.S. dollars for reporting purposes, the 100 euros is worth maybe $75. To combat this “loss,” some companies try to raise prices in their European or Mexican stores, but that carries a risk of alienating shoppers, angering retailers, and giving local competitors a price edge. Some advantages of a strong dollar, however, are that companies with substantial outside USA operations, see their overseas expenses, such as salaries paid in euros, become
cheaper. Another advantage of a strong dollar is that it gives American companies greater firepower for international acquisitions. Another advantage of a strong dollar is that companies that import benefit from greater buying power, since their dollars now go further overseas. 3-9. Does McDonald’s Corp. benefit from a low or high value of the dollar? Explain why.
Answer: The value of the dollar changes some every day, but generally in 2014-2015, the value of the dollar was very strong, and thus profits of USA companies with a lot of revenue from abroad, such as McDonald’s were lowered on average six to seven percent. Why the lowered profits? Because, for example, 100 euros earned in Europe, when translated back to U.S. dollars for reporting purposes, the 100 euros is worth maybe $75. To combat this “loss,” some companies try to raise prices in their European or Mexican stores, but that carries a risk of alienating shoppers, angering retailers, and giving local competitors a price edge. Some advantages of a strong dollar, however, are that companies with substantial outside USA operations, see their overseas expenses, such as salaries paid in euros, become cheaper. Another advantage of a strong dollar is that it gives American companies greater firepower for international acquisitions. Another advantage of a strong dollar is that companies that import benefit from greater buying power, since their dollars now go further overseas. 3-10. Explain how Facebook, Twitter, and Instagram can represent a major threat or opportunity for a company.
Answer: Technological forces represent major opportunities and threats that must be considered in formulating strategies. Social networking sites such as Facebook, Twitter, and Instagram provide opportunities for many companies in terms of broadening ex posure to a wider market, but overlooking these technological trends or waiting too long to act on them may represent a threat to a company’s survival. Bad news can spread very fast on social networ k sites, representing a major threat to firms. Good news can also spread very fast, representing a major opportunity to firms. 3-11. If your Competitive Profile Matrix has three firms and they all end up with the same Total Weighted Score, would the analysis still be useful? Why.
Answer: Yes. The CPM reveals the relative strengths and weaknesses among rival firms across ten or more strategic factors. This rating information can be essential to help formulate strategies. The aim is not to arrive at a single number, but rather to assimilate and evaluate information in a meaningful way that aids in decision making. If the total weighted scores by chance end up the same, there is no problem, but that situation would suggest a very competitive industry and very price sensitive products/services. 3-12. The drop in gas prices benefited thousands of firms. Does this fact confirm that “external factors are more important than internal factors” in strategic planning? Discuss.
Answer: No. But the authors feel that external factors are more important than internal factors generally speaking; however, that does not take anything away from the importance of internal
factors. An analogy, however, is that “if the tide is rising, it is hard to counter the tide.” But again, it is vitally important for a firm to be exceptional internally in order to capitalize on external opportunities and mitigate the impact of external threats. 3-13. Governments worldwide are turning to “protectionism” to cope with economic problems, imposing tariffs and subsidies on foreign goods and restrictions/incentives on their own firms to keep jobs at home. What are the strategic implications of this trend for international commerce?
Answer: An increasing number of countries utilize protective tariffs to allow companies within these countries to prosper. However, many economists say that protectionist trade constraints make it harder for a country’s economy to grow, restricts imports, and also invites retaliation from other countries that may do the same to “protect” their firms. Protectionism hurts international commerce. 3-14. What are the three basic objectives of a competitive intelligence program?
Answer: The three basic objectives of a competitive intelligence (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 that a competitor might make that would endanger a firm’s position in the market. 3-15. Let’s say you work for McDonald’s and you applied Porter’s Five -Forces Model to study the fast-food industry. Would information in your analysis provide factors more readily to an EFE Matrix, a CPM, or to neither matrix? Justify your answer.
Answer: Either matrix can be used successfully to study the fast-food industry. All five forces exhibited in Porter’s model strongly impact competitiveness and rivalry in the fast-food industry. For example, it is easy for small, rival firms to enter the market, and there are countless substitute products and suppliers. In an EFEM, the key external factors are grouped into opportunities and threats, whereas the critical success factors in the CPM include both internal and external issues; therefore, the ratings refer to strengths and we aknesses in a CPM. 3-16. Explain why it is appropriate for ratings in an EFE Matrix to be 1, 2, 3, or 4 for any opportunity or threat.
Answer: Ratings in an EFE Matrix are based on effectiveness of a firm’s strategies in regards to the particular factor. A rating of 4 means the firm’s response is superior, a 3 above average, a 2 average, and a rating of 1 means the firm’s strategic response to the external factor is poo r. Even though a factor may be a huge threat as indicated by a high weight, the firm may be doing a great job handling that threat, thus receiving a rating of 4. In contrast, even though some factor may represent a huge opportunity for the firm, if the firm is doing a poor job capitalizing on that opportunity, then the rating would be 1. So, in contrast to an IFEM to be presented in the next chapter, you should have 1, 2, 3, 4 anywhere up and down the rating column in an EFEM.
3-17. Why is inclusion of about 20 factors recommended in the EFE Matrix, rather than about 10 factors or about 40 factors?
Answer: No firm can do everything that will benefit them. Prioritization is a key aspect of strategic planning, including in selection of key external factors. About 40 total would dilute the significance of the most important factors. About 10 would leave too much information on the table. The set of external factors will ultimately be matched with internal factors to yield alternative strategies, so 40 would be overwhelming and 10 would likely exclude some vital information. Because threats and opportunities are weighted, going abov e 20 factors would dilute the importance of key factors. 3-18. In developing an EFE Matrix, would it be advantageous to arrange your opportunities according to the highest weight, and do likewise for your threats? Explain.
Answer: Yes. Arranging factors according to importance would help the firm organize, evaluate, and utilize external factors in the strategic planning process. It is not essential that the EFEM be structured in this manner, but it definitely would be helpful for an analyst. 3-19. In developing an EFE Matrix, would it be best to have 10 opportunities and 10 threats, or would 17 opportunities (or threats) be fine with 3 of the other to achieve a total of 20 factors as desired?
Answer: The EFE Matrix can include any combination of opportunities and threats for analysis. The key is to include the 20 most important factors rather than necessarily to limit the number of opportunities or threats. The number 20 is not magic, but it is most commonly used as appropriate given scarce resources and the need for prioritization in strategic planning. 3-20. Could or should critical success factors in a CPM include external factors? Explain.
Answer: The critical success factors in a CPM can include both internal and external issues, and the ratings refer to strengths and weaknesses, revealing how well the firms are performing on the respective factors. For example, customer loyalty is oftentimes included and that factor is arguably external since the firm cannot control customer loyalty. 3-21. Explain how to conduct an external strategic-management audit.
Answer: The process of performing an external audit should involve as many managers and employees as possible. First, gather competitive intelligence and economic, social, political, technological, and demographic information. Then, assimilate and evaluate this information using a series of meetings. Determine the 20 most important external factors. Prepare both a CPM and an EFEM. 3-22. Identify a recent economic, social, political, or technological trend that significantly affects the local Pizza Hut.
Answer: Economic — The USA unemployment rate has stabilized at 8%. Social — Hispanics now comprise 26% of the USA population. Political — State and local governments’ budgets declined 7% last year. Technological — Use of social media websites is growing 12% annually in business. 3-23. Discuss the following statement: Major opportunities and threats usually result from an interaction among key environmental trends rather than from a single external event or factor.
Answer: This is a TRUE statement that reveals how complex the external audit part of strategy formulation can be. There are an infinite number of interactions among key external factors. 3-24. Use Porter’s Five-Forces Model to evaluate competitiveness within the U.S. banking industry.
Answer: Porter identifies five competitive forces that determine the intensity of competition in an industry and the total value of profits created in a particular industry. The five forces are 1) new entrants, 2) substitute products or services, 3) bargaining power of suppliers, 4) bargaining power of buyers, and 5) rivalry among existing firms. A key to selecting appropriate generic strategies is to analyze these competitive forces in terms of trends, opportunities, and threats facing the firm. For example in the banking industry, it is easy for small firms to enter the market, and there are many substitute products offered by eBay, Amazon, etc., and rivalry is intense as banks are in close proximity to each other. The supplier force is least impactful in the banking industry. 3-25. How does the external audit affect other components of the strategic-management process?
Answer: In countless ways, external audit results can and often do affect all other components of the strategic-management model. For example, a rival firm could enter your market area and thus require your firm to alter its objectives and lower pricing, etc. 3-26. As the owner of a small business, explain how you would organize a strategicinformation scanning system. How would you organize such a system in a large organization?
Answer: In both small and large organizations, strategists could assign specific publications and websites to particular individuals who could then monitor their assigned source and regularly report strategic information to a coordinator. Also, managers in both small and large businesses could effectively use online databases. Sales representatives from both small and large firms should be utilized to gather field strategic information. 3-27. Construct an EFE Matrix for an organization of your choice.
Answer: There are several examples in the chapter. An EFE Matrix allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal,
technological, and competitive information. Students should follow these guidelines and develop an EFEM perhaps for where they currently work or desire to work. There are five steps in developing an EFE Matrix as illustrated in Table 3-12. List key external factors as identified in the external-audit process. Include a total of 20 factors from both the opportunities and threats. Assign to each factor a weight from .0 (not important) to 1.0 (very important). These weights show the relative importance. The total of all the weights should equal 1.0. Assign a 1-4 rating to each factor to indicate how effective the firm’s current response strategy is: 1= the response is poor, 2 = the response is average, 3 = the response is above average, and 4 = the response is superior. Multiply each factor’s weight by its rating to get a weighted score. Sum the weighted scores for each variable to determine the total weighted score for the organization. 3-28. Let’s say your boss develops an EFE Matrix that includes 62 factors. How would you suggest reducing the number of factors to 20?
Answer: Let a group of knowledgeable individuals in the organization evaluate the relative importance of each factor by assigning a 1 = not important, 2 = somewhat important, and 3 = very important. Then add the ratings each factor receives. The 20 factors with the highest sum score should be included in the EFE Matrix. Another way is to ask those individuals to simply put a check mark by their top 20 factors; then take up the responses and add the check marks to determine the prioritization. 3-29. Discuss the ethics of gathering competitive intelligence.
Answer: Gathering competitive intelligence information is an essential activity to do; it is not corporate espionage. All the information needed is available by ethical means, mostly accessible through the Internet, but also from sales representatives, suppliers, distributors, and even customers. Firms owe it to all their stakeholders to gather competitive intelligence and to perform this activity systematically and ethically. There is no need to steal or bribe or coerce. 3-30. Discuss the ethics of cooperating with rival firms.
Answer: This activity is both ethical and for many firms essential in order to spread risks across firms and share competencies for the greater good. There are many win-win examples of this being done, such as the recent Microsoft/Dell collaboration. The norms of personal ethics serve as a foundation for business ethics and provide a basis for cooperating with rival firms. Engaging in unethical practices, even with rival firms, will jeopardize a firm’s credibility and respect in the industry. 3-31. Do you agree with I/O theorists that external factors are more important than internal factors in a firm achieving competitive advantage? Explain both your and their position.
Answer: Although I/O theorists suggest that industry factors are more important than internal factors, research findings suggest that only 20% of a firm’s prof itability can be explained by industry factors and 36% explained by internal factors. Regardless, it is not a question of whether external or internal factors are more important. Rather, effective integration (matching) and understanding of both external and internal factors is the key to securing and keeping a competitive advantage. 3-32. Define, compare, and contrast the weights versus ratings in an EFE Matrix.
Answer: The weight in an EFE Matrix indicates the relative importance of that factor to being successful in the firm’s industry. The rating indicates how effectively the firm’s current strategies respond to each key external factor. Thus, the weight allows more important factors to receive more consideration, while the rating evaluates how well the firm handles each factor. Weights are industry based; ratings are company-based. 3-33. Develop a Competitive Profile Matrix for your university. Include six factors.
Answer: A template is provided below. University 1: Critical Success Factors Tuition costs Quality of faculty Academic reputation Average class size Campus landscaping Athletic programs Quality of students Graduate programs Location of campus Campus culture Totals
Weight
Rating
University 2: Score
Rating
Score
1.0
3-34. List 10 external areas that give rise to opportunities and threats.
Answer: The ten external areas are economic, social, cultural, demographic, natural environment, political, government, legal, technological, and competitive. 3-35. Describe the “process of performing an external audit” in an organization doing strategic planning for the first time.
Answer: The process of performing an external audit should involve as many managers and employees as possible. A company must first gather competitive intelligence and information about economic, social, cultural, demographic, environmental, political, governmental, legal, and technological trends. Individuals should be asked to monitor various sources of information, such as key magazines, journals, and newspapers. These persons can submit
periodic scanning reports to a committee of managers charged with performing the external audit. Once the information is gathered, it should be assimilated and evaluated. A meeting or series of meetings is needed to collectively identify the most important opportunities and threats facing the firm. Factors should be ranked and prioritized. A final list of the most important key external factors should be communicated and distributed in the organization. Strategies will be derived from matching these key external factors with ke y internal factors. 3-36. Compare and contrast the duties and responsibilities of a CIO with a CTO in a large firm.
Answer: A Chief Information Officer (CIO) manages the firm’s relationship with stakeholders, particularly external stakeholders such as suppliers, distributors, and creditors. The Chief Technology Officer (CTO) is more an internal technician, focusing on technical issues such as data acquisition, data processing, decision-support systems, and software and hardware acquisition. The CIO and CTO work together to ensure that information needed to formulate, implement, and evaluate strategies is available when it is needed.
Answers to the End-of-Chapter 3 Assurance of Learning Exercises ASSURANCE OF LEARNING EXERCISE 3A: COMPETITIVE INTELLIGENCE (CI) CERTIFICATION
ANSWER: This is an excellent exercise that provides students with a deeper understanding of competitive intelligence (CI) certification. 1. Strategic & Competitive Intelligence Professionals – Formerly the Society of Competitive Intelligence Professionals, SCIP is a global nonprofit membership organization for everyone involved in creating and managing business knowledge. Its mission is to enhance the success of members through leadership, education, advocacy, and networking. SCIP provides education and networking opportunities for business professionals working in the rapidly growing field of competitive intelligence. Many SCIP members have backgrounds in market research, strategic analysis, or science and technology. 2. The Institute for Competitive Intelligence – The Institute for Competitive Intelligence was founded to provide international training programs to Competitive Intelligence professionals seeking certification in Competitive Intelligence. The Institute provides education through intensive, practical learning, where participants can choose to study complete certificate programs or attend specific workshops. The Institute also offers individual in-house training to companies.
3. The Fuld-Gilad-Herring Academy of Competitive Intelligence – The Fuld-Gilad-Herring Academy of Competitive Intelligence (ACI) is an educational institution dedicated to training managers and companies in better managing risks and anticipating new market opportunities though the use of superior competitive intelligence, market intelligence, marketing intelligence, and strategic intelligence. It is the on ly institution to offer an accredited Competitive Intelligence Professional (CIP™) certificate program - a complete intelligence program - from basics to advanced analysis - developed and led by the leading thinkers and educators in the field. ACI has been recognized for its expertise in competitive intelligence by: Business Week , CNBC The Economist , Fast Company, Forbes, Fortune, FNN, The New York Times, United Nations and The Wall Street Journal.
ASSURANCE OF LEARNING EXERCISE 3B: DEVELOP AN EFE MATRIX FOR Hershey Company
ANSWER Key External Factors Opportunities 1. Per capita disposable income increasing 2.8% annually 2. Prices of sugar declining 3% annually 3. Northern Europeans consume twice the per capita amount of chocolate than southern Europeans 4. Chocolate imports are growing 6.6% annually 5. The candy industry has a 13 percent profitability average. 6. West Africa produces 70 percent of the world’s cocoa production. 7. Chocolate consumption is growing 2.6% annually 8. Crude oil prices are low and declining 3% annually 9. India has overtaken China as the fastest growing country in Asia 10. More than 40% of the chocolate eaten in the world is consumed in Europe Threats 1. Political unrest in West Africa is jeopardizing cocoa bean supply 2. Cocoa prices rising 10% annually expected to continue 3. Per capita sugar and sweetener consumption is decreasing 3% annually 4. Value of the dollar is high and slowly rising further 5. M&M Mars and Nestle dominate the European and Asian markets 6. Minimum wages are increasing to $10+/hour in numerous USA states 7. Corporate wellness programs discourage candy and chocolate consumption 8. Nestle has 450 f actories compared to Hershey’s 10 9. Candy sales are seasonal, being highest during the 3 rd and 4th quarters 10. Diabetes and obesity are on the rise, spurring healthy eating globally Totals
Weight Rating WScore 0.04 2 0.08 0.06 4 0.24 0.04 2 0.08 0.03 0.04 0.08 0.04 0.03 0.05 0.05
3 4 3 4 2 2 2
0.09 0.16 0.24 0.16 0.06 0.10 0.10
0.06 0.08 0.09
3 3 2
0.18 0.24 0.18
0.04 0.08 0.03 0.02
4 3 3 2
0.16 0.24 0.09 0.04
0.03 0.04 0.07
3 4 2
0.09 0.16 0.14
1.00
2.84
Note that the key factors in this example are not arranged in order of the highest weight first, but that is recommended in constructing an EFEM, as you see in Chapter 3. ASSURANCE OF LEARNING EXERCISE 3C: PERFORM AN EXTERNAL ASSESSMENT
ANSWER This exercise gives students the opportunity to apply strategic-management concepts to a local company, perhaps a business where they presently work. Performing an external strategic assessment provides vital information about competitors as well as demographic, political, technological, and economic trends and events that could dramatically impact the business’ overall vision/mission/strategies.
ASSURANCE OF LEARNING EXERCISE 3D: DEVELOP AN EFE MATRIX FOR YOUR UNIVERSITY
ANSWER: An example is provided below. Note that this college is doing excellent in enrolling minority students but is doing poorly in delivering online programs especially for international students. Emphasize to students that the ratings can be 1, 2, 3, or 4 for any opportunity OR threat, because the firm could be doing excellent regarding any external factor – (unlike the IFEM in the next chapter where weaknesses by definition receive a rating of 1 or 2, and strengths a 3 or 4). Note that the key factors in this example are not arranged in order of the highest weight first but that is recommended in constructing an EFEM, as you see in Chapter 3. Key External Factors Opportunities: 1. 14% increase in percentage of minority students enrolling in college vs. prior year 2. Need for adult education programs in the area growing 15% annually 3. Demand for international and online programs growing 20% annually 4. Large local firms seek new certification programs from the institution 5. Demand for nursing graduates growing 12% annually 6. The USA GDP is rising 1% annually 7. Social media use is growing 6% annually in North and South America 8. Demand for engineers is growing 5% annually in the USA
Weight
Rating
WScore
.06
4
0.24
.05
2
0.10
.10
1
0.10
.05
3
0.15
.04
2
0.08
.05 .06
3 4
0.15
.06
2
0.12
Threats: 1. Pressure from state to admit marginal students to better serve minority students 2. Local two-year institutions offer courses 20% cheaper and less rigorous 3. 15% decline in international student applications 4. 12% annual decline in state funding levels 5. Major rival peer institutions offer and heavily market online degrees in our area 6. State population declining 4% annually 7. Unemployment rate stable at 9.0% causing many would-be students to work 8. The number of high school graduates is dropping 3% annually 9. The number of two-year tech school students is growing 8% annually 10. Demand for liberal arts degree students is declining 6% annually TOTAL
.04
4
0.16
.10
2
0.20
.06
3
0.18
.04
1
0.04
.07
2
0.14
.05 .04
4 1
0.20 0.04
.10
3
0.30
.06
2
0.12
.07
4
0.28
1.00
2.60
Conclusion: The university has some major external problems, as indicated by the relatively low 2.60 total score. The university’s very weak response to the opportunity to “develop and deliver online courses,” coupled with their weak response to the “decline in state funding” are particularly worrisome going forward.
ASSURANCE OF LEARNING EXERCISE 3E: COMPARING CHIPOTLE MEXICAN GRILL TO PANERA BREAD AND MOE’S SOUTHWEST GRILL
ANSWER: This exercise requires on-site visits as well as online research. In August 2015, however, Chipotle was facing a severe lawsuit alleging that the company lied to consumers in April 2015 when it announced with great fanfare that it was “G-M-Over it” and would no longer serve food made with genetically modified (GMO) ingredients. The Kaplan, Fox, and Kilsheimer law firm has filed a class-action lawsuit in federal court claiming that Chipotle’s marketing is misleading and deceptive because the restaurant still sells lots of foods made with GMOs. Specifically, the complaint alleges that Chipotle markets its "Food With Integrity" brand to healthy-lifestyle and environmentally conscious consumers who are willing to pay high prices for food that matches their ethical eating choices. The lawsuit alleges that Chipotle’s meat, cheese, and sour cream is made from
animals fed with GMO soy and corn, and Chipotle soft drinks are made with corn syrup made from GMO corn. The lawsuit was filed in the Northern District of California on behalf of California consumers who have purchased food from Chipotle since April 27th. Attorney Laurence King says: “Chipotle’s advertising in its stores should have accurately informed customers about the source and quality of its ingredients and should not mislead consumers that they are serving food without GMOs when in fact they are.”
ASSURANCE OF LEARNING EXERCISE 3F: DEVELOP A COMPETITIVE PROFILE MATRIX FOR HERSHEY COMPANY
ANSWER: Competitive Profile Matrix (CPM) Hersheys Co. Critical Success Factors
Nestle SA
Mars Inc
Weight Rating Score Rating Score Rating Score
Advertising Promotional A ctivity Custo mer Service Store Locations R&D Employee Dedication Market Share Custo mer Loyalty Product Innovation Product Quality Resources Price Competitivenes s
Totals
0.10
4
0.40
2
0.20
1
0.10
0.07 0.07 0.10 0.05 0.05 0.10 0.11 0.09 0.11 0.07 0.08
3 4 4 1 2 4 2 2 4 4 3
0.21 0.28 0.40 0.05 0.10 0.40 0.22 0.18 0.44 0.28 0.24
1 2 2 3 1 2 3 4 2 2 1
0.07 0.14 0.20 0.15 0.05 0.20 0.33 0.36 0.22 0.14 0.08
2 3 3 4 3 3 4 3 3 3 2
0.14 0.21 0.30 0.20 0.15 0.30 0.44 0.27 0.33 0.21 0.16
1.00
3.20
2.14
2.81
ASSURANCE OF LEARNING EXERCISE 3G: DEVELOP A COMPETITIVE PROFILE MATRIX FOR OUR UNIVERSITY
ANSWER: Students could utilize the following matrix to develop a CPM for their institution as compared to two rival institutions. Remind students to avoid giving the same rating to two institutions. Also remind students that even small differences in the assigned weights can reveal priorities which are a key aspect of strategic planning at all stages.
Critical Success Factors Tuition costs Quality of faculty Academic reputation
Weight
University 1:
University 2:
University 3:
Rating
Rating
Rating
WS
WS
WS
Average class size Campus facilities Athletic programs Quality of students Graduate programs Location of campus Campus culture Totals
1.00
Answers to End-of-Chapter 3 Mini-Case Questions 1. Table 3-7 provides a list of 15 conditions that cause high rivalry among competing firms in an industry. In the women’s handbag business, what in your opinion are the top five (among the fifteen) conditions contri buting to Coach’s demise?
The authors have ranked the fifteen items below according to their best judgment. Rank (1 = most contributory to 15 = least contributory) 1. High number of competing firms 9 2. Similar size of firms competing 10 3. Similar capability of firms competing 2 4. Falling demand for the industry’s products 11 5. Falling product or service prices in the industry 12 6. When consumers can switch brands easily 3 7. When barriers to leaving the market are high 7 8. When barriers to entering the market are low 13 9. When fixed costs are high among firms competing 8 10. When the product is perishable 15 11. When rivals have excess capacity 14 12. When consumer demand is falling 5 13. When rivals have excess inventory 4 14. When rivals sell similar products/services 1 15. When mergers are common in the industry 6 For fun in class, you could let every student get their own ranking, exchange papers, compare to the author’s ranking, and declare a winner for the class, for extra credit – in an analogous way as given in the in-red exercises in this manual. 2. Figure 3-4 reveals Porter’s Five Forces Model. Rank order the five forces from 1 = most impact to 5 = least impact to reveal your opinion regarding which forces are contributing most to Coach’s demise.
The five forces are as follows: 1. Rivalry among competing firms
The author’s ranking are as follows: 1
2. Potential entry of new competitors 3. Potential development of substitute products 4. Bargaining power of suppliers 5. Bargaining power of consumers
5 2 4 3
3. In your opinion (ladies), what are the key differentiating features that you look for in handbags, and what could Coach do to re-earn your business? Rank COH, KORS, and KATE in terms of price, style, youthfulness, and quality. Develop a 3 x 4 matrix to reveal your positioning of these rival firms along these dimensions.
The authors are men, not ladies. So, ask the lady students to complete the following matrix, assigning a 1, 2, and 3 along each row to reveal their opinion(s): COH KORS KATE Price Style Youthfulness Quality 4. Does Coach like to see the value of the dollar increase or decrease versus the Euro, and versus the Yen? Why?
Coach derives roughly half of its revenue from outside the USA. Thus, Coach would benefit if the value of the dollar decreased.
NOTE – THE FOLLOWING IS AN EXCELLENT, FUN, NOT-IN-THE-BOOK, ADDITIONAL ASSURANCE OF LEARNING EXERCISE FOR CHAPTER 3 EXERCISE TITLE: What External Forces Are Most Important In Strategic Planning? Purpose
A prioritized list of external factors is needed for effective strategic planning. Oftentimes the process entails all managers individually ranking the factors identified, from 1 (most important) to 20 (least important). Prioritization is absolutely essential in strategic planning because no organization can do everything that would benefit the firm; tough choices among good choices have to be made. 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. For some companies or organizations at various times, some forces may be more important to include than others. This exercise reveals the authors’ ranking of the relative importance of five external forces for inclusion in an external assessment. The purpose of this exercise is to examine more closely the external areas of a business. In addition, the purpose of this exercise is to examine whether individual decision making is better than group decision making. Academic research suggests that groups make better decisions than individuals about eighty percent of the time.
Instructions
Rank the five external forces as to their relative importance (1 = most important, 5 = least important). First, rank the forces as an individual. Then, rank the forces as part of a group of three. Thus, determine what person(s) and what group(s) here today can come closest to the expert ranking. This exercise enables examination of the relative effectiveness of individual versus group decision making in strategic planning. The Steps
1. Fill in Column 1 in Table 1 to reveal your individual ranking of the relative importance of the five forces (1 = most important, 2 = next most important, etc.). For example, if you feel Economic factors are the 4th most important external force, then enter a 4 in Table 1 in Column 1 beside Economic. 2. Fill in Column 2 in Table 1 to reveal your group’s ranking of the relative importance of the five forces (1 = most important, 2 = next most important, etc.). 3. Fill in Column 3 in Table 1 to reveal the expert’s ranking of the five forces. 4. Fill in Column 4 in Table 1 to reveal the absolute difference between Column 1 and Column 3 to reveal how well you performed as an individual in this exercise. (Note: For absolute difference, disregard negative numbers.) 5. Fill in Column 5 in Table 1 to reveal the absolute difference between Column 2 and Column 3 to reveal how well your group performed in this exercise. 6. Sum Column 4. Sum Column 5. 7. Compare the Column 4 sum with the Column 5 sum. If your Column 4 sum is less than your Column 5 sum, then you performed better as an individual than as a group. Normally, group decision making is superior to individual decision making, so if you did better than your group, you did excellent. 8. The Individual Winner(s): The individual(s) with the lowest Column 4 sum is the WINNER. 9. The Group Winners(s): The group(s) with the lowest Column 5 score is the WINNER. Table 1 – External Force Analysis: Comparing Individual versus Group Decision Making
External Forces
Column 1 Column 2 Column 3 Column 4 Column 5
1. Economic 2. Social/Cultural/Demographic/ Natural Environment 3. Political/Governmental/Legal 4. Technological 5. Competitive Sums
Answer: The Expert Ranking
External Forces
1. 2. 3. 4. 5.
Authors’ Ranking (1 = most important; 5 = least important)
Economic Social/Cultural/Demographic/Nat.Envir. Political/Governmental/Legal Technological Competitive
2 4 5 3 1
Rationale: The authors have developed hundreds of EFE Matrices for organizations over three decades. The expert rankings given above are based on their experience. First, the number and nature of rival firms (competitive factors) is typically the most important external factor. Next most important are economic trends and conditions because changes in disposable income, value of the dollar, and GDP can severely help or hamper any firm. Third most important is technology because in more and more industries technological changes are spurring or curtailing demand for various products/services. Fourth most important are social/cultural/demographic/natural environment forces largely because they are generally easier to anticipate. Lastly in importance are political/governmental/legal forces that can ironically be the most important in some situations, but generally speaking are less important than the other four external forces for most firms at most times.
