Chat with us, powered by LiveChat Explain the difference between strategic types and actual strategies. - Writeden
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8. Financial ratios. You have an entire week to work on this assignment as it can be very difficult. Start early. You will need the time. This exercise is designed to familiarize you with determining a company’s financial strength and weaknesses. Ratios for one period by themselves usually provide little knowledge or are very useful. Only when they are compared over time or with industry or other norms can you determine if a particular ratio shows a strength, weakness, or is neutral. There are two parts to this assignment.

Part 1. To complete this part of the assignment you will need to turn in a table with 6 columns and 22 rows for ratios. In the first column write the name of each 22 ratios from the book. While there are other ratios you could determine, use only the ones from the textbook. In the next two columns compute Coke ratios by means of the template for 2016 and 2017 using the textbook information only. While you may find similar ratios already calculated on the internet, they almost always were done using more compete financial data than what the textbook uses and will be an incorrect answer for this assignment. The goal is to learn to calculate the ratios and determine their significance, not to get the “right” numbers.

In the fourth column write the Coke’s industry average ratio for the latest period you can find doing research for each ratio. Start with googling non-alcoholic beverage industry financial ratios. Some of the web sites have information that is easier to use than others. Be sure to indicate the year the ratio applies to. You may not be able to find all the same ratios as the book has, but you should find most of them. In the fifth column, write the S&P 500 average for the same period. (The S&P 500 is an index that represent the performance of the 500 large companies in the U.S.) The S&P ratios will represent the average ratio of all US companies. The S&P ratios may be a little harder to find and again you may not find all of the same ones as the book has. In the sixth column you will show your results of analyzing the ratios in each row. You should do several comparisons. How did Coke’s ratios change? Are they better or worse? How does Coke’s ratio for the same period compare to its industry and compare to the S&P? Determine if Coke’s ratio show weakness (W), strength (S), or is neutral (N) for each ratio and put your response in the 6th column.

Part 2. Determine ratios you rated as S and ratios you rated as W that are significant enough to include in a SWOT analysis for Coke and explain IN DETAIL why they are significant. Try to have at least 2 of each.

9. Use the template to create an IFE matrix for Coca-Cola. Be sure to list ten strengths and ten weaknesses. Use the information you developed in the last two assignments plus the information from the book. Unlike the EFE, you will have to use old information from the book to complete this assignment. Do not worry that Strength and Weakness uses older information than Opportunities and Threats. It does not matter for learning the concepts. You may use internet sources to help you, but your submission must be your own. Beware of copying any entire or part of an IFE you find for Coca-Cola as this will have serious repercussions. Like before, table 3-7 lists possible outside sources for use in finding additional information, but SCSU does not subscribe to any of them. Some are nevertheless still available for free on the internet, while others are not. You are NOT expected to use any outside source you have to pay for. Include the 2 financial strengths and 2 financial weaknesses you determined in assignment 8 plus any significant income and balance sheet information, or other financial information from the textbook.

BE SURE TO INCLUDE SIGNIFICANT FINANCIAL FACTORS YOU DECIDED WERE A STRENGTH OR WEAKNESS IN THE LAST ASSIGNMENT, BUT NOT ALL FINANCIAL FACTORS ARE SIGNIFICANT ENOUGH TO BE IN YOUR IFE.

Like the EFE, you will have to assign values to each of the factors. Your numbers will have a direct impact on your final strategy, so be as precise as you can.

You may use the template, but do not submit the template. You must copy and submit ONLY THE IFE tables in D2L as a word document. If you can’t copy the template tables you will have to create your own identical tables, but using the template is best as it is set up to facilitate correct entries.

10. Understanding what strategies are.

1. Explain the difference between strategic types and actual strategies.

2. This question is to demonstrate you understand each of the 11 possible strategies used by the textbook. For each of the possible strategy types listed in the table write a HYPOTHETICAL strategy Coke could do in the future even if it is not realistic. Be very specific. Copy and submit the completed table in D2L as a word document. I filled in the first one for you as an example so you do not need another forward integration strategy. Since Coke sells its syrup to bottlers who then sell to stores where customers buy Coke, buying the bottlers moves Coke closer to consumers, so that would be a forward integration strategy.

1.Forward integration

2.Backward integration

3.Horizontal integration

4.Market penetration

5.Market development

6.Product development

7.Related diversification

8.Unrelated diversification

9.Retrenchment

10.Divesture

11.Liquidation

11. Coke strategies

a. Using internet sources, such as Coca-Cola’s corporate website, determine two strategies Coca-Cola is currently (as of 2021) actually pursuing. You must explain in detail why you determined each was a strategy Coke is pursuing, and what the advantages and disadvantages of each strategy (not strategy type) are.

b. Identify what strategic type each strategy you found for Coke is and why you think it fits that strategy type.

Requirements: The more detailed and well explained possible

64 PART 2 • STRATEGY FORMuLATION64StrategyFormulationFeedback Loop StrategyImplementationStrategyEvaluationChapter 10: Business Ethics, Environmental Sustainability, and Social ResponsibilityChapter 11: Global and International IssuesStrategyEvaluationandGovernanceChapter 9ImplementingStrategies:Finance and AccountingIssuesChapter 8ImplementingStrategies:Managementand MarketingIssuesChapter 7BusinessVision andMissionChapter 2Strategiesin ActionChapter 5StrategyAnalysis andChoiceChapter 6TheInternalAssessmentChapter 4The ExternalAssessmentChapter 3FIGURE 3-1The Comprehensive, Integrative Strategic-Management ModelSource: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1 (February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010): 20.3

65LEARNING OBJECTIVESAfter studying this chapter, you should be able to do the following: 3-1. Describe the nature and purpose of an external assessment in formulating strategies. 3-2. Identify and discuss 10 external forces that impact organizations. 3-3. Explain Porter’s Five-Forces Model and its relevance in formulating strategies. 3-4. Describe key sources of information for identifying opportunities and threats. 3-5. Discuss forecasting tools and techniques. 3-6. Explain how to develop and use an External Factor Evaluation (EFE) Matrix. 3-7. Explain how to develop and use a Competitive Profile Matrix (CPM).The External AssessmentASSURANCE-OF-LEARNING EXERCISESThe following exercises are found at the end of this chapter:SET 1: Strategic Planning for Coca-ColaEXERCISE 3A: Develop an EFE Matrix for Coca-ColaEXERCISE 3B: Develop a Competitive Profile Matrix for Coca-ColaSET 2: Strategic Planning for My UniversityEXERCISE 3C: Develop an EFE Matrix for Your College or UniversityEXERCISE 3D: Develop a Competitive Profile Matrix for Your College or UniversitySET 3: Strategic Planning to Enhance My EmployabilityEXERCISE 3E: How Competitive Is Your State Among All States for Finding a Job?EXERCISE 3F: Compare and Contrast CareerBuilder, Glassdoor, Monster Jobs, and ZipRecruiterEXERCISE 3G: A Template Competency TestSET 4: Individual versus Group Strategic PlanningEXERCISE 3H: What External Forces Are Most Important in Strategic Planning?MyLab Management Improve Your Grade!If your instructor is using MyLab Management, visit www.pearson.com/mylab/management for videos, simulations, and writing exercises.

CHAPTER 3 • THE ExTERNAL ASSESSMENT 67The External Assessment Phase of Strategy FormulationThe purpose of an external audit is to develop a finite list of both opportunities that could benefit a firm and threats that should be avoided or mitigated. As the term finite suggests, the external audit is not aimed at developing an exhaustive list of every possible factor that could influence the busi-ness; rather, it is aimed at identifying key variables that offer actionable responses. Firms should be able to respond either offensively or defensively to the factors by formulating strategies that capitalize on external opportunities or that minimize the impact of potential threats. Figure 3-1 illustrates with white shading how the external audit fits into the strategic-management process.Key External ForcesThere are 10 external forces that can be divided into 5 broad categories: (1) economic forces; (2) social, cultural, demographic, and environment (SCDE) forces; (3) political, governmen-tal, and legal forces; (4) technological forces; and (5) competitive forces. Relationships among these forces and an organization are depicted in Figure 3-2. External trends and events, such as increasing security concerns surrounding big data, changing consumer demand surrounding authenticity and personalization, and people in developing countries learning about online ser-vices, significantly affect products, services, markets, and organizations worldwide.The Actionable-Quantitative-Comparative-Divisional (AQCD) TestWhen identifying and prioritizing key external factors in strategic planning, make sure the fac-tors selected meet the following four criteria to the extent possible:1. Actionable (i.e., meaningful and helpful in ultimately deciding what actions or strategies a firm should consider pursuing);2. Quantitative (i.e., include percentages, ratios, dollars, and numbers to the extent possible);3. Comparative (i.e., reveals changes over time), and4. Divisional (relates to the firm’s products and/or regions (rather than consolidated) so infer-ences can be drawn regarding what products and regions are doing well or not).Factors that meet the four criteria described above pass what can be called the “Actionable-Quantitative-Comparative-Divisional (AQCD) Test,” which is a measure of the quality of an external factor. In addition to passing the AQCD Test, make sure that external factors are indeed external (not internal), and make sure that external factors, particularly opportunities, are stated as external trends, events, or facts, rather than being stated as strategies the firm could pursue. Also, make sure the external LO 3.1CompetitorsSuppliersDistributorsCreditorsCustomersEmployeesCommunitiesManagersStockholdersLabor unionsGovernmentsTrade associationsSpecial interest groupsProductsServicesMarketsNatural environmentAN ORGANIZATION’SOPPORTUNITIES ANDTHREATSEconomic forcesSocial, cultural, demographic, andnatural environment forcesPolitical, legal, and governmental forcesTechnological forcesCompetitive forcesFIGURE 3-2Relationships Between Key External Forces and an Organization

68 PART 2 • STRATEGY FORMuLATIONfactors relate closely to the firm achieving its mission (opportunities) or hindering its mission (threats). Factors selected for inclusion in an external assessment should be mission-driven.Regarding the AQCD criteria, strive to include all high quality factors in an external assess-ment for a firm. A high quality factor will meet three or four of the AQCD criteria; a low quality factor will meet two or fewer of the AQCD criteria. When performing an external assessment, engage in an engineering hunt for facts to make sure as many factors as possible pass the AQCD Test. It is important to state external factors to the extent possible in actionable, quantitative, comparative, and divisional terms.High quality and low quality external factors for Walmart are given below to further exem-plify this important concept:ASK YOuRSELF IS THE FACTORActionableQuantitativeComparativeDivisionalA High Quality External FactorOnline retail grocery shopping grew from 12% to 16% in 2018.yesyesyesyesA Low Quality External FactorConsumers’ average disposable income increased in 2018.nonononoChanges in external forces translate into changes in demand for both industrial and con-sumer goods and services. External forces affect the types of products developed, the nature of market segmentation and positioning strategies, the range of services offered, and the choice of businesses to acquire or sell. External forces have a direct impact on both suppliers and distribu-tors. Identifying and evaluating external opportunities and threats enables organizations to revise their vision and mission if needed, to design strategies to achieve long-term objectives, and to develop policies to achieve annual objectives.10 External Forces that Impact OrganizationsEconomic ForcesEconomic factors have a direct impact on the potential attractiveness of various strategies. An example of an economic variable is “value of the dollar,” which can have a significant effect on financial results of companies with global operations. Domestic firms with significant overseas sales, such as McDonald’s, are hurt by a strong dollar. If the dollar appreciates 10 percent relative to the local currency of a particular country in which a U.S. company has \$100 million in revenues, that company’s revenues would decrease by \$10 million as they are translated into U.S. dollars. For foreign firms with relatively large U.S. sales, however, a strong dollar provides a boost. A strong dollar enables U.S. firms to purchase raw materials more cheaply from other countries. However, in early 2018, the value of the dollar was near a 3-year low versus foreign currencies.Favorable economic conditions recently bode well for many firms because economic growth typically reduces unemployment, boosts consumer confidence, and increases disposable income. The World Economic Outlook report, published by the International Monetary Fund, predicts a broad-based global acceleration in the world economy; small, but wide-spanning growth (around 3.6 percent) is expected among most major economies in 2018–2021.1A few categories of economic variables that often yield AQCD opportunities and threats for organizations are provided in Table 3-1. In doing strategic planning or case analysis, economic factors must be stated in AQCD terms to the extent possible to be useful in strategic planning.LO 3.2

CHAPTER 3 • THE ExTERNAL ASSESSMENT 69Social, Cultural, Demographic, and Environment (SCDE) ForcesSCDE forces impact strategic decisions on virtually all products, services, markets, and custom-ers. Small, large, for-profit, and nonprofit organizations in all industries are being staggered and challenged by the opportunities and threats arising from changes in SCDE variables. These forces are shaping the way people live, work, produce, and consume. New trends are creating a shift in consumer demands and, consequently, a need for different products, new services, and updated strategies. For example, consumers in the United States now desire automobiles with greater space and utility, in lieu of sedans. In response to this external trend, Ford Motor recently invested \$7 billion in higher-margin trucks and SUVs and announced plans to reintroduce the Ranger Trust and the Bronco SUV in North America.2In the U.S. food industry, demand for processed packaged foods is declining because con-sumers are showing increased preferences for freshly prepared food options. Packaged food companies such as Kellogg are trying to quickly adapt to mitigate this external threat; Kellogg recently hired a new CEO, Steven Cahillane, who comes with extensive experience leading the health and wellness company, Nature’s Bounty.Consumer tastes and trends constantly change; people wander through stores less, opt-ing increasingly to use their mobile phones and computers to research prices and cherry-pick promotions. Brick-and-mortar retail department stores consequently are struggling as consum-ers increasingly turn to online retailers and smaller specialty stores. These external trends have prompted many retail chains to slow or cease store openings.3The United States (and the world) is also becoming older. Individuals age 65 and older in the United States, as a percentage of the population, will rise to 19 percent by 2030. The trend toward an older society is good news for restaurants, hotels, airlines, cruise lines, tours, travel services, pharmaceutical firms, automakers, and funeral homes. Older people are especially interested in health care, financial services, travel, crime prevention, and leisure. The aging population affects the strategic orientation of nearly all organizations.Example categories of SCDE variables that often yield AQCD opportunities and threats for organizations are given in Table 3-2. In performing strategic planning and case analysis, rele-vant SCDE factors must be stated in AQCD terms to the extent possible to be useful in strategic planning.Political, Governmental, and Legal ForcesPolitics, governments, and legislators can and often do impact strategic decisions. Federal, state, local, and foreign governments are major regulators, deregulators, subsidizers, employers, and customers of organizations. Political, governmental, and legal factors, therefore, can represent major opportunities or threats for both small and large organizations. For industries and firms that depend heavily on government contracts or subsidies, political forecasts can be the most important part of an external audit. State and local income taxes and property taxes, for example, TABLE 3-1 Example Economic Categories To Be MonitoredShift to a service economyDemand shifts for different goods and servicesAvailability of creditIncome differences by region and consumer groupsLevel of disposable incomePrice fluctuationsPropensity of people to spendForeign countries’ economic conditionsInterest ratesMonetary and fiscal policiesInflation ratesStock market trendsGross domestic product (GDP) trendsTax rate variation by country and stateConsumption patternsEuropean Economic Community (EEC) policiesUnemployment trendsValue of the dollar in world marketsImport/export factorsOrganization of Petroleum Exporting Countries (OPEC) policies

74 PART 2 • STRATEGY FORMuLATIONcompetitiveness, rather than short-term factors such as stock market movements, who won the election, or even something as trivial as inclement weather, which is often an excuse proposed by pundits on TV to explain slow Christmas sales. It is not that short-term factors are not important or have no impact, but they simply do not affect competition to the degree that long-term factors do, as revealed in the Five-Forces Model.As illustrated in Figure 3-3, the Porter’s Five-Forces Model offers guidance to strategists in formulating strategies to keep rival firms at bay. According to Porter, the nature of competitive-ness in a given industry can be viewed as a composite of five forces:1. Rivalry among competing firms2. Potential entry of new competitors3. Potential development of substitute products4. Bargaining power of suppliers5. Bargaining power of consumersRivalry Among Competing FirmsRivalry among competing firms is usually the most powerful of the five competitive forces and the most traditional factor analyzed by managers. It is also the only factor most affected by changes in the other four factors. Strategies pursued by one firm can be successful only to the extent that they provide competitive advantage over the strategies pursued by rival firms. Intense rivalry among competitors in an industry can decrease overall industry profits because firms often lower prices or spend extra on advertising to maintain market share, often transferring profits directly to consumers and other players in the Five-Forces Model. Rivalry among competing firms increases for numerous reasons as given in Table 3-5, including an increase in the number of competitors and a shift towards competitors becoming more equal in size and capability.As rivalry among competing firms intensifies, industry profits decline, in some cases to the point where an industry becomes inherently unattractive. 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—especially when a firm senses weakness from another. Although avoiding high-rivalry industries would be ideal, that is often easier said than done. At times it may be best to look for an industry with more favorable five forces and reduced rivalry, but firms can also compete within a similar or sub-industry by offering products targeting different customer groups with dif-ferentiated products. Offering differentiation helps all firms in the industry by moving away from competing on cost, where unique customers can be better served while maintaining profits for firms.Potential development of substitute productsBargaining power of consumersBargaining power of suppliersPotential entry of new competitorsRivalry among competingfirmsFIGURE 3-3The Five-Forces Model of Competition

CHAPTER 3 • THE ExTERNAL ASSESSMENT 75Potential Entry of New CompetitorsWhenever new firms can easily enter a particular industry, existing firms are likely to face threats of reduced market share. In such industries, a firm’s strategies should deter new firms from enter-ing the market to avoid further saturation of the market. Example barriers to entry can include economies of scale, specialized know-how, strong brand reputation, established customer loyalty, high capital requirements, absolute cost advantages, highly efficient supply chains, specialized distribution channels, access to key raw materials, and possession of patents. The automotive oil-change industry, for example, has relatively low barriers to entry; whereas the smartphone industry has much higher barriers to entry.Despite numerous barriers to entry, new firms sometimes enter industries with higher-quality products, lower prices, and substantial marketing resources. When the threat of new firms enter-ing the market is strong, incumbent firms generally fortify their positions and take swift actions to deter new entrants, such as lowering prices, extending warranties, adding features, or offer-ing financing specials. Even the threat of new entrants can increase rivalry and thus reduce profitability.Potential Development of Substitute ProductsIn many industries, firms are in close competition with producers of substitute products in other industries. Examples are beer, wine, and liquor; public transportation and car, bike, and taxi/Uber; natural gas, electricity, and solar power; glass bottles, paperboard containers, and alumi-num cans. A high threat of substitutes exists when consumer needs can easily be filled by one or more substitute products outside of the firm’s industry. Competitive pressures arising from substitute products increase as the relative price of substitute products decline and as consumers’ costs of switching decrease.The presence of substitute products puts a ceiling on the price that can be charged before consumers will switch to the substitute product. Price ceilings equate to profit ceilings and more intense competition among rivals. Producers of eyeglasses and contact lenses, for example, face increasing competitive pressures from laser eye surgery. Producers of sugar face similar pres-sures from artificial sweeteners. Newspapers and magazines face substitute-product competitive pressures from the Internet and 24-hour cable television. Substitute products can also come from places not normally expected. For example, a diamond producer may not consider a honeymoon package as a substitute for a less expensive ring. The bottom line with this “force” is that strate-gists must manage the potential threat of substitute products.Bargaining Power of SuppliersThe bargaining power of suppliers refers to the ability of suppliers to raise the price of any inputs into the industry. This “force” affects the intensity of competitiveness in an industry, especially when there are few substitutes available for the product offered by suppliers, when the cost of switching to an alternative product offered by a different supplier is high, when the industry is not a key source of the supplier’s revenues, or when there are few suppliers.TABLE 3-5 Conditions that Cause High Rivalry Among Competing Firms 1. When the number of competing firms is high 2. When competing firms are of similar size 3. When competing firms have similar capabilities 4. When demand for the industry’s products is changing rapidly 5. When price cuts are common in the industry 6. When consumers can switch brands easily 7. When barriers to leaving the market are high 8. When barriers to entering the market are low 9. When fixed costs are high among competing firms10. When products are perishable or have short product life cycles

80 PART 2 • STRATEGY FORMuLATIONStep 2: Assign Weights to Key External FactorsIn developing an EFE Matrix, assign a weight that ranges from 0.01 (not important) to 1.0 (all-important) for each factor. The weight assigned to a given factor indicates the relative importance of the factor for being successful in the firm’s industry relative to other factors included in the EFE. For example, a factor receiving a weight of 0.06 is 200 percent more important than a factor receiving a weight of 0.02 for success in the industry. Regardless of whether a key factor for a particular firm is an opportunity or threat, factors considered to have the greatest affect on orga-nizational performance of all firms in a specific industry should be assigned the highest weights. The sum of all weights must equal 1.0. Do not try to even weights out to total 0.50 for opportuni-ties and 0.50 for threats. In fact, if rivalry is high in a given industry, as discussed in the Porter’s Five Forces section, then the sum of weights assigned to threats could be higher than the sum for opportunities. Weights are industry-based, not company-based. List opportunities from highest weight to lowest weight; do the same for threats.Step 3: Assign Ratings to Key External FactorsIn developing an EFE Matrix, assign a rating between 1 and 4 to each key external factor to indicate how effectively (or ineffectively) the firm’s strategies are responding to the opportunity or threat, where 4 = the response is superior, 3 = the response is above average, 2 = the response is average, and 1 = the response is poor. Both opportunities and threats can receive a rating of 1, 2, 3, or 4 at any time. Ratings are based on the effectiveness of a firm’s strategies in capitalizing on opportunities or avoiding/mitigating threats. Ratings are company-based, not industry-based.Assignment of numerical values down the rating column in an EFE Matrix should be with consideration that companies carve out niches in industries that enable them to gain and sus-tain competitive advantages through effective strategies. These niches are most often based on capitalizing on some opportunities more effectively than rivals. This is not to say that threats are not important, they are; some threats can wipe a firm out. However, if a firm faces many opportunities, this is likely the result of effective strategies positioning the firm well, so higher ratings are often warranted for opportunities; higher ratings increase the total weighted score in an EFE Matrix.As an example, the luxury car maker Ferrari could receive a high rating on a price com-petitiveness external factor, even though their sports cars are expensive because price competi-tiveness is not a deciding factor (low weight) for customers in the luxury sports car industry. Thus, in assigning ratings, as with weights, consider a subset of the industry in make effective judgments.Step 4: Obtain Weighted ScoresAlong each row in an EFE Matrix, multiply the factor’s weight by its rating to determine a weighted score for each factor.Step 5: Obtain Total Weighted ScoreSum the weighted scores to determine the total weighted score for the organization. Regardless of how many factors are included in an EFE Matrix, the total weighted score can range from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total weighted scores well below 2.5 characterize organizations that are weak at responding to external factors, implying that new strategies are likely needed and perhaps a new direction, new vision or mission. Total weighted scores well above 2.5 indicate a strong external position, whereby a continuation of current strat-egies may be prudent, being ever mindful that there is always room for improvement. A total weighted score of 3.5 for example indicates that an organization is responding in an outstand-ing way to existing opportunities and threats in its industry. In other words, the firm’s strat-egies effectively take advantage of existing opportunities and minimize the potential adverse effects of external threats. A total weighted score of 1.5 indicates that the firm’s strategies are not capitalizing on opportunities or avoiding external threats. Making “small” decisions regarding weights and ratings in matrices is essential for making effective big strategy decisions later in the strategic-planning process; for example, a billion dollars may be at stake in choosing a particular strategy over another to implement, and the EFE Matrix with its factors, weights, and ratings is helpful in making that type of choice.

CHAPTER 3 • THE ExTERNAL ASSESSMENT 81TABLE 3-8 EFE Matrix for a Local 10-Theater Cinema ComplexKey External FactorsWeightRatingWeighted ScoreOpportunities1. Two new neighborhoods developing within 3 miles0.0910.092. TDB University is expanding 6% annually0.0840.323. Major competitor across town recently closed0.0830.244. Demand for going to cinemas growing 10%0.0720.145. Disposable income among citizens up 5% in prior year0.0630.186. Rowan County is growing 8% annually in population0.0530.157. Unemployment rate in county declined to 3.1%0.0320.06Threats1. Trend toward healthy eating eroding concession sales0.1240.482. County and city property taxes increasing 25%0.0820.163. Movies rented at local Redboxes up 12%0.0820.164. Demand for online movies growing 10%0.0620.125. Commercial property adjacent to cinemas for sale0.0630.186. Movies rented last quarter from Time Warner up 15%0.0610.067. Local religious groups object to R-rated movies0.0430.128. TDB University installing an on-campus movie theater0.0430.12Total1.002.58An Example EFE MatrixAn example EFE Matrix is provided in Table 3-8 for a local 10-theater cinema complex. Observe in the table that the most important factor to being successful in this industry is “Trend toward healthy eating eroding concession sales,” as indicated by the 0.12 weight. Also note that the local cinema is doing excellent (received a rating of 4) in regard to its handling of two external factors, “TDB University is expanding 6 percent annually” and “Trend toward healthy eating eroding concession sales.” Perhaps the cinema is placing flyers on campus and also adding yogurt and healthy drinks to its concession menu.Overall, the total weighted score of 2.58 is above the average (midpoint) of 2.5, so this cin-ema business is doing slightly above average taking advantage of the external opportunities and minimizing external threats facing the firm. There is definitely room for improvement, though, because the highest total weighted score would be 4.0. As indicated by ratings of 1, the business needs to capitalize more on the “Two new neighborhoods developing within 3 miles” opportu-nity and work to avoid the “movies rented from . . . Time Warner” threat.An actual EFE Matrix for one of the largest U.S. grocery retailers, Kroger, is given in Table 3-9 on page 82. As shown, the most important external factor facing Kroger, as indicated by a weight of 0.10, deals with Amazon acquiring Whole Foods Market. Kroger’s key factors are listed in order from the most important (highest weight) to the least important. Notice how the factors largely meet the AQCD test. Recall that mathematically, 0.04 is 33 percent more important than 0.03, and a rating of 3 is 50 percent higher than a rating of 2. Small judgments regarding assignment of weights and ratings in matrices are vital for making effective larger decisions related to deployment of resources and money across regions and products.Overall, the total weighted score of 3.03 is above the average (midpoint) of 2.5, indicat-ing that Kroger is doing pretty well at taking advantage of the external opportunities and minimizing the threats facing the firm. There is definitely room for improvement, though, because the highest total weighted score would be 4.0. The rating of 1 for “The National Retail Federation estimates an 8–12% U.S. e-commerce growth in the next year,” for exam-ple, suggests that Kroger should better capitalize on this opportunity, perhaps by expanding its online offerings.

82 PART 2 • STRATEGY FORMuLATIONThe Competitive Profile MatrixThe Competitive Profile Matrix (CPM) reveals how a focal firm compares to major competitors across a range of key factors. This comparative analysis provides important strategic information regarding a firm’s competitive advantages or disadvantages in a given industry. In determining what factors to include in a CPM, tailor the factors to the particular industry. For example, in the airline industry, such factors as on-time arrival, leg room in planes, and routes served are far better factors to include than merely including “quality of service” or “financial condition” as factors.Similar to an EFE, a CPM uses weights and total weighted scores, which quantify the importance of a given factor to the industry, as well as total weighted scores, which quantify how well a given firm is doing relative to the other two firms evaluated in the CPM. The key difference between a CPM and EFE is that a CPM compares firms and an EFE Matrix analyzes how a firm internally is responding to key external issues. Critical success factors include points LO 3.7TABLE 3-9 An Actual EFE Matrix for Kroger Co.OpportunitiesWeightRatingWeighted Score1.Organic & natural food sales in the United States totaled \$47 billion, an increase of nearly \$3.7 billion from the previous year.0.0940.362.Online grocery spending is forecasted to grow from 4.3% of the total U.S. food and beverage sales to 20% by 2025.0.0730.213.Sales growth in the grocery industry is 3.8% annually.0.0740.284.Organic food sales increased 8.8% to \$55 billion.0.0520.15.Convenience store lunch and dinner services contribute 21.7% of in-store sales.0.0520.16.The National Retail Federation estimates an 8% to 12% U.S. e-commerce growth in 2019.0.0510.057.Global food retail sales are about \$4 trillion annually, led by supermarkets/hypermarkets.0.0420.088.GDP of United States increased from 2.2% to 3.1%.0.0420.089.The Private Label Manufacturer’s Association notes that private label products are 25% to 50% cheaper than national brands, appealing to customers who value affordability.0.0310.0310.Studies show that 51.2% of Internet users make online purchases using mobile apps.0.0130.03ThreatsWeightRatingWeighted Score1.Amazon spent \$13.7 billion to acquire 460 brick-and-mortar Whole Foods Market stores.0.1020.22.Target is investing \$7 billion to update and downsize its stores and develop new exclu-sive brands between 2018 and 2020.0.0810.083.Walmart’s fiscal 2017 revenue was \$485.8 billion, up \$9.4 billion, or 0.78%. Kroger’s total revenue is \$115.3 billion.0.0730.214.Fast-food revenue exceeds \$600 billion annually; it is rising 15% annually.0.0520.15.E-commerce sales as percentage of total retail sales is nearly 10%, and rising 3% annually.0.0510.056.Walmart groceries cost about 4% less than Kroger’s.0.0420.87.Walmart.com now offers more than 67 million products, a 30% increase this year.0.0310.038.Walmart created its own “designer” cantaloupe that “tastes as sweet in winter as it does in summer,” and a more flavorful tomato is in the works.0.0320.069.Publix Supermarket is growing 12% a year.0.0340.1210.Aldi’s U.S. grocery market is growing 15% a year.0.0230.06Total1.003.03

84 PART 2 • STRATEGY FORMuLATIONTABLE 3-11 An Actual CPM for Kroger CompanyKroger CompanyWalmart Inc.Amazom.com Inc.Critical Success FactorsWeightRatingScoreRatingScoreRatingScorePrice Competitiveness0.1730.5140.6820.34Product Quality0.1320.2630.3910.13Multiple Formats0.1040.4030.3010.10Market Penetration0.0940.3630.2720.18Customer Loyalty0.0820.1640.3230.24Name Recognition0.0810.0840.3230.24Store Locations0.0720.1440.2810.07Customer Service0.0720.1430.2140.28Market Share0.0620.1240.2410.06Financial Profit0.0520.1040.2030.15Distribution System0.0520.1030.1540.20Advertising0.0510.0540.2020.10Total1.002.423.562.09IMPLICATIONS FOR STRATEGISTSFigure 3-4 reveals that to gain and sustain competitive advantages, strategists must collect, analyze, and prioritize information regard-ing the firm’s competitors, as well as identify and consider relevant social, demographic, economic, and technology trends and events impacting the firm and its industry. It is not uncommon for there to be substantial discussing, perhaps even some cussing, in delib-erating what external factors should be included in an EFE Matrix, because factors included ultimately impact the firm’s strategies and direction. An engineering hunt for external facts is essential because resultant strategies can be expensive and sometimes irreversible. Survival of the firm can hinge on an effective, thorough external as-sessment being performed.This chapter reveals that actionable, quantitative, comparative, divisional (AQCD) information is a key ingredient for making strategic decisions. The EFE Matrix and Competitive Profile Matrix presented in this chapter are excellent strategic-planning tools for assimilating and prioritizing information to enhance decision-making.The Process of Performing an External AuditIn performing an external audit, involve as many managers and em-ployees as possible because involvement leads to understanding and commitment; individuals appreciate having the opportunity to con-tribute ideas and to gain a better understanding of their firm’s indus-try, competitors, markets, and strategies. An effective way to gather competitive intelligence and information across the 10 forces dis-cussed in this chapter is to ask various managers to monitor particu-lar sources of information, such as key magazines, trade journals, newspapers, and online sources. These persons can submit periodic scanning reports to the person(s) who coordinate the external audit. This approach provides a continuous stream of timely strategic infor-mation and involves many individuals in the external-audit process. Suppliers, distributors, salespersons, customers, and competitors represent other sources of vital information.After external-audit information is gathered, it should be assimi-lated into an EFE Matrix and CPM as described herein. To accomplish this task, some firms conduct a meeting or series of meetings to collectively determine the most important opportunities and threats facing the firm. A prioritized list of these factors can be obtained by requesting all managers to individually rank the factors identi-fied, from 1 (for the most important opportunity/threat) to 20 (for the least important opportunity/threat). Then, by summing the rank-ings, a prioritized list of factors is revealed. Prioritization is absolutely essential in strategic planning because no organization can do ev-erything that would benefit the firm; tough choices among good options have to be made; in both an EFE Matrix and CPM factors are listed from most important (highest weight) to least important. Even a full list of more than 50 factors can be distilled to the 20 most important in the manner described.An actual CPM is provided in Table 3-11, again for Kroger Company. Note that the two rival firms, Walmart and Amazon, receive higher ratings than Kroger on several critical success fac-tors, including distribution system, advertising, and customer service, for example. Also note the factors are listed beginning with the most important (highest weight). Note there is no duplica-tion of ratings across a row and that Kroger is responding worse than Walmart and Amazon on “name recognition” and “advertising.”

86 PART 2 • STRATEGY FORMuLATIONChapter SummaryIncreasing turbulence in markets and industries around the world means the external audit has become an explicit and vital part of the strategic-management process. This chapter provided a framework for collecting and evaluating economic, social, cultural, demographic, environmen-tal, political, governmental, legal, technological, and competitive information. The AQCD Test was explained to assure that opportunities and threast as stated in an EFE Matrix are actionable, qualitative, comparative, and divisional to the extent possible. Firms that do not mobilize and empower their managers and employees to identify, moni-tor, forecast, and evaluate key external forces may fail to anticipate emerging opportunities and threats and, consequently, may pursue ineffective strategies, miss opportunities, and invite orga-nizational demise. Firms not taking advantage of e-commerce and social-media networks are technologically falling behind.A major responsibility of strategists is to ensure development of an effective external-audit system. This includes using information technology to devise a competitive intelligence system that works. The EFE Matrix, CPM, and Porter’s Five-Forces Model can help strategists evalu-ate their market and industry, but these tools must be accompanied by good intuitive judgment. Multinational firms especially need a systematic and effective external-audit system because external forces among foreign countries vary so greatly.Key Terms and Conceptsactionable responses (p. 67)chief information officer (CIO) (p. 72)chief technology officer (CTO) (p. 72)competitive intelligence (CI) (p. 72)Competitive Profile Matrix (CPM) (p. 82)external audit (p. 66)External Factor Evaluation (EFE) Matrix (p. 79)external forces (p. 67)industry analysis (p. 66)information technology (IT) (p. 72)Porter’s Five-Forces Model (p. 74)Issues for Review and Discussion 3-1. Explain why it is important to develop both a full and narrow list of key external factors in developing an EFE Matrix. 3-2. Explain the significance of an EFE Matrix total weighted score of 3.67 versus a 1.59. 3-3. What does a CPM total weighted score of 1.88 imply for a company? 3-4. In an EFE Matrix, should the weights for opportunities be designed to roughly equal the weights for threats? Why? 3-5. List the 10 external forces discussed in this chapter. When and why would some forces be more important than others? 3-6. How have external factors resulted in a major overhaul to the traditional retail industry as we once knew it? 3-7. Provide a synopsis of IBISWorld, Mergent Online, and PrivCo. 3-8. Compare and contrast the EFE Matrix with a CPM in terms of value provided for a strategist in performing an external assessment. 3-9. 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? 3-10. Describe how political elections can be an important ex-ternal factor for companies to consider. Select an industry and reveal some key political factors impacting firms. 3-11. List some legal or ethical ways to gather competitive intelligence. List some illegal or unethical ways. 3-12. As the value of the dollar rises, U.S. firms doing busi-ness 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? 3-13. Does McDonald’s Corp. benefit from a low or high value of the dollar? Explain why. 3-14. Explain how Facebook, Twitter, and Instagram can represent a major threat or opportunity for a company. 3-15. If your CPM has three firms and they all end up with the same total weighted score, would the analysis still be useful? Why? 3-16. What external factors impact the ability of state to attract business? Visit the website: https://www.cnbc.com/2017/06/12/heres-how-your-state-can-become-a-cnbc-top-state-for- business.html and summarize how the selection criteria used to determine the best states for business compares to the information presented in this chapter. 3-17. Governments sometimes use “protectionism” to cope with economic problems, imposing tariffs and subsi-dies on foreign goods as well as placing restrictions and incentives on their own firms to keep jobs at home. What are the strategic implications of protectionism for international commerce? 3-18. Rank in order the relative importance of Porter’s five forces in the business of operating a college or university. 3-19. Let’s say you work for McDonald’s and you applied Porter’s Five-Forces Model to study the fast-food industry. Rank the five forces as to relative importance for strategic planning at McDonald’s.

CHAPTER 3 • THE ExTERNAL ASSESSMENT 914. Fill in Column 4 in Table 3-12 to reveal the absolute difference between Column 1 and Column 3 to reveal how well you performed as an individual in this exercise. (Note: Absolute difference disregard negative numbers)5. Fill in Column 5 in Table 3-12 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 3-12 External Force Analysis: Comparing Individual versus Group Decision-MakingExternal ForcesColumn 1Column 2Column 3Column 4Column 51. Economic2. Social/Cultural/Demographic/Environment3. Political/Governmental/Legal4. Technological5. CompetitiveSumsMINI-CASE ON SAM’S CLUBSAM’S CLUB IS BOOMING IN CHINASam’s Club in the United States has struggled to attract affluent shoppers. However, in China, Sam’s Club targets high-income consumers, and specifically affluent mothers with young children. Sam’s Club does a great job at positioning itself for the wealthy Chinese target market. Advertised as a trusted place with imported goods and high-quality foods, Sam’s Club stores are located in China’s most affluent cities. Its success thus far in China can be attributed largely to its effective market seg-mentation, targeting, and positioning.Many large firms have trouble doing business in China despite the country’s high GDP, rising levels of disposable income, shift to becoming a high-tech nation, and growing middle class. But Walmart’s Sam’s Clubs are booming in China. Three of the top five Sam’s Clubs by sales are located in China. Rather than positioning itself as a place for bulk items and closeouts, Sam’s Clubs in China are positioned as a place for high-quality products and foods. For example, eggs are guaranteed to be less than 12 days old and all have a serial number that customers can enter into their smartphone and see the production date and origin.Sam’s in China benefits from not having to “do battle” with Costco Wholesale; Costco does no business in China. Sam’s has roughly 2 million members in China, many whom are affluent moms age 35 to 40, a primary target group. The number of Sam’s stores in China is expected to increase from 20 at the start of 2018 to 40 by 2020. Sam’s in China recently provided “two-kid seat” carts in all stores to take advantage of China recently relaxing its “one-child policy.”Another feature of Sam’s stores in China is extra large parking lots; nearly all customers drive to Sam’s and ample parking is greatly appreciated in a country where crowded and expensive parking is the norm otherwise. Sam’s strategies in China are an excellent example of how a firm must adapt it policies, Kevin Foy/Shutterstock

92 PART 2 • STRATEGY FORMuLATIONOpportunity 1Threat 1Opportunity 3Threat 3RATINGSHighHighLowLowWEIGHTSMiddleOpportunity 2Threat 2Opportunity 4Threat 4FIGURE 3-5A Weights-by-Ratings Matrix to Exemplify EFE Matrix Logic1. http://finance.yahoo.com2. www.hoovers.com3. www.morningstar.com4. www,mergentonline.com5. http://globaledge.msu.edu/industries/6. See Table 3-7 for Excellent Library DatabasesWeb ResourcesCurrent ReadingsAggarwal, Vikas A., Hart E. Posen, and Maciej Workiewicz. “Adaptive Capacity to Technological Change: A Microfoundational Approach.” Strategic Management Journal 38, no. 6 (June 2017): 1212–1231.Cattani, Gino, Joseph F. Porac, and Howard Thomas. “Categories and Competition.” Strategic Management Journal 38, no. 1 (January 2017): 64–92.Chin, M. K. and Matthew Semadeni. “CEO Political Ideologies and Pay Egalitarianism within Top Management Teams.” Strategic Management Journal 38, no. 8 (August 2017): 1608–1625.Dowell, Glen W. S. and Suresh Muthulingam. “Will Firms Go Green if It Pays? The Impact of Disruption, Cost, and External Factors on the Adoption of Environmental procedures, features, and actions when it enters a foreign land to capitalize on external opportunities and threats in that country. What works in one country quite likely needs changing in another; pushing the same business model globally has spelled doom for many firms that enter China, and then soon withdraw.Questions1. Consider the following two-dimensional matrix with weights on the y-axis and ratings on the x-axis, as given in Figure 3-5. What are example opportunities and threats that could possi-bly characterize Sam’s Club in China in the four corners of the matrix? Develop a hypotheti-cal opportunity and threat for Sams’s that could be positioned in each of the four corners of the matrix. Give a supporting rationale for each factor. Which corner of the matrix do you think characterizes factors most commonly in an EFE Matrix? Why? Which corner of the matrix do you think characterizes factors least commonly in an EFE Matrix? Why? What could you say about the middle of the matrix in terms of factors commonly included in an EFE Matrix?Note: A purpose of this mini-case is to give students practice thinking about when, in developing an EFE Matrix, could a particular factor receive the following weights and ratings:1. a low weight and high rating2. a high weight and high rating3. a low weight and low rating4. a high weight and low ratingSource; Based on Wayne Ma, “In China, Sam’s Goes Up Market and Scores,” Wall Street Journal, (December 8, 2017): B1.

CHAPTER 3 • THE ExTERNAL ASSESSMENT 93Initiatives.” Strategic Management Journal 38, no. 6 (June 2017): 1287–1304.Guo, Yidi, Quy Nguyen Huy, and Zhixing Xiao. “How Middle Managers Manage the Political Environment to Achieve Market Goals: Insights from China’s State-Owned Enterprises.” Strategic Management Journal 38, no. 3 (March 2017): 676–696.Jia, Nan and Kyle J. Mayer. “Political Hazards and Firms’ Geographic Concentration.” Strategic Management Journal 38, no. 2 (February 2017): 203–231.Li, Jing, Jun Xia, and Edward Zajac. “On the Duality of Political and Economic Stakeholder Influence on Firm Innovation Performance: Theory and Evidence from Chinese Firms.” Strategic Management Journal 39, no. 1, (January 2018): 193–216.Madsen, Tammy L. and Gordon Walker. “Competitive Heterogeneity, Cohorts, and Persistent Advantage.” Strategic Management Journal 38, no 2 (February 2017): 184–202.Ocasio, William, Tomi Laamanen, and Eero Vaara. “Communication and Attention Dynamics: An Attention-Based View of Strategic Change.” Strategic Management Journal 39, no. 1 (January 2018): 155–167.Oehmichen, Jana, Sebastian Schrapp, and Michael Wolff. “Who Needs Experts Most? Board Industry Expertise and Strategic Change—A Contingency Perspective.” Strategic Management Journal 38, no. 3 (March 2017): 645–656.Shepherd, Dean A., Jeffery S. McMullen, and William Ocasio. “Is That an Opportunity? An Attention Model of Top Managers’ Opportunity Beliefs for Strategic Action.” Strategic Management Journal 38, no. 3 (March 2017): 626–644.Souder, David, Akbar Zaheer, Harry Sapienza, and Rebecca Ranucci. “How Family Influence, Socioemotional Wealth, and Competitive Conditions Shape New Technology Adoption.” Strategic Management Journal 38, Issue 9 (September 2017): 1774–1790.Tan, David and Christopher I. Rider. “Let Them Go? How Losing Employees to Competitors Can Enhance Firm Status.” Strategic Management Journal 38, Issue 9 (September 2017): 1848–1874.Verhaal, J. Cameron, Jake Hoskins, and Leif Lundmark. “Little Fish in a Big Pond: Legitimacy Transfer, Authenticity, and Factors of Peripheral Firm Entry and Growth in the Market Center.” Strategic Management Journal 38, Issue 12 (December 2017): 2532–2552.Wei, Shi, Yan Zhang, and Robert E. Hoskisson. “Ripple Effects of CEO Awards: Investigating the Acquisition Activities of Superstar CEOs’ Competitors.” Strategic Management Journal 38, Issue 10 (October 2017): 2080–2102.Endnotes 1. Josh Zumbrun, “Global Economic Expansion Exceeds Forecasts, IMF Says,” Wall Street Journal, (October 11, 2017): A8. 2. Mike Colias, “Ford Set to Shirt \$7 Billion Toward Trucks and SUVs,” Wall Street Journal, (October 4, 2017): B3. 3. Shelly Banjo and Paul Ziobro, “Shoppers Flee Physical Stores,” Wall Street Journal, (August 6, 2014): B1. 4. Based on Vanessa Fuhrmans, “A Future Without Jobs? Think Again,” Wall Street Journal, (November 16, 2017): B5. 5. Arthur Thompson, Jr., A. J. Strickland III, and John Gamble, Crafting and Executing Strategy: Text and Read-ings (New York: McGraw-Hill/Irwin, 2005): 63. 6. Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980): 24–27. 7. Dale McConkey, “Planning in a Changing Environment,” Business Horizons 31, no. 5 (September–October 1988): 67.

21PART 1OVERVIEW OF STRATEGIC MANAGEMENTStrategyFormulationFeedback Loop StrategyImplementationStrategyEvaluationChapter 10: Business Ethics, Environmental Sustainability, and Social ResponsibilityChapter 11: Global and International IssuesStrategyEvaluationandGovernanceChapter 9ImplementingStrategies:Finance and AccountingIssuesChapter 8ImplementingStrategies:Managementand MarketingIssuesChapter 7BusinessVision andMissionChapter 2Strategiesin ActionChapter 5StrategyAnalysis andChoiceChapter 6TheInternalAssessmentChapter 4The ExternalAssessmentChapter 3FIGURE 1-1The Comprehensive, Integrative Strategic-Management ModelSource: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1 (February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010): 20.

3LEARNING OBJECTIVESAfter studying this chapter, you should be able to do the following: 1-1. Describe the strategic-management process. 1-2. Discuss the three stages of activities for strategy formulation, implementation, and evaluation activities. 1-3. Explain the need for integrating analysis and intuition in strategic management. 1-4. Define and give examples of key terms in strategic management. 1-5. Describe the benefits of engaging in strategic management. 1-6. Explain why some firms do not engage in strategic planning. 1-7. Describe the pitfalls in doing strategic planning. 1-8. Discuss the connection between business and military strategies. 1-9. Explain how this course can enhance a student’s employability.ASSURANCE-OF-LEARNING EXERCISESThe following exercises are found at the end of this chapter:SET 1: Strategic Planning for Coca-ColaEXERCISE 1A: Gather Strategy Information for Coca-Cola CompanyEXERCISE 1B: Enter Coca-Cola Vitals into the Strategic Planning TemplateSET 2: Strategic Planning for My UniversityEXERCISE 1C: Perform SWOT Analysis for My UniversitySET 3: Strategic Planning to Enhance My EmployabilityEXERCISE 1D: Perform SWOT Analysis on MyselfSET 4: Individual versus Group Strategic PlanningEXERCISE 1E: How Detrimental Are Various Pitfalls in Strategic Planning?The Nature of Strategic ManagementMyLab Management Improve Your Grade!If your instructor is using MyLab Management, visit www.pearson.com/mylab/management for videos, simulations, and writing exercises.

6 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTimplementation, and evaluation, with strategic planning referring only to strategy formulation. The purpose of strategic planning is to exploit and create new and different opportunities for tomorrow; long-range planning, in contrast, tries to optimize for tomorrow the trends of today.The term strategic planning originated in the 1950s and was popular between the mid-1960s and the mid-1970s. During these years, strategic planning was widely believed to be the answer for all problems. At the time, much of corporate America was “obsessed” with strategic plan-ning. Following that boom, however, strategic planning was cast aside during the 1980s as vari-ous planning models did not yield higher returns. The 1990s, however, brought the revival of strategic planning, and the process is widely practiced today in the business world.A strategic plan is, in essence, a company’s game plan. Just as an athletic team needs a good game plan to have a chance for success, a company must have a good strategic plan to compete successfully. Profit margins among firms in most industries are so slim that there is little room for error in the overall strategic plan. A strategic plan results from tough managerial choices among numerous good alternatives, and it signals commitment to specific markets, policies, pro-cedures, and operations in lieu of other, “less desirable” courses of action.The Strategic-Management ModelThe strategic-management model shown in Figure 1-1 is a widely accepted, comprehensive depiction of the strategic-management process.1 The process conveyed does not guarantee suc-cess, but it does represent a clear and practical approach for formulating, implementing, and evaluating strategies. Relationships among major components of the strategic-management pro-cess are shown in the model, which appears on the opening page of all subsequent chapters with appropriate area of the model shaded to show the particular focus of the chapter. This text is organized around the model because it reveals how organizations actually do strategic planning. There are three important questions to answer in preparing a strategic plan:Where are we now?Where do we want to go?How are we going to get there?Identifying an organization’s existing vision, mission, objectives, and strategies is the logi-cal starting point for strategic management because a firm’s present situation and condition may preclude certain strategies and may even dictate a particular course of action. Every organiza-tion has a vision, mission, objectives, and strategy, even if these elements are not consciously designed, written, or communicated. The answer to where an organization is going can be deter-mined largely by where the organization has been!The strategic-management process is dynamic and continuous. A change in any one of the major components in the model can necessitate a change in any or all of the other components. For instance, various third-world countries coming online could represent a major opportunity and require a change in long-term objectives and strategies; a failure to accomplish annual objec-tives might require a change in policy; or a major competitor’s change in strategy might require a change in the firm’s mission. The activities represented in Figure 1-1 are not independent silos; they represent an interrelated process. Thus, activities for strategy formulation, implementation, and evaluation should be performed on a continual basis, not just at the end of the year or semi-annually. The strategic-management process never really ends.In Figure 1-1, perhaps the most important “activity” is the feedback loop because strategy must be thought of as a “verb rather than a noun.” The stages of strategic management (formula-tion, implementation, and evaluation) are so fluid as to be virtually indistinguishable when one starts and the other ends. Continuous feedback enables firms to readily adapt to changing condi-tions; when anyone is preparing an external or internal assessment or even implementing strategies, they should be mindful of the firm’s vision and mission. The feedback loop reveals that a change in any strategic-planning activity can impact any or all other activities. For example, changes in a firm’s mission can impact all other activities; everything a firm does should be mission driven.Note in Figure 1-1 that business ethics, social responsibility, environmental sustainability, and international issues impact all activities in the model, as discussed in Chapters 10 and 11, respectively. Regarding business ethics, recent research revealed in the Ethics Capsule 1 con-cludes that “trustworthiness” is the most important variable in doing business.

12 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTA mission statement is an “enduring statement of purpose that distinguishes one busi-ness from other similar firms. A mission statement identifies the scope of a firm’s opera-tions in product and market terms.”10 It addresses the basic question that faces all strategists: “What is our business?” A clear mission statement describes the values and priorities of an organization. Developing a mission statement compels strategists to think about the nature and scope of present operations and to assess the potential attractiveness of future markets and activities. A mission statement broadly charts the future direction of an organization and serves as a constant reminder to its employees of why the organization exists and what the founders envisioned when they put their fame and fortune (and names) at risk to breathe life into their dreams.External Opportunities and ThreatsExternal opportunities and external threats refer to economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and competitive trends and events that could significantly benefit or harm an organization in the future. Opportunities and threats are largely beyond the control of a single organization, thus, the word external. Some general categories of opportunities and threats are listed in Table 1-3. Dollars, numbers, percentages, ratios, and quantification are essential so strategists can assess the magnitude of opportunities and threats and take appropriate actions. For example, in Table 1-3, rather than saying “Marketing is moving rapidly to the Internet,” strategists need to conduct research and find, for example, that “spending on online advertisements globally is rising 18 percent annually and represents about 44 percent of total advertising spending in the USA.” Strategies must be formulated and imple-mented based on specific factual information to the extent possible because so much is at stake in having a good game plan.External trends and events are creating a different type of consumer and consequently a need for different types of products, services, and strategies. A competitor’s strength could be a threat, or a rival firm’s weakness could be an opportunity. A basic tenet of strategic management is that firms need to formulate strategies to take advantage of external opportunities and avoid or reduce the impact of external threats. For this reason, identifying, monitoring, and evaluating external opportunities and threats are essential for success. This process of conducting research and gathering and assimilating external information is sometimes called environmental scanning or industry analysis. Lobbying is one activity that some organizations use to influence external opportunities and threats.Internal Strengths and WeaknessesInternal strengths and internal weaknesses are an organization’s controllable activities that are performed especially well or poorly. They arise in the activities of management, market-ing, finance/accounting, production, and information systems of a business. Identifying and TABLE 1-3 Some General Categories of Opportunities and Threats• Consumers’s expectation for green operations and products is rising 8 percent annually in Western Europe.• Internet marketing is growing 11 percent annually in the United States.• Commodity food prices rose 6 percent the prior year.• Oil and gas prices declined 18 percent in the last twelve months.• Computer hacker problems are increasing 14 percent annually.• Interest rates are 4 percent but rising in the United States.• State and local governments’s finances worsened 12 percent last year.• The number of births declined 5 percent annually in many countries over the last three years.• The gross domestic product (GDP) of Brazil fell from 6 percent to 5 percent in the last year.• Competitor XYZ just introduced product ABC at a 10 percent lower price than our product.• Social-media networking is growing 9 percent annually in China.

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 13evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategic-management activity. Organizations strive to pursue strategies that capitalize on internal strengths and improve internal weaknesses.Strengths and weaknesses are determined relative to competitors. Relative deficiency or supe-riority is important information. Also, strengths and weaknesses can be determined by elements of being rather than performance. For example, a strength may involve ownership of natural resources or a historic reputation for quality. Strengths and weaknesses may be determined relative to a firm’s own objectives. For instance, high levels of inventory turnover may not be a strength for a firm that seeks never to stock-out.In performing a strategic-management case analysis, it is important to be as divisional as possible when determining and stating internal strengths and weaknesses. In other words, for a company such as Walmart, saying, “Sam Club’s revenues grew 11 percent in the recent quarter,” is far better than saying “Walmart’s revenues grew 6 percent in the recent quarter.” Being divisional enables strategies to be more effectively formulated and targeted. This is important because all firms must allocate resources across divisions (segments) of the firm (that is, by product, region, customer, or whatever the various units of the firm are), such as Walmart’s Sam’s Club compared with Walmart Supercenters, Walmart Mexico, or Walmart Europe.Both internal and external factors should be stated as specifically as possible, using numbers, percentages, dollars, and ratios, as well as comparisons over time to rival firms. Quantification is important because strategies will be formulated and resources allocated based on this informa-tion. The more specific the underlying external and internal factors, the more effectively strategies can be formulated and resources allocated. Determining the numbers takes more time, but survival of the firm often is at stake, so doing some research and incorporating numbers associated with key factors is essential.Internal factors can be determined in a number of ways, including computing ratios, measur-ing performance, and comparing to past periods and industry averages. Various types of surveys also can be developed and administered to examine internal factors, such as employee morale, production efficiency, advertising effectiveness, and customer loyalty.Long-Term ObjectivesObjectives can be defined as specific results that an organization seeks to achieve in pursuing its mission. Long term means more than one year. Objectives are essential for organizational success because they provide direction; aid in evaluation; foster synergy; reveal priorities; focus coordination; and provide a basis for effective planning, organizing, motivating, and controlling activities. Objectives should be challenging, measurable, consistent, reasonable, and clear. In a multidimensional firm, objectives are needed both for the overall company and each division.Headquartered in New York City, Foot Locker, Inc. recently posted the following long-term objectives on its corporate website (paraphrased):1. Annual revenues: \$7.5 billion2. Annual revenues per square foot: \$5003. EBIT margin: 11 percent4. Profit margin: 7 percent5. Return on invested capital: 14 percent6. Inventory turnover: 3+ timesIn contrast, Macy’s, Inc.’s Annual Report lists as objectives to “to grow sales profitably” and “to maximize total shareholder return.” Avoid vagueness like this throughout a strategic-planning project!StrategiesStrategies are the means by which long-term objectives will be achieved. Business strategies may include geographic expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture, liquidation, and joint venture. Strategies are potential actions that require top-management decisions and significant amounts of the firm’s resources.

14 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTThey affect an organization’s long-term prosperity, typically for at least five years, and thus are future oriented. Strategies also have multifunctional and multidivisional consequences and require consideration of both the external and internal factors facing the firm.Strategies currently being pursued by Amazon are described in Table 1-4.TABLE 1-4 Amazon’s StrategiesThe world’s largest bookseller, Amazon, is surprisingly embracing the brick-and-mortar bookstore retail format it’s been killing for 20 years. Amazon’s physical bookstore front fits with the company’s increas-ing reliance on storefronts including AmazonBooks, Amazon Go, and AmazonFresh Pickup to build sales and meet customers where they are. AmazonBooks now has more than 10 physical stores. Another reason for Amazon’s new strategy is that physical bookstores are experiencing something of a comeback. From 2010 to 2017, the number of independent bookstores increased by nearly 30 percent. These stores are capitalizing on a loyal customer base that appreciates the value of a real bookstore that hosts read-ings and events, offers conversation and discussion areas, and enables in-store browsing and discovery. Amazon also recently acquired the brick-and-mortar grocery store chain Whole Foods Market. Entire industries are being rocked or crushed by Amazon’s competitive size, scale, diversity, automation, and prowess.Source: Based on Jeremy Bowman, “3 Reasons Amazon Is Opening a Brick-and-Mortar Bookstore Chain,” https://www.aol.com/article/finance/2017/06/07/3-reasons-amazon-is-opening-a-brick-and-mortar-bookstore- chain/22130842/TABLE 1-5 Matching Key External and Internal Factors to Formulate StrategiesKey Internal FactorKey External FactorResultant StrategyS1: Demand for Dunkin Donuts up 6 percent annually (internal strength)+ O1: Desire for healthy products up 8 percent annually (external opportunity)= SO1: Dunkin Donuts elimi-nated all artificial dyes and colors in its donuts in 2018W1: Insufficient production capacity by 1 million units annually (internal weakness)+ O2: Exit of two major foreign competitors from the area (external opportunity)= WO1: Purchase competitors’ production facilitiesS2: R&D has developed four new products in twelve months (internal strength)+ T1: Sugary drink consumption is declining 5 percent annually (external threat)= ST1: Spend \$1 million to promote healthiness of four new productsW2: Poor employee morale (internal weakness)+ T2: Healthcare costs rose 7 percent last year (external threat)= WT1: Implement a new corporate wellness programSWOT AnalysisStrengths-Weaknesses-Opportunities-Threats (SWOT) Analysis is an important matching tool that helps managers develop four types of strategies: SO (strengths-opportunities) strate-gies, WO (weaknesses-opportunities) strategies, ST (strengths-threats) strategies, and WT (weaknesses-threats) strategies.11 Matching key external and internal factors is a critically impor-tant activity in strategic planning. Note in Table 1-5 that the resultant strategies 1, 2, 3, and 4 are SO, WO, ST, and WT strategies, respectively. SWOT analysis is explained further in Chapter 6, but the matching of external with internal factors to generate strategies results in a SWOT Matrix as illustrated in Figure 1-2.Annual ObjectivesAnnual objectives are short-term milestones that organizations must achieve to reach long-term objectives. Like long-term objectives, annual objectives should be measurable, quan-titative, challenging, realistic, consistent, and prioritized. They must also be established at the corporate, divisional, and functional levels in a large organization. Annual objectives should be stated in terms of management, marketing, finance/accounting, and production accomplishments. A set of annual objectives is needed for each long-term objective. These

SWOTSTRENGTHS (S)WEAKNESSES (W) 1.2.3.4.5.6.7.8.9.10.1.2.3.4.5.6.7.8.9.10.1.2.3.4.5.6.7.8.9.10.OPPORTUNITIES (O)SO STRATEGIESST STRATEGIESWO STRATEGIES WT STRATEGIES1.2.ETC.1.2.ETC.1.2.3.4.5.6.7.8.9.10.THREATS (T)1.2.ETC.1.2.ETC.FIGURE 1-2The Basic SWOT Matrix Format 15

16 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTobjectives are especially important in strategy implementation, whereas long-term objectives are particularly important in strategy formulation. Annual objectives provide the basis for allocating resources.PoliciesPolicies are the means by which annual objectives will be achieved. Policies include guide-lines, rules, and procedures established to support efforts to achieve stated objectives. Policies are guides to decision making and address repetitive or recurring situations. Usually, policies are stated in terms of management, marketing, finance/accounting, production/operations, R&D, and MIS activities. They may be established at the corporate level and apply to an entire orga-nization, at the divisional level and apply to a single division, or they may be established at the functional level and apply to particular operational activities or departments.Like annual objectives, policies are especially important in strategy implementation because they outline an organization’s expectations of its employees and managers. Policies allow con-sistency and coordination within and between organizational departments. For example, IBM recently instituted a new policy requiring employees to work from an IBM office rather than work-ing remotely, reversing a 30-year policy. IBM had previously for decades boasted that more than 40 percent of its employees worked remotely, but the company’s new policy is aimed at improving employee collaboration and accelerating the pace of work. The policy is also aimed at reversing IBM’s two consecutive quarters of declining revenue. Several large companies are following the IBM lead, recalling at-home employees, including Yahoo, Bank of America, and Aetna Inc.Benefits of Engaging in Strategic ManagementStrategic management allows an organization to be more proactive than reactive in shaping its own future; it allows an organization to initiate and influence (rather than just respond to) activi-ties, and thus, to exert control over its own destiny. Small business owners, chief executive offi-cers, presidents, and managers of many for-profit and nonprofit organizations have recognized and realized the benefits of strategic management.Historically, the principal benefit of strategic management has been to help organiza-tions formulate better strategies through the use of a more systematic, logical, and rational approach for decision making. In addition, the process, rather than the decision or document, is also a major benefit of engaging in strategic management. Through involvement in the process (i.e., dialogue and participation), managers and employees become committed to sup-porting the organization. A key to successful strategic management is communication, and it may be the most important word in all of management. Figure 1-3 illustrates this intrinsic benefit of a firm engaging in strategic planning; note that all firms need all employees “on a mission” to help the firm succeed.Dale McConkey said, “Plans are less important than planning.” The manner in which strate-gic management is carried out is therefore exceptionally important. A major aim of the process LO 1.5a. Dialogueb. ParticipationEnhancedCommunicationDeeper/ImprovedUnderstandinga. Of others’ viewsb. Of what the ﬁrm is doing/planning and why THE RESULTAll Managers andEmployees on aMission to Help theFirm SucceedGreaterCommitmenta. To achieve objectivesb. To implement strategiesc. To work hardFIGURE 1-3Benefits to a Firm that Does Strategic Planning

30 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTEXHIBIT 2 Coke’s Balance Sheets (in millions of dollars)Balance Sheet12/31/1612/31/17Percent ChangeAssetsCash and Short Term Investments\$18,150\$15,358-15%Accounts Receivable3,8563,667-5%Inventory2,6752,655-1%Other Current Assets9,32914,86559%Total Current Assets34,01036,5457%Property Plant & Equipment10,6358,203-23%Goodwill10,6299,401-12%Intangibles726368-49%Other Long-Term Assets31,27033.3797%Total Assets87,27087,8961%LiabilitiesAccounts Payable9,4908,748-8%Other Current Liabilities17,04218,4468%Total Current Liabilities26,53227,1942%Long-Term Debt29,68431,1825%Other Long-Term Liabilities7,83410,54335%Total Liabilities64,05068,9198%EquityCommon Stock1,7601,7600%Retained Earnings65,50260,430-8%Treasury Stock(47,988)(50,677)6%Paid in Capital & Other3,9467,46489%Total Equity23,22018,977-18%Total Liabilities and Equity87,27087,8961%Source: Based on information at www.coca-colacompany.comExhibit 3 reveals that Coke spends about \$4 billion annually to advertise its beverages. Note also in Exhibit 3 that the company is intent on increasing its dividends paid every year even if it has to bor-row money to make this payment. The company’s long-term debt is creeping up every year.Operating SegmentsRegarding 2017 cases of beverages sold, the USA accounted for 19 percent of the company total; case volume outside the USA accounted for 81 percent of sales. Of the 19 percent of cases sold in the USA, 62 percent were sparkling soft drinks.The four countries outside the United States that Coke sells most to are Mexico, China, Brazil, and Japan. These four countries accounted for 31 percent of Coke’s outside-USA sales in 2017, and 71 percent of these sales were of sparkling soft drinks. Coke’s revenues derived from the United States compared to the rest of the world through 2016 are given in Exhibit 4; the company did not provide this breakdown in 2017, perhaps because of significant declines. Note the decreases in 2016 on all three rows.

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 31Coke has five main operating segments: (1) Europe, Middle East, and Africa, (2) Latin America, (3) North America, (4) Asia Pacific, and (5) Bottling Investments. Revenues and operating profits by segment are provided in Exhibit 5 and Exhibit 6, respectively. Note that North America generates 29.9 percent of coke revenues and 34.4 percent of operating income. Note that only one segment, Latin America, showed an increase in operating income in 2017.Source: Based on information at www.coca-colacompany.comEXHIBIT 5 Coke’s Revenues by Segment (in millions of dollars)201720161. Europe, Middle East, and Africa\$7,374\$7,2782. Latin America\$4,029\$3,8193. North America\$10,637\$10,2104. Asia Pacific\$5,176\$5,2945. Bottling Investments\$10,605\$19,8856. Corporate\$138\$1327. Eliminations(\$2,549)(\$4,755)Total\$35,410\$41,863EXHIBIT 3 Coke Financial Data Across Key Variables (in millions of dollars)201720162015Advertising expenditures\$3,958\$4,004\$3,976Selling and distribution expenses\$3,257\$5,177\$6,025Treasury stock purchased\$3,682\$3,681\$3,564Number of shares repurchased828686Average price per share of stock44.09\$43.62\$41.33Dividends paid6,320\$6,043\$5,741Long-term debt\$31,182\$29,684\$28,311Source: Based on information at www.coca-colacompany.comEXHIBIT 4 Coke’s Revenues from the United States Compared to Outside the United States (in millions of dollars)20162015United States\$19,899\$20,360Outside United States\$21,964\$23,934Total\$41,863\$44,294Source: Based on information at www.coca-colacompany.comEXHIBIT 6 Coke’s Total Operating Income by Segment (in millions of dollars)201720161. Europe, Middle East, and Africa\$3,646\$3,6762. Latin America\$2,214\$1,9513. North America\$2,578\$2,5824. Asia Pacific\$2,163\$2,2245. Bottling Investments(\$1,117)(\$137)6. Corporate(\$1,983)(\$1,670)Total\$7,501\$8,626Source: Based on information at www.coca-colacompany.com

32 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTEXHIBIT 7 Coke’s Number of Cases Sold in 2017 Compared with 2016Product CategoryPercentage Change in 2017 from 20161. Sparkling soft drinks–12. Juice, dairy, and plant-based beverages003. Water, enhanced water, and sports drinks+14. Tea and coffee+2Source: Based on company information.rather than its beverages. Danone competes to a lesser degree with Coke. The number-three soft-drink producer, Dr Pepper Snapple, produces and markets nonalcoholic beverages in the United States, Canada, Mexico, and the Caribbean. Exhibit 9 reveals the top 10 beverages sold in the United States. Note that Coke, inclusive of Coke Zero, Diet Coke, and other brands, lead among the top 10, but PepsiCo has four brands in the top 10. In the percentage-change column in Exhibit 9, notice that bottled water has the largest growth.Source: Based on information at www.coca-colacompany.com1. Muhtar Kent, CEO and Chairman of the Board of Directors2. Marcos de Quinto, EVP and Chief Marketing Officer3. Ceree Eberly, SVP and Chief People Officer4. Bernhard Goepelt, SVP and General Counsel5. Julie Hamilton, SVP and Chief Customer and Commercial Leadership Officer6. James Quincey, President and COO 7. Brent Hastie, SVP, Strategy and Planning8. Ed Hayes, SVP and Chief Technical Officer 9. Barry Simpson, SVP and CIO1212345678910111314151610. Clyde C. Tuggle, SVP and Chief Public Affairs and Communications Officer11. Kathy Waller, EVP and CFO12. John Murphy, President of the Asia Pacific Group13. Irial Finan, EVP and President, Bottling Investments Group14. J. Alexander M. Douglas, Jr., EVP and President of Coca-Cola North America15. Alfredo Rivera, President of the Latin America Group16. Brian Smith, President of the Europe, Middle East, and Africa Group EXHIBIT 8 Coke’s Top Executive Officers and Organizational ChartRegarding number of cases of various product lines sold in 2017, Exhibit 7 reveals that only two of four categories increased: (1) Water, enhanced water, and sports drinks, up 1 percent, and (2) Tea and coffee, up 2 percent.Organizational StructureCoke’s top executives and organizational structure are given in Exhibit 8. Note the segment top persons (#12, 13, 14, 15, 16) report to the COO (# 6).CompetitorsPepsiCo, Inc. and Dr Pepper Snapple are Coke’s two primary competitors, but other rival firms include Nestlé SA, Groupe Danone, Suntory Beverage & Food Limited (“Suntory”), and Monster Beverage Corporation. Unlike Coke, PepsiCo derives most of its revenues and growth from its snack food business

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 33EXHIBIT 10 A Comparison of Coke to Two Big RivalsCOKEDR PEPPERPEPSICOMarket Capitalization\$ 197B\$ 17B\$ 167B# of Employees100,30020,000264,000Revenue\$ 41.8B\$ 6.6B\$ 63.5BProfit Margin10.68%11.73%10.97%EBITDA\$ 10.9B\$ 1.6B\$ 12.6BOperating Margin24.14%20.73%16.4%Net Income\$ 6.5B\$ 770M47.0BROA6.23%9.09%8.56%EPS\$ 0.95\$ 4.17\$ 4.84As indicated in Exhibit 10, Coke is 11 times larger than Dr Pepper Snapple and is 18 percent larger than PepsiCo based on market capitalization (stock price times number of shares outstanding). However, PepsiCo is much larger than Coke on numerous other variables as given.EXHIBIT 9 Coke and Rival Firms on Top Beverage Brands Sold (2016 and 2015)BrandFirmsMillions of Gallons 2015Millions of Gallons 2016Percentage ChangeShare in Total 2015Share in Total 20161. Coke (all types)Coca-Cola3,9943,933(1.5)12.612.02. Pepsi (all types)PepsiCo1,9461,859(4.5)6.15.63. Mountain DewPepsiCo1,3431,333(0.7)4.24.14. Dr Pepper (all types)Dr Pepper Snapple1,1601,1680.73.63.55. Nestlé Pure LifeNestlé NAmerica1,0751,0851.03.43.36. GatoradePepsiCo1,0421,0823.83.33.37. SpriteCoca-Cola8668973.62.72.78. Poland SpringNestlé NAmerica75883610.32.42.59. DasaniCoca-Cola7077435.02.22.310. AquafinaPepsiCo54660510.91.71.8TOP 1013,43713,5410.842.241.2Others18,38719,3645.357.858.8Total31,82432,9043.4100.0100.0Source: Based on information developed by Beverage Marketing Corporation.PepsiCo, Inc. (PEP)Headquartered in Purchase, New York, PepsiCo’s beverage products include Pepsi, Gatorade, Mountain Dew, Diet Pepsi, Aquafina, Diet Mountain Dew, Tropicana Pure Premium, Mist Twist, and Mug brands; and ready-to-drink tea and coffee, and juices. PepsiCo’s Frito-Lay segment offers Lays and Ruffles potato chips; Doritos, Tostitos, and Santitas tortilla chips; and Cheetos cheese-flavored snacks, branded dips, and Fritos corn chips. PepsiCo’s Quaker Foods segment provides Quaker oat-meal, grits, rice cakes, granola, and oat squares; and Aunt Jemima mixes and syrups, Quaker Chewy granola bars, Captain Crunch cereal, Life cereal, and Rice-A-Roni side dishes.PepsiCo obtains about 60 percent of its revenues from food and snacks, not beverages. PepsiCo and Coca-Cola are both investing in craft soda brands trying to reverse decreasing soda volume sales. After acquiring two craft soda brands from Monster Beverages, Coca-Cola recently relaunched Blue Sky and Hansen’s. A few days later, PepsiCo launched the 1893 Original Cola and Ginger Cola lines, which are made with sparkling water, kola nut extract, and Fair Trade–certified sugar.

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 35Monster Beverage’s sales for Q3 2017 that ended September 30, 2017, increased 11.5 percent to \$2.6 billion from \$2.3 billion versus the prior year. Net income for Q3 was \$619.4 million, compared with \$539.7 million the prior year. Net sales for Monster’s Strategic Brands segment, which includes the various energy drink brands acquired from Coke, increased 6.2 percent to \$76.6 million for that Q3, up from \$72.1 million the prior year. Monster’s sales to customers outside the United States in-creased 36.3 percent to \$260.1 million in that Q3, up from \$190.8 million in the prior year period. Net income for Q3 increased 14.1 percent to \$218.7 million from \$191.6 million in the prior year period.The Nonalcoholic Beverage IndustryExhibit 11 reveals the annual growth (or decline) in various categories of beverages. Notice declines in sales of carbonated soft drinks and fruit drinks but rapid growth in sales of flavored and enhanced water and ready-to-drink coffee.Bottled WaterIn 2016, bottled water surpassed carbonated soft drinks as the largest beverage category in the United States by volume. Per-capita consumption of bottled water reached more than 39 gallons annually, compared with around 38.5 gallons for carbonated soft drinks. Within the next decade, bottled water consumption per capita is expected to surpass 50 gallons. The U.S. bottled water market showed strong growth in terms of volume and revenues in the past 3 years. Bottled water sales are booming, up 7.3, 7.9, and 8.6 percent in 2014, 2015, and 2016, respectively. By comparison, carbonated soft drink volumes declined 2.1, 2.4, and 0.8 percent during those same years. According to BMC, in 2017, bottled water sales are projected to grow 8 to 9 percent, remaining the top nonalcoholic bever-age for years to come, further confirmation of the shift in consumer preference toward healthier and lower-calorie options.Sparkling WaterSparkling water is projected to outpace even bottled water in the next decade as consumers search for tastier but healthier options. In fact, sparkling water sales surged more than 20 percent in 2017. Flavored sparkling water sales grew by more than 15 percent in 2017 to \$2.4 billion. To better reach this flavored sparking water market, early in 2018 PepsiCo released its seltzer water brand called Bubly. Other beverages also growing in sales are flavored and enhanced water, ready-to-drink coffee, and energy drinks. Specifically, sales of flavored and enhanced water in the United States increased 12.3 percent in 2016, followed by ready-to-drink coffee up 11 percent, and energy drinks up 4.8 percent.Given these positive trends, carbonated soft drinks still account for 83.5 percent of the bever-ages industry’s market capitalization as of September 2017. In 2016, soda consumption in the United States fell 0.8 percent, continuing the downward trend. Consequently, in Q2 2017, Coke reported a 16 percent drop in net revenues to \$9.7 billion. In that Q2, Coke reported increased volume for juice, dairy, and plant-based beverages (with 3% growth), tea and coffee (2%), as well as water, en-hanced water, and sports drinks (1%). Coke is shifting its portfolio toward smaller-sized packages and healthier beverages. In August 2017, Coke replaced its Coke Zero products with the zero-sugar and EXHIBIT 11 Annual Percentage Growth or Decline in Sales of Various Beverage Categories 2016 and 2015 in the United StatesFlavored & Enhanced Water+12.3Ready-to-Drink Coffee+11.0Bottled Water+8.6Energy Drinks+4.8Sports Drinks+3.9Ready-to-Drink Tea+3.1Carbonated Soft Drinks-0.8Fruit Drinks-1.4Total+ 3.4Source: Based on information developed by Beverage Marketing Corporation (BMC).

40 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTPitfalls1. Using strategic planning to gain control over decisions and resources2. Doing strategic planning only to satisfy accreditation or regulatory requirements3. Too hastily moving from mission development to strategy formulation4. Failing to communicate the plan to employees, who continue working in the dark5. Top managers making many intuitive decisions that conflict with the formal plan6. Top managers not actively supporting the strategic-planning process7. Failing to use plans as a standard for measuring performance8. Delegating planning to a “planner” rather than involving all managers9. Failing to involve key employees in all phases of planning10. Failing to create a collaborative climate supportive of change11. Viewing planning as unnecessary or unimportant12. Becoming so engrossed in current problems that insufficient or no planning is done13. Being so formal in planning that flexibility and creativity are stifledThe purpose of this exercise is to examine and discuss how potentially detrimental or severe the various pitfalls are in doing strategic planning. In addition, the purpose of this exercise is to examine whether individual decision making is better than group decision making. Academic research sug-gests that groups make better decisions than individuals about 80 percent of the time.Steps1. Fill in Column 1 in Table 1-9 to reveal your individual ranking of how potentially detrimental to strategic planning the pitfalls are, where 1 = most detrimental to 13 = least detrimental. For example, if you feel Pitfall 1 is the fifth most detrimental, then enter a 5 in Table 1 in Column 1 beside Pitfall 1.2. Fill in Column 2 in Table 1-9 to reveal your group’s ranking of the thirteen pitfalls.3. Fill in Column 3 in Table 1-9 to reveal the expert’s ranking of the thirteen pitfalls. (To be provided by your professor, the expert rankings are based on the authors’ experience and the end of the chapter.)4. Fill in Column 4 in Table 1-9 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.)TABLE 1-9 Pitfalls in Doing Strategic Planning: Comparing Individual versus Group Decision MakingPitfalls to Avoid In Column 1 Column 2 Column 3 Column 4 Column 5Doing Strategic Planning1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. SUM

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 415. Fill in Column 5 in Table 1-9 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.

94 PART 2 • STRATEGY FORMuLATION4StrategyFormulationFeedback Loop StrategyImplementationStrategyEvaluationChapter 10: Business Ethics, Environmental Sustainability, and Social ResponsibilityChapter 11: Global and International IssuesStrategyEvaluationandGovernanceChapter 9ImplementingStrategies:Finance and AccountingIssuesChapter 8ImplementingStrategies:Managementand MarketingIssuesChapter 7BusinessVision andMissionChapter 2Strategiesin ActionChapter 5StrategyAnalysis andChoiceChapter 6TheInternalAssessmentChapter 4The ExternalAssessmentChapter 3FIGURE 4-1The Comprehensive, Integrative Strategic-Management ModelSource: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1 (February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010): 20.

95ASSURANCE-OF-LEARNING EXERCISESThe following exercises are found at the end of this chapter:SET 1: Strategic Planning for Coca-ColaEXERCISE 4A: Perform a Financial Ratio Analysis for Coca-ColaEXERCISE 4B: Develop an IFE Matrix for Coca-ColaSET 2: Strategic Planning for My UniversityEXERCISE 4C: Construct an IFE Matrix for Your College or UniversitySET 3: Strategic Planning for MyselfEXERCISE 4D: Construct an IFE Matrix for YourselfSET 4: Individual versus Group Strategic PlanningEXERCISE 4E: What Internal Functional Areas Are Most Important to Examine in Strategic Planning?LEARNING OBJECTIVESAfter studying this chapter, you should be able to do the following: 4-1. Describe the nature and role of an internal assessment in formulating strategies. 4-2. Discuss the nature and role of management in formulating strategies. 4-3. Discuss the nature and role of marketing in formulating strategies. 4-4. Discuss the nature and role of finance and accounting in formulating strategies. 4-5. Discuss management information systems (MIS) in terms of formulating strategies. 4-6. Explain how to develop and use an Internal Factor Evaluation (IFE) Matrix.The Internal AssessmentMyLab Management Improve Your Grade!If your instructor is using MyLab Management, visit www.pearson.com/mylab/ management for videos, simulations, and writing exercises.

98 PART 2 • STRATEGY FORMuLATIONcontinually capitalize on its strengths and improve on its weaknesses to gain and sustain com-petitive advantage.ManagementThere are four basic activities that comprise management: planning, organizing, motivating, and controlling. An overview of these activities is provided in Table 4-1 because an organization should continually capitalize on its strengths and improve on its weaknesses in these four areas.LO 4.2ETHICS CAPSULE 4The Sagebrush Lizard versus the Big Oil ManThe state of Texas leads the United States in crude oil production. West Texas, in particular, is home to the largest oil deposit ever dis-covered in the continental United States. With an estimated 20 bil-lion barrels of oil, valued at more than \$900 billion, West Texas has become a mecca for oil and gas companies. Warm weather, a so-phisticated labor and equipment industry, and favorable geological formations all contribute to efficient drilling productions in West Texas. Numerous reservoirs can be drilled simultaneously through a process called fracking, in which a high-pressure mixture of water, sand, and chemicals is forcefully injected into the rock, causing gas to be released. Texas oil drilling helps oil and gas companies, boosts the Texas and U.S. economies, adds jobs, increases exports, reduces imports, and lowers gas prices for everybody. These touted benefits make the oil drilling seem like a good, ethical practice, but there is a dark side.What many don’t know is that the unique sand used in fracking in West Texas is also home to the dunes sagebrush lizard, a 3-inch long, tan-colored animal that lives only in a small portion of a few counties in West Texas and Southeastern New Mexico. The pretty, picky little lizard may soon be added to the federal endangered spe-cies list; more than half of the lizard’s habitat has been taken over by miners and drillers, such as big Ben Brigham. Brigham has made hun-dreds of millions of dollars as a Texas oilman and claims to be working with biologists to recreate the sagebrush lizard’s habitat and relocate the lizards to a new area that resembles the lizard’s home ecosystem. From an internal analysis perspective, do you think Brigham’s estab-lished oil-drilling operations and current production procedures that yield the benefits described offset the possibility of the sagebrush liz-ard becoming extinct? Investors, environmentalists, and policy makers are meeting in hopes of finding an appropriate solution.Source: Based on Christopher M. Matthews, “It’s Lizard vs. Oil Magnate In the Latest Fracking Fight,” Wall Street Journal, (October 14, 2017): A1, A10.I need help from people.TABLE 4-1 The Basic Functions of ManagementFunctionDescriptionStage of Strategic-Management Process When Most ImportantPlanningPlanning consists of all managerial activities related to preparing for the future, such as establishing objectives, devising strategies, and developing policies.Strategy FormulationOrganizingOrganizing includes all managerial activities that result in a structure of task and authority relationships, such as organizational design, job specialization, job descriptions, span of control, job design, and job analysis.Strategy ImplementationMotivatingMotivating involves efforts directed toward shaping human behavior, such as leadership, communication, teamwork, job enrichment, and human resource management (HRM).Strategy ImplementationControllingControlling refers to all managerial activities that compare actual results with planned results, such as quality control, financial control, inventory control, expense control, analysis of variances, rewards, and sanctions.Strategy EvaluationPetr Podrouzek/123RF

CHAPTER 4 • THE INTERNAL ASSESSMENT 101The production/operations portion of a business consists of all those activities that trans-form inputs (raw materials, labor, capital, machines, and facilities) into finished goods and ser-vices. The extent to which a manufacturing plant’s output reaches its full potential output is called capacity utilization, a key strategic variable. The higher the capacity utilization, the bet-ter; otherwise, equipment may sit idle. For example, if a manufacturing firm’s plants are averag-ing 60 percent capacity utilization, that would represent a severe weakness of the firm.As indicated in Table 4-3, Roger Schroeder suggests that production/operations comprises five decision areas: process, capacity, inventory, workforce, and quality. Production/operations activities often represent the largest part of an organization’s human and capital assets. In many industries, the major costs of producing a product are incurred within operations, so production/operations can have great value as a competitive weapon in a company’s overall strategy. Strengths and weaknesses in the five areas of production can mean the success or failure of an enterprise.Increasingly in production settings, a new breed of robots called collaborative machines are working alongside people. Priced as low as \$20,000 and becoming widely used even in small businesses, robots do not take lunch breaks or sick days or require health insurance, and they can work nonstop all night tirelessly if needed. Collaborative machines are more flexi-ble, often doing one task one day and a different task the next day. At Panek Precision Inc., a Northbrook, Illinois-based machine shop, Mr. Panek states, “Having robots has allowed us to move our existing workers into more useful tasks, such as monitoring more-advanced machines that require human tending.” Workers are generally quite receptive to collaborative machines, even giving them names, such as “Fred” at Stuller Inc., a jewelry factory in Lafayette, Louisiana, and “Baxter” at K’NEX Brands, a toy maker in Hatfield, Pennsylvania.4 Strengths and weak-nesses with respect to controlling could relate to (1) inventory turnover levels versus competitors, (2) how well or poorly the firm’s operations are performing across various geographical regions, and (3) how cost efficient the firm is in acquiring needed supplies.Integrating Strategy and CultureThe functions of management can be performed best when a firm’s strategy and culture are inte-grated. Every business entity has a unique organizational culture that impacts strategic-planning activities. Organizational culture is “a pattern of behavior that has been developed by an orga-nization as it learns to cope with its problem of external adaptation and internal integration, and that has worked well enough to be considered valid and to be taught to new members as the cor-rect way to perceive, think, and feel.”5 This definition emphasizes the importance of matching external with internal factors in making strategic decisions. Organizational culture captures the subtle, elusive, and largely unconscious forces that shape a workplace. Remarkably resistant to change, culture can represent a major strength or weakness for any firm.The strategic-management process takes place largely within a particular organization’s cul-ture. A culture ideally supports the collective commitment of its people to a common purpose. It must foster competence and enthusiasm among managers and employees. If strategies can capitalize on cultural strengths, such as a strong work ethic or highly ethical beliefs, then man-agement often can swiftly and easily implement changes. However, if the firm’s culture is not TABLE 4-3 The Basic Decisions Areas Within Production/OperationsDecision AreasExample Decisions1. ProcessRobotics, facility layout, process flow analysis, line balancing, process control, and transportation analysis.2. CapacityForecasting, facilities planning, aggregate planning, scheduling, capacity plan-ning, queuing analysis, and capacity utilization.3. InventoryLevel of raw materials, work-in-process, finished goods, what to order, when to order, how much to order, and materials handling.4. WorkforceManaging the skilled, unskilled, clerical, and managerial employees by caring for job design, work measurement, job enrichment, work standards, and moti-vation techniques.5. QualityQuality control, sampling, testing, quality assurance, and cost control.Source: Based on a variety of sources.

CHAPTER 4 • THE INTERNAL ASSESSMENT 1038. Are employee turnover and absenteeism low?9. Are organizational reward and control mechanisms effective?MarketingMarketing can be described as the process of defining, anticipating, and fulfilling consum-ers’ needs and wants. Marketing is about satisfying current and potential customers’ needs. Excellent marketing can provide firms with a competitive advantage. Table 4-5 lists compa-nies that lead their respective industries in customer satisfaction according to the American Customer Satisfaction Index (ACSI) that surveys around 180,000 U.S. customers each year.Marketing consists of five basic activities: (1) marketing research and target market analy-sis, (2) product planning, (3) pricing products, (4) promoting products, and (5) placing or distrib-uting products. Understanding these activities helps strategists identify and evaluate marketing strengths and weaknesses—a vital strategy-formulation activity.Marketing Research and Target Market AnalysisMarketing research is the systematic gathering, recording, and analyzing of data to identify and define opportunities and problems related to the marketing of goods and services. Marketing research is often used to help firms evaluate and formulate strategies. Marketing researchers employ numerous scales, instruments, procedures, concepts, and techniques to gather infor-mation; their research can uncover critical strengths and weaknesses. Organizations that pos-sess excellent marketing research skills have a competitive advantage. According to the former president of PepsiCo:Looking at the competition is the company’s best form of market research. The majority of our strategic successes are ideas that we borrow from the marketplace, usually from a small regional or local competitor. In each case, we spot a promising new idea, improve on it, and then out-execute our competitor.6An important use of marketing research involves target market analysis—the examina-tion and evaluation of consumer needs and wants. Marketing research involves methods such as administering customer surveys, analyzing consumer information, evaluating market positioning strategies, developing customer profiles, and determining optimal market segmentation strate-gies, all of which contribute to effective customer analysis.LO 4.3TABLE 4-5 Companies that Lead Their Industries in Customer Satisfaction According to the 2017 American Customer Satisfaction IndexCompanyIndustryJetBlueAirlineLexus (Toyota)AutomobilesDillard’sDepartment StoresCracker BarrelFull-Service RestaurantsLGHousehold AppliancesVanguardInternet Investment ServicesAmazonInternet RetailGoogleInternet Search Engines and InformationChick-fil-ALimited-Service RestaurantsCloroxCleaning ProductsApplePersonal ComputersAAAProperty and Casualty InsuranceTrader Joe’sSupermarketsSource: Based on information from http://www.theacsi.org/acsi-benchmarks/benchmarks-by-industry

104 PART 2 • STRATEGY FORMuLATIONSuccessful organizations continually monitor present and potential customers’ buying pat-terns and engage in extensive marketing research to understand the needs and wants of differ-ent segments of customers. Firms tailor their product offerings to fit the needs of their target market(s). Many companies have recently shifted their target markets to focus on younger con-sumers, and particularly millennials because these individuals now make up the largest group of U.S. consumers. For example, Home Depot, P&G, Williams-Sonoma Inc., Sherwin-Williams Co., and Scotts Miracle-Gro Company are now targeting millennials by offering online lessons aimed at teaching basic skills such as how to mow a lawn, use a tape measure, hammer a nail, and care for plants.With a clearly defined target market, marketers can best use their strategic toolbox to ensure that their firm’s offering delivers value to target customers. A clear understanding of a firm’s target market(s) serves as the foundation on which the marketing mix is designed. Commonly referred to as the “four Ps of marketing,” the marketing mix includes product, price, promotion, and place, as indicated in Table 4-6. Marketers design a marketing mix to fit the unique needs of each target market. Table 4-6 reveals key areas to consider when searching for and identifying possible strengths and weaknesses related to the marketing functional area of a firm.Product PlanningProducts can be physical goods, services, ideas, or anything a company offers to satisfy individual or business customer needs through the exchange process. Product planning includes devising warranties; packaging; determining product options, features, brand style, and quality; deleting old products; and providing customer service. Product planning is particularly important when a company is pursuing product development or diversification. In such cases, companies often must decide whether to extend an existing product line or create an entirely new product line. In implementing a product development strategy, the Campbell Soup Company, for example, may consider extending its line of soups by developing a new soup, or entering a new category of products by perhaps offering a marinade.One important part of product planning involves test marketing, which allows an organiza-tion to examine alternative marketing plans, learn about potential problems with the product, uncover ways to better market the product, or forecast future sales of new products. In conduct-ing a test-market project, an organization must decide how many cities to include, which cities to include, how long to run the test, what information to collect during the test, and what action to take after the test has been completed. Test marketing is used more frequently by consumer goods companies than industrial goods companies. The technique can enable an organization to avoid substantial losses by revealing weak products and ineffective marketing approaches before large-scale production begins.Another important part of product planning is research and development (R&D). Many firms today conduct no R&D, and yet many other companies depend on successful R&D activ-ities for survival. Firms pursuing a product-development strategy especially need to have a strong R&D orientation. High-tech firms, such as Microsoft, spend a much larger proportion of their revenues on R&D. A key decision for many firms is whether to be a “first mover” or a “fast follower” (i.e., spend heavily on R&D to be the first to develop radically new products, or spend less on R&D by imitating, duplicating, or improving on products after rival firms develop them).TABLE 4-6 The Marketing Mix Component VariablesProductPlacePromotionPriceQualityFeatures and optionsStyle and brandsPackagingProduct lineWarranty and servicesDistribution channelsDistribution coverageOutlet locationSales territoriesInventory levelsTransportation carriersAdvertisingPersonal sellingSales promotionPublicityLevelDiscountsAllowancesPayment termsSource: Based on a variety of sources.

CHAPTER 4 • THE INTERNAL ASSESSMENT 107Marketing Audit Checklist of QuestionsThe following types of questions about marketing must be examined in performing an internal assessment1. Are markets segmented effectively?2. Is the organization positioned well among competitors?3. Are present channels of distribution reliable and cost effective?4. Is the firm conducting and using market research effectively?5. Are product quality and customer service good?6. Are the firm’s products and services priced appropriately?7. Does the firm have an effective promotional strategy?8. Is the firm’s Internet presence excellent as compared to rivals?Finance and AccountingFinancial condition is often considered the single-best measure of a firm’s competitive position and overall attractiveness to investors. Table 4-7 lists top companies for financial strength according to the Drucker Institute, which assesses financial performance based on return on assets, return on equity, return on invested capital, market share and profits, as well as investors’ return on their shares. Note that Accenture PLC heads the list. Determining an organization’s financial strengths and weaknesses is essential in formulating strategies. A firm’s liquidity, leverage, working capital, profitability, asset utilization, cash flow, and equity can eliminate some strategies as being feasible alternatives. Financial factors often impact existing strategies and influence strategy-implementation plans.Finance and AccountingAccording to James Van Horne, finance and accounting activities can be categorized into three decision areas: the investment decision, the financing decision, and the dividend decision.8 The investment decision, also called capital budgeting, is the allocation and real-location of capital and resources to projects, products, assets, and divisions of an organization. After strategies are formulated, capital budgeting decisions are required to successfully imple-ment strategies. The financing decision determines the best capital structure for the firm and includes examining various methods by which the firm can raise capital (for example, by issuing stock, increasing debt, selling assets, or using a combination of these approaches). The financing decision must consider both short-term and long-term needs for working capital. Two key finan-cial ratios that indicate whether a firm’s financing decisions have been effective are the debt-to-equity ratio and the debt-to-total-assets ratio.LO 4.4TABLE 4-7 A Sampling of Top Companies for Financial StrengthCompanyNumber of Employees2017 Revenues (in billions)Accenture PLC425,000\$34.8Altria Group, Inc.8,300\$25.7Apple Inc.123,000\$215.6Berkshire Hathaway, Inc.45,500\$223.6Home Depot, Inc.406,000\$94.5Mastercard, Inc.11,900\$10.7P&G Company95,000\$65.0Starbucks Corporation254,000\$21.3United Parcel Service, Inc.434,000\$60.9Verizon Communications, Inc.160,900\$125.9Walmart, Inc.2,300,000\$482.1Source: Based on Ezequiel Minaya, “Consumer-Goods Firms Shine in Financial Category,” Wall Street Journal, (December 6, 2017): R2.

108 PART 2 • STRATEGY FORMuLATIONDividend decisions concern issues such as the dollar amount per share to pay quarterly to stock-holders, the stability of dividends paid over time, and the repurchase or issuance of stock. Dividend decisions determine the amount of funds that are retained in a firm compared to the amount paid out to stockholders. Three financial ratios that are helpful in evaluating a firm’s dividend decisions are the earnings-per-share ratio, the dividends-per-share ratio, and the price-earnings ratio. The benefits of paying dividends to investors must be balanced against the benefits of internally retaining funds, and there is no set formula on how to balance this trade-off. Sometimes to appease shareholders, dividends are paid out (1) even when the firm has incurred a negative annual net income, (2) even when the firm has to obtain outside sources of capital to pay for the dividends, and (3) even when the funds were needed as reinvestment in the business. Reasons for this practice are as follows:1. Paying cash dividends is customary for some firms. Failure to do so could be thought of as a stigma. A dividend change is a signal about the future.2. Dividends represent a sales point for investment bankers. Some institutional investors can buy only dividend-paying stocks.3. Shareholders often demand dividends, even in companies with great opportunities for rein-vesting all available funds.4. A myth exists that paying dividends will result in a higher stock price.Financial RatiosFinancial ratio analysis is the most widely used method for determining an organization’s streng-ths and weaknesses in the investment, financing, and dividend areas. Because the functional areas of business are so closely related, financial ratios can actually signal strengths or weaknesses anywhere up and down a firm’s value chain from suppliers through production to distribution.Financial ratios are computed from an organization’s income statement and balance sheet. Computing financial ratios is like taking a photograph: The results reflect a situation at just one point in time. Comparing ratios over time and to industry averages is more likely to result in meaningful statistics that can be used to identify and evaluate strengths and weaknesses. Financial ratio trend analysis, illustrated in Figure 4-2, is a useful technique that incorporates both the time and industry average dimensions of financial ratios. Note that the dotted lines reveal projected ratios.Financial ratios are equally applicable in for-profit and nonprofit organizations, but the ratios vary considerably across types of industries. Even though nonprofit organizations would not have return-on-investment or earnings-per-share ratios, they would routinely monitor many other special ratios. For example, a church would monitor the ratio of dollar contributions to the number of members, whereas a zoo would monitor dollar food sales to number of visitors. A university would monitor number of students divided by number of professors. Nonprofit organizations because strive to be financially sound just as for-profit firms do. Nonprofit organi-zations need strategic planning just as much as for-profit firms.Financial ratio analysis should be conducted on three separate fronts:1. How has each ratio changed over time? This information provides a means of evaluating historical trends. Examine whether each ratio has been historically increasing, decreasing, or nearly constant. Analysts often calculate the percentage change in a ratio from one year to the next to assess historical financial performance on that dimension. Large percentage changes can be especially relevant, but be mindful that if base numbers are small then large percentage changes can ensue more easily.2. How does each ratio compare to industry norms? A firm’s inventory turnover ratio may appear impressive at first glance but may pale when compared to industry standards or norms. Industries can differ dramatically on certain ratios. For example, grocery companies have a high inventory turnover, whereas automobile dealerships have a lower turnover. Therefore, comparison of a firm’s ratios within its particular industry can be essential in determining strengths and weaknesses.3. How does each ratio compare with key competitors? Often competition is more intense between several competitors in a given industry or location than across all rival firms in the industry. When this is true, financial ratio analysis should include comparison to those key competitors. For example, if a firm’s profitability ratio is trending up over time and compares favorably to the industry average, but it is trending down relative to its leading competitor, there may be reason for concern.

CHAPTER 4 • THE INTERNAL ASSESSMENT 109Excellent free online and subscription (fee-based) resources for obtaining financial information about firms and industries are provided in Table 4-8. Some sources listed provide financial ratios. The free Excel template at www.strategyclub.com calculates ratios once students enter in rel-evant data.Financial ratio analysis is not without some limitations. For example, financial ratios are based on accounting data, and firms differ in their treatment of such items as depreciation, inven-tory valuation, R&D expenditures, pension plan costs, mergers, and taxes. Also, seasonal factors can influence comparative ratios. Therefore, conformity to industry composite ratios does not establish with certainty that a firm is performing normally or that it is well managed. Likewise, departures from industry averages do not always indicate that a firm is doing especially well or badly. For example, a high inventory turnover ratio could indicate efficient inventory manage-ment and a strong working capital position, but it also could indicate a serious inventory shortage and a weak working capital position.Another limitation of financial ratios in terms of including them as key internal factors in the upcoming IFE Matrix is that financial ratios are not very “actionable” in terms of reveal-ing potential strategies needed (i.e., because they generally are based on performance of the overall firm). For example, to include as a key internal factor that the firm’s “current ratio increased from 1.8 to 2.1” is not as actionable because the factor does not specify which cur-rent assets or current liabilities were most significant in contributing to the change. In contrast, a factor such as “the firm’s fragrance division revenues increased 18 percent in Africa in 2018” would be considerably more actionable because more insight is provided as to actions needed to address the issue. Recall from the prior chapter the importance of factors being stated in actionable terms. The AQCD (actionable-quantitative-comparative-divisional) Test discussed in the prior chapter for performing an external assessment is equally important in performing an internal assessment.Table 4-9 provides a summary of key financial ratios showing how each ratio is calculated and what each ratio measures. However, all the ratios are not significant for all industries and companies. For example, accounts receivable turnover and average collection period are not 5.04.03.02.01.00.02017Current ratio2017Profit margin10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 020182019202020212018201920202021Industry averageCompanyCompanyIndustry averageFIGURE 4-2Financial Ratio Trend Analysis

110 PART 2 • STRATEGY FORMuLATIONmeaningful to a company that takes only cash receipts. As indicated in Table 4-9, key financial ratios can be classified into the following five types: liquidity (how is the firm’s cash position), leverage (how is the firm’s debt position), activity (how efficient is the firm’s operations), profit-ability (how is the firm performing), and growth (is the firm meeting shareholders’ expectations).Finance and Accounting Audit ChecklistStrengths and weaknesses in finance and accounting commonly arise from answering the follow-ing types of questions:1. Where is the firm financially strong and weak as indicated by financial ratio analysis?2. Can the firm raise needed short-term capital?3. Should the firm raise needed long-term capital through debt or equity?4. Does the firm have sufficient working capital?5. Are capital budgeting procedures effective?6. Are dividend payout policies reasonable?7. Does the firm have excellent relations with its investors and stockholders?8. Are the firm’s financial managers experienced and well trained?9. Is the firm’s debt situation excellent?TABLE 4-8 Excellent Websites to Obtain Strategic Information (Including Financial Ratios) on Companies and Industries1. Online Free Resources.a. Form 10K or Annual Reportb. http://finance.yahoo.comc. www.hoovers.comd. http://globaledge.msu.edu/industries/e. www.morningstar.com2. Online Subscription Resources (Likely Subscribed to by Your University Library)a. Mergent Online: www.mergentonline.com At this website, financial statements seem to be more complete than at other sites. You can also search for companies with the same SIC or NAICS code and then create a comparison financial ratio report. A number of different ratios can be used as comparison criteria to create a tailored report that can then be exported into a Microsoft Excel format. Alternatively, use the Competi-tors Tab in Mergent to build a list of companies and compare their ratios. Your college library likely subscribes to this service.b. Factiva: http://new.dowjones.com/products/factiva/ At this website, first use the Companies & Markets tab to search for a company. Next, click “Reports” and choose the “Ratio Comparison Report” to get a company’s ratios compared to industry averages. Your college library likely subscribes to this service.c. S&P NetAdvantage: http://www.standardandpoors.com/products-services/industry_surveys/en/us This website provides company and industry ratios and information in two sections of the da-tabase: (1) the Compustat Excel Analytics section of a particular company’s information page and (2) the S&P Industry Surveys.d. Onesource: www.avention.com/OneSource This is a widely used source for financial ratio information. Search for a particular company and then click on the link for “Ratio Comparisons” on the left side of the company information page. The data in Onesource will compare your company against the industry, against the sec-tor, and against the stock market as a whole.e. Yahoo Industry Center: http://biz.yahoo.com/ic/ This is an excellent free resource that allows a user to browse industries by performance rank-ings, including return on equity, price-earnings ratio, market cap, price change, profit margin, price-to-book value, long-term debt, and more.3. Hardcopy Reference Books for Financial Ratios in Most Librariesa. Robert Morris Associate’s Annual Statement Studies: An excellent source of financial ratio information.b. Dun & Bradstreet’s Industry Norms & Key Business Ratios: An excellent source of financial ratio information.Source: Based on a variety of sources.

CHAPTER 4 • THE INTERNAL ASSESSMENT 111TABLE 4-9 A Summary of Key Financial RatiosRatioHow CalculatedWhat It MeasuresI. Liquidity RatiosCurrent RatioCurrent assetsCurrent liabilitiesThe extent to which a firm can meet its short-term obligationsQuick RatioCurrent assets minus inventoryCurrent liabilitiesThe extent to which a firm can meet its short-term obligations without relying on the sale of its inventoriesII. Leverage RatiosDebt-to-Total-Assets RatioTotal debtTotal AssetsThe percentage of total funds provided by creditorsDebt-to-Equity RatioTotal debtTotal stockholders’ equityThe percentage of total funds provided by creditors versus by ownersLong-Term Debt-to-Equity RatioLong-term debtTotal stockholders’ equityThe balance between debt and equity in a firm’s long-term capital structureTimes-Interest-Earned RatioProfits before interest and taxesTotal interest chargesThe extent to which earnings can decline without the firm becoming unable to meet its annual interest costsIII. Activity RatiosInventory TurnoverCOGS/InventoryWhether a firm holds excessive stocks of inventories and whether a firm is slowly selling its inventories compared to the industry averageFixed Assets TurnoverSalesFixed assetsSales productivity and plant and equipment utilizationTotal Assets TurnoverSalesTotal assetsWhether a firm is generating a sufficient volume of business for the size of its asset investmentAccounts Receivable TurnoverSales/Accounts ReceivableThe average length of time it takes a firm to collect credit sales (in percentage terms)Average Collection PeriodAccounts receivableTotal credit sales/365 daysThe average length of time it takes a firm to collect on credit sales (in days)IV. Profitability RatiosGross Profit MarginGross Profit/SalesThe total margin available to cover operating expenses and yield a profitOperating Profit MarginEarning before interest and taxes EBITSalesProfitability without concern for taxes and interestNet Profit MarginNet incomeSalesAfter-tax profits per dollar of salesReturn on Total Assets (ROA)Net incomeTotal assetsAfter-tax profits per dollar of assets; this ratio is also called return on investment (ROI)Return on Stockholders’ Equity (ROE)Net IncomeTotal stockholders’ equityAfter-tax profits per dollar of stockholders’ investment in the firmEarnings Per Share (EPS)Net incomeNumber of shares of common stock outstandingEarnings available to the owners of common stockPrice-Earnings RatioMarket price per shareEarnings per shareAttractiveness of firm on equity marketsV. Growth RatiosSalesAnnual percentage growth in total salesFirm’s growth rate in salesNet IncomeAnnual percentage growth in profitsFirm’s growth rate in profitsEarnings Per ShareAnnual percentage growth in EPSFirm’s growth rate in EPSDividends Per ShareAnnual percentage growth in dividends per shareFirm’s growth rate in dividends per share

114 PART 2 • STRATEGY FORMuLATIONSteps in Developing an IFE MatrixAn internal strategic-management audit includes development of an Internal Factor Evaluation (IFE) Matrix. This strategy-formulation tool weights and rates major strengths and weaknesses in the functional areas of a business, providing a total weighted score indicating the overall strength of a firm’s internal position. The IFE Matrix is an evaluation of the effectiveness of the firm’s current strategies, not taking into account opportunities and threats. The purpose of the IFE Matrix and the internal assessment as a whole is to determine how effective the firm’s cur-rent strategies are based on the firm’s strengths and weaknesses.Strategists analyze the firm’s response to key strengths and weaknesses (the ratings in step 3) in relation to the importance of these factors within the industry it operates (the weights in step 2). The resulting total weighted score (step 5) indicates the internal effectiveness of the current strategy. The IFE Matrix total weighted score is suggestive of whether a continuation of strategy is needed (scores above 2.5) or a change in strategy is warranted (scores below 2.5). Used in conjunction with the EFE Matrix and CPM discussed in Chapter 3, the IFE Matrix provides the input needed to perform strategy-matching analyses described in Chapter 6.An IFE Matrix can be developed in five steps:Step 1: Develop a Full and Narrow List of Key Internal FactorsConduct research about the focal company using the resources listed in Table 4.8. Compile and organize information into two data sets, strengths and weaknesses, developing a full list of perhaps 50 to 100 strength and weakness factors. Be sure to include factors from management, marketing, finance, accounting, and MIS that are of strategic importance. Then, narrow your data sets down to 20 key internal factors that include specifically 10 strengths and 10 weak-nesses. (Note: We use 10 and 10 because organizations commonly use this breakdown and the template at www.strategyclub.com uses 10 and 10). List strengths first and then weaknesses.Firms determine the most important 20 factors among a full list usually by rating the factors according to importance (1 = least important to 10 = most important) and consolidating the rat-ing data or by ranking the factors (1 = most important to 50 = least important) and consolidating the ranking data. Both methods will yield the 20 most important factors to include. The impor-tant point here is that companies (and students) never should include just the first 20 factors that come to mind. For example, a student recently included as a weakness in her IFE Matrix for a college that “there are feral cats on campus”; 99 percent of the time that factor should not be included in the matrix. Instead, conduct research to identify internal factors that relate to the university’s vision, mission, strategies, and competitive advantages.When determining particular factors to include in an IFE Matrix and when assigning weights and ratings, focus on a narrow industry perspective. Within the narrow industry, consider the vision and mission of the firm, and the firm’s current strategies (i.e., when selecting factors and assigning weights and ratings). For example, for McDonald’s, the industry is fast-food restau-rants, rather than restaurants in general, and for Porsche, the industry is luxury sports cars, not simply automobiles. This narrow industry perspective is important, as indicated in Table 4-10.Step 2: Assign Weights to Key Internal FactorsIn developing an IFE Matrix, assign a weight that ranges from 0.01 (not important) to 1.0 (all-important) for each factor. The weight assigned to a given factor indicates the relative impor-tance of the factor for being successful in the firm’s industry relative to other factors included in the IFE. For example, a factor receiving a weight of 0.04 is 100 percent more important than a factor receiving a weight of 0.02 for success in the industry. Regardless of whether a key fac-tor for a particular firm is a strength or weakness, factors considered to have the greatest effect on organizational performance of all firms in a specific industry should be assigned the highest weights. The sum of all weights must equal 1.0. Do not try to even weights out to total 0.50 for strengths and 0.50 for weaknesses. Weights are industry-based, not company-based. List strengths from highest weight to lowest weight; do the same for weaknesses.Step 3: Assign Ratings to Key Internal FactorsIn developing an IFE Matrix, assign a rating between 1 and 4 to each key internal factor to indicate how effectively (or ineffectively) the firm’s strategies are responding to the strength

116 PART 2 • STRATEGY FORMuLATIONAn Example IFE MatrixAn example IFE Matrix is provided in Table 4-11 for a retail computer store. The table reveals that the two most important factors to be successful in the retail computer store business (as indicated by the highest weighted factors) are Strength #1: “Revenues from repair/service in the store,” and Weakness #1: Location of store negatively impacted by new Highway 34. Note that among the strengths, the store’s strategies are not responding well (rating is 2) to two factors: “Average customer purchase increased from \$97 to \$128” and “Debt-to-total assets ratio declines to 34%,” as indicated by the assigned 2 ratings. Regarding the store’s weaknesses, note that the owner’s strategies are responding “superior” to two factors: (1) “Location of store negatively impacted by new Highway 34,” as indicated by the rating of 4 (because plans are underway to perhaps relocate the store), and (2) “Bathroom needs refurbishing,” as indicated by the rating of 4 (because the bathroom is in the process of being remodeled). Note that the store’s IFE Matrix overall contains numerous dollars, numbers, percentages, and ratios, rather than vague statements; this is excel-lent. This store receives a 2.73 total weighted score, which on a 1- to 4-scale, indicates some suc-cess but there is room for improvement in store operations, strategies, policies, and procedures.Coupled with the EFE Matrix, the IFE Matrix provides important information for strategy formulation. For example, this retail computer store might want to hire another checkout person and repair its carpet and paint. Also, the store may want to increase advertising for its repair/ser-vices, because that is a really important (weight 0.15) factor to being successful in this business.In multidivisional firms, each autonomous division or strategic business unit should con-struct their own IFE Matrix (and their own EFE Matrix). Divisional matrices then can be inte-grated to develop an overall corporate IFE Matrix. Be as divisional as possible when developing a corporate IFE Matrix. Also, in developing an IFE Matrix, do not allow more than 30 percent of the key factors to be financial ratios. Financial ratios are generally the result of many fac-tors, so it is difficult to know what particular strategies should be considered based on financial ratios. For example, a firm would have no insight on whether to sell in Brazil or South Africa to take advantage of a high corporate ROI ratio.TABLE 4-11 Sample Internal Factor Evaluation Matrix for a Retail Computer StoreKey Internal FactorsWeightRatingWeighted ScoreStrengths1. Revenues from repair/service in the store up 16%.0.1530.452. Employee morale is excellent.0.1030.303. Average customer purchase increased from \$97 to \$128.0.0720.144. In-store promotions resulted in 20% increase in sales.0.0530.155. In-store technical support personnel have MIS college degrees.0.0540.206. Inventory turnover increased from 5.8 to 6.7.0.0530.157. Debt-to-total assets ratio declines to 34%.0.0320.068. Newspaper advertising expenditures increased 10%.0.0230.069. Revenues per employee up 19%.0.0230.06Weaknesses1. Location of store negatively impacted by new Highway 34.0.1540.602. Revenues from software segment of store down 12%.0.1020.203. Often customers wait 15 minutes to check out.0.0510.054. Store has no website.0.0520.105. Revenues from service segment down 8%.0.0410.046. Supplier on-time delivery increased to 2.4 days.0.0310.037. Carpet and paint in store somewhat in disrepair.0.0230.068. Bathroom in store needs refurbishing.0.0240.08Total1.002.73

CHAPTER 4 • THE INTERNAL ASSESSMENT 117IMPLICATIONS FOR STRATEGISTSFigure 4-3 illustrates that to gain and sustain competitive advantages, a firm must formulate strategies that capitalize on internal strengths and continually improve on its internal weaknesses. Firms must nurture and build on competitive advantages embedded largely within the list of strengths included in an IFE Matrix. Coupled with the vision or mission and external audit, the internal audit must be performed methodically and carefully because survival of the firm could hinge on the strategic plan that ensues from these assessments. Do not let assignment of weights and ratings become based on mere guessing, emotion, and opinion; use the sources of information mentioned in this chapter and others to extract actionable, quantitative, comparative, divisional, fac-tors for inclusion in matrices. Use the AQCD Test as a guide for devel-oping effective, useful strength and weakness factors.The Process of Performing an Internal AuditThe process of performing an internal audit closely parallels the process of performing an external audit. Representative managers and employees throughout the firm need to be involved in deter-mining a firm’s strengths and weaknesses. The internal audit requires gathering, assimilating, and prioritizing information about the firm’s management, marketing, finance, accounting, production, and MIS operations to reveal the firm’s most important strengths and most severe weaknesses.Compared to the external audit, the process of performing an internal audit provides more opportunity for participants to under-stand how their jobs, departments, and divisions fit into the whole organization. This is a great benefit because managers and employ-ees perform better when they understand how their work affects other areas and activities of the firm. For example, when marketing and manufacturing managers jointly discuss issues related to inter-nal strengths and weaknesses, they gain a better appreciation of the issues, problems, concerns, and needs of all the functional areas. Thus, performing an internal audit is an excellent vehicle or forum for improving the process of communication in an organization.Establish A ClearVision & MissionEvaluate & MonitorResults:Take CorrectiveActions; AdaptTo ChangeGain & SustainCompetitiveAdvantagesFormulate Strategies:Collect, Analyze, &Prioritize Data UsingMatrices; Establish AClear Strategic PlanImplement Strategies:Establish Structure;Allocate Resources;Motivate & Reward;Attract Customers;Manage FinancesFIGURE 4-3How to Gain and Sustain Competitive Advantages

CHAPTER 4 • THE INTERNAL ASSESSMENT 119Key Terms and Conceptsactivity ratios (p. 111)business analytics (p. 112)capacity utilization (p. 101)capital budgeting p. (107)channel of distribution (p. 106)collaborative machines (p. 101)controlling (p. 100)data mining (p. 112)distinctive competencies (p. 97)dividend decisions (p. 108)empirical indicators (p. 97)financial ratio analysis (p. 108)financing decision (p. 107)growth ratios (p. 111)human resource management (HRM) (p. 100)internal audit (p. 117)Internal Factor Evaluation (IFE) Matrix (p. 114)investment decision (p. 107)leverage ratios (p. 111)liquidity ratios (p. 111)management (p. 98)management information system (MIS) (p. 112)marketing (p. 103)marketing research (p. 103)motivating (p. 99)organizational culture (p. 101)organizing (p. 99)planning (p. 99)production/operations (p. 101)profitability ratios (p. 111)promotion (p. 105)resource-based view (RBV) (p. 97)synergy (p. 99)target market analysis (p. 103)test marketing (p. 104)Issues for Review and Discussion 4-1. Explain why strengths are more important than weaknesses in strategic planning. 4-2. What is bitcoin? Explain how to use bitcoin. 4-3. Do strengths always receive higher weights than weaknesses? Explain why. 4-4. Do strengths always receive higher ratings than weaknesses? Explain why. 4-5. Should assignment of weights down an IFE Matrix weight column be contingent on “intensity of industry rivalry”? Discuss. 4-6. Explain why it is so important to focus on a firm’s narrow industry rather than its broader industry in developing an IFE Matrix. 4-7. Explain the concept of factors being “actionable.” 4-8. Explain why companies develop a list of 50 to 100 internal factors before distilling the list to 20 to include in an IFE Matrix. 4-9. Describe two ways how a firm can determine from a list of 50 to 100 internal factors the 20 most important factors to include in an IFE Matrix. 4-10. Discuss strategic implications of a firm receiving a total weighted IFE Matrix score of 1.5 versus 3.5. 4-11. If IFE Matrix strength factor 4 receives a rating of 4 what does that signify for the analyst? If weakness factor 4 receives a rating of 4 what does that signify? 4-12. The primary means for gaining and sustaining com-petitive advantages for most companies are shifting downstream. Explain and discuss this statement. 4-13. In analyzing big data, there is a shift from focusing largely on aggregates or averages to also focusing on outliers because outliers oftentimes reveal (predict) critical innovations, trends, disruptions, and revolu-tions on the horizon. Explain and discuss this statement. 4-14. What are some limitations of financial ratio analysis? 4-15. Does RBV theory determine diversification targets? Explain and discuss. 4-16. True or False: Personal selling is typically more useful for industrial-goods companies, whereas advertising is typically more effective for consumer-goods companies. Explain. 4-17. What are “collaborative machines”? 4-18. Identify some excellent online resources for finding financial ratio information. 4-19. How might elements of the marketing mix, particularly “price” and “place” vary for common household goods versus luxury products? 4-20. Is a capacity utilization rate of 50 percent good? Why? 4-21. Explain why communication may be the most important word in management. What do you think is the most im-portant word in marketing? In finance? In accounting?

CHAPTER 4 • THE INTERNAL ASSESSMENT 1234. Fill in Column 4 in Table 4-12 to reveal the absolute difference between Column 1 and Column 3 to reveal how well you performed as an individual in this exercise. (Note: Absolute difference disregards negative numbers.)5. Fill in Column 5 in Table 4-12 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 4-12 Internal Functional Area Analysis: Comparing Individual versus Group Decision MakingInternal Functional Areas Column 1 Column 2 Column 3 Column 4 Column 51. Management2. Marketing3. Finance4. Accounting5. MISSumsMINI-CASE ON PROCTER & GAMBLE (P&G) COMPANYWHAT COMPANY IS BEST MANAGED IN THE UNITED STATES?The answer could be P&G. Ratings by the Drucker Institute on overall corporate effectiveness show that P&G is certainly among the most effectively managed firms in the United States. P&G CEO, David Taylor, explains that, “Every day P&G people work to serve consumers with superior brands and reward shareholders with balanced, sustainable long-term growth and value creation. This rec-ognition is further validation that we are on the right track.”The Drucker Institute analyzes performance of companies across the functional areas of busi-ness, including more than 35 metrics, such as market-share data, patents, and employee ratings. Information is collected and analyzed to determine how well companies are doing according to Drucker’s core principles: customer satisfaction, financial strength, employee development, inno-vation, and corporate social responsibility. P&G received exceptionally high scores on innovation, social responsibility, and financial strength.P&G competes in the consumer-products industry. The company’s finance chief, Jon Moeller, explains that P&G wants to focus on product categories that are used daily, such as toothpaste and soap, so of late has narrowed its product mix, disposing of underperforming brands and cutting back from more than 100 brands to around 65. Simultaneously, P&G has cut over 20,000 jobs and trimmed nearly \$10 billion in costs. P&G puts its cash to good use and is considered a “dividend king” by some experts. P&G Chief Information Officer, Javier Polit, explained that “What was pre-viously cost-prohibitive is now cost-effective with the use of the cloud. We’re about to forecast now in ways we couldn’t before. We’ve seen improvements in regard to the quantity of raw materials we buy, and the costs associated with ship and restock.”Midosemsem/123RF

124 PART 2 • STRATEGY FORMuLATIONAs stated by CEO David Taylor, “it is a combination of a few key capabilities that determine whether any company will be successful, especially “superior products that delight customers,” “ex-emplary technology,” and what underpins it all is “acquiring the best people.”Questions1. Consider the following two-dimensional matrix with weights on the y-axis and ratings on the x-axis as given in Figure 4-4. What are example strengths and weaknesses that could possibly characterize P&G in the four corners of the matrix? Develop a hypothetical strength and weak-ness for P&G that could be positioned in each of the four corners of the matrix. Give a support-ing rationale for each factor. Which corner of the matrix do you think characterizes factors most commonly in an IFE Matrix? Why? Which corner of the matrix do you think characterizes fac-tors least commonly in an IFE Matrix? Why? What could you say about the middle of the matrix in terms of factors commonly included in an IFE Matrix?Strength 1Weakness 1Strength 2Weakness 2Strength 3Weakness 3RATINGSHighHighLowLowWEIGHTSMiddleStrength 4Weakness 4FIGURE 4-4A Weights-by-Ratings Matrix to Exemplify IFE Matrix LogicNote: A purpose of this mini-case is to give students practice thinking about when, in developing an IFE Matrix, could a particular factor receive the following weights and ratings:1. a low weight and high rating2. a high weight and high rating3. a low weight and low rating4. a high weight and low ratingSource: Company documents and a variety of sources including Sara Castellanos, “Tech Innovation Isn’t Just for Tech Firms,” Wall Street Journal, (December 6, 2017): R6, and Vanessa Fuhrmans and Yoree Koh, “The Most Effectively Managed U.S. Companies and How They Got That Way,” Wall Street Journal, (December 6, 2017): R1–R2.Web Resources1. See Table 4-8 on page 110.Current ReadingsArora, Ashish, Sharon Belenzon, and Andrea Patacconi. “The Decline of Science in Corporate R&D.” Strategic Manage-ment Journal 39, Issue 1 (January 2018): 3–32.Bridoux, Flore, Régis Coeurderoy, and Rodolphe Durand. “Heterogeneous Social Motives and Interactions: The Three Predictable Paths of Capability Development.” Strategic Management Journal 38, no. 9 (September 2017): 1755–1773.Chatain, Oliver and Denisa Mindruta. “Estimating Value Creation from Revealed Preferences: Application to Value-based Strategies.” Strategic Management Journal 38, no. 10 (October 2017): 1964–1985.David, Fred R., Meredith E. David, and Forest R. David. “The Integration of Marketing Concepts in Strategic Management Courses: An Empirical Analysis.” SAM Advanced Management Journal 82, no. 1 (Winter 2017): 26–47.

64 PART 2 • STRATEGY FORMuLATION64StrategyFormulationFeedback Loop StrategyImplementationStrategyEvaluationChapter 10: Business Ethics, Environmental Sustainability, and Social ResponsibilityChapter 11: Global and International IssuesStrategyEvaluationandGovernanceChapter 9ImplementingStrategies:Finance and AccountingIssuesChapter 8ImplementingStrategies:Managementand MarketingIssuesChapter 7BusinessVision andMissionChapter 2Strategiesin ActionChapter 5StrategyAnalysis andChoiceChapter 6TheInternalAssessmentChapter 4The ExternalAssessmentChapter 3FIGURE 3-1The Comprehensive, Integrative Strategic-Management ModelSource: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1 (February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010): 20.3

65LEARNING OBJECTIVESAfter studying this chapter, you should be able to do the following: 3-1. Describe the nature and purpose of an external assessment in formulating strategies. 3-2. Identify and discuss 10 external forces that impact organizations. 3-3. Explain Porter’s Five-Forces Model and its relevance in formulating strategies. 3-4. Describe key sources of information for identifying opportunities and threats. 3-5. Discuss forecasting tools and techniques. 3-6. Explain how to develop and use an External Factor Evaluation (EFE) Matrix. 3-7. Explain how to develop and use a Competitive Profile Matrix (CPM).The External AssessmentASSURANCE-OF-LEARNING EXERCISESThe following exercises are found at the end of this chapter:SET 1: Strategic Planning for Coca-ColaEXERCISE 3A: Develop an EFE Matrix for Coca-ColaEXERCISE 3B: Develop a Competitive Profile Matrix for Coca-ColaSET 2: Strategic Planning for My UniversityEXERCISE 3C: Develop an EFE Matrix for Your College or UniversityEXERCISE 3D: Develop a Competitive Profile Matrix for Your College or UniversitySET 3: Strategic Planning to Enhance My EmployabilityEXERCISE 3E: How Competitive Is Your State Among All States for Finding a Job?EXERCISE 3F: Compare and Contrast CareerBuilder, Glassdoor, Monster Jobs, and ZipRecruiterEXERCISE 3G: A Template Competency TestSET 4: Individual versus Group Strategic PlanningEXERCISE 3H: What External Forces Are Most Important in Strategic Planning?MyLab Management Improve Your Grade!If your instructor is using MyLab Management, visit www.pearson.com/mylab/management for videos, simulations, and writing exercises.

CHAPTER 3 • THE ExTERNAL ASSESSMENT 67The External Assessment Phase of Strategy FormulationThe purpose of an external audit is to develop a finite list of both opportunities that could benefit a firm and threats that should be avoided or mitigated. As the term finite suggests, the external audit is not aimed at developing an exhaustive list of every possible factor that could influence the busi-ness; rather, it is aimed at identifying key variables that offer actionable responses. Firms should be able to respond either offensively or defensively to the factors by formulating strategies that capitalize on external opportunities or that minimize the impact of potential threats. Figure 3-1 illustrates with white shading how the external audit fits into the strategic-management process.Key External ForcesThere are 10 external forces that can be divided into 5 broad categories: (1) economic forces; (2) social, cultural, demographic, and environment (SCDE) forces; (3) political, governmen-tal, and legal forces; (4) technological forces; and (5) competitive forces. Relationships among these forces and an organization are depicted in Figure 3-2. External trends and events, such as increasing security concerns surrounding big data, changing consumer demand surrounding authenticity and personalization, and people in developing countries learning about online ser-vices, significantly affect products, services, markets, and organizations worldwide.The Actionable-Quantitative-Comparative-Divisional (AQCD) TestWhen identifying and prioritizing key external factors in strategic planning, make sure the fac-tors selected meet the following four criteria to the extent possible:1. Actionable (i.e., meaningful and helpful in ultimately deciding what actions or strategies a firm should consider pursuing);2. Quantitative (i.e., include percentages, ratios, dollars, and numbers to the extent possible);3. Comparative (i.e., reveals changes over time), and4. Divisional (relates to the firm’s products and/or regions (rather than consolidated) so infer-ences can be drawn regarding what products and regions are doing well or not).Factors that meet the four criteria described above pass what can be called the “Actionable-Quantitative-Comparative-Divisional (AQCD) Test,” which is a measure of the quality of an external factor. In addition to passing the AQCD Test, make sure that external factors are indeed external (not internal), and make sure that external factors, particularly opportunities, are stated as external trends, events, or facts, rather than being stated as strategies the firm could pursue. Also, make sure the external LO 3.1CompetitorsSuppliersDistributorsCreditorsCustomersEmployeesCommunitiesManagersStockholdersLabor unionsGovernmentsTrade associationsSpecial interest groupsProductsServicesMarketsNatural environmentAN ORGANIZATION’SOPPORTUNITIES ANDTHREATSEconomic forcesSocial, cultural, demographic, andnatural environment forcesPolitical, legal, and governmental forcesTechnological forcesCompetitive forcesFIGURE 3-2Relationships Between Key External Forces and an Organization

68 PART 2 • STRATEGY FORMuLATIONfactors relate closely to the firm achieving its mission (opportunities) or hindering its mission (threats). Factors selected for inclusion in an external assessment should be mission-driven.Regarding the AQCD criteria, strive to include all high quality factors in an external assess-ment for a firm. A high quality factor will meet three or four of the AQCD criteria; a low quality factor will meet two or fewer of the AQCD criteria. When performing an external assessment, engage in an engineering hunt for facts to make sure as many factors as possible pass the AQCD Test. It is important to state external factors to the extent possible in actionable, quantitative, comparative, and divisional terms.High quality and low quality external factors for Walmart are given below to further exem-plify this important concept:ASK YOuRSELF IS THE FACTORActionableQuantitativeComparativeDivisionalA High Quality External FactorOnline retail grocery shopping grew from 12% to 16% in 2018.yesyesyesyesA Low Quality External FactorConsumers’ average disposable income increased in 2018.nonononoChanges in external forces translate into changes in demand for both industrial and con-sumer goods and services. External forces affect the types of products developed, the nature of market segmentation and positioning strategies, the range of services offered, and the choice of businesses to acquire or sell. External forces have a direct impact on both suppliers and distribu-tors. Identifying and evaluating external opportunities and threats enables organizations to revise their vision and mission if needed, to design strategies to achieve long-term objectives, and to develop policies to achieve annual objectives.10 External Forces that Impact OrganizationsEconomic ForcesEconomic factors have a direct impact on the potential attractiveness of various strategies. An example of an economic variable is “value of the dollar,” which can have a significant effect on financial results of companies with global operations. Domestic firms with significant overseas sales, such as McDonald’s, are hurt by a strong dollar. If the dollar appreciates 10 percent relative to the local currency of a particular country in which a U.S. company has \$100 million in revenues, that company’s revenues would decrease by \$10 million as they are translated into U.S. dollars. For foreign firms with relatively large U.S. sales, however, a strong dollar provides a boost. A strong dollar enables U.S. firms to purchase raw materials more cheaply from other countries. However, in early 2018, the value of the dollar was near a 3-year low versus foreign currencies.Favorable economic conditions recently bode well for many firms because economic growth typically reduces unemployment, boosts consumer confidence, and increases disposable income. The World Economic Outlook report, published by the International Monetary Fund, predicts a broad-based global acceleration in the world economy; small, but wide-spanning growth (around 3.6 percent) is expected among most major economies in 2018–2021.1A few categories of economic variables that often yield AQCD opportunities and threats for organizations are provided in Table 3-1. In doing strategic planning or case analysis, economic factors must be stated in AQCD terms to the extent possible to be useful in strategic planning.LO 3.2

CHAPTER 3 • THE ExTERNAL ASSESSMENT 69Social, Cultural, Demographic, and Environment (SCDE) ForcesSCDE forces impact strategic decisions on virtually all products, services, markets, and custom-ers. Small, large, for-profit, and nonprofit organizations in all industries are being staggered and challenged by the opportunities and threats arising from changes in SCDE variables. These forces are shaping the way people live, work, produce, and consume. New trends are creating a shift in consumer demands and, consequently, a need for different products, new services, and updated strategies. For example, consumers in the United States now desire automobiles with greater space and utility, in lieu of sedans. In response to this external trend, Ford Motor recently invested \$7 billion in higher-margin trucks and SUVs and announced plans to reintroduce the Ranger Trust and the Bronco SUV in North America.2In the U.S. food industry, demand for processed packaged foods is declining because con-sumers are showing increased preferences for freshly prepared food options. Packaged food companies such as Kellogg are trying to quickly adapt to mitigate this external threat; Kellogg recently hired a new CEO, Steven Cahillane, who comes with extensive experience leading the health and wellness company, Nature’s Bounty.Consumer tastes and trends constantly change; people wander through stores less, opt-ing increasingly to use their mobile phones and computers to research prices and cherry-pick promotions. Brick-and-mortar retail department stores consequently are struggling as consum-ers increasingly turn to online retailers and smaller specialty stores. These external trends have prompted many retail chains to slow or cease store openings.3The United States (and the world) is also becoming older. Individuals age 65 and older in the United States, as a percentage of the population, will rise to 19 percent by 2030. The trend toward an older society is good news for restaurants, hotels, airlines, cruise lines, tours, travel services, pharmaceutical firms, automakers, and funeral homes. Older people are especially interested in health care, financial services, travel, crime prevention, and leisure. The aging population affects the strategic orientation of nearly all organizations.Example categories of SCDE variables that often yield AQCD opportunities and threats for organizations are given in Table 3-2. In performing strategic planning and case analysis, rele-vant SCDE factors must be stated in AQCD terms to the extent possible to be useful in strategic planning.Political, Governmental, and Legal ForcesPolitics, governments, and legislators can and often do impact strategic decisions. Federal, state, local, and foreign governments are major regulators, deregulators, subsidizers, employers, and customers of organizations. Political, governmental, and legal factors, therefore, can represent major opportunities or threats for both small and large organizations. For industries and firms that depend heavily on government contracts or subsidies, political forecasts can be the most important part of an external audit. State and local income taxes and property taxes, for example, TABLE 3-1 Example Economic Categories To Be MonitoredShift to a service economyDemand shifts for different goods and servicesAvailability of creditIncome differences by region and consumer groupsLevel of disposable incomePrice fluctuationsPropensity of people to spendForeign countries’ economic conditionsInterest ratesMonetary and fiscal policiesInflation ratesStock market trendsGross domestic product (GDP) trendsTax rate variation by country and stateConsumption patternsEuropean Economic Community (EEC) policiesUnemployment trendsValue of the dollar in world marketsImport/export factorsOrganization of Petroleum Exporting Countries (OPEC) policies

74 PART 2 • STRATEGY FORMuLATIONcompetitiveness, rather than short-term factors such as stock market movements, who won the election, or even something as trivial as inclement weather, which is often an excuse proposed by pundits on TV to explain slow Christmas sales. It is not that short-term factors are not important or have no impact, but they simply do not affect competition to the degree that long-term factors do, as revealed in the Five-Forces Model.As illustrated in Figure 3-3, the Porter’s Five-Forces Model offers guidance to strategists in formulating strategies to keep rival firms at bay. According to Porter, the nature of competitive-ness in a given industry can be viewed as a composite of five forces:1. Rivalry among competing firms2. Potential entry of new competitors3. Potential development of substitute products4. Bargaining power of suppliers5. Bargaining power of consumersRivalry Among Competing FirmsRivalry among competing firms is usually the most powerful of the five competitive forces and the most traditional factor analyzed by managers. It is also the only factor most affected by changes in the other four factors. Strategies pursued by one firm can be successful only to the extent that they provide competitive advantage over the strategies pursued by rival firms. Intense rivalry among competitors in an industry can decrease overall industry profits because firms often lower prices or spend extra on advertising to maintain market share, often transferring profits directly to consumers and other players in the Five-Forces Model. Rivalry among competing firms increases for numerous reasons as given in Table 3-5, including an increase in the number of competitors and a shift towards competitors becoming more equal in size and capability.As rivalry among competing firms intensifies, industry profits decline, in some cases to the point where an industry becomes inherently unattractive. 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—especially when a firm senses weakness from another. Although avoiding high-rivalry industries would be ideal, that is often easier said than done. At times it may be best to look for an industry with more favorable five forces and reduced rivalry, but firms can also compete within a similar or sub-industry by offering products targeting different customer groups with dif-ferentiated products. Offering differentiation helps all firms in the industry by moving away from competing on cost, where unique customers can be better served while maintaining profits for firms.Potential development of substitute productsBargaining power of consumersBargaining power of suppliersPotential entry of new competitorsRivalry among competingfirmsFIGURE 3-3The Five-Forces Model of Competition

CHAPTER 3 • THE ExTERNAL ASSESSMENT 75Potential Entry of New CompetitorsWhenever new firms can easily enter a particular industry, existing firms are likely to face threats of reduced market share. In such industries, a firm’s strategies should deter new firms from enter-ing the market to avoid further saturation of the market. Example barriers to entry can include economies of scale, specialized know-how, strong brand reputation, established customer loyalty, high capital requirements, absolute cost advantages, highly efficient supply chains, specialized distribution channels, access to key raw materials, and possession of patents. The automotive oil-change industry, for example, has relatively low barriers to entry; whereas the smartphone industry has much higher barriers to entry.Despite numerous barriers to entry, new firms sometimes enter industries with higher-quality products, lower prices, and substantial marketing resources. When the threat of new firms enter-ing the market is strong, incumbent firms generally fortify their positions and take swift actions to deter new entrants, such as lowering prices, extending warranties, adding features, or offer-ing financing specials. Even the threat of new entrants can increase rivalry and thus reduce profitability.Potential Development of Substitute ProductsIn many industries, firms are in close competition with producers of substitute products in other industries. Examples are beer, wine, and liquor; public transportation and car, bike, and taxi/Uber; natural gas, electricity, and solar power; glass bottles, paperboard containers, and alumi-num cans. A high threat of substitutes exists when consumer needs can easily be filled by one or more substitute products outside of the firm’s industry. Competitive pressures arising from substitute products increase as the relative price of substitute products decline and as consumers’ costs of switching decrease.The presence of substitute products puts a ceiling on the price that can be charged before consumers will switch to the substitute product. Price ceilings equate to profit ceilings and more intense competition among rivals. Producers of eyeglasses and contact lenses, for example, face increasing competitive pressures from laser eye surgery. Producers of sugar face similar pres-sures from artificial sweeteners. Newspapers and magazines face substitute-product competitive pressures from the Internet and 24-hour cable television. Substitute products can also come from places not normally expected. For example, a diamond producer may not consider a honeymoon package as a substitute for a less expensive ring. The bottom line with this “force” is that strate-gists must manage the potential threat of substitute products.Bargaining Power of SuppliersThe bargaining power of suppliers refers to the ability of suppliers to raise the price of any inputs into the industry. This “force” affects the intensity of competitiveness in an industry, especially when there are few substitutes available for the product offered by suppliers, when the cost of switching to an alternative product offered by a different supplier is high, when the industry is not a key source of the supplier’s revenues, or when there are few suppliers.TABLE 3-5 Conditions that Cause High Rivalry Among Competing Firms 1. When the number of competing firms is high 2. When competing firms are of similar size 3. When competing firms have similar capabilities 4. When demand for the industry’s products is changing rapidly 5. When price cuts are common in the industry 6. When consumers can switch brands easily 7. When barriers to leaving the market are high 8. When barriers to entering the market are low 9. When fixed costs are high among competing firms10. When products are perishable or have short product life cycles

80 PART 2 • STRATEGY FORMuLATIONStep 2: Assign Weights to Key External FactorsIn developing an EFE Matrix, assign a weight that ranges from 0.01 (not important) to 1.0 (all-important) for each factor. The weight assigned to a given factor indicates the relative importance of the factor for being successful in the firm’s industry relative to other factors included in the EFE. For example, a factor receiving a weight of 0.06 is 200 percent more important than a factor receiving a weight of 0.02 for success in the industry. Regardless of whether a key factor for a particular firm is an opportunity or threat, factors considered to have the greatest affect on orga-nizational performance of all firms in a specific industry should be assigned the highest weights. The sum of all weights must equal 1.0. Do not try to even weights out to total 0.50 for opportuni-ties and 0.50 for threats. In fact, if rivalry is high in a given industry, as discussed in the Porter’s Five Forces section, then the sum of weights assigned to threats could be higher than the sum for opportunities. Weights are industry-based, not company-based. List opportunities from highest weight to lowest weight; do the same for threats.Step 3: Assign Ratings to Key External FactorsIn developing an EFE Matrix, assign a rating between 1 and 4 to each key external factor to indicate how effectively (or ineffectively) the firm’s strategies are responding to the opportunity or threat, where 4 = the response is superior, 3 = the response is above average, 2 = the response is average, and 1 = the response is poor. Both opportunities and threats can receive a rating of 1, 2, 3, or 4 at any time. Ratings are based on the effectiveness of a firm’s strategies in capitalizing on opportunities or avoiding/mitigating threats. Ratings are company-based, not industry-based.Assignment of numerical values down the rating column in an EFE Matrix should be with consideration that companies carve out niches in industries that enable them to gain and sus-tain competitive advantages through effective strategies. These niches are most often based on capitalizing on some opportunities more effectively than rivals. This is not to say that threats are not important, they are; some threats can wipe a firm out. However, if a firm faces many opportunities, this is likely the result of effective strategies positioning the firm well, so higher ratings are often warranted for opportunities; higher ratings increase the total weighted score in an EFE Matrix.As an example, the luxury car maker Ferrari could receive a high rating on a price com-petitiveness external factor, even though their sports cars are expensive because price competi-tiveness is not a deciding factor (low weight) for customers in the luxury sports car industry. Thus, in assigning ratings, as with weights, consider a subset of the industry in make effective judgments.Step 4: Obtain Weighted ScoresAlong each row in an EFE Matrix, multiply the factor’s weight by its rating to determine a weighted score for each factor.Step 5: Obtain Total Weighted ScoreSum the weighted scores to determine the total weighted score for the organization. Regardless of how many factors are included in an EFE Matrix, the total weighted score can range from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total weighted scores well below 2.5 characterize organizations that are weak at responding to external factors, implying that new strategies are likely needed and perhaps a new direction, new vision or mission. Total weighted scores well above 2.5 indicate a strong external position, whereby a continuation of current strat-egies may be prudent, being ever mindful that there is always room for improvement. A total weighted score of 3.5 for example indicates that an organization is responding in an outstand-ing way to existing opportunities and threats in its industry. In other words, the firm’s strat-egies effectively take advantage of existing opportunities and minimize the potential adverse effects of external threats. A total weighted score of 1.5 indicates that the firm’s strategies are not capitalizing on opportunities or avoiding external threats. Making “small” decisions regarding weights and ratings in matrices is essential for making effective big strategy decisions later in the strategic-planning process; for example, a billion dollars may be at stake in choosing a particular strategy over another to implement, and the EFE Matrix with its factors, weights, and ratings is helpful in making that type of choice.

CHAPTER 3 • THE ExTERNAL ASSESSMENT 81TABLE 3-8 EFE Matrix for a Local 10-Theater Cinema ComplexKey External FactorsWeightRatingWeighted ScoreOpportunities1. Two new neighborhoods developing within 3 miles0.0910.092. TDB University is expanding 6% annually0.0840.323. Major competitor across town recently closed0.0830.244. Demand for going to cinemas growing 10%0.0720.145. Disposable income among citizens up 5% in prior year0.0630.186. Rowan County is growing 8% annually in population0.0530.157. Unemployment rate in county declined to 3.1%0.0320.06Threats1. Trend toward healthy eating eroding concession sales0.1240.482. County and city property taxes increasing 25%0.0820.163. Movies rented at local Redboxes up 12%0.0820.164. Demand for online movies growing 10%0.0620.125. Commercial property adjacent to cinemas for sale0.0630.186. Movies rented last quarter from Time Warner up 15%0.0610.067. Local religious groups object to R-rated movies0.0430.128. TDB University installing an on-campus movie theater0.0430.12Total1.002.58An Example EFE MatrixAn example EFE Matrix is provided in Table 3-8 for a local 10-theater cinema complex. Observe in the table that the most important factor to being successful in this industry is “Trend toward healthy eating eroding concession sales,” as indicated by the 0.12 weight. Also note that the local cinema is doing excellent (received a rating of 4) in regard to its handling of two external factors, “TDB University is expanding 6 percent annually” and “Trend toward healthy eating eroding concession sales.” Perhaps the cinema is placing flyers on campus and also adding yogurt and healthy drinks to its concession menu.Overall, the total weighted score of 2.58 is above the average (midpoint) of 2.5, so this cin-ema business is doing slightly above average taking advantage of the external opportunities and minimizing external threats facing the firm. There is definitely room for improvement, though, because the highest total weighted score would be 4.0. As indicated by ratings of 1, the business needs to capitalize more on the “Two new neighborhoods developing within 3 miles” opportu-nity and work to avoid the “movies rented from . . . Time Warner” threat.An actual EFE Matrix for one of the largest U.S. grocery retailers, Kroger, is given in Table 3-9 on page 82. As shown, the most important external factor facing Kroger, as indicated by a weight of 0.10, deals with Amazon acquiring Whole Foods Market. Kroger’s key factors are listed in order from the most important (highest weight) to the least important. Notice how the factors largely meet the AQCD test. Recall that mathematically, 0.04 is 33 percent more important than 0.03, and a rating of 3 is 50 percent higher than a rating of 2. Small judgments regarding assignment of weights and ratings in matrices are vital for making effective larger decisions related to deployment of resources and money across regions and products.Overall, the total weighted score of 3.03 is above the average (midpoint) of 2.5, indicat-ing that Kroger is doing pretty well at taking advantage of the external opportunities and minimizing the threats facing the firm. There is definitely room for improvement, though, because the highest total weighted score would be 4.0. The rating of 1 for “The National Retail Federation estimates an 8–12% U.S. e-commerce growth in the next year,” for exam-ple, suggests that Kroger should better capitalize on this opportunity, perhaps by expanding its online offerings.

82 PART 2 • STRATEGY FORMuLATIONThe Competitive Profile MatrixThe Competitive Profile Matrix (CPM) reveals how a focal firm compares to major competitors across a range of key factors. This comparative analysis provides important strategic information regarding a firm’s competitive advantages or disadvantages in a given industry. In determining what factors to include in a CPM, tailor the factors to the particular industry. For example, in the airline industry, such factors as on-time arrival, leg room in planes, and routes served are far better factors to include than merely including “quality of service” or “financial condition” as factors.Similar to an EFE, a CPM uses weights and total weighted scores, which quantify the importance of a given factor to the industry, as well as total weighted scores, which quantify how well a given firm is doing relative to the other two firms evaluated in the CPM. The key difference between a CPM and EFE is that a CPM compares firms and an EFE Matrix analyzes how a firm internally is responding to key external issues. Critical success factors include points LO 3.7TABLE 3-9 An Actual EFE Matrix for Kroger Co.OpportunitiesWeightRatingWeighted Score1.Organic & natural food sales in the United States totaled \$47 billion, an increase of nearly \$3.7 billion from the previous year.0.0940.362.Online grocery spending is forecasted to grow from 4.3% of the total U.S. food and beverage sales to 20% by 2025.0.0730.213.Sales growth in the grocery industry is 3.8% annually.0.0740.284.Organic food sales increased 8.8% to \$55 billion.0.0520.15.Convenience store lunch and dinner services contribute 21.7% of in-store sales.0.0520.16.The National Retail Federation estimates an 8% to 12% U.S. e-commerce growth in 2019.0.0510.057.Global food retail sales are about \$4 trillion annually, led by supermarkets/hypermarkets.0.0420.088.GDP of United States increased from 2.2% to 3.1%.0.0420.089.The Private Label Manufacturer’s Association notes that private label products are 25% to 50% cheaper than national brands, appealing to customers who value affordability.0.0310.0310.Studies show that 51.2% of Internet users make online purchases using mobile apps.0.0130.03ThreatsWeightRatingWeighted Score1.Amazon spent \$13.7 billion to acquire 460 brick-and-mortar Whole Foods Market stores.0.1020.22.Target is investing \$7 billion to update and downsize its stores and develop new exclu-sive brands between 2018 and 2020.0.0810.083.Walmart’s fiscal 2017 revenue was \$485.8 billion, up \$9.4 billion, or 0.78%. Kroger’s total revenue is \$115.3 billion.0.0730.214.Fast-food revenue exceeds \$600 billion annually; it is rising 15% annually.0.0520.15.E-commerce sales as percentage of total retail sales is nearly 10%, and rising 3% annually.0.0510.056.Walmart groceries cost about 4% less than Kroger’s.0.0420.87.Walmart.com now offers more than 67 million products, a 30% increase this year.0.0310.038.Walmart created its own “designer” cantaloupe that “tastes as sweet in winter as it does in summer,” and a more flavorful tomato is in the works.0.0320.069.Publix Supermarket is growing 12% a year.0.0340.1210.Aldi’s U.S. grocery market is growing 15% a year.0.0230.06Total1.003.03

84 PART 2 • STRATEGY FORMuLATIONTABLE 3-11 An Actual CPM for Kroger CompanyKroger CompanyWalmart Inc.Amazom.com Inc.Critical Success FactorsWeightRatingScoreRatingScoreRatingScorePrice Competitiveness0.1730.5140.6820.34Product Quality0.1320.2630.3910.13Multiple Formats0.1040.4030.3010.10Market Penetration0.0940.3630.2720.18Customer Loyalty0.0820.1640.3230.24Name Recognition0.0810.0840.3230.24Store Locations0.0720.1440.2810.07Customer Service0.0720.1430.2140.28Market Share0.0620.1240.2410.06Financial Profit0.0520.1040.2030.15Distribution System0.0520.1030.1540.20Advertising0.0510.0540.2020.10Total1.002.423.562.09IMPLICATIONS FOR STRATEGISTSFigure 3-4 reveals that to gain and sustain competitive advantages, strategists must collect, analyze, and prioritize information regard-ing the firm’s competitors, as well as identify and consider relevant social, demographic, economic, and technology trends and events impacting the firm and its industry. It is not uncommon for there to be substantial discussing, perhaps even some cussing, in delib-erating what external factors should be included in an EFE Matrix, because factors included ultimately impact the firm’s strategies and direction. An engineering hunt for external facts is essential because resultant strategies can be expensive and sometimes irreversible. Survival of the firm can hinge on an effective, thorough external as-sessment being performed.This chapter reveals that actionable, quantitative, comparative, divisional (AQCD) information is a key ingredient for making strategic decisions. The EFE Matrix and Competitive Profile Matrix presented in this chapter are excellent strategic-planning tools for assimilating and prioritizing information to enhance decision-making.The Process of Performing an External AuditIn performing an external audit, involve as many managers and em-ployees as possible because involvement leads to understanding and commitment; individuals appreciate having the opportunity to con-tribute ideas and to gain a better understanding of their firm’s indus-try, competitors, markets, and strategies. An effective way to gather competitive intelligence and information across the 10 forces dis-cussed in this chapter is to ask various managers to monitor particu-lar sources of information, such as key magazines, trade journals, newspapers, and online sources. These persons can submit periodic scanning reports to the person(s) who coordinate the external audit. This approach provides a continuous stream of timely strategic infor-mation and involves many individuals in the external-audit process. Suppliers, distributors, salespersons, customers, and competitors represent other sources of vital information.After external-audit information is gathered, it should be assimi-lated into an EFE Matrix and CPM as described herein. To accomplish this task, some firms conduct a meeting or series of meetings to collectively determine the most important opportunities and threats facing the firm. A prioritized list of these factors can be obtained by requesting all managers to individually rank the factors identi-fied, from 1 (for the most important opportunity/threat) to 20 (for the least important opportunity/threat). Then, by summing the rank-ings, a prioritized list of factors is revealed. Prioritization is absolutely essential in strategic planning because no organization can do ev-erything that would benefit the firm; tough choices among good options have to be made; in both an EFE Matrix and CPM factors are listed from most important (highest weight) to least important. Even a full list of more than 50 factors can be distilled to the 20 most important in the manner described.An actual CPM is provided in Table 3-11, again for Kroger Company. Note that the two rival firms, Walmart and Amazon, receive higher ratings than Kroger on several critical success fac-tors, including distribution system, advertising, and customer service, for example. Also note the factors are listed beginning with the most important (highest weight). Note there is no duplica-tion of ratings across a row and that Kroger is responding worse than Walmart and Amazon on “name recognition” and “advertising.”

86 PART 2 • STRATEGY FORMuLATIONChapter SummaryIncreasing turbulence in markets and industries around the world means the external audit has become an explicit and vital part of the strategic-management process. This chapter provided a framework for collecting and evaluating economic, social, cultural, demographic, environmen-tal, political, governmental, legal, technological, and competitive information. The AQCD Test was explained to assure that opportunities and threast as stated in an EFE Matrix are actionable, qualitative, comparative, and divisional to the extent possible. Firms that do not mobilize and empower their managers and employees to identify, moni-tor, forecast, and evaluate key external forces may fail to anticipate emerging opportunities and threats and, consequently, may pursue ineffective strategies, miss opportunities, and invite orga-nizational demise. Firms not taking advantage of e-commerce and social-media networks are technologically falling behind.A major responsibility of strategists is to ensure development of an effective external-audit system. This includes using information technology to devise a competitive intelligence system that works. The EFE Matrix, CPM, and Porter’s Five-Forces Model can help strategists evalu-ate their market and industry, but these tools must be accompanied by good intuitive judgment. Multinational firms especially need a systematic and effective external-audit system because external forces among foreign countries vary so greatly.Key Terms and Conceptsactionable responses (p. 67)chief information officer (CIO) (p. 72)chief technology officer (CTO) (p. 72)competitive intelligence (CI) (p. 72)Competitive Profile Matrix (CPM) (p. 82)external audit (p. 66)External Factor Evaluation (EFE) Matrix (p. 79)external forces (p. 67)industry analysis (p. 66)information technology (IT) (p. 72)Porter’s Five-Forces Model (p. 74)Issues for Review and Discussion 3-1. Explain why it is important to develop both a full and narrow list of key external factors in developing an EFE Matrix. 3-2. Explain the significance of an EFE Matrix total weighted score of 3.67 versus a 1.59. 3-3. What does a CPM total weighted score of 1.88 imply for a company? 3-4. In an EFE Matrix, should the weights for opportunities be designed to roughly equal the weights for threats? Why? 3-5. List the 10 external forces discussed in this chapter. When and why would some forces be more important than others? 3-6. How have external factors resulted in a major overhaul to the traditional retail industry as we once knew it? 3-7. Provide a synopsis of IBISWorld, Mergent Online, and PrivCo. 3-8. Compare and contrast the EFE Matrix with a CPM in terms of value provided for a strategist in performing an external assessment. 3-9. 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? 3-10. Describe how political elections can be an important ex-ternal factor for companies to consider. Select an industry and reveal some key political factors impacting firms. 3-11. List some legal or ethical ways to gather competitive intelligence. List some illegal or unethical ways. 3-12. As the value of the dollar rises, U.S. firms doing busi-ness 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? 3-13. Does McDonald’s Corp. benefit from a low or high value of the dollar? Explain why. 3-14. Explain how Facebook, Twitter, and Instagram can represent a major threat or opportunity for a company. 3-15. If your CPM has three firms and they all end up with the same total weighted score, would the analysis still be useful? Why? 3-16. What external factors impact the ability of state to attract business? Visit the website: https://www.cnbc.com/2017/06/12/heres-how-your-state-can-become-a-cnbc-top-state-for- business.html and summarize how the selection criteria used to determine the best states for business compares to the information presented in this chapter. 3-17. Governments sometimes use “protectionism” to cope with economic problems, imposing tariffs and subsi-dies on foreign goods as well as placing restrictions and incentives on their own firms to keep jobs at home. What are the strategic implications of protectionism for international commerce? 3-18. Rank in order the relative importance of Porter’s five forces in the business of operating a college or university. 3-19. Let’s say you work for McDonald’s and you applied Porter’s Five-Forces Model to study the fast-food industry. Rank the five forces as to relative importance for strategic planning at McDonald’s.