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
Buy all Coke bottlers they do not already own
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.
66 PART 2 • STRATEGY FORMuLATIONCompanies and organizations continually deal with external uncertainties and must quickly adapt to change to survive, as indicated in the following story:Once there were two company presidents who competed in the same industry. These two presidents decided to go on a camping trip to discuss a possible merger. They hiked deep into the woods. Suddenly, they came upon a grizzly bear that rose up on its hind legs and snarled. Instantly, the first president took off his knapsack and got out a pair of jogging shoes. The second president said, “Hey, you can’t outrun that bear.” The first president responded, “Maybe I can’t outrun that bear, but I surely can outrun you!”As illustrated in Figure 3-1, this chapter focuses on the concepts and tools needed to manage external uncertainties by conducting an external audit (sometimes called industry analysis). An external audit focuses on identifying and evaluating trends and events beyond the control of a single firm, such as increased foreign competition, population shifts to coastal areas, an aging society, and a social-media revolution. An external audit reveals key opportunities and threats confronting an organization; an external audit guides managers in formulating strategies that take advantage of the opportunities and avoid or reduce the impact of threats.This chapter presents a practical framework for gathering, assimilating, analyzing, and prioritizing external information that provides a foundation for formulating strate-gies effectively. Specifically, the first two-thirds of this chapter address external oppor-tunity/threat areas in terms of what, where, how, and why to obtain this information; the latter one-third of this chapter explains how to develop and use an External Factor Evaluation (EFE) Matrix and Competitive Profile Matrix (CPM) to assimilate all the op-portunity/threat factors/information.The exemplary strategist showcased in this chapter is Ben Silbermann, CEO and co-founder of Pinterest, the popular social-media company. Silbermann is outstanding at rec-ognizing external opportunities and threats and formulating effective strategies accordingly.EXEMPLARY STRATEGIST SHOWCASEDBen Silbermann, CEO and Cofounder of PinterestIt is 2018 and Pinterest has grown to a valuation of more than $13 billion and a customer base of about 200 million users who have “pinned” more than 110 billion ideas on Pinterest boards. Led by CEO and strategist Ben Silbermann, Pinterest is one of the fastest-growing companies in the world. The Pinterest website (www. pinterest .com) is free to use and available in nearly 30 foreign languages. Headquartered in San Francisco, Pinterest has about 900 employees. Hundreds of companies advertise on Pinterest with display ads and “pin” their products and services on boards. The Pinterest website is a visual discovery, collection, and storage tool used by customers in the United States (60 percent) and abroad (40 percent). Thousands of busi-nesses and marketers use Pinterest to access data collected on Pinterest customers, who interestingly are about 80 percent women, typically age 35 to 44. Silbermann has turned Pinterest into a global gold mine of data for advertisers and retailers. He says Pinterest is “only beginning to understand” how social media impacts consumers’ lives, and he is blaz-ing a new trail with an innovative, entrepreneurial company. Pinterest takes no commission or cut on transactions it processes and has no plans to go public to raise capital. A key advantage of staying private is to keep the ins and outs of business including the finance and market-ing operations of the company, secret from rival companies, who may want to imitate and replicate Pinterest strategies and offerings.Source: Erin Griffith, “Ben Silbermann,” Fortune, (September 1–17, 2017): 69. Also, http://fortune.com/2015/07/13/pinterest-ceo-ben-silbermann/Pixellover RM 2/Alamy Stock Photo
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
70 PART 2 • STRATEGY FORMuLATIONimpact where companies locate facilities and where people desire to live. Nine U.S. states, for example, have zero state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire, and Tennessee.Governmental legislation can significantly impact where businesses sell their products. For example, rapidly developing shifts in legislation surrounding the legality of marijuana are open-ing new markets for investors. Nearly a decade ago, Colorado passed the world’s first legislation that would treat marijuana like alcohol, taxing and regulating its sales. U.S. consumers spent $6.7 billion on legal marijuana in 2016; this number is expected to reach $208 billion in 2021.Example categories of political, governmental, and legal variables that often yield AQCD opportunities and threats to organizations are provided in Table 3-3. Political, governmental, and legal factors must be stated in AQCD terms to the extent possible to be useful in strate-gic planning. Local, state, and federal laws, as well as regulatory agencies and special-interest groups, can have a major impact on the strategies of small, large, for-profit, and nonprofit orga-nizations. Many companies have altered or abandoned strategies in the past because of politi-cal or governmental actions. As indicated in Ethics Capsule 3, new pending federal legislation regarding Alaska oil drilling could create business opportunities and threats and present ethical dilemma issues.TABLE 3-2 Key SCDE VariablesPopulation changes by race, age, and geographic areaAttitudes toward retirementRegional changes in tastes and preferencesEnergy conservationNumber of marriagesAttitudes toward product qualityNumber of divorcesAttitudes toward customer serviceNumber of birthsPollution controlNumber of deathsAttitudes toward foreign peoplesImmigration and emigration ratesEnergy conservationSocial Security programsSocial programsLife expectancy ratesNumber of churchesPer-capita incomeNumber of church membersSocial-media pervasivenessSocial responsibility issuesETHICS CAPSULE 3Preserve Alaska Wildlife or Boost Alaska Economy?Alaska is home to the largest wildlife refuge in the United States, the Arctic National Wildlife Refuge, which spans more than 19 million acres. The refuge serves an important role in the migra-tion of wildlife including birds, caribou, and polar bears, and it is also believed to hold significant oil reserves. In December 2017, Congress voted to authorize drilling in Alaska’s Arctic National Wildlife Refuge to boost the nation’s energy independence and help the Alaskan economy. However, from an ethical perspective, the arctic program director for the Wilderness Society, Lois Epstein, states that, “Opening the Arctic refuge coastal plain to oil leas-ing, exploration, and production unacceptably threatens the Arctic refuge’s globally significant wilderness and wildlife values.” In per-forming an external strategic-management analysis, tradeoffs such as this abound and judgments must be made; decisions regarding tradeoffs are evidenced in the choice of factors, weights, and rat-ings assigned in an EFE Matrix presented in this chapter. Do you think the benefits from the potential drilling in the Refuge would offset the potential harm to Arctic wildlife? Government and envi-ronmental officials are weighing in on the issue as Congress dis-cusses proposed legislation. What assurances would have to be made, if any, for you to approve of your company drilling in the Refuge?Source: Based on Jim Carlton, “Interior Official Urges Arctic Drilling,” Wall Street Journal, (November 3, 2017): A3.Where Are We Going Mom?Tony Campbell/Shutterstock
CHAPTER 3 • THE ExTERNAL ASSESSMENT 71Technological ForcesA variety of new technologies such as the Internet of Things, three-dimensional (3D) printing, predictive analytics, quantum computing, robotics, and artificial intelligence are fueling innova-tion in many industries and impacting strategic-planning decisions. Businesses are using mobile technologies and applications to better determine customer trends and are employing advanced analytics to make enhanced strategy decisions. The vast increase in the amount of data coming from mobile devices and social-media sites is astonishing. A primary reason that Cisco Systems recently entered the data analytics business is that sales of hardware, software, and services con-nected to the Internet of Things is expected to increase to $7.1 billion by 2020 from approximately $2.0 billion in 2015. A recent report by Cognizant Technology Solutions Corp., an IT services and consulting firm, predicts that more than 20 new job categories are soon to emerge from techno-logical advances.Online retail is crushing traditional retail. Credit Suisse reports that more U.S. brick-and-mortar retail stores closed in 2017 than in the 2008 economic recession. U.S. online retail sales increased a whopping 24 percent in 2017, as consumers prefer having boxes delivered to their door. This technological trend is so pervasive that Walmart Stores, Inc. in 2018 changed their name to Walmart, Inc.—removing the word stores. In fact, in terms of online selling of groceries, Walmart is the leader in China, even though there are more than four hundred Walmart stores in China.Advances in technology impact the manufacturing labor market. Ben Pring, Director of Cogniant’s Center for the Future of Work estimates that nearly 19 million jobs in the United States will become obsolete or be replaced by automation in the next 15 years.4 In a dra-matic shift from using cheap labor in countries such as Vietnam, Adidas is shifting to produce footwear in developed countries using fully robotic plants called “speed-factories.” Adidas’s speed- factories are now located across the world, including in Germany, the United States, France, China, and Japan. This shift from cheap manpower to complete automation is a techno-logical revolution occurring in the footwear industry. Before new speed-factories, Adidas owned no factories, instead using more than one thousand suppliers that employ millions of people to assemble shoes at low-wage facilities globally. Adidas’ new strategy aims to eventually surpass its major rival Nike.No company or industry today is insulated against emerging technological developments. In high-tech industries, identification and evaluation of key technological opportunities and threats can be the most important part of the external strategic-management audit. In performing an external assessment, technology-related factors must be stated in AQCD terms to the extent possible to be useful in strategic planning. Technological advancements impact firms in countless ways, such as the following:1. They can dramatically affect organizations’ products, services, markets, suppliers, distribu-tors, competitors, customers, manufacturing processes, marketing practices, and competi-tive position.2. They can create new markets, result in a proliferation of new and improved products, change the relative competitive cost positions in an industry, and render existing products and services obsolete.3. They can reduce or eliminate cost barriers between businesses, create shorter production runs, create shortages in technical skills, and result in changing values and expectations of employees, managers, and customers.4. They can create new competitive advantages that are more powerful than existing advantages.TABLE 3-3 Example Political, Governmental, and Legal Categories To Be MonitoredNatural environmental regulationsUnited States versus other country relationshipsProtectionist actions by countriesPolitical conditions in countriesChanges in patent lawsGlobal price of oil changesEqual employment opportunity lawsLocal, state, and federal lawsLevel of defense expendituresImport–export regulationsUnionization trendsTariffs, particularly on steel and aluminumAntitrust legislationLocal, state, and national elections
72 PART 2 • STRATEGY FORMuLATIONA chief information officer (CIO) and chief technology officer (CTO) are common positions in firms today, reflecting the growing importance of information technology (IT) in strategic management. A CIO and CTO work together to ensure that information needed to formulate, implement, and evaluate strategies is available on demand. The CIO is primarily a manager, managing the firm’s relationship with stakeholders; the CTO is primarily a technician, focusing on technical issues such as data acquisition, data processing, decision-support systems, and software and hardware acquisition.Monitoring online reviews for businesses, large or small, has become a burdensome but essential task, especially given social-media channels, such as Twitter, that empowers opinionated customers. Benign neglect of a company’s online reputation can quickly hurt sales, especially given the new normal behavior of customers consulting their smartphones for even the smallest of purchases.Competitive ForcesArguably the most important part of an external audit is identifying rival firms and deter-mining their strengths, weaknesses, capabilities, objectives, and strategies. George Salk stated, “If you’re not faster than your competitor, you’re in a tenuous position, and if you’re only half as fast, you’re terminal.” As indicated in Global Capsule 3, Netflix is faster than its rival firms but staying ahead requires constant monitoring of what those firms are doing and why. Go to www.owler.com for information about competitors.Competition in virtually all industries is intense—and sometimes cutthroat. Within the smartphone and personal tech industry, for example, GoPro Inc. is struggling to maintain market share. To differentiate its offerings from the latest smartphone camera technologies offered by Apple and Samsung, GoPro developed a new product called Fusion that features a 360-degree spherical camera with a unique Over-Capture capability, enabling users to capture pictures from every angle simultaneously.Addressing questions about competitors, such as those presented in Table 3-4, is essential in performing an external audit. Competitive intelligence (CI), as formally defined by the Society of Competitive Intelligence Professionals (SCIP), is a systematic and ethical process for gather-ing and analyzing information about the competition’s activities and general business trends to further a business’s own goals (SCIP website). Quality competitive intelligence in business, as in the military, is one of the keys to success. Major competitors’ weaknesses can represent external opportunities; major competitors’ strengths may represent key threats.Various legal and ethical ways to obtain competitive intelligence include the following:• Reverse-engineer rival firms’ products.• Use surveys and interviews of customers, suppliers, and distributors of rival firms.• Analyze rival firm’s Form 10-K.• Conduct fly-over and drive-by visits to rival firm operations.• Search online databases and websites such as www.owler.com.• Contact government agencies for public information about rival firms.TABLE 3-4 Key Questions about Competitors 1. What are the strengths and weaknesses of our major competitors? 2. What products and services do we offer that are unique in the industry? 3. What are the objectives and strategies of our major competitors? 4. How will our major competitors most likely respond to current economic, SCDE, political, govern-mental, legal, technological, and competitive trends affecting our industry? 5. How vulnerable are our major competitors to our new strategies, products, and services? 6. How vulnerable is our firm to successful counterattack by our major competitors? 7. How does our firm compare to rivals in mastering the social-media conversation in this industry? 8. To what extent are new firms entering and old firms leaving this industry? 9. What key factors have resulted in our present competitive position in this industry?10. How are supplier and distributor relationships changing in this industry?
CHAPTER 3 • THE ExTERNAL ASSESSMENT 73GLOBAL CAPSULE 3What Company Is Growing Fastest Globally?The answer to the question posed may be Netflix, a firm that pursues global expansion with a ven-geance. Netflix added 4.45 million new inter-national subscribers in the third quarter (Q3) of 2017 alone, with Q3 revenue increasing 30 per-cent. Netflix is taking advantage of the opportu-nity associated with the population of the world approaching 7.5 billion; the United States has slightly more than 320 million people. That leaves billions of people outside the United States who may be interested in the products and services produced through domestic firms. Remaining solely domestic is an increasingly risky strategy, especially as the world population continues to grow to an estimated 8.6 billion in 2030, 9.8 bil-lion in 2050, and 11.2 billion in 2100.Netflix is also mitigating an external threat in that some content owners such as Walt Disney Company are planning to offer their own movie- and video-streaming services instead of working with Netflix. Apple also expects to spend more than $1 billion in 2018 to produce its own original content. To combat this threat, Netflix is spending over $8 billion on content annually, sub-stantially more than its rivals Hulu, Amazon.com, and HBO. Netflix is focused on signing creative tal-ent and acquiring its own production and intellec-tual property. For example, the company recently made it first acquisition, taking onboard the comic-book publisher Millarworld. In addition to contin-ued global expansion, Netflix’s long-term strategy is to continue international expansion, rely less on licensing programs from content suppliers, and focus increasingly on acquiring original content. Source: Based on Austen Hufford, “Netflix Subscriber Growth Surges,” Wall Street Journal, (October 17, 2017): B2.Enjoying a Netflix MovieWavebreak Media Ltd/123RF• Monitor relevant trade publications, magazines, and newspapers.• Purchase social-media data about customers of all firms in the industry.• Hire top executives from rival firms.Information gathering from employees, managers, suppliers, distributors, customers, creditors, and consultants can make the difference between having superior or just average intelligence and overall competitiveness. All members of an organization—from the CEO to custodians—are valuable intelligence agents for the firm. Special characteristics of a successful CI program include flexibility, usefulness, timeliness, and cross-functional cooperation. CI is not corporate espionage. Unethical tac-tics such as bribery, wiretapping, and computer hacking should never be used to obtain information. Due to cybersecurity threats, CI must assure however that persons in a firm cannot access data and information unrelated to their job description because hackers exploit this avenue in firms.In performing an external assessment, competitor-related factors must be stated in AQCD terms to the extent possible to be useful in strategic planning.Porter’s Five-Forces ModelHarvard Business School Professor, Michael Porter, suggests that firms should strive to compete in attractive industries, avoid weak or faltering industries, and gain a full understanding of key external factors within that attractive industry. Given that competitive positioning within an indus-try is a key determinant of competitive advantage, Porter established the Five-Forces Model.One of the major contributions of Porter’s work is he shifted focus away from viewing com-petition directed toward a few rival firms to a broader analysis that includes forces from current competitors, new competitors, substitute products, suppliers, and buyers. Competitive advantage can be created in each area of the five forces by offering value to the consumer that exceeds cost. Rather than focusing solely on a top competitor, it is important that firms examine how suppliers and others listed in the five forces are trying to siphon off as much value as possible in all busi-ness transactions.Porter’s Model is also used to determine which industries to enter because generally the stronger the five forces are, the less profitable the industry. Porter is an advocate of external vari-ables rather than internal ones being a larger driver of competitive advantage, similar to a rising or falling tide; it is difficult to overcome a rising tide no matter your internal capabilities. Porter’s Model also prompts managers to focus on the medium- and longer-term factors that determine LO 3.3
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
76 PART 2 • STRATEGY FORMuLATIONIn some cases, firms pursue a backward-integration strategy to compete with suppliers. This strategy is especially effective when suppliers are unreliable, too costly, not capable of meeting a firm’s needs on a consistent basis, or simply have too much bargaining power and are able to charge absorbent prices. Boeing and Airbus, the two largest jetliner manufacturers, are beginning to make a portion of the parts that go into planes because both firms determined too high of a proportion industry profitability was going to suppliers. A key lesson for suppliers is that if your customer has the means to backward-integrate, it may be best to renegotiate prices.Overall, firms are in a better position when numerous suppliers exist. It is often in the best interest of both suppliers and producers to assist each other with reasonable prices, improved quality, development of new services, just-in-time deliveries, and reduced inventory costs, thus enhancing long-term profitability for all concerned. In more and more industries, sellers are forg-ing strategic partnerships with select suppliers in an effort to (1) reduce inventory and logistics costs, (2) accelerate the availability of next-generation components, (3) reduce defect rates, and (4) squeeze out important cost savings for both themselves and their suppliers.5Bargaining Power of ConsumersBargaining power of buyers refers to the ability of buyers to drive down prices for products offered by companies in a given industry. This force is strong when firms operate in industries that contain a limited number of buyers or that are made up of buyers that have multiple choices of where to buy from; this force is also strong when buyers purchase in volume or have low switching costs. Consumers (buyers) gain bargaining power under the following circumstances:1. If they can inexpensively switch to competing brands or substitutes2. If they are particularly important to the seller3. If sellers are struggling in the face of falling consumer demand4. If they are informed about sellers’ products, prices, and costs5. If they have discretion in whether and when they purchase the product6The impact of this “force” on industry competitiveness is higher when the products being purchased are standard or undifferentiated, enabling consumers to negotiate selling price, war-ranty coverage, and accessory packages to a greater extent. Rival firms may offer extended war-ranties or special services to gain customer loyalty whenever the bargaining power of consumers is substantial. New car buyers, for example, often compare prices of their desired car across several dealerships, often negotiating lower prices and additional services from dealerships in exchange for their business.As a result of Porter’s Five Forces, the intensity of competition among firms varies widely across industries. Table 3-6 reveals the average operating profit for firms in different industries. Note substantial variation among industries, with the lowest being for bookstores. The collective impact of competitive forces is so brutal in some industries that the market is TABLE 3-6 Competitiveness Across a Few Industries (2018 data)IndustryOperating Profit (%)Banking30.8Hotels18.4Pharmaceutical8.7Oil and Gas Extraction7.5Fragrances/Cosmetics7.1Telecommunications6.1Food Manufacturing5.4Machinery/Construction4.9Paper Manufacturing4.9Bookstores2.9
CHAPTER 3 • THE ExTERNAL ASSESSMENT 77clearly “unattractive” from a profit-making standpoint. Strategists must continually monitor the five forces to identify new opportunities and threats facing the firm, and alter strategies accordingly.Eliminating competition is a possibility and common strategy employed by firms in an indus-try with high rivalry. Firms use mergers and acquisitions and purchase suppliers or buyers (dis-tributors) all as a means to eliminate rivalry, but there are problems associated with this level of thinking. Acquiring the competition often is associated with paying a premium and dealing with different organizational cultures; although there may be no competitors currently, new competitors may enter with different products and ultimately better serve many current customers. Purchasing suppliers or distributors takes a firm away from the business they do best, possibly allowing com-petitors to better develop and improve their products without being bogged down with supply chain issues they know little about.Several pitfalls firms should avoid when using the Five Forces Analysis, include (1) placing equal weight on all five forces instead of identifying the most pressing forces for their industry, (2) defining the industry too broad or too narrow, and (3) using the five forces to pin labels such as attractive or unattractive on an industry rather than using the model to more efficiently formulate strategies. When using Porter’s Five Forces Model as an external assessment tool in doing strategic planning, strive to identify AQCD opportunities and threats most important for success in a given industry, and most relevant to the firm’s vision and mission.Key Sources of Information for an External AuditA wealth of strategic information is available to organizations from both published and unpub-lished sources. Unpublished sources include customer surveys, market research, speeches at pro-fessional and shareholders’ meetings, television programs, interviews, and conversations with stakeholders. Published sources of strategic information include periodicals, journals, reports, government documents, abstracts, books, directories, newspapers, and manuals. A company website is usually an excellent place to start to find information about a firm, particularly on the Investor Relations web pages.There are many excellent websites for gathering strategic information, but six outstanding ones that the authors use routinely in performing an external audit are:1. http://finance.yahoo.com2. www.hoovers.com3. www.morningstar.com4. www,mergentonline.com5. http://globaledge.msu.edu/industries/6. Corporate website of companiesThe fifth website listed is operated by Michigan State University and provides industry pro-files that are an excellent source for information, news, events, and statistical data for any industry. Most college libraries subscribe to excellent online business databases that can then be used free by students to gather information to perform a strategic-management case analysis. Simply ask your reference librarian. Some outstanding library database sources of external audit information are described in Table 3-7; the authors use all of these sources, especially S&P Net Advantage’s Industry Surveys and IBISWorld, to obtain AQCD external factors for inclusion in an external assessment. Note also in Table 3-7 the PrivCo source is helpful for obtaining information about privately held firms; use www.owler.com for information about rival firms.Forecasting and Making AssumptionsForecasts are educated assumptions about future trends and events. Forecasting is a complex activity because of factors such as technological innovation, cultural changes, new products, improved services, stronger competitors, shifts in government priorities, changing social values, unstable economic conditions, and unforeseen events. Managers often must rely on published forecasts to effectively identify key external opportunities and threats.LO 3.4LO 3.5
78 PART 2 • STRATEGY FORMuLATIONA sense of the future permeates all action and underlies every decision a person makes. People eat expecting to be satisfied and nourished in the future. People sleep assuming that in the future they will feel rested. They invest energy, money, and time because they believe their efforts will be rewarded in the future. They build highways assuming that automobiles and trucks will need them in the future. Parents educate children on the basis of forecasts that they will need certain skills, attitudes, and knowledge when they grow up. The truth is we all make implicit forecasts throughout our daily lives. The question, therefore, is not whether we should forecast but rather how we can best forecast to enable us to move beyond our ordinarily unarticulated assumptions about the future. Can we obtain information and use it to make educated assumptions (forecasts) that better guide our current decisions and foster a more desirable future state of affairs? Assumptions must be made based on facts, figures, trends, and research. Strive for the firm’s assumptions to be more accurate than rival firms’ assumptions.No forecast is perfect; some are even wildly inaccurate. This fact accents the need for strate-gists to devote sufficient time and effort to study the underlying bases for published forecasts and to develop internal forecasts of their own. Key external opportunities and threats can be effec-tively identified only through good forecasts.Making AssumptionsPlanning would be impossible without assumptions. McConkey defines assumptions as the “best present estimates of the impact of major external factors, over which managers have little if any control, but which may exert a significant impact on performance or the ability to achieve desired results.”7 Strategists are faced with countless variables and imponderables that TABLE 3-7 Excellent Online Sources to Obtain EFE Matrix Factor Information• IBISWorld—Provides online USA Industry Reports (NAICS), U.S. Industry iExpert Summaries, and U.S. Business Environment Profiles. A global version of IBIS is also available.• Nexis Uni Academic—Provides online access to newspaper articles (including New York Times and Washington Post) and business information (including SEC filings).• Nexis Uni Company—Provides online access to extensive, current data on 13 millionIt collects and compiles information into excellent documents.• Mergent Online—Provides online access to Mergent’s Manuals, which include trend, descriptive, and statistical information on hundreds of public companies and industries. Unconsolidated company income statements and balance sheets are provided.• PrivCo—Provides information on privately held companies, including private financials and rev-enues; private M&A deals and deal multiples, private firm valuations, VC funding, private equity deal history. (Go to www.owler.com for information about competitors.)• Regional Business News—Provides comprehensive full-text coverage for regional business publica-tions; incorporates coverage of more than 80 regional business publications covering all metropolitan and rural areas within the United States.• Standard & Poor’s NetAdvantage—Provides online access to Standard & Poor’s (S&P) Industry Surveys, stock reports, corporation records, The Outlook, mutual fund reports, and more. Locate the “Company” tab at the top of the page or the “Simple Search” option located on the right side of the page. Use the “Company Profile” option.• Value Line Investment Survey—Provides excellent online information and advice on approximately 1,700 stocks, more than 90 industries, the stock market, and the economy. Company income state-ments and balance sheets are provided.• U.S. Securities and Exchange Commission—Provides the Form 10K for publicly held companies in the United States. Use the search box at the top of the page or look under the “Filings” tab along the top of the page.• Company Annual Reports On-Line (CAROL)—Provides direct links to publicly held companies’ financial statements in both Europe and the United States.Source: Based on information at www.fmarion.edu/library. companies.
CHAPTER 3 • THE ExTERNAL ASSESSMENT 79can be neither controlled nor predicted with 100 percent accuracy. Wild guesses should never be made in formulating strategies, but reasonable assumptions based on available information must always be made.By identifying future occurrences that could have a major effect on the firm and by making reasonable assumptions about those factors, strategists can carry the strategic-management process forward. Assumptions are needed only for future trends and events that are most likely to have a significant effect on the company’s business. Based on the best information at the time, assumptions serve as checkpoints on the validity of strategies. If future occurrences deviate significantly from assumptions, strategists know that corrective actions may be needed. Firms that compile the best information generally make the most accurate assumptions, which can lead to major competitive advantages.The External Factor Evaluation MatrixAn External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, techno-logical, and competitive information. The EFE Matrix provides an empirical assessment of how well a firm is handling external factors overall, including the firm’s effectiveness at capitalizing on opportunities and minimizing threats.Steps to Develop an EFE MatrixAn EFE Matrix can be developed in five steps:Step 1: Develop a Full and Narrow List of Key External FactorsConduct research about the focal company using the resources listed in Table 3.7. Compile and organize information into two data sets, opportunities and threats, developing a full list of per-haps 50 to 100 opportunity and threat factors relevant to the 10 external areas described previ-ously. Include factors most important to your firm’s industry, vision, mission, and strategies, considering the five forces just discussed. Then, narrow your data sets down to 20 key external factors that include specifically 10 opportunities and 10 threats. (Note: We use 10 and 10 because organizations commonly use this breakdown and the template at www.strategyclub.com uses 10 and 10). List opportunities first and then threats. Also, do not include strategies as opportunities, so for example, “to build two new manufacturing plants in Europe” is a strategy, not an oppor-tunity; there may be an underlying opportunity that could make that strategy reasonable, such as “eight European countries have repealed restrictions on the sale of generic drugs.”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, someone recently included as a threat in his EFE Matrix that “a hurricane can come.” Ninety-nine percent of the time that factor should not be included in the matrix; instead, conduct research to identify external factors that relate to the firm’s vision, mis-sion, strategies, and competitive advantages.When determining particular factors to include in an EFE Matrix, and when assigning weights and ratings (Step 2) focus on a narrow industry perspective. For example, for Spirit Airlines, the industry is discount airlines, rather than all airlines, and for Lamborghini, the industry is high-end sports cars, not simply automobiles. This narrow industry perspective is important to facilitate external factors being stated in terms that meet the AQCD Test discussed earlier.In developing a list of key external factors, be mindful of the AQCD Test because vagueness in stating factors must be avoided; vagueness gives analysts no guidance in assigning weights or ratings in developing an EFE Matrix. Recall that Edward Deming said, “In God we trust. Everyone else bring data.” Include “actionable” factors as defined previously in this chapter.LO 3.6
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
CHAPTER 3 • THE ExTERNAL ASSESSMENT 83TABLE 3-10 An Example Competitive Profile MatrixCompany 1Company 2Company 3Critical Success FactorsWeightRatingScoreRatingScoreRatingScoreAdvertising0.2010.2040.8030.60Global Expansion0.2040.8010.2020.40Financial Position0.1540.6020.3030.45Management0.1040.4030.2010.10Product Quality0.1040.4030.3020.20Customer Loyalty0.1040.4030.3020.20Price Competitiveness0.1030.3020.2010.10Market Share0.0510.0540.2030.15Total1.003.152.502.20Note: The ratings values are as follows: 1 = response is poor, 2 = response is average, 3 = response is above average, 4 = response is superior. As indicated by the total weighted score of 2.20, Company 3 is performing worst. Only 8 critical success factors are included for simplicity; in actuality, however, this is too few. The template asks that 12 factors be included and to tailor factors to a given industry.of competitive advantage within an industry, as well as other factors that are crucial for a firm to succeed within a given industry; critical success factors in a CPM can include both internal and external issues. List critical success factors from highest weight to lowest weight in a CPM.Weights in a CPM are industry-based and sum to 1.0. Ratings in a CPM are assigned to quantify how well a firm and its key competitors are performing on each critical success factor; ratings reveal the degree of effectiveness of the firm’s strategies. Assign a rating between 1 and 4 to each key factor to indicate how effectively the firm’s current strategies respond to the fac-tor, where 4 = the response is superior, 3 = the response is above average, 2 = the response is average, and 1 = the response is poor. Ratings are company-based; weights are industry-based.A sample CPM is provided in Table 3-10. In this example, the two most important factors to being successful in the industry are “advertising” and “global expansion,” as indicated by weights of 0.20. If there were no weight column in this analysis, note that each factor then would be equally important. Thus, including a weight column yields a more robust analysis because it enables the analyst to capture perceived or actual levels of importance. Note in Table 3-10 that Company 1’s strategies are responding in a superior fashion to “product quality,” as indicated by a rating of 4, whereas Company 2’s strategies are superior regarding “advertising.” Overall, Company 1’s strategies are responding best, as indicated by the total weighted score of 3.15 and Company 3 is responding worst. Never duplicate ratings in a row in a CPM; go ahead and make judgments or decisions as to appropriate ratings based on your research and knowledge of the focal firm and rival companies. (Note: The point of this example is to illustrate the mechanics of developing a CPM rather than having industry-specific factors.)Other than the critical success factors listed in the sample CPM, factors often included in this analysis include breadth of product line, effectiveness of sales distribution, proprietary or patent advantages, location of facilities, production capacity and efficiency, experience, union relations, technological advantages, and e-commerce expertise. In generating the list of critical success factors, strive to include factors that differentiate firms within the industry (i.e., factors that determine competitive advantages).Just because one firm receives a 3.20 overall total weighted score and another receives a 2.80 in a CPM, it does not necessarily follow that the first firm is precisely 14.3 percent better than the second, but it does suggest that the first firm is performing better on the variables included in the CPM. Regarding weights in a CPM or EFE Matrix, be mindful that 0.08 is mathematically 33 percent higher than 0.06, so even small differences can reveal important perceptions regarding the relative importance of various factors. The aim with numbers is to assimilate and evaluate information in a meaningful way that aids in decision making.
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.”
CHAPTER 3 • THE ExTERNAL ASSESSMENT 85Establish 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 3-4How to Gain and Sustain Competitive AdvantagesIMPLICATIONS FOR STUDENTSIn developing and presenting the external assessment for your firm, be mindful that gaining and sustaining competitive advantage is the overriding purpose of developing the EFE Matrix and CPM. During this “external” section of your written or oral project, emphasize how and why particular factors can yield competitive advantage for the firm. In other words, instead of robotically going through the weights and ratings (which, by the way, are critically important), highlight various factors in light of where you are leading the firm. Make it abundantly clear in your discussion how your firm, with your recommendations, can subdue rival firms or at least profitably compete with them. Showcase during this part of your project the key underlying reasons how and why your firm can prosper among rivals. Remember to be prescriptive, rather than descriptive, in the manner that you present your entire project. If presenting your proj-ect orally, be self-confident and passionate rather than timid and uninterested. Definitely “bring the data” throughout your project because “vagueness” is the most common downfall of students in doing case analysis. To obtain the most recent information about your case company, read the firm’s most recent quarterly report; the narrative that accompanies quarterly reports is excellent.It is necessary for students in developing an EFE Matrix to in-clude specific (AQCD) factors related to direct competitors, trends in the economy, legal or tax issues, consumer attitudes, consumer demographics, and other similar facts, trends, and events. In ad-dition, there are factors associated with Porter’s Five Forces that may need including. For example, you may want to include factors such as the following:1. China recently established four free-trade zones allowing for-eign companies to establish operations in the country without having a Chinese partner; this may be an external threat because rival firms can enter the market more easily, such as in the au-tomobile industry.2. Potential substitute products may be a threat. For example, con-sumption of bottled water rising 8 percent annually is a threat for Dr Pepper Snapple.3. Suppliers in any industry can potentially siphon away profits as easily as a direct competitor; suppliers raising prices by 10 percent may be an external threat.
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 87MyLab Management Writing AssignmentsIf your instructor is using MyLab Management, go to www.pearson.com/mylab/management for Auto-graded writing questions as well as the following Assisted-graded writing questions: 3-40. Describe the “process of performing an external audit” in an organization doing strategic planning for the first time. 3-41. Compare and contrast the duties and responsibilities of a Chief Information Officer (CIO) with a Chief Technol-ogy Officer (CTO) in a large firm. 3-20. Explain why it is appropriate for ratings in an EFE Matrix to be 1, 2, 3, or 4 for any opportunity or threat. 3-21. Why is inclusion of about 20 factors recommended in the EFE Matrix rather than about 10 factors or about 40 factors? 3-22. In developing an EFE Matrix, explain why is it advan-tageous to arrange your opportunities according to the highest weight, and your threats likewise? 3-23. In developing an EFE Matrix, would it be best to have 10 opportunities and 10 threats or would 17 opportuni-ties (or threats) be fine with 3 of the other to achieve a total of 20 factors as desired? 3-24. Could or should critical success factors in a CPM in-clude external factors? Explain. 3-25. Explain how to conduct an external strategic- management audit in a business versus as a student performing case analysis. 3-26. Identify a recent economic, social, political, or techno-logical trend that significantly affects the local Pizza Hut. 3-27. Discuss the following statement: Major opportunities and threats usually result from an interaction among key environmental trends rather than from a single external event or factor. 3-28. Use Porter’s Five-Forces Model to evaluate competi-tiveness within the U.S. banking industry. 3-29. How does the external audit affect other components of the strategic-management process? 3-30. Construct an EFE Matrix for an organization of your choice. 3-31. Let’s say your boss develops an EFE Matrix that in-cludes 62 factors. How would you suggest reducing the number of factors to 20? 3-32. Discuss the ethics of gathering competitive intelligence. 3-33. Discuss the ethics of cooperating with rival firms. 3-34. Do you agree with Porter’s view that competitive positioning within an industry is a key determinant of competitive advantage(s)? 3-35. Define, compare, and contrast the weights versus rat-ings in an EFE Matrix. 3-36. What is the different between factors listed in an EFE Matrix versus critical success factors listed in a CPM? In which matrix is it particularly important to include specific, actionable factors? Why? 3-37. List the 10 external forces that give rise to opportunities and threats. 3-38. Why do annual reports often state external risk informa-tion in really vague terms; why should strategists avoid including such vagueness in developing an EFE Matrix? 3-39. Explain the AQCD Test for determining the quality of an external factor. Why should the AQCD Test be met to the extent possible in performing an external assessment?ASSURANCE-OF-LEARNING EXERCISESSET 1: STRATEGIC PLANNING FOR COCA-COLAEXERCISE 3ADevelop an EFE Matrix for Coca-ColaPurposeThis exercise will give you practice in developing an EFE Matrix. An EFE Matrix summarizes the results of an external audit. This is an important strategic-planning tool widely used by strategists.InstructionsStep 1 Join with two other students in class, and jointly prepare an EFE Matrix for Coca-Cola. Refer to the Cohesion Case (p. 28) and to Exercise 1A (p. 37), if necessary, to identify exter-nal opportunities and threats. Make sure the factors you include are actionable, quantitative, comparative, and specific. Use the online sources listed in Table 3-7. Be sure not to include strategies as opportunities; but do include as many monetary amounts, percentages, num-bers, and ratios as possible.Step 2 All three-person teams participating in this exercise should record their EFE total weighted scores on the board. Put your initials after your score to identify it as your team’s score.Step 3 Compare the total weighted scores. Which team’s score came closest to the instructor’s an-swer? Discuss reasons for variation in the scores reported on the board.
88 PART 2 • STRATEGY FORMuLATIONEXERCISE 3BDevelop a Competitive Profile Matrix for Coca-ColaPurposeMonitoring competitors’ performance and strategies is a key aspect of an external audit. This exercise is designed to give you practice in evaluating the competitive position of organizations in a given in-dustry and assimilating that information in a CPM.InstructionsStep 1 Turn back to the Cohesion Case and review the section on competitors (p. 28). Also view online resources that compare Coca-Cola with Pepsi. Use the sources listed in Table 3-7.Step 2 Prepare a CPM that includes Coca-Cola, Pepsi, and Dr Pepper.Step 3 Turn in your CPM for a classwork grade.SET 2: STRATEGIC PLANNING FOR MY UNIVERSITYEXERCISE 3CDevelop an EFE Matrix for Your College or UniversityPurposeMost colleges and universities do strategic planning. Institutions are consciously and systematically identifying and evaluating external opportunities and threats facing higher education in your state, the nation, and the world.InstructionsStep 1 Join with two other individuals in class and jointly prepare an EFE Matrix for your institution.Step 2 Go to the board and record your total weighted score in a column that includes the scores of all three-person teams participating. Put your initials after your score to identify it as your team’s score.Step 3 Which team viewed your college’s strategies most positively? Which team viewed your col-lege’s strategies most negatively? Discuss the nature of the differences.EXERCISE 3DDevelop a Competitive Profile Matrix for Your College or UniversityPurposeYour college or university competes with all other educational institutions in the world, especially those in your own state. State funds, students, faculty, staff, endowments, gifts, and federal funds are areas of competitiveness. Other areas include athletic programs, dorm life, academic reputation, loca-tion, and career services. The purpose of this exercise is to give you practice in thinking competitively about the business of education in your state.InstructionsStep 1 Identify two colleges or universities in your state that compete directly with your institu-tion for students. Interview several persons, perhaps classmates, who are aware of particular strengths and weaknesses of those universities. Record information about the two competing universities.Step 2 Prepare a CPM that includes your institution and the two competing institutions. Include the following 10 factors in your analysis:1. Tuition costs2. Quality of faculty3. Academic reputation4. Average class size5. Campus landscaping
CHAPTER 3 • THE ExTERNAL ASSESSMENT 896. Athletic programs7. Quality of students8. Graduate programs9. Location of campus10. Campus cultureStep 3 Submit your CPM to your instructor for evaluation.SET 3: STRATEGIC PLANNING TO ENHANCE MY EMPLOYABILITYEXERCISE 3EHow Competitive Is Your State Among All States for Finding a Job?PurposeJust like companies, states compete against each other across numerous variables. For more than a decade, CNBC has been conducting annual research to determine where each U.S. state ranks (out of the 50 states) in terms of their quality of life, job prospects, business attractiveness, and education, among many other things. Each year, data is collected on more than 60 measures of competitiveness and all 50 states are scored on each measure, ranging from economic policies and taxes, to the cost of food, to the quality of their workforces.The purpose of this exercise is to determine how your state ranks in terms of its job outlook and prospects. This information can enhance your job search as you near completion of a business admin-istration degree.InstructionsStep 1 Go to the following website https://www.cnbc.com/2017/07/11/top-states-to-find-a-job-in-america-in-2017.html and take a while to explore the types of reports offered, as well as the source of data collected and used to create such reports.Step 2 Review where your state ranks on the list of top states for business, top states to get an education, and top states to find a job. Determine the three best competitive aspects of your state.Step 3 Are there similarities between your state’s ranking on each of these three reports? Do you think job outlooks, education, and business attractiveness are inherently related? Develop a report explaining your answer. Use information from the reports to support your arguments. What actions could your state take to improve its competitiveness overall?EXERCISE 3FCompare and Contrast CareerBuilder, Glassdoor, Monster Jobs, and ZipRecruiterPurposeJob hunting websites compete against each other for your business. Both job seekers and companies with job openings use job hunting websites, especially CareerBuider, Glassdoor, Monster Jobs, and ZipRecruiter. The purpose of this exercise is to familiarize you with the operation, strengths, and weaknesses of these four websites.InstructionsStep 1 Review the four named websites taking note of what you especially like and dislike.Step 2 Prepare a CPM for CareerBuilder. Include the three rival websites in your analysis.EXERCISE 3GA Template Competency TestPurposeThe free Excel strategic planning template at www.strategyclub.com is widely used for strategic planning by students and small businesses; this exercise aims to enhance your familiarity with the
90 PART 2 • STRATEGY FORMuLATIONtemplate. Developing competence with the template will enable you to place this skill appropriately on your resume, in addition to facilitating your development of a comprehensive strategic plan for an assigned case company.InstructionsAnswer the following six questions about the template. Discuss your answers with classmates to de-termine any issues or concerns.Questions1. How many factors does the template include in an EFE Matrix; in a CPM?2. What happens using the template if you enter an inappropriate rating or weight such as a weak-ness rating of 4 or a weight of 1.2?3. In using the template, why are changes to a matrix done on Part I or Part II rather than on a matrix itself?4. Why is it best to transform a firm’s income statement and balance sheet into the template finan-cial statement format early in developing a strategic plan for a case company?5. What are key differences between Part I and Part II in the template?6. Does the template address vision and/or mission statements?SET 4: INDIVIDUAL VERSUS GROUP STRATEGIC PLANNINGEXERCISE 3H What External Forces Are Most Important In Strategic Planning?PurposeA prioritized list of external factors is needed for effective strategic planning. Oftentimes the process entails all managers individually ranking the factors identified, from 1 (most important) to 20 (least important). Prioritization is absolutely essential in strategic planning because no organization can do everything that would benefit the firm; tough choices among good choices have to be made.External forces can be divided into five broad categories: (1) economic forces; (2) social, cultural, demographic, and natural environment forces; (3) political, governmental, and legal forces; (4) tech-nological forces; and (5) competitive forces. For some companies or organizations at various times, some forces may be more important to include than others. This exercise reveals the authors’ ranking of the relative importance of five external forces for inclusion in an external assessment.The purpose of this exercise is to examine more closely the external areas of a business. In ad-dition, the purpose of this exercise is to examine whether individual decision-making is better than group decision-making. Academic research suggests that groups make better decisions than individu-als about eighty percent of the time.InstructionsRank the five external forces as to their relative importance (1 = most important, 5 = least important). First, rank the forces as an individual. Then, rank the forces as part a group of three. Thus, determine what person(s) and what group(s) here today can come closest to the expert ranking. This exercise enables examination of the relative effectiveness of individual versus group decision-making in stra-tegic planning.Steps1. Fill in Column 1 in Table 3-12 to reveal your individual ranking of the relative importance of the five forces (1 = most important, 2 = next most important, etc.). For example, if you feel Economic factors are the 4th most important external force, then enter a 4 in Table 3-12 in Column 1 beside Economic.2. Fill in Column 2 in Table 3-12 to reveal your group’s ranking of the relative importance of the five forces (1 = most important, 2 = next most important, etc.).3. Fill in Column 3 in Table 3-12 to reveal the expert’s ranking of the five forces.
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.
4 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTChapter 1 provides an overview of strategic management, introduces a practical, integra-tive model of the strategic-management process (illustrated in Figure 1-1), and defines basic activities and terms in strategic management. The primary focus of this textbook is on “learning by doing.” From this text, students learn “how to do strategic planning.” The integrative model reveals the “layout of this text” and the “process of strategic planning” so students can follow the journey in a meaningful way.An exciting new feature of this edition at the beginning of each chapter is an exemplary strate-gist capsule to showcase a famous strategist for doing an exemplary job applying strategic-planning concepts, tools, and techniques. The first person featured for excellent strategic-management prac-tices is Vince Lombardi, former head coach and General Manager of the Green Bay Packers pro-fessional football team. At the end of each chapter, a new, one-page, mini-case on a company is provided with respective questions that apply various concepts, tools, and techniques presented.What Is Strategic Management?Strategic management is the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. As this definition implies, strategic management focuses on integrating management, marketing, finance, account-ing, production, and information systems to achieve organizational success. Strategic manage-ment can also be defined as the executive-level activity of distributing resources across products and regions to gain a sustainable competitive advantage over rivals.Firms have liberty to compete many different ways in a variety of geographic areas, so deci-sions must be made regarding what markets to enter, what markets to avoid, which competitor’s space to invade, and which to avoid. A firm’s survival can hinge on these decisions being right; this textbook unveils the process needed for making effective strategic decisions. For example, Westinghouse Electric’s recent strategy to build a new generation of nuclear power plants was ill formulated and thus resulted in bankruptcy and eventual acquisition (in 2018) by Canada’s Brookfield Business Partners LP.LO 1.1EXEMPLARY STRATEGIST SHOWCASEDCoach Vince LombardiThe legendary football coach of the Green Bay Packers, Vince Lombardi (1913–1970) changed a losing culture into a winning culture. Founded in 1919 and headquartered in the small, frigid Wisconsin town of Green Bay, the Packers are the only nonprofit, community-owned major league professional sports team in the United States. The third-oldest franchise in the National Football League (NFL), the Packers were perennial losers until Vince Lombardi took over in 1959 as head coach and general man-ager. The very existence of the Packer franchise was in jeopardy when Lombardi arrived in Green Bay. Coming off a 1–10–1 season and 11 straight losing seasons, Lombardi led the Packers to 3 NFL champion-ships in his first 7 seasons. The Pro Football Hall of Fame says: “Lombardi is arguably the greatest football coach of all time and is on the short list of history’s greatest coach, regardless of sport.” Because of his suc-cess as both a manager and strategist, Lombardi became a national sym-bol of single-minded determination to win. The following quotes from Vince Lombardi reveal his basic strategy for winning, which was based on building character, commitment, and setting an exemplary example:1. Winning is not everything, but making the effort to win is.2. The objective is to win—fairly, squarely, decently, by the rules, but to win.3. The difference between a successful person and others is not a lack of strength and not a lack of knowledge, but rather a lack of will.4. Winning is a habit. Watch your thoughts, they become your beliefs. Watch your beliefs, they become your words. Watch your words, they become your actions. Watch your actions, they be-come your habits. Watch your habits, they become your character.Source: Based on Michael Mink, “Coach Vince Lombardi Set A Superb Standard,” Investors Business Daily, (February 5, 2016): A3.CSU Archives/Everett Collection Inc/Alamy Stock Photo
CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 5Formulating strategies such as deciding what to produce and where, when, and how to compete is what leads to a sustainable competitive advantage. Even the best strategies must be implemented well through operational- or tactical-level activities like hiring and motivating employees, cutting costs, benchmarking, outsourcing, securing financing, and keeping facilities warm (or cool). Implementation activities are vitally important and must be monitored by strate-gists, but effectively formulated strategies, more so than operational tactics, is generally what leads to sustained competitive advantages.To gain a sustainable competitive advantage, firms need to provide unique products and services. Uniqueness matters. For example, Apple’s computers, iPads, and iPhones all run on Apple’s unique operating system; the only way to have an iPhone is to also be a user of Apple’s operating system. To assure “effective uniqueness,” firms must accept concessions in the strategy process to gain a sustainable competitive as exemplified in the Apple example. Another example is Rolex, and the company not offering cheaper lines of watches. Rolex has resisted increasing market share by offering new cheaper product lines to attract new customers. Instead, Rolex has maintained its unique reputation and market share as the top luxury watch brand in the world. Rolex, and all successful firms, thus make tradeoffs and tough decisions throughout the process of developing, producing, and selling products.Chapter 2 discusses core values, vision, and mission—items that represent the starting point for developing and nurturing a firm’s uniqueness. Everything in strategy flows from a particular firm’s core values, vision, and mission, and all successful firms are different (unique) from rival firms in some key ways.The term strategic management is used at many colleges and universities as the title for the capstone course in business administration. This course integrates material from all business courses, and in addition, introduces new strategic-management concepts and techniques being widely used by firms. Two special features of this text are a Cohesion Case (on Coca-Cola) and end-of-chapter assurance-of-learning exercises, as described in Table 1-1.Strategic PlanningThe term strategic management in this text is used synonymously with the term strategic plan-ning. The latter term is more often used in the business world, whereas the former is often used in academia. Sometimes the term strategic management is used to refer to strategy formulation, TABLE 1-1 A Cohesion Case and Assurance-of-Learning ExercisesA distinguishing, popular feature of this text is the Cohesion Case, named so because a written case on a company (Coca-Cola) appears at the end of this chapter, and then all other subsequent chapters feature end-of-chapter assurance-of-learning exercises to apply strategic-planning concepts, tools, and techniques to the Cohesion Case company. Coca-Cola is a well-known, well-managed global firm undergoing stra-tegic change. By working through the Coca-Cola–related exercises, students become well prepared to develop an effective strategic plan for any company (case) assigned to them. Case analysis is a core part of almost every strategic-management course globally.We are thrilled to provide new sets of end-of chapter assurance-of-learning exercises. All exercises have been carefully designed to “assure learning” by applying chapter concepts, tools, and techniques in a fun and meaningful way to best assure that competence is gained in particular employability skills discussed near the end of this chapter. The four sets of assurance-of-learning exercises that appear at the end of each chapter are as follows:Set 1: Strategic Planning for Coca-Cola—Exercises that apply chapter material to the Coca-Cola Cohesion Case Company; these exercises ready students for doing case analysis as “knowledge application and analysis” and “information technology” skills are honed.Set 2: Strategic Planning for My University—Exercises that apply chapter material to your college or university; these exercises ready students for doing case analysis in nonprofit organizations as “business ethics and social responsibility” and “data literacy” skills are honed.Set 3: Strategic Planning to Enhance My Employability—Exercises that apply chapter material to in-dividuals instead of companies; these exercises prepare students for making career choices and enable students to apply strategy tools, techniques, and concepts to enhance their own career.Set 4: Individual versus Group Strategic Planning—Exercises that apply chapter material by comparing the effectiveness of individual versus group decisions; these are fun in-class group activities that yield “a winning individual and a winning group” for each exercise as critical-thinking and collaboration skills are honed.
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.
CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 7The strategic-management process is not as cleanly divided and neatly performed in practice as the strategic-management model suggests. Strategists do not go through the process in lock-step fashion. Generally, there is give-and-take among hierarchical levels of an organization. To develop a strategic plan, many organizations conduct formal meetings semiannually to discuss and update the firm’s vision, mission, opportunities, threats, strengths, weaknesses, strategies, objectives, policies, and performance. These meetings are commonly held off premises and are called retreats. The rationale for periodically conducting strategic-management meetings away from the work site is to encourage more creativity and candor from participants. Good communi-cation and feedback are needed throughout the strategic-management process.Application of the strategic-management process is typically more formal in larger and well-established organizations. Formality refers to the extent that participants, responsibilities, author-ity, duties, and “basic approach” are objective and clear rather than subjective and vague. Smaller businesses tend to be less formal. Firms that compete in complex, rapidly changing environ-ments, such as technology companies, tend to be more formal in strategic planning. Firms that have many divisions, products, markets, and technologies also tend to be more formal in apply-ing strategic-management concepts. Greater formality in applying the strategic-management process is usually positively associated with organizational success.2Stages of Strategic ManagementThe strategic-management process consists of three stages: strategy formulation, strategy implementation, and strategy evaluation. Strategy formulation includes developing a vision and mission, identifying an organization’s external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue. Strategy-formulation issues include deciding what new businesses to enter, what businesses to abandon, whether to expand operations or diversify, whether to enter international markets, whether to merge or form a joint venture, and how to avoid a hostile takeover.LO 1.2ETHICS CAPSULE 1What Ethics Variable Is Most Important in Doing Business?Three professors from Harvard Business School, Amy Cuddy, Susan Fiske, and Peter Glick, recently revealed in a new book, Presence, that the most important variable in doing business with someone you do not know is trustworthiness. The authors say that within seconds of meeting someone, people determine first and foremost the extent that the person is trustworthy. They say that variable is far more important than competence, intelligence, looks, strength, height, and numerous other variables.Professor Cuddy explains, “From an evolutionary perspective, it was more crucial to our survival that we know quickly whether a person(s) deserves our trust.” In other words, for nearly a million years of man’s evolution, when people first met other people, they assessed within seconds whether the new person(s) was trustwor-thy, meaning is this person going to steal from us or try to kill us. Trustworthiness, these authors report, was always assessed before competence (i.e., can this person start a fire or catch a fish). Cuddy says competence is evaluated today only after trust is established because physically and psychologically, man today is the result of various traits being promoted and others extinguished over the millennia, and trustworthiness is number one according to these researchers.Curry, Fiske, and Glick go on to say that focusing too much today on displaying your strengths or that you are smart, whether in a job interview or in seeking to do business with someone, can backfire. Cuddy says, “A warm, trustworthy person who is also strong elicits admiration, but only after you’ve established trust does your strength become a gift, rather than a threat.”Based on Jenna Goudreau, A Harvard psychologist says people judge you based on 2 criteria when they first meet you, http://www.aol.com/ article/2016/01/16/a-harvard-psychologist-says-people-judge-you- based-on-2-criteria/21298315/?cps=gravity_4816_5749740174701162847Who Is This Approaching?MAURICIO ANTON/Science Photo Library/Getty Images
8 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTBecause no organization has unlimited resources, strategists must decide which alterna-tive strategies will benefit the firm most. Strategy-formulation decisions commit an organiza-tion to specific products, markets, resources, and technologies over an extended period of time. Strategies determine long-term competitive advantages. For better or worse, strategic decisions have major multifunctional consequences and enduring effects on an organization. Top managers have the best perspective to understand fully the ramifications of strategy-formulation decisions; they have the authority to commit the resources necessary for implementation.Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executed effi-ciently. Strategy implementation includes developing a strategy-supportive culture, creating an organizational structure, redirecting marketing efforts, preparing budgets, developing and using information systems, devising tactics, and linking employee compensation to organizational performance.Strategy implementation often is called the “action stage” of strategic management. Implementing strategy means mobilizing employees and managers to put formulated strategies into action. Often considered to be the most difficult stage in strategic management, strategy implementation requires personal discipline, commitment, and sacrifice. Successful strategy implementation hinges on managers’ ability to motivate employees, which is more an art than a science. Strategies formulated but not implemented serve no useful purpose.Interpersonal skills are especially critical for successful strategy implementation. Strategy-implementation activities affect all employees and managers in an organization. Every division and department must decide on answers to questions such as “What must we do to implement our part of the organization’s strategy?” and “How best can we get the job done?” The challenge of implementation is to stimulate managers and employees throughout an organization to work with pride and enthusiasm toward achieving stated objectives.Strategy evaluation is the final stage in strategic management. Managers desperately need to know when particular strategies are not working well; strategy evaluation is the primary means for obtaining this information. All strategies are subject to future modification because external and internal factors constantly change. Three fundamental strategy-evaluation activities are (1) reviewing external and internal factors that are the bases for current strategies, (2) measuring performance, and (3) taking corrective actions. Strategy evaluation is needed because success today is no guarantee of success tomorrow! Success always creates new and different problems; complacent organizations experience demise.Formulation, implementation, and evaluation of strategy activities occur at three hierarchi-cal levels in a large organization: corporate, divisional or strategic business unit, and functional. By fostering communication and interaction among managers and employees across hierarchical levels, strategic management helps a firm function as a competitive team. Most small businesses and some large businesses do not have divisions or strategic business units; they have only the corporate and functional levels. Nevertheless, managers and employees at these two levels should be actively involved in strategic-management activities.Peter Drucker says the prime task of strategic management is thinking through the overall mission of a business—that is, of asking the question, “What is our business?” This leads to the setting of objec-tives, the development of strategies, and the making of today’s decisions for tomorrow’s results. This clearly must be done by a part of the organization that can see the entire busi-ness; that can balance objectives and the needs of today against the needs of tomorrow; and that can allocate resources of men and money to key results.3Integrating Analysis and IntuitionEdward Deming once said, “In God we trust. All others bring data.” The strategic-management process can be described as an objective, logical, systematic approach for making major decisions in an organization. It attempts to organize qualitative and quantitative informa-tion in a way that allows effective decisions to be made under conditions of uncertainty. Yet strategic management is not a pure science that lends itself to a nice, neat, one-two-three approach.LO 1.3
CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 9Based on past experiences, judgment, and feelings, most people recognize that intuition is essential to making good strategic decisions. Some managers and owners of businesses pro-fess to have extraordinary abilities for using intuition alone in devising brilliant strategies. For example, Will Durant, who organized General Motors (GM), was described by Alfred Sloan as “a man who would proceed on a course of action guided solely, as far as I could tell, by some intuitive flash of brilliance. He never felt obliged to make an engineering hunt for the facts. Yet at times, he was astoundingly correct in his judgment.”4 Albert Einstein acknowledged the impor-tance of intuition when he said, “I believe in intuition and inspiration. At times I feel certain that I am right while not knowing the reason. Imagination is more important than knowledge because knowledge is limited, whereas imagination embraces the entire world.”5Although some organizations today may survive and prosper because they have intuitive geniuses managing them, most are not so fortunate. Most organizations can benefit from inte-grating intuition and analysis in decision making. Choosing an intuitive or analytic approach to decision making is not an either–or proposition. Managers at all levels in an organization inject their intuition and judgment into strategic-management analyses. Analytical thinking and intui-tive thinking complement each other.Operating from the I’ve-already-made-up-my-mind-don’t-bother-me-with-the-facts mode is not management by intuition; it is management by ignorance.6 Drucker says, “I believe in intu-ition only if you discipline it. ‘Hunch’ artists, who make a diagnosis but don’t check it out with the facts, are the ones in medicine who kill people, and in management kill businesses.”7 In a sense, the strategic-management process is an attempt to duplicate what goes on in the mind of a brilliant, intuitive person who knows the business and assimilates and integrates that knowledge through analysis in formulating strategies.As Henderson notes:The accelerating rate of change today is producing a business world in which custom-ary managerial habits in organizations are increasingly inadequate. Experience alone was an adequate guide when changes could be made in small increments. But intuitive and experience-based management philosophies are grossly inadequate when decisions are strategic and have major, irreversible consequences.8Adapting to ChangeThe strategic-management process is based on the belief that organizations should continually monitor internal and external events and trends so that timely changes can be made as needed. The rate and magnitude of changes that affect organizations are increasing dramatically, as evi-denced by how the drop in oil prices caught so many firms by surprise. Firms, like organisms, must be “adept at adapting” or they will not survive.To survive, all organizations must astutely identify and adapt to change, as the Chinese Mobike Company does as revealed in the Global Capsule 1 on page 10. The strategic-management process is aimed at allowing organizations to adapt effectively to change over the long run. Waterman noted:In today’s business environment, more than in any preceding era, the only constant is change. Successful organizations effectively manage change, continuously adapting their bureaucracies, strategies, systems, products, and cultures to survive the shocks and prosper from the forces that decimate the competition.9The need to adapt to change leads organizations to key strategic-management questions, such as “What kind of business should we become?” “Are we in the right field(s)?” “Should we reshape our business?” “What new competitors are entering our industry?” “What strate-gies should we pursue?” “How are our customers changing?”; and “Are new technologies being developed that could put us out of business?”Online commerce is forcing hundreds of brick-and-mortar retailers to change or liquidate. The fashion retailer Bebe Stores recently announced it is closing all its 168 stores and going online only. Yarden Research reports that 29.1 percent of retail sales of general merchandise, apparel and accessories, and furniture in America is now purchased online. Companies such as Macy’s and Target are converting more and more of their retail store space to warehouse/ distribution area rather than being open for customer shopping.
10 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTKey Terms in Strategic ManagementBefore we further discuss strategic management, we should define ten key terms: competitive advantage, strategists, vision and mission statements, external opportunities and threats, inter-nal strengths and weaknesses, long-term objectives, strategies, annual objectives, and policies.Competitive AdvantageStrategic management is all about gaining and maintaining competitive advantage. This term can be defined as any activity a firm does especially well compared with activities done by rival firms, or any resource a firm possesses that rival firms desire. For example, having fewer fixed assets than rival firms can provide major competitive advantages. Apple Inc. has virtually no manufacturing facilities of its own, whereas rival Sony owns 57 electronics factories. Apple relies almost entirely on contract manufacturers for production of its products.Normally, a firm can sustain a competitive advantage for only a certain period because of rival firms imitating and undermining that advantage. Thus, it is not adequate simply to obtain competitive advantage. A firm must strive to achieve sustained competitive advantage by doing the following:1. Continually adapting to changes in external trends and events and internal capabilities, competencies, and resources.2. Effectively formulating, implementing, and evaluating strategies that capitalize on those factors.3. Offering products that are unique and not easily duplicated by rivals.4. Accepting tradeoffs by deciding what not to do; no firm can be everything to everybody.StrategistsStrategists are the individuals most responsible for the success or failure of an organization. They have various job titles, such as chief executive officer, chief strategy officer, president, owner, chair of the board, executive director, chancellor, dean, and entrepreneur. Jay Conger, professor of organizational behavior at the London Business School and author of Building Leaders, says, “All strategists have to be chief learning officers. We are in an extended period of change. If our LO 1.4GLOBAL CAPSULE 1Mobike: Global Bike Renting Takes off Like a Jet PlaneOn a political map, the boundaries between countries may be clear, but on a competi-tive map showing the real flow of financial and industrial activity, as well as idea shar-ing, the boundaries have largely disap-peared. The speedy flow of information has eaten away at national boundaries so that people worldwide readily see for themselves how other people live and work. We have become a borderless world with global citi-zens, global competitors, global customers, global suppliers, global distributors, and global entrepreneurs.There are millions of start-up businesses rolling out services globally. For example, Mobike in Beijing, China, is a bicycle-sharing business with more than 100 million users who use the com-pany’s 6 million “connected” bikes. Members pay a fee for the privilege and retrieve a bike from one docking station and return it to another, but recently Mobike members simply download the company app, find a bike near them, scan a code to unlock it, and then drop the bike off wherever they like. GPS and wireless technology built into the bike enable Mobike to track the bike’s whereabouts. No docking stations are needed. This type of small business likely would be viable in many cities all over the globe.In the United States, the largest bike-share fleet resides in Dallas, Texas where 18,000 bikes flood Dallas streets and users are not required to use racks; racks are required in New York City. The rackless business model is the norm in China, but there, and in Dallas, bikes end up in trees, creeks, yards, and block sidewalks.Source: Based on Clifton Leaf, “Ideas Know No Borders,” Fortune, August 1, 2017, p. 10. Also, Ken Smith, “A Bike-Share Invasion From China,” Bloomberg Businessweek, November 13, 2017, p. 22. Also, Eliot Brown, “It’s the Wild West for Bike Sharing,” March 27, 2018, p. B4.Follow Me BikingNatasha-Aleksandra/Shutterstock
CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 11leaders aren’t highly adaptive and great models during this period, then our companies won’t adapt either, because ultimately leadership is about being a role model.”Strategists help an organization gather, analyze, and organize information. They track indus-try and competitive trends, develop forecasting models and scenario analyses, evaluate corporate and divisional performance, spot emerging market opportunities, identify business threats, and develop creative action plans. Strategic planners usually serve in a support or staff role. Usually found in higher levels of management, they typically have considerable authority for decision making in the firm. The CEO is the most visible and critical strategic manager. Any manager who has responsibility for a unit or division, responsibility for profit and loss outcomes, or direct authority over a major piece of the business is a strategic manager (strategist).The chief strategy officer (CSO) position has become common in many organizations. Hundreds of companies have appointed a new chief strategy officer in the last couple of years, including Talon International, TeleTech, Fleet Complete, Ringler Associates, LRES, Amber Engine, Beaver-Visitec International, Momentum Worldwide, PGi, TIA, World Surf League, Bank of Hawaii, Snapdeal, Oramed, Saatva, Centrillion, Geisinger Health System, and Amplifi Commerce.Strategists differ as much as organizations do, and these differences must be considered in the formulation, implementation, and evaluation of strategies. Strategists differ in their atti-tudes, values, ethics, willingness to take risks, concern for social responsibility, concern for profitability, concern for short-run versus long-run aims, and management style; some will not even consider various types of strategies because of their personal philosophies. The founder of Hershey, Milton Hershey, built the company so that he could afford to manage an orphanage. From corporate profits, Hershey today cares for about 850 boys and 950 girls in its boarding school for pre-K through grade 12.Athletic coaches are also strategists. Football, basketball, baseball, soccer, and in fact many ath-letic contests are often won or lost based on a team’s game plan. For example, a basketball coach may plan to fast break and play up-tempo, rather than play more half-court, if the players are smaller and faster, or if the team has more depth than the opposing team. Some inspirational, strategic-planning-related quotes from legendary National Football League (NFL) coaches are provided in Table 1-2.Vision and Mission StatementsMany organizations today develop a vision statement that answers the question “What do we want to become?” Developing a vision statement is often considered the first step in strategic planning, preceding even development of a mission statement. Many vision statements are a single sentence as revealed through numerous examples in Chapter 2.TABLE 1-2 Eight Famous, Strategic-Planning–Relevant Quotes from NFL Coaches1. “Perfection is not attainable. But if we chase perfection, we can catch excellence.”—Vince Lombardi, Head Coach Green Bay Packers (1959–1967)2. “Leadership is a matter of having people look at you and gain confidence . . . If you’re in control, they’re in control.”—Tom Landry, Head Coach Dallas Cowboys (1960–1988)3. “If you want to win, do the ordinary things better than anyone else does them, day in and day out.”—Chuck Noll, Head Coach Pittsburgh Steelers (1969–1991)4. “Leaders are made, they are not born. They are made by hard effort, which is the price which all of us must pay to achieve any goal that is worthwhile.”—Vince Lombardi, Head Coach Green Bay Packers (1959–1967)5. “You fail all the time, but you aren’t a failure until you start blaming someone else.”—Bum Phillips, Head Coach Houston Oilers (1975–1980), New Orleans Saints (1981–1985)6. “Success demands singleness of purpose.”—Vince Lombardi, Head Coach Green Bay Packers (1959–1967)7. “Stay focused. Your start does not determine how you’re going to finish.”—Herm Edwards, Head Football Coach of the New York Jets (2001–2005), Kansas City Chiefs (2006–2008), and Arizona State University (2018 to present).8. “Nobody who ever gave his best regretted it.”—George S. Halas, Head Coach Chicago Bears (1933–1942, 1946–1955, 1958–1967)Source: A variety of sources.
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
CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 17is to achieve understanding and commitment from all managers and employees. Understanding may be the most important benefit of strategic management, followed by commitment. When managers and employees understand what the organization is doing and why, they often feel a part of the firm and become committed to assisting it. This is especially true when employ-ees also understand links between their own compensation and organizational performance. Managers and employees become surprisingly creative and innovative when they understand and support the firm’s mission, objectives, and strategies. A great benefit of strategic management, then, is the opportunity that the process provides to empower individuals. Empowerment is the act of strengthening employees’ sense of effectiveness by encouraging them to participate in decision making and to exercise initiative and imagination and rewarding them for doing so. You want your people to run the business as it if were their own.Strategic planning is a learning, helping, educating, and supporting process, not merely a paper-shuffling activity among top executives. Strategic-management dialogue is more impor-tant than a nicely bound strategic-management document. A strategist must avoid developing a strategic plan alone and then present the plan to operating managers to execute. Through involvement in the process, line managers must become “owners” of the strategy. Ownership of a strategic plan by the people who have to execute the plan is a key to success in any organization.Although making good strategic decisions is the major responsibility of an organization’s owner or chief executive officer, both managers and employees must also be involved in strategy formulation, implementation, and evaluation activities. Participation is a key to gaining com-mitment for needed changes. An increasing number of corporations and institutions are using strategic management to make effective decisions. But strategic management is not a guarantee for success; it can be dysfunctional if conducted haphazardly.Financial BenefitsOrganizations that use strategic-management concepts are generally more successful, showing significant improvement in sales, profitability, and productivity, compared to firms without sys-tematic planning activities. High-performing firms tend to do systematic planning to prepare for future fluctuations in their external and internal environments. Firms with management systems that use strategic-planning concepts, tools, and techniques generally exhibit superior long-term financial performance relative to their industry.High-performing firms seem to make more informed decisions with good anticipation of both short- and long-term consequences. In contrast, firms that perform poorly often engage in activities that are shortsighted and do not reflect good forecasting of future conditions. Strategists of low-performing organizations are often preoccupied with solving internal problems and meet-ing paperwork deadlines. They typically underestimate their competitors’ strengths and overesti-mate their own firm’s strengths. They often attribute weak performance to uncontrollable factors such as a poor economy, technological change, or foreign competition.More than 100,000 businesses in the United States fail annually. Business failures include bankruptcies, foreclosures, liquidations, and court-mandated receiverships. Although many factors besides a lack of effective strategic management can lead to business failure, the plan-ning concepts and tools described in this text can yield substantial financial benefits for any organization.Nonfinancial BenefitsBesides helping firms avoid financial demise, strategic management offers other tangible benefits, such as enhanced awareness of external threats, improved understanding of com-petitors’ strategies, increased employee productivity, reduced resistance to change, and a clearer understanding of performance–reward relationships. Strategic management enhances the problem-prevention capabilities of organizations because it promotes interaction among managers at all divisional and functional levels. Firms that have nurtured their managers and employees, shared organizational objectives with them, empowered them to help improve the product or service, and recognized their contributions can turn to them for help in a pinch because of this interaction.
18 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTIn addition to empowering managers and employees, strategic management often brings order and discipline to an otherwise floundering firm. It can be the beginning of an efficient and effective managerial system. Strategic management may renew confidence in the current busi-ness strategy or point to the need for corrective actions. The strategic-management process pro-vides a basis for identifying and rationalizing the need for change to all managers and employees of a firm; it helps them view change as an opportunity rather than as a threat. Some nonfinancial benefits of a firm using strategic management are increased discipline, improved coordination, enhanced communication, increased forward thinking, improved decision making, increased synergy, and more effective allocation of time and resources.Why Some Firms Do No Strategic PlanningSome firms do not engage in formal strategic planning, and some firms do engage in strategic planning but receive little support from managers and employees. Ten reasons (excuses) often given for minimal or no strategic planning in a firm are as follows:1. No formal training in strategic management2. No understanding of or appreciation for the benefits of planning3. No monetary rewards for doing planning4. No punishment for not planning5. Too busy “firefighting” (resolving internal crises) to plan ahead6. View planning as a waste of time because no product/service is made7. Laziness; effective planning takes time and effort; time is money8. Content with current success; failure to realize that success today is no guarantee for suc-cess tomorrow; 9. Overconfidence10. Prior bad experience with strategic planning done sometime, somewherePitfalls in Strategic PlanningStrategic planning is an involved, intricate, and complex process that takes an organization into uncharted territory. It does not provide a ready-to-use prescription for success; instead, it takes the organization through a journey and offers a framework for addressing questions and solving prob-lems. Being aware of potential pitfalls and being prepared to address them is essential to success.There are some pitfalls in doing strategic planning; avoid the following:• Using strategic planning to gain control over decisions and resources• Doing strategic planning only to satisfy accreditation or regulatory requirements• Too hastily moving from mission development to strategy formulation• Not communicating the plan to employees, who continue working in the dark• Top managers making many intuitive decisions that conflict with the formal plan• Top managers not actively supporting the strategic-planning process• Not using plans as a standard for measuring performance• Delegating planning to a “planner” rather than involving all managers• Not involving key employees in all phases of planning• Not creating a collaborative climate supportive of change• Viewing planning as unnecessary or unimportant• Viewing planning activities as silos comprised of independent parts• Becoming so engrossed in current problems that insufficient or no planning is done• Being so formal in planning that flexibility and creativity are stifled12Comparing Business and Military StrategiesA strong military heritage underlies the study of strategic management. Terms such as objec-tives, mission, strengths, and weaknesses were first formulated to address problems on the battlefield. According to Webster’s New World Dictionary, strategy is “the science of planning LO 1.6LO 1.7LO 1.8
CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 19and directing large-scale military operations, of maneuvering forces into the most advanta-geous position prior to actual engagement with the enemy.”13 The word strategy comes from the Greek strategos, which refers to a military general and combines stratos (the army) and agos (to lead). The history of strategic planning began in the military. A key aim of both busi-ness and military strategy is “to gain competitive advantage.” In many respects, business strat-egy is like military strategy, and military strategists have learned much over the centuries that can benefit business strategists today.Both business and military organizations try to use their own strengths to exploit com-petitors’ weaknesses. If an organization’s overall strategy is wrong (ineffective), then all the efficiency in the world may not be enough to allow success. Business or military success is generally not the happy result of accidental strategies. Rather, success is the product of both continuous attention to changing external and internal conditions and the formulation and implementation of insightful adaptations to those conditions. The element of surprise provides great competitive advantages in both military and business strategy; information systems that provide data on opponents’ or competitors’ strategies and resources are also vitally important.A fundamental difference between military and business strategy is that business strategy is formulated, implemented, and evaluated with an assumption of competition, whereas mili-tary strategy is based on an assumption of conflict. In a military setting there is generally one winner, but in business there are usually multiple winners. For example, several firms can win in the hamburger business; you do not have to confront McDonald’s head on, instead offer a different mix of burgers, restaurant design, and customer service and still be successful. This example explains competition and avoiding conflict with a larger player such as McDonald’s. In military situations, it is often impossible to avoid conflict with the larger army. Business strate-gists have access to valuable insights that military thinkers have refined over time. Superior strategy formulation and implementation can overcome an opponent’s superiority in numbers and resources.Born in Pella in 356 bce, Alexander the Great was king of Macedon, a state in northern ancient Greece. Tutored by Aristotle until the age of 16, Alexander had created one of the largest empires of the ancient world by the age of thirty, stretching from the Ionian Sea to the Himalayas. Alexander was undefeated in battle and is considered one of history’s most successful command-ers. He became the measure against which military leaders even today compare themselves, and military academies throughout the world still teach his strategies and tactics. Alexander the Great once said, “Greater is an army of sheep led by a lion, than an army of lions led by a sheep.” This quote reveals the overwhelming importance of an excellent strategic plan for any organization to succeed.Both business and military organizations must adapt to change and constantly improve to be successful. Too often, firms do not change their strategies when their environment and competitive conditions dictate the need to change. Gluck offered a classic military example of this:When Napoleon won, it was because his opponents were committed to the strategy, tac-tics, and organization of earlier wars. When he lost—against Wellington, the Russians, and the Spaniards—it was because he, in turn, used tried-and-true strategies against en-emies who thought afresh, who were developing the strategies not of the last war but of the next.14Sun Tzu’s The Art of War has been applied to many fields well outside of the military. Much of the text is about how to fight wars without actually having to do battle: It gives tips on how to outsmart one’s opponent so that physical battle is not necessary. As such, the book has found application as a training guide for many competitive endeavors that do not involve actual combat, such as in devising courtroom trial strategy or acquiring a rival company. Similarities can be construed from Sun Tzu’s writings to the practice of formulating and implementing strategies among businesses today. Table 1-6, on page 20, provides narrative excerpts from The Art of War; which of the principles listed do you believe are most applicable or analogous to companies as compared to armies?
20 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTTABLE 1-6 Excerpts from Sun Tzu’s The Art of War Writings• Strategic planning is a matter of vital importance to the state: a matter of life or death, the road either to survival or ruin. Hence, it is imperative that it be studied thoroughly.• Strategic planning is based on deception. When near the enemy, make it seem that you are far away; when far away, make it seem that you are near. Hold out baits to lure the enemy. Strike the enemy when he is in disorder. Avoid the enemy when he is stronger. Attack the enemy where he is unpre-pared. Appear where you are not expected.• A speedy victory is the main object in strategic planning. If this is long in coming, weapons are blunted and morale depressed. When the army engages in protracted campaigns, the resources of the state will fall short. Thus, while we have heard of stupid haste in war, we have not yet seen a clever operation that was prolonged.• Generally, in strategic planning the best policy is to take a state intact; to ruin it is inferior to this. To capture the enemy’s entire army is better than to destroy it; to take intact a regiment, a company, or a squad is better than to destroy it. For to win one hundred victories in one hundred battles is not the epitome of skill. To subdue the enemy without fighting is the supreme excellence. Those skilled in war subdue the enemy’s army without battle.• The art of using troops is this: When ten to the enemy’s one, surround him. When five times his strength, attack him. If double his strength, divide him. If equally matched, you may engage him with some good plan. If weaker, be capable of withdrawing. And if in all respects unequal, be capable of eluding him.• Know your enemy and know yourself, and in a hundred battles you will never be defeated. When you are ignorant of the enemy but know yourself, your chances of winning or losing are equal. If ignorant both of your enemy and of yourself, you are sure to be defeated in every battle.• He who occupies the field of battle first and awaits his enemy is at ease, and he who comes later to the scene and rushes into the fight is weary; those skilled in war bring the enemy to the field of battle rather than being brought there by him.• Analyze the enemy’s plans so that you will know his deficiencies as well as his strengths. Agitate him to ascertain the pattern of his movement. Lure him out to reveal his dispositions and position. Launch probing attacks to decipher strengths and weaknesses.• Avoid strength. Strike weakness. Anyone able to win the victory by modifying his tactics in accor-dance with the enemy situation may be said to be divine.• If you decide to go into battle, do not announce your intentions or plans. Project “business as usual.”• Unskilled leaders work out their conflicts on battlefields. Brilliant strategists rarely go to battle; they achieve their objectives through tactical positioning well in advance of confrontation.• When you do decide to challenge another company (or army), much calculating, estimating, analyz-ing, and positioning bring triumph. Little computation brings defeat.• Skillful leaders do not let a strategy inhibit creative counter-movement. Thus, commands from a distance should not interfere with spontaneous maneuvering at the point of attack.• When a decisive advantage is gained over a rival, skillful leaders do not press on. They hold their position and give their rivals the opportunity to surrender or merge. Never allow your forces to be damaged by those who have nothing to lose.Note: The word strategic planning is substituted for war or warfare.Source: Based on Sun Tzu’s The Art of War Writings, 1910, Lionel Giles.Developing Employability SkillsThe how-to, skills-oriented, practical approach of this textbook’s content and layout enables students to gain numerous career-enhancing (employability) skills that experts say are vital for success in the twenty-first-century workplace. “Employability” skills include actual tools, techniques, and concepts being used by businesses and learned by students using this text; the skills can be grouped into 6 broad categories and 14 specific categories, as shown in Table 1-7.LO 1.9
CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 21IMPLICATIONS FOR STRATEGISTSFigure 1-4 reveals that to gain and sustain competitive advantages, a firm must create and nurture a clear vision and mission, and then systematically formulate, implement, and evaluate strategies. Consistent business success rarely happens by chance; it most often results from careful planning followed by diligent, intelligent, hard work. If the process were easy, every business would be success-ful. Consistent success requires that strategists gather and assimilate relevant data, make tough trade-off decisions among various op-tions that would benefit the firm, energize and reward employees, and continually adapt to change. To survive and prosper, a business must gain and sustain at least several major competitive advantages over rival firms. In the process, many attractive options will be dis-carded in favor of a few; strategic planning in a sense can be de-fined as “choosing what not to do.”TABLE 1-7 Employability Skills to Be Gained by Students Using This TextBroad Skills to Be Developed1. Critical thinking: to define and solve problems and make decisions or form judgments about a particular situation or set of circumstances.2. Collaboration: to work with colleagues on reports, presentations, and projects.3. Knowledge application and analysis: to learn a concept and then apply that knowledge to other challenges.4. Business ethics and social responsibility: to know in your heart that good ethics is good business.5. Information technology: to enhance one’s word-processing, spreadsheets, database, presentation, and software skills.6. Data literacy: to access, assess, interpret, manipulate, summarize, and communicate data.Specific Skills to Be Gained; Learn How to:1. Develop a three-year strategic plan for any for-profit or nonprofit company or organization.2. Write and evaluate vision and mission statements.3. Conduct an external and internal strategic planning assessment.4. Formulate strategies using SWOT analysis.5. Develop and use a BCG and IE portfolio matrix analysis.6. Develop and use a QSPM analysis.7. Determine an appropriate set of recommendations with associated costs for any firm.8. Develop and use perceptual maps to better position firms versus rival companies.9. Determine the value of any firm using various corporate valuation methods.10. Perform EPS-EBIT analysis to determine the extent that debt versus stock should be used to raise needed capital for the firm.11. Develop and use value chain analysis, balance scorecards, and financial ratio analysis.12. Evaluate corporate structures and develop effective organizational charts.13. Develop and use projected financial statements to support any proposed strategic plan.14. Use a popular corporate strategic planning Excel template.Means Used to Develop SkillsThis text has:11 concise chapters organized around a practical, integrative strategic-planning model61 end-of-chapter assurance-of-learning exercises organized in four effective, fun categories355 end-of-chapter review questions30 brand-new, student-friendly cases on companies in the news undergoing change11 mini-cases with chapter relevant questions1 Cohesion Case on Coca-Cola at the end of this chapter and many associated end-of-chapter exercises1 popular Excel-based, Strategic Planning Template widely used by both companies and students doing strategic planning (see the author website at www.strategyclub.com)750 chapter MyLab questions written by the authors750 case MyLab questions written by the authors
22 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTThe strategic-management process represents a systematic means for creating, maintaining, and strengthening a firm’s competitive ad-vantages. This text provides step-by-step guidance throughout the process to help strategists gain and sustain a firm’s competitive advan-tages. As the eleven chapters unfold, more than one hundred key ele-ments of the process, ranging from developing portfolio matrices to managing workplace romance, are examined to help strategists lead the firm in delivering prosperity to shareholders, customers, and em-ployees. The 11 chapters provide a clear, planned, journey through the strategic-management process, with numerous highlights accented along the way, so strategists can perform essential analyses and an-ticipate and resolve potential problems in leading their firm to success. Use the free Excel template at www.strategyclub.com to keep your firm’s strategic-planning process track.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 1-4How to Gain and Sustain Competitive AdvantagesIMPLICATIONS FOR STUDENTSIn performing strategic-management case analysis, emphasize throughout your project, beginning with the first page or slide, where your firm has competitive advantages and disadvantages. More importantly, emphasize throughout how you recommend the firm sustain and grow its competitive advantages and how you rec-ommend the firm overcome its competitive disadvantages. Pave the way early and often in your presentation for what you ultimately recommend your firm should do over the next three years. The no-tion of competitive advantage should be integral to the discussion of every page or PowerPoint slide. Therefore, avoid being merely descriptive in your written or oral analysis; rather, be prescriptive, insightful, and forward-looking throughout your project.
CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 23TABLE 1-8 Twelve Reasons Students (and Companies) Use the Strategic Planning Template at www.strategyclub.com 1. To save time in preparing a strategic-management case analysis; enables user to focus on the “thinking rather than the mechanics” of developing matrices and performing analyses. 2. To follow the correct process in formulating and implementing strategies. 3. To avoid mistakes in math calculations, plotting points, and drawing graphs. 4. To develop professional-looking charts, graphs, and matrices. 5. To develop existing and projected financial ratios. 6. To correctly place firms in BCG and IE portfolio matrices. 7. To examine many different scenarios for using debt versus stock to raise needed capital, using EPS-EBIT analysis. 8. To vary weights and ratings in matrices and to see the resultant impact on total weighted scores. 9. To more easily share information with team members and colleagues.10. To more easily develop projected financial statements to reveal the expected impact of various strategies.11. To develop skills with perceptual mapping or product positioning.12. To gain experience using actual corporate strategic planning software; many business jobs require proficiency in Excel, which students gain in using the template.Chapter SummaryAll firms have a strategy, even if it is informal, unstructured, and sporadic. All organizations are heading somewhere, but unfortunately some organizations do not know where they are going. The old saying “If you do not know where you are going, then any road will lead you there!” accents the need for organizations to use strategic-management concepts and techniques. The strategic-management process is becoming more widely used by small firms, large companies, nonprofit institutions, governmental organizations, and multinational conglomerates alike. The process of empowering managers and employees has almost limitless benefits.Organizations should take a proactive rather than a reactive approach in their industry, and they should strive to influence, anticipate, and initiate rather than just respond to events. The strategic-management process embodies this approach to decision making. It represents a logical, systematic, and objective approach for determining an enterprise’s future direction. The stakes are generally too high for strategists to use intuition alone in choosing among alternative courses of action. Successful strategists take the time to think about their businesses, where they are with their businesses, and what they want to be as organizations; and then they implement programs and policies to get from where they are to where they want to be in a reasonable period of time.It is a known and accepted fact that people and organizations that plan ahead are much more likely to become what they want to become than those that do not plan at all. A good strategist plans and controls his or her plans, whereas a bad strategist never plans and then tries to control people! This text is devoted to providing you with the tools necessary to be a good strategist.Key Terms and Conceptsannual objectives (p. 14)competitive advantage (p. 10)employability (p. 20)empowerment (p. 17)environmental scanning (p. 12)external opportunities (p. 12)For all the reasons given in Table 1-8, use the free Excel strategic planning template at www.strategyclub.com to develop your three-year strategic plan for any assigned case company.
external threats (p. 12)internal strengths (p. 12)internal weaknesses (p. 12)intuition (p. 9)long-range planning (p. 6)long-term objectives (p. 13)mission statement (p. 12)policies (p. 16)retreats (p. 7)strategic management (p. 4)strategic-management model (p. 6)strategic-management process (p. 7)strategic planning (p. 5)strategies (p. 13)strategists (p. 10)strategy evaluation (p. 8)strategy formulation (p. 7)strategy implementation (p. 8)sustained competitive advantage (p. 10)SWOT analysis (p. 14)vision statement (p. 11)Issues for Review and Discussion 1-1. Why do you believe SWOT analysis is so commonly used by businesses in doing strategic planning? 1-2. What variable does recent research reveal to be most important of all in doing business? Explain why this variable is so important. 1-3. For your college or university, identify a strategy that would exemplify the matching concept evidenced in SWOT analysis. 1-4. Diagram the comprehensive strategic-management model. 1-5. Develop a diagram to reveal the benefits to a firm for doing strategic planning. Include “improved understand-ing,” “enhanced communication,” “all managers and employees on a mission,” and “greater commitment”—in the correct order. 1-6. How important do you believe “having an excellent game plan” is to winning a basketball or football game against your university’s major rival? Discuss. 1-7. Are strategic management and strategic planning synonymous terms? Explain. 1-8. Why do many firms move too hastily from vision and mission development to devising alternative strategies? 1-9. Why are strategic-planning retreats often conducted away from the worksite? How often should firms have a retreat, and who should participate in them? 1-10. Distinguish between long-range planning and strategic planning. 1-11. How important do you think “being adept at adapting” is for business firms? Explain. 1-12. As cited in the chapter, famous businessman Edward Deming once said, “In God we trust. All others bring data.” What did Deming mean in terms of developing a strategic plan? 1-13. What strategies do you believe can save newspaper companies from extinction? 1-14. Distinguish between the concepts of vision and mission. 1-15. Your university has fierce competitors. List three ex-ternal opportunities and three external threats that face your university. 1-16. List three internal strengths and three internal weak-nesses that characterize your university. 1-17. List reasons why objectives are essential for organiza-tional success. 1-18. Why are policies especially important in strategy implementation? 1-19. What is a “retreat,” and why do firms take the time and spend the money to have these? 1-20. Discuss the notion of strategic planning being more formal versus informal in an organization. On a 1- to 10-scale from formal to informal, what number best represents your view of the most effective approach? Why? 1-21. List what you believe are the five most important les-sons for business that can be garnered from The Art of War. 1-22. What is the fundamental difference between business strategy and military strategies in terms of basic as-sumptions? 1-23. Explain why the strategic-management class is often called a “capstone course.” 1-24. What aspect of strategy formulation do you think requires the most time? Why? 1-25. Why is strategy implementation often considered the most difficult stage in the strategic-management process? 1-26. Why is it so important to integrate intuition and analysis in strategic management? 1-27. Explain the importance of a vision and a mission state-ment. 1-28. Discuss relationships among objectives, strategies, and policies. 1-29. Why do you think some chief executive officers fail to use a strategic-management approach to decision making? 1-30. Discuss the importance of feedback in the strategic-management model. 1-31. How can strategists best ensure that strategies will be effectively implemented? 1-32. Give an example of a recent political development that changed the overall strategy of an organization. 1-33. Who are the major competitors of your college or uni-versity? What are their strengths and weaknesses? What are their strategies? How successful are these institu-tions compared to your college?24 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT
1-34. In your opinion, what is the single major benefit of using a strategic-management approach to decision making? Justify your answer. 1-35. Most students will never become a chief executive officer or even a top manager in a large company. So why is it important for all business majors to study strategic management? 1-36. Describe the content available at the Strategy Club website at www.strategyclub.com. 1-37. List four financial and four nonfinancial benefits of a firm engaging in strategic planning. 1-38. Why is it that a firm can normally sustain a competitive advantage for only a limited period of time? 1-39. Why it is not adequate simply to obtain competitive advantage? 1-40. How can a firm best achieve sustained competitive advantage? 1-41. In sequential order in the strategic-planning process, arrange the following appropriately: policies, objectives, vision, strategies, mission, strengths. 1-42. Label the following as an opportunity, a strategy, or a strength.a. XYZ Inc. is hiring fifty more salespersons.b. XYZ Inc. has fifty salespersons.c. XYZ Inc.’s rival firm has only fifty salespersons. 1-43. Explain why internal strengths and weaknesses should be stated in divisional terms to the extent possible. 1-44. Explain why both internal and external factors should be stated in specific terms (that is, using numbers, per-centages, money ratios, and comparisons over time) to the extent possible. 1-45. Identify the three activities that comprise strategy evaluation. 1-46. List six characteristics of annual objectives. 1-47. Would strategic-management concepts and techniques benefit foreign businesses as much as domestic firms? Justify your answer. 1-48. What do you believe are some potential pitfalls or risks in us-ing a strategic-management approach to decision making? 1-49. What does recent research reveal to be the most important component or activity in the strategic-management process? CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 25MyLab Management Writing AssignmentsIf your instructor is using MyLab Management, go to www.pearson.com/mylab/management for Auto-graded writing questions as well as the following Assisted-graded writing questions: 1-50. Strengths and weaknesses should be determined relative to competitors or by elements of being or relative to a firm’s own objectives. Explain. 1-51. What are the three stages in strategic management? Which stage is more analytical? Which relies most on empowerment to be successful? Which relies most on statistics? Justify your answers.MINI-CASE ON TESLA, INC. (TSLA)WHAT AMERICAN COMPANY DOES THE BEST JOB OF STRATEGIC PLANNING, AND HOW IS IT DONE?The answer to the first part of the question posed may be Tesla Inc., the U.S. electric automobile manufacturer founded in 2003 and headquartered in Palo Alto, California. The answer to the second part of the question may be “by matching internal strengths/weaknesses with external opportunity/threats” using SWOT analysis. For the first time ever, in 2017, Tesla joined the Fortune 500 largest companies in the United States; the company’s annual revenues exceed $7 billion.An integral part of Tesla’s excellent strategic plan is to capitalize on the 6.5 percent annual gross domestic product (GDP) growth in China, compared to the GDP growth of about 2 percent in the United States. Tesla’s sales in China skyrocketed in recent years as CEO Elon Musk of Tesla capitalizes heavily on the firm’s technological prowess (internal strength) matched with China’s booming GDP (external opportunity) and China’s strong preference for electric vehicles (external opportunity). In 2016, sales of electric and plug-in hybrid automobiles in China rose 50 percent to 507,000, more than triple the comparable figure in the United States. Electric vehicles are viewed in China as a way to help clear smoggy skies (an external opportunity), and that is a primary reason why China’s government has ex-empted electric cars from rigid license plate restrictions in six large cities: Shanghai, Beijing, Shenzhen, Hangzhou, Guangzhou, and Tianjin; these six cities report the highest Tesla sales.Tesla’s strategic plan includes manufacturing cars in China by the end of 2018, because shipping cars from California to China is costly. Tariffs and taxes incurred to export cars to China increases the price of Tesla sedans and SUVs by 50 percent (external threat). The number of electric vehi-cle charging stations in China exceeds one thousand (external opportunity). Tesla mass produces its A New Tesla Anybody?Jim West/Alamy Stock Photo
26 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT Model X SUV because China’s obsession with SUVs is a decade old and growing rapidly. Sales of SUVs in China now comprise nearly 40 percent of all passenger-vehicle sales in that country.Turning to Australia, Tesla recently supplied the largest battery in the world to Jamestown, Aus-tralia. The battery is storing electricity from a new wind farm that supplies thirty thousand homes with power. The battery has a 100-megawatt capacity. Tesla’s strategic plan is for the whole world to use its batteries in cars, trucks, homes, and businesses.Questions1. Identify several external opportunities and threats that face Tesla.2. Identify several internal strengths and weaknesses that face Tesla.3. Match several of your external and internal factors to formulate several strategies that Tesla is (or could) use going forward.4. What is Tesla’s competitive advantage in the automobile industry?Source: Based on Scott Cendrowski, “Tesla Makes a U-Turn in China,” Fortune, p. 128–136. June 15, 2017.Web Resources1. The Author Website The website for this textbook is widely used by both companies and students for actually doing strategic planning. The downloadable template at the website receives more than thirty thousand hits per year.www.strategyclub.com2. SWOT Analysis Narrative and Worksheet This website explains SWOT analysis and provides a downloadable worksheet.https://www.mindtools.com/pages/article/newTMC_05.htm3. SWOT Analysis Images This website provides more than one hundred jpeg images of SWOT matrices that can be used in a case project or strategic planning report. https://www.google.com/search?q=swot+analysis&tbm=isch&tbo=u&source=univ&sa=X&ved=0ahUKEwjokNTanonWAhUIPiYKHdfeAOQQsAQIeQ&biw=1295&bih=7434. Strategic-Management Models This website provides more than one hundred jpeg images of strategic-planning models that can be used to guide a strategic planning un-dertaking https://www.google.com/search?q=strategic+management+models&client=safari&rls=en&tbm=isch&tbo=u&source=univ&sa=X&ved=0ahUKEwjh7ZfjoYnWAhVG7CYKHcNgBQcQsAQIgwE&biw=1295&bih=7435. Strategic-Management Organizations Some popular strategy websites are as follows:Strategic Management Society (SMS)—https://strategicmanagement.net/—publishes the Strategic Management Journal and holds annual strategic management conferencesAssociation for Strategic Planning—www .strategyassociation.org/—provides a Strategic Management Professional (SMP) certification programMcKinsey & Company—www.mckinsey.com—perhaps the largest management-consulting firm in the world; the company does extensive strategic planning consultingCurrent ReadingsArend, Richard J., Y. Lisa Zhao, Michael Song, and Im Subin. “Strategic Planning as a Complex and Enabling Mana-gerial Tool.” Strategic Management Journal 38, Issue 8 (August 2017): 1741–1752.Chen, Tianxu, Lihong Olan, and Vadake Narayanan. “Battle on the Wrong Field? Entrant Type, Dominant Designs, and Technology Exit.” Strategic Management Journal 38, Issue 13 (December 2017): 2553–2743.Cheng, Gao, Tiona Zuzul, Geoffrey Jones, and Tarun Khann. “Overcoming Institutional Voids: A Reputation-Based View of Long-Run Survival.” Strategic Management Journal 38, Issue 11 (November 2017): 2147–2167.Crilly, Donal. “Time and Space in Strategy Discourse: Implications for Intertemporal Choice.” Strategic Management Journal 38, Issue 12 (December 2017): 2370–2389.Detien, Jodi, and Sheila S. Webber. “Strategic Shifts that Build Executive Leadership,” Business Horizons 60, Issue 3 (May 2017): 335–343.Dorobantu, Sinziana, Aseem Kaul, and Bennet Zelner. “Nonmarket Strategy Research Through the Lens of New Institutional Economics: An Integrative Review and Future Directions.” Strategic Management Journal 38, Issue 1 (January 2017): 114–140.Durand, Rodolphe, Robert M. Grant, and Tammy L. Madsen. “The Expanding Domain of Strategic Management Research and the Quest for Integration.” Strategic Management Journal 38, Issue 1 (January 2017): 4–16.Flammer, Caroline, and Pratima Bansal. “Does a Long-Term Orientation Create Value? Evidence from a Regression Discontinuity.” Strategic Management Journal 38, Issue 9 (September 2017): 1827–1847.Gans, Joshua, and Michael D. Ryall. “Value Capture Theory: A Strategic Management Review.” Strategic Management Journal 38, Issue 1 (January 2017): 17–41.Han, T. J. Smit, and Lenos Trigeorgis. “Strategic NPV: Real Options and Strategic Games Under Different Information Structures.” Strategic Management Journal 39, Issue 1 (January 2018): 242–266.
CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 27Mankins, Michael, Karen Harris, and David Harding. “Strategy in the Age of Superabundant Capital.” Harvard Business Review 95, Issue 2 (March/April 2017): 66–75.McIntyre, David P., and Arati Srinivasan. “Networks, Platforms, and Strategy: Emerging Views and Next Steps.” Strategic Management Journal 38, Issue 1 (January 2017): 141–160.Menon, Anoop. “Bringing Cognition into Strategic Interactions: Strategic Mental Models and Open Questions.” Strategic Management Journal 39, Issue 1 (January 2018): 168–192.Miles, Sandra Jeanquart, and Mark Van Clieaf, “Strategic Fit: Key to Growing Enterprise Value Through Organizational Capital. Business Horizons 60, Issue 1 (January 2017): 55–65.Ramirez, Rafael, Steve Churchhouse, Alejandra Palermo, and Jonas Hoffmann. “Using Scenario Planning to Reshape Strategy.” MIT Sloan Management Review 58, Issue 4 (Summer 2017): 31–37.Ross, Jeanne W., Ina M. Sebastian, and Cynthia M. Beath, “How to Develop a Great Digital Strategy.” Sloan Management Review 58, Issue 2 (Winter 2017): 7–9.Trigeorgis, Lenos and Jeffrey J. Reuer. “Real Options Theory in Strategic Management.” Strategic Management Journal 38, Issue 1 (January 2017): 42–63.Wolf, Carolina, and Steven W. Floyd. “Strategic Planning Research: Toward a Theory-Driven Agenda.” Journal of Management 43, Issue 6 (July 2017): 1754–1788.Zhao, Eric Yanfei, Greg Fisher, Michael Lounsbury, and Danny Miller. “Optimal Distinctiveness: Broadening the Interface Between Institutional Theory and Strategic Management.” Strategic Management Journal 38, Issue 1 (January 2017): 93–113.Endnotes 1. Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1 (February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Su-wignjo, 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. 2. G. L. Schwenk and K. Schrader, “Effects of Formal Stra-tegic Planning in Financial Performance in Small Firms: A Meta-Analysis,” Entrepreneurship and Practice 3, no. 17 (1993): 53–64. 3. Peter Drucker, Management: Tasks, Responsibilities, and Practices (New York: Harper & Row, 1974), 611. 4. Alfred Sloan, Jr., Adventures of the White Collar Man (New York: Doubleday, 1941), 104. 5. Quoted in Eugene Raudsepp, “Can You Trust Your Hunches?” Management Review 49, no. 4 (April 1960): 7. 6. Stephen Harper, “Intuition: What Separates Executives from Managers,” Business Horizons 31, no. 5 (September–October 1988): 16. 7. Ron Nelson, “How to Be a Manager,” Success (July–August 1985): 69. 8. Bruce Henderson, Henderson on Corporate Strategy (Boston: Abt Books, 1979), 6. 9. Robert Waterman, Jr., The Renewal Factor: How the Best Get and Keep the Competitive Edge (New York: Bantam, 1987). See also BusinessWeek, September 14, 1987, 100; and Acad-emy of Management Executive 3, no. 2 (May 1989): 115. 10. John Pearce, II, and Fred David, “The Bottom Line on Corporate Mission Statements,” Academy of Management Executive 1, no. 2 (May 1987): 109. 11. Heinz Weihrich, “The TOWS Matrix: A Tool for Situational Analysis,” Long Range Planning 15, no. 2 (April 1982): 61. Note: Although Dr. Weihrich first modified SWOT analysis to form the TOWS matrix, the acronym SWOT is much more widely used than TOWS in practice. See also Marilyn Helms and Judy Nixon, “Exploring SWOT Analysis—Where Are We Now?” Journal of Strategy and Manage-ment 3, no. 3 (2010): 215–251. 12. Based on www.des.calstate.edu/limitations.html and www.entarga.com/stratplan/purposes.html 13. Victoria Neufeldt, ed. Webster’s New World Dictionary, 4th ed. (Hoboken, NJ: Pearson, 1998). Pearson purchased this dictionary from Simon & Schuster in 1998, but sold it to IDG Books in 1999. 14. Frederick Gluck, “Taking the Mystique Out of Planning,” Across the Board (July–August 1985), 59.
28 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTTHE COHESION CASECoca-Cola Company, 2018BY FRED R. DAVIDwww.coca-cola.com, KOHeadquartered in Atlanta, Georgia, Coca-Cola Company (Coke) is the world’s largest producer and distributor of beverages, marketing over 500 nonalcoholic brands in more than 200 countries. Coke has 21 billion-dollar brands, 19 of which are available in lower- and no-sugar options. Four of the top five beverages sold globally are Coke products: 1) Coca-Cola, 2) Diet Coke, 3) Fanta, and 4) Sprite. Other Coke products include Dasani waters, Fanta, Gold Peak teas and coffees, Honest Tea, Powerade sports drinks, Simply juices, Glaceau Smartwater, Sprite, and Zico coconut water. However, company’s revenues for 2017 declined 15 percent, so rumblings are spreading within the firm.Coke brands sold mostly outside the United States include Ayataka green tea in Japan, I LOHAS water in Japan, Ice Dew water in China, FUZE TEA outside the United States, Minute Maid Pulpy in Asia Pacific, Georgia coffee in Japan, and Del Valle in Latin America. Five large independent bottling companies supply Coke with 39 percent of their bottling needs, led by Coca-Cola FEMSA that sup-plies central Mexico and countries in Latin and South America.Coke revenues have declined every year for nearly a decade, usually accompanied by net income declines. Since 2005, sales of diet soda in general have dropped every year, a combined 34 percent. Although Diet Coke is the weakest link in the company’s whole soda lineup, the brand is still the third best-selling carbonated drink in the United States.Environmentalists are complaining, saying Coke produces 110 million plastic bottles annually that end up in landfills and oceans. To combat this complaint, the company launched in 2018 its “World Without Waste” initiative. Coke needs a good strategic plan because its customer base is erod-ing and its shareholders want sustained 5 percent annual growth in revenues and profits—and not declines—every year.Copyright by Fred David Books LLC.HistoryFounded in 1886, Coke’s flagship product Coca-Cola was invented in 1886 by pharmacist John Pemberton in Columbus, Georgia. Coke has operated a franchised distribution system since 1889, whereby the com-pany only produces syrup concentrate, which is then sold to various bottlers throughout the world, who hold exclusive territories.Interestingly, the big, jolly man in the red suit with a white beard (Santa Claus), did not always look that way. In 1931, Coke paid illustrator Haddon Sundblom to create advertising images depicting a jolly, plump, red (like Coke cans) dressed, warm, friendly Santa Claus delivering toys to children. To create the new Santa ads, Sundblom used Clement Clark Moore’s 1822 poem “A Visit from St. Nicholas” (commonly called “’Twas the Night Before Christmas”).Coke’s new Santa advertisements debuted in 1931 in magazines such as The Saturday Evening Post, National Geographic, The New Yorker, and others. Before 1931, Santa was depicted as every-thing from a tall gaunt man to a spooky-looking elf. He was often shown wearing a bishop’s robe and a Norse huntsman’s animal skin. From 1931 to 1934, Coke ads featuring the new Santa Claus changed the whole world’s view of Santa; these original images of Santa are valuable works of art even today.In 2010, Coke became the first brand to exceed 1 billion euros in annual United Kingdom grocery sales. In January 2018, in the United States, Coke introduced its slimmer 12-ounce Diet Coke can, updating the logo and offering the 35-year-old drink four new flavors: mango, cherry, blood orange, and ginger lime. Diet Coke sales have declined as more people switch to other low-calorie drinks, such as flavored fizzy water. The company said the new flavors and look—with a different color vertical stripe for each flavor and red for plain—are aimed at appealing to millennials (people ages 18 to 34). Coke tested more than 30 flavors before settling on the four new ones.
CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 29Core Values, Vision, and MissionProvided on the corporate website, Coke’s core values center on seven words: leadership, collaboration, integrity, accountability, passion, diversity, and quality. Coke’s vision statement has not changed in more than a decade; provided on the corporate website, it reads (paraphrased):People: To be a workplace where people are inspired to be the best they can be.Portfolio: To offer quality beverage brands that anticipate/satisfy consumer desires/needs.Partners: To nurture customers and suppliers working together to provide value.Planet: To be a responsible citizen helping build and support sustainable communities.Profit: To maximize long-term return to shareowners given our overall responsibilities.Productivity: To be an effective, lean, and fast-moving company.Coke’s mission statement too has not changed in more than a decade and is given on the corporate website; it reads (paraphrased): “To refresh the planet; to create moments of optimism and happiness; to provide value and make a difference.”Business Ethics and DiversityThe Coke website says the company “directs zero advertising targeted to children under age 12.” Also, in regards to business ethics, the company places substantial nutrition information, including calories, on the front of most of their cans and packages. A wide range of packaging sizes are provided and over 100 reduced, low, or no-calorie beverages.Coke annually publishes an elaborate Sustainability Report that details the company’s water stew-ardship, women’s economic empowerment, and philanthropic giving. In addition, the company’s year 2020 sustainability goals include the firm giving back 1 percent of the company’s operating income annually, and recovering 75 percent of the recyclable bottles and cans introduced into developed mar-kets. The report is available on the corporate website.Financial PositionCoke’s fiscal year ends on December 31. As indicated in Exhibit 1, Coke posted revenues of $35.4 billion in 2017, compared to $41.8 billion in 2016, a 15 percent decline. Net income was $1.28 billion compared to $6.66 billion in 2016, an 81 percent decline. Declines in both of these numbers are alarming. Note all the negative numbers in Exhibit 1, even though for most companies 2017 was a very properous year.Coke’s balance sheets are provided in Exhibit 2. Note that Coke purchased $3.7 billion of its own stock in 2017. In 2017, Coke paid $5 billion out to shareholders in dividends even though the company’s net income was only $1.28 billion. Thus, basically the company borrowed money to pay dividends; this event resulted in a negative retained earnings for the year 2017 and a large drop in re-tained earnings on the 2017 balance sheet, as shown in Exhibit 2. Note in Exhibit 2 that Coke’s paid-in-capital increased a whopping 89 percent in 2017 revealing high use of equity as a source of capital.EXHIBIT 1 Coke’s Income Statements (in millions of dollars)Income Statement12/31/1612/31/17Percent ChangeRevenues$41,863$35,410-15.41%Cost of Goods Sold16,46513,256-19.49%Gross Profit25,39822,154-12.77%Operating Expenses16,77214,653-12.63%EBIT8,6267,501-13.04%Interest Expense49075954.90%EBT8,1366,742-17.13%Tax1,5865,560250.57%Non-Recurring Events(23)66NANet Income6,5271,248-80.88%Source: Based on information at www.coca-colacompany.com
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.
34 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTPepsiCo is having trouble with its Gatorade energy drink brand whose sales in the United States declined 0.5 percent to $5.9 billion in 2017. This was the brand’s first decline in annual sales since 2012. Gatorade accounts for about 20 percent of PepsiCo’s North American drink volume. The com-pany released Gatorade Organic in August 2016 and made $20 million on that product through the end of 2017. The sports-drink market is becoming highly competitive; even up-start BodyArmour, a distant third in market share, is gaining rapidly on PepsiCo in sports drinks, such as Gatorade.Dr Pepper Snapple Group, Inc. (DPS)Headquartered in Plano, Texas, DPS manufactures nonalcoholic beverages in the United States, Canada, Mexico, and the Caribbean. It also markets ready-to-drink teas, juices, juice drinks, water, and mixers. The company offers brands such as: 7UP, A&W, Bai, Crush, Canada Dry, Schweppes, Sunkist soda, Squirt, Hawaiian Punch, and RC Cola. DPS manufactures and sells Mott’s apple sauces. DPS’s revenues increased slightly from $6.2 billion in 2014 to $6.3 billion in 2015, to $6.4 billion in 2016, to $6.7 in 2017. DPS’s net income also has increased slightly every year, from $703 million in 2014 to $770 million in 2017. DPS recently acquired Bai Brands for about $1.7 billion. DPS currently has about 8.5 percent of the U.S. nonalcoholic beverage market, according to Euromonitor International.DPS owns seven of the top 10 noncola soft drinks on the market. Third-quarter (Q3) 2017 results showed DPS’s carbonated soft drinks decreasing 1 percent, whereas its noncarbonated beverages in-creased 6 percent. Q3 showed flat sales in the United States and Canada, but sales in Mexico and the Caribbean increased 2 percent. Also for Q3, the DPS brand named Clamato grew 7 percent and Mott’s sauce sales grew 5 percent, but Snapple sales declined 5 percent.The big news in the beverage industry is that Keurig Green Mountain, the maker of Keurig K-Cup coffee machines, acquired Dr Pepper Snapple in 2018. Keurig is privately owned by JAB Holdings, one of Europe’s largest investment firms; JAB also owns Peeet’s Coffee, Panera Bread, and Krispy Kreme doughnuts. JAB is a privately held fund that manages the money of the Reimann family, one of Germany’s wealthiest families. This acquisition is aimed directly at both Coca-Cola and Starbucks Corp. This acquisition puts Keurig in the global soda business and strengthens its coffee business. Euromonitor reports that sales of ready-to-drink coffees increased more than 17 percent in 2017. JAB’s partner in Keurig is Mondelez International that holds roughly 24 percent of the stock JAB, but that percentage dropped to about 14 percent when the Dr Pepper acquisition was finalized. Keurig’s revenue for 2017 was about $4.1 billion and its market share in the coffee-pod industry has declined from 40 percent in 2013 to about 23 percent in 2017.Groupe DanoneHeadquartered in Paris, France, Groupe Danone is the number-one producer of yogurt in the world, the number-two bottled water and baby nutrition manufacturer, number-one in manufacturing fresh dairy products, and the European leader in medical nutrition. Danone’s primary brand in bottled water is Evian. Danone sells flavored waters and focuses on health-conscious consumers. One brand is Levite, a big suc-cess in Mexico. Danone continues to add new drinks in different markets, such as Taillefine Fiz in France, which is a zero-calorie soda that has achieved a number-two ranking in the French low-calorie segment. Danone is present in more than 130 markets and generated sales of €21.9 billion in 2016, with more than half of that revenue coming from emerging countries. Fresh dairy products represent about 50 percent of Danone’s total sales, early life nutrition 22 percent, water 21 percent, and medical nutrition 7 percent.Monster Beverage Company (MNST)Headquartered in Corona, California, Monster Beverage develops, markets, sells, and distributes energy-drink beverages, sodas, or concentrates for energy-drink beverages, under brand names such as Monster Energy, Monster Rehab, Monster Energy Extra Strength Nitrous Technology, Java Monster, Muscle Monster, Mega Monster Energy, Punch Monster, Juice Monster, Ubermonster, BU, Mutant Super Soda, Nalu, NOS, Burn, Mother, Ultra, Play and Power Play, Gladiator, Relentless, Samurai, BPM, and Full Throttle.Coca-Cola owns 16.7 percent of the Monster Beverage, which it purchased in 2015 for approx-imately $2.15 billion. In addition to the equity stake, both companies’ strategic partnerships related to business transfers and expanded global distribution. In October 2017, Coca-Cola transferred ownership of all of its worldwide energy businesses including NOS, Full Throttle, and nine smaller brands to Monster Beverage Company. At the same time, Monster transferred all of its nonenergy drink businesses to Coca-Cola, including Hansen’s natural sodas, Peace Tea, Hubert’s Lemonade, and Hansen’s juice products. As shown in Exhibit 10, energy drinks comprise 4.8 percent of all nonalcoholic beverages sold.
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).
36 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTzero-calorie brand Coke Zero Sugar. For PepsiCo, food and snacks volume increased 2 percent in the first half of 2017, whereas beverages declined 1 percent.R&DTo reverse revenue declines, beverage firms boosted R&D spending at an average annual rate of nearly 20 percent over the past 5 years. R&D spending is likely to remain high in 2017 and 2018 as beverage companies strive to rejuvenate revenue growth. Developing flavored sparkling waters is an example.Outside the United StatesIn 2016, international operations represented 62 percent of total nonbottling revenues at Coke and 42 percent at PepsiCo. Coke does business in countries using currencies other than the U.S. dollar, including the euro, the Japanese yen, the Brazilian real, and the Mexican peso. Coke uses 72 curren-cies in addition to the U.S. dollar. Unfavorable foreign currency exchange rates can have a significant effect on reported revenue growth for global beverage manufacturers, especially because the U.S. dol-lar’s value relative to foreign currencies is on average at a 3-year low.There are uncertainties going forward in our major international markets, including the United Kingdom’s impending withdrawal from the European Union, commonly referred to as “Brexit,” which is due to be finalized as of December 2020 and unstable political conditions, including civil unrest and governmental changes, in certain other international markets could undermine global consumer confidence and reduce consumers’ purchasing power, thereby reducing demand for our products.City, County, State, and Federal TaxesPublic health advocates are actively lobbying for tax referendums and legislation in more U.S. cities to tax soda. Companies such as Coke and PepsiCo Soda spent nearly $70 million from 2009 to 2016 lobbying against soda taxes and warning label measures in U.S. cities and states, as well as an average of about $15 million annually on federal lobbying, according to the consumer advocacy group Center for Science in the Public Interest (CSPI). For example, beverage companies spent about $9.4 million between January 2016 and June 2016 to oppose the Philadelphia City Council’s soda tax proposal, ac-cording to CSPI’s estimates. Philadelphia eventually imposed a soda tax in June 2016, the first major U.S. city (and the second city after Berkeley, California) to do so. In November 2016, three cities in California (San Francisco, Albany, and Oakland) passed their own soda tax laws, as did Cook County, Illinois (which includes Chicago) and Boulder, Colorado. In June 2017, Seattle implemented a tax of 1.75 cents per ounce on sugary drinks and soda. Chicago’s soda tax began in the Fall 2017.Taxes on sugary beverages came into effect in Mexico on January 1, 2014, in an effort to combat obe-sity in the country; higher product costs are likely to dampen demand, and tax revenue could help to fund costs related to preventive actions and medical treatment. Mexico is the country with the biggest obesity problem in the world, according to the Food and Agriculture Organization of the United Nations. This will be a game changer for beverage companies exporting to Mexico (such as Coke). In 2015, soda sales in Mexico plummeted 12 percent. Price-sensitive consumers are turning away from buying soda products.Beverage Caloric Intake in the United StatesThe American Beverage Association reported in December 2017 that the average American drank 201.2 calories a day in 2016, up slightly from 2015. More than offsetting the decline in sales of soda and juice in cans or bottles, sales of soda from fountains in restaurants are increasing. And Americans are drinking more and more sweet tea at restaurants. In terms of liquid intake, the average beverage calories consumed in the United States per capita per day in 2016 was sodas (126.7), juice (42.5), teas (11.2), sports (10.6), and other (10.2) according to the Beverage Marketing Corporation. Consumption of diet and low-calorie soda continues to fall, but consumption of sports and energy drinks continues to rise at a faster rate.Impulse BuyingPepsiCo is reinvesting some of the millions of dollars it is saving under the new tax laws in e-commerce, which today accounts for roughly $1 billion in the company’s annual retail sales. PepsiCo is also in-vesting savings in training for workers, cash returns for shareholders, and $100 million in employee bonuses. The rise of online shopping is bad news for Coca-Cola and PepsiCo because impulse buy-ing makes up roughly 30 percent of overall beverage sales. Without customers grabbing a Diet Pepsi while checking out at Walmart or a two-liter bottle of Coke Zero at the grocery store, the beverage companies would be in big trouble. Sales of soft drinks by volume have dropped for 12 consecutive years in the United States, so companies like Coca-Cola and PepsiCo need impulse buying, which is being eroded by more online shopping. Coca-Cola is currently investigating click-and-collect grocery sales, bundled deals (such as meal kits), and new impulse “triggers” online.
The FutureCoke swung from net income of $550 million in Q4 2016 to a net loss of $2.75 billion in Q4 2017. This decline was mostly due to a one-time charge of $3.6 billion blamed on the new federal tax law, which forced Coke to pay taxes on certain past offshore earnings. However, Coke supports the tax changes because its effective tax rate is expected to decline to 21 percent in 2018.The steady decline in consumption of carbonated beverages necessitates Coke formulating and implementing new strategies going forward. The company needs a full-blown, comprehensive stra-tegic plan to determine specific actions needed under the following general categories of strategies:1. Further global expansion to tap markets not yet saturated2. Continued product development to introduce new healthy drinks3. Acquisition of small rival firms to gain growth in revenues4. Continued market penetration with extensive advertising and promotion to shift consumer perception away from unhealthiness to treating yourself with a soda5. Continued shift to smaller cans and package sizes6. Perhaps diversification into snacks and foods as PepsiCo has successfully done7. Push aggressively into bottled water to capitalize on rapid growth in that sector8. Develop natural sweeteners to replace artificial sweeteners9. Increase lobbying to curtail city, county, and state sugar taxes CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 37ASSURANCE-OF-LEARNING EXERCISESSET 1: STRATEGIC PLANNING FOR COCA-COLAEXERCISE 1AGather Strategy Information for Coca-Cola CompanyPurposeThe primary purpose of this exercise is to show students how to obtain vital information for doing case analysis or preparing a strategic plan for any publicly held firm. The secondary purpose is to familiarize you with (1) strategy terms introduced in this chapter and (2) key sources of information for doing strategic planning. Generally in a strategic-management course, teams of students prepare a strategic plan (case anal-ysis) for some assigned company, so this exercise can assist in learning how to get started in such a project.InstructionsStep 1 Read the Coca-Cola Cohesion Case and list what you consider to be the firm’s strengths, weaknesses, opportunities, and threats. Then, go to the corporate website at www.coca- colacompany.com, scroll down to the bottom of the website, and click on Investors. Click Annual Reports and then click 2017 Annual Report or Form 10K. Download this pdf file to your desktop; peruse the information and add to your list of Coca-Cola’s strengths, weak-nesses, opportunities, and threats.Step 2 Go to your college library website and download to your desktop Standard & Poor’s Industry Surveys PDF file for the beverage industry. Use this information to add to your list of Coca-Cola’s strengths, weaknesses, opportunities, and threats.Step 3 Go to the www.finance.yahoo.com website. Enter the stock symbol KO. Note the wealth of information on Coca-Cola that may be obtained by clicking any item along the row below the company name. Use this data to refine your lists of key external and internal factors. Each factor listed for this exercise should include a percentage, number, dollar, or ratio to reveal some quantified fact or trend. These factors provide the underlying basis for a strategic plan because a firm strives to take advantage of strengths, improve weaknesses, avoid threats, and capitalize on opportunities. Avoid vagueness in strategic planning.Bob Pardue/Alamy Stock Photo
38 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENTStep 4 Through class discussion, compare your lists of external and internal factors to those devel-oped by other students and modify your lists as needed. Save this information for use in later exercises in the book.Step 5 Whatever case company you work on this semester, update the information on your com-pany by following the steps listed above.EXERCISE 1BEnter Coca-Cola Vitals into the Strategic Planning TemplatePurposeThe purpose of this exercise is to give you practice using resources at the author website (www.strategyclub .com), especially the Excel strategic planning template. Thousands of students annually find the author website resources to be immensely useful in preparing and delivering a strategic management case analysis.InstructionsStep 1 Go to the www.strategyclub.com website. Review the following resources:• Excel student template• Example sample case analysis PowerPoint• Live author videos• Live case analysis presentation on Barnes and Noble• Chapter and case updates• Guidelines for presenting a strategic plan or case analysisStep 2 Download the free Excel strategic-planning template. Read carefully instructions given with the template.Step 3 Using your Exercise 1A results, enter Coca-Cola’s strengths, weaknesses, opportunities, and threats into the Excel template.Step 4 Save this file for use in later exercises.SET 2: STRATEGIC PLANNING FOR MY UNIVERSITYEXERCISE 1CPerform SWOT Analysis for My UniversityPurposeThe purpose of this exercise is to apply SWOT analysis to a nonprofit organization—namely your college or university. SWOT analysis is the most widely used of all strategic planning tools and techniques because it is conceptually simple and lends itself readily to discussion among manag-ers. SWOT analysis formulates strategies by matching an organization’s internal strengths and weaknesses with external opportunities and threats to generate feasible strategies to be considered.For a university, external factors could include declining numbers of high school graduates; population shifts; community relations; increased competitiveness among colleges and universi-ties; rising numbers of adults returning to college; decreased support from local, state, and federal agencies; increasing numbers of foreign students attending U.S. colleges; and a rising number of Internet courses.Internal factors of a college or university could be related to faculty, students, staff, alumni, athletic programs, physical plant, grounds and maintenance, student housing, administration, fund-raising, academic programs, food services, parking, placement, clubs, fraternities, sororities, and public relations.InstructionsStep 1 For your university, identify four External Opportunities, four External Threats, four Internal Strengths, and four Internal Weaknesses.Step 2 Match your external with internal factors to develop or generate two SO Strategies, two WO Strategies, two ST Strategies, and two WT Strategies. For example, an SO Strategy to “Double the number of online course offerings in three years” could be developed or generated based
CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 39on a strength “world renown faculty” coupled with an opportunity “rising interest in online courses.”Step 3 Discuss your key factors and strategies as a class.Step 4 What new things did you learn about your university from the class discussion? How could this type of discussion benefit an organization? Save your answers and work for use in late exercises.SET 3: STRATEGIC PLANNING TO ENHANCE MY EMPLOYABILITYEXERCISE 1DPerform SWOT Analysis on MyselfPurposeThis exercise can help you decide on the best career path for yourself. Individuals and organizations are alike in many ways. Each has competitors and each should plan for the future. Every individual (and organization) faces some external opportunities and threats, some internal strengths and weak-nesses, and reaches pivotal forks in the road. These and other similarities make it possible for in-dividuals to use many corporate strategic-management concepts and tools such as SWOT analysis.InstructionsIntroduced in this chapter, SWOT analysis a popular strategic planning tool that can help individuals in career planning. Individuals can perform SWOT analysis by completing the following six steps:1. Identify four external opportunities you face.2. Identify four external threats you face.3. Identify four of your personal strengths.4. Identify four personal weaknesses.5. Develop SO (strength-opportunity), WO (weakness-opportunity), ST (strength-threat), WT (weakness-threat) strategies—two strategies of each type, thus eight strategies total.6. Select three strategies to implement.An external opportunity could be, for example, that your university offers a graduate program that interests you, whereas an external threat could be that interest rates are rising precluding getting a loan. A weakness could be a low grade-point average, whereas a personal strength may be three years of work experience. Strategy is sometimes defined as “the match” a person (or firm) makes between its internal resources and skills and the opportunities and risks created by its external factors. When a person has major weaknesses, he or she should strive to overcome them and perhaps convert them into strengths. When a person faces major threats, they should seek to avoid or mitigate the effects of them to focus on opportunities. Even though SWOT analysis is explained considerably more in Chapter 6, give it a try here to help in planning your next career move.SET 4: INDIVIDUAL VERSUS GROUP STRATEGIC PLANNINGEXERCISE 1EHow Detrimental Are Various Pitfalls in Strategic Planning?PurposeWhenever a firm engages in strategic planning, there are certain potholes or pitfalls that need to be avoided. Being aware of potential pitfalls and being prepared to address them is essential to suc-cess. A list of thirteen pitfalls that commonly plague firms and undermine strategic-planning efforts follows. These can be ranked in terms of how potentially detrimental or severe they are in doing strategic planning. This exercise reveals the authors’ ranking of the thirteen pitfalls in terms of how potentially detrimental or severe they are in doing strategic planning.
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.
96 PART 2 • STRATEGY FORMuLATIONThis chapter focuses on identifying and evaluating a firm’s strengths and weaknesses in the functional areas of business, including management, marketing, finance, accounting, and management information systems (MIS). Careful evaluation of a business’ functional areas is necessary to determine the firm’s core competencies and understand whether the firm’s current strategy is effectively working to provide a sustainable competitive advantage. One ex-cellent way to evaluate the effectiveness of a firm’s strategy is to study the firm’s financial per-formance relative to competitors and industry averages. Financial information alone, however, cannot provide a complete assessment of the effectiveness of a firm’s strategy, and strategists as well as students of strategy must dig deep into management, marketing, finance, accounting, and MIS issues simultaneously to fully understand why a firm’s strategy is effective or not.The first two-thirds of this chapter address potential strengths and weaknesses in the func-tional areas cited in terms of what, where, how, and why to obtain this information; the latter one-third of this chapter explains how to assimilate and use this information through develop-ment and evaluation of an Internal Factor Evaluation (IFE) Matrix.Showcased as an exemplary strategist, Elon Musk does an excellent job using his company’s internal strengths to capitalize on external opportunities. Elon Musk has founded four different billion-dollar companies, PayPal, SolarX, Solar City, and Tesla. Once called a “technologist,” Musk is revolutionizing the power and transportation industries and changing the world as we know it today.The Internal Assessment Phase of Strategy FormulationAll organizations have strengths and weaknesses in the functional areas of business. No enter-prise is equally strong or weak in all areas. Objectives and strategies are established with the intention of capitalizing on internal strengths and overcoming weaknesses. The internal-audit part of the strategic-management process is illustrated in Figure 4-1 with white shading.LO 4.1Musk told his more than 17 million Twitter followers in late 2017 that Tesla in 2020 would manufacture an F-150–type pickup truck except all electric, following the company’s 2019 release of an all-electric com-mercial semitrailer truck.Source: Based on Brian Deagon, “The New Space Race,” Investor’s Business Daily, September 11, 2017, B1 & B6. Also based on: http://www.rollingstone .com/culture/features/elon-musk-inventors-plans-for-outer-space-cars-finding-love-w511747 and https://www.cnbc.com/2017/11/21/how-tesla-and-elon-musk-became-household-names.htmlEXEMPLARY STRATEGIST SHOWCASEDElon Musk, CEO and Cofounder of Tesla, Inc. and Space Exploration Technologies Corporation (SpaceX)For more than a decade, Elon Musk has been a U.S. exemplary strategist on a mission to develop his rocket-ship company SpaceX and send humans on a 7-month, 34-million-mile journey to Mars. Headquartered in Los Angeles County, Musk’s SpaceX already fer-ries supplies to and from the International Space Station. While pio-neering private space exploration and preparing to colonize planets, Musk has also catapulted Tesla to be the world’s leader in batteries that supply energy for cars, trucks, homes, businesses, and rockets.SpaceX and Tesla aren’t the only companies started by Musk; he also started two other billion-dollar companies, PayPal and Solar City. Named the “Architect of the Future,” Musk was recently featured as a Rolling Stones Magazine cover story, highlighting his “world-changing plans to inhabit outer space, revolutionize high-speed transportation, and rein-vent cars.” As explained in Musk’s own words, his ambition stems in part by his unfettered optimism for the future of human existence:Fundamentally, the future is vastly more exciting and interesting if we are a space-faring civilization and multi-planetary species than if we are not.NASAOn the way to Mars?
CHAPTER 4 • THE INTERNAL ASSESSMENT 97Some researchers emphasize the importance of the internal-audit part of the strategic-management process by comparing it to the external audit in importance. Robert Grant, for example, concluded that the internal audit is more important, saying:In a world where customer preferences are volatile, the identity of customers is chang-ing, and the technologies for serving customer requirements are continually evolving, an externally focused orientation does not provide a secure foundation for formulating long-term strategy. When the external environment is in a state of flux, the firm’s own resources and capabilities may be a much more stable basis on which to define its identity. Hence, a definition of a business in terms of what it is capable of doing may offer a more durable basis for strategy.1Resource-Based ViewThe resource-based view (RBV) approach to competitive advantage contends that internal resources are more important for a firm than external factors in achieving and sustaining compet-itive advantage. Proponents of RBV theory contend that a firm’s performance is primarily deter-mined by internal resources that enable the firm to exploit opportunities and neutralize threats. A firm’s resources can be tangible, such as labor, capital, land, plant, and equipment, or intangible, such as culture, knowledge, brand equity, reputation, and intellectual property. Because tangible resources can more easily be bought and sold, intangible resources are often more important for gaining and sustaining competitive advantages.A resource can be considered valuable to the extent that it is (1) rare, (2) hard to imitate, or (3) not easily substitutable. Often called empirical indicators, these three characteristics of resources enable a firm to implement strategies that improve its efficiency and effectiveness and lead to a sustainable competitive advantage. The more a resource(s) is rare (not held by many firms in the industry), hard to imitate (hard to copy or achieve), and not easily substitutable (invulnerable to threat of substitution from different products), the stronger a firm’s competitive advantage will be and the longer the advantage will last. Valuable resources comprise strengths that a firm can capitalize on to prosper in a given industry.The basic premise of RBV theory is that the mix, type, amount, and nature of a firm’s internal resources should be considered first and foremost in devising strategies that can lead to sustainable competitive advantage. Managing strategically according to the RBV involves devel-oping and exploiting a firm’s unique resources and capabilities, and continually maintaining and strengthening those resources.As indicated in the Ethics Capsule 4, exploiting a firm’s unique resources and capabilities can present ethical dilemmas.Key Internal ForcesAn internal strategic-management assessment includes analysis of how strong or weak a firm is in each functional area of business, including management, marketing, finance, accounting, and MIS. Uniqueness or distinctive competences a firm has or lacks in each area provides the foundation for identifying strength and weakness factors. Strengths that cannot be easily matched or imitated by competitors are called distinctive competencies. It is of paramount importance in strategic planning to capitalize on and nurture strengths because competitive advantages generally arise more from strengths, uniqueness, and distinctive competencies than from weaknesses. Improving on weaknesses, however, is a vital task for all organizations and generally helps to improve efficiencies, weaknesses are unlikely to develop into sustainable competitive advantages, thus stressing the importance of nurturing strengths.It is impossible in a strategic-management text to review in depth all the material pre-sented in prior business courses; there are many subareas within these functions, such as customer service, warranties, advertising, packaging, and pricing under marketing. However, strategic planning must include a detailed assessment of how the firm is doing in all internal areas. Thus, an overview of each of the functional business areas from a strategy perspective is provided here. Regardless of the type or size of firm, effective strategic planning hinges on identification and prioritization of internal strengths and weaknesses because a firm must
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 99PlanningPlanning is the essential bridge between the present and the future; planning increases the likeli-hood of achieving desired results. Even though planning is considered the foundation of manage-ment, it is the task that managers most commonly neglect. Planning enables a firm to:1. Take into account relevant factors and focus on the critical ones2. Ensure that the firm is prepared for all reasonable eventualities and can make timely changes and adapt as needed3. Gather the resources needed and carry out tasks in the most efficient way possible4. Conserve its own resources and avoid wasting natural resources5. Assess whether the effort, costs, and implications associated with achieving desired objec-tives are warranted6. Be proactive, anticipate, and influence the futurePlanning is more than simply projecting past and present trends into the future (long-range plan-ning). Planning also includes revising a firm’s vision and mission, forecasting future events and trends, establishing objectives, and choosing strategies to pursue. Successful organizations strive to guide their own futures rather than merely react to external forces and events as they occur. Historically, organisms and organizations that adapt well to changing conditions survive and prosper; others become extinct.An organization can develop synergy through planning. Synergy exists when everyone pulls together as a team that knows what it wants to achieve; synergy is the 2 + 2 = 5 effect. By establishing and communicating clear objectives, employees and managers can work together toward desired results. Synergy can result in powerful competitive advantages. The strategic- management process itself is aimed at creating synergy in an organization.Strengths and weaknesses with respect to planning could relate to: (1) quality of a firm’s vision or mission and how well the firm’s strategies support the vision or mission, (2) divisions’ relative contribution to the firm’s performance, and (3) resource allocation across regions and products.OrganizingThe purpose of organizing is to achieve coordinated effort by defining task and authority relation-ships. Organizing means determining who does what and who reports to whom. There are count-less examples in history of well-organized enterprises successfully competing against—and in some cases defeating—much stronger but less-organized firms. A well-organized firm generally has motivated managers and employees who are committed to seeing the organization succeed. Resources are allocated more effectively and used more efficiently in a well-organized firm.The organizing function of management can be viewed as consisting of three sequential activities: breaking down tasks into jobs, combining jobs to form departments, and delegating authority. In The Wealth of Nations, published in 1776, Adam Smith cited the advantages of work specialization in the manufacture of pins:One man draws the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head. Ten men working in this manner can produce 48,000 pins in a single day, but if they had all wrought separately and independently, each might at best produce twenty pins in a day.2Organizing includes developing an appropriate structure, span of control, and chain of command. Structure dictates how resources are allocated and how objectives are established in a firm. Changes in strategy often require changes in structure because positions may be created, deleted, or merged. The most common types of structure are discussed in Chapter 7. Strengths and weaknesses with respect to organizing could relate to (1) how well the firm’s current structure matches the various divisions and strategy of the firm, (2) the degree to which a clear chain of command is displayed through executive titles, and (3) the extent of overlap among related jobs and job descriptions.MotivatingMotivating is the process of influencing people to accomplish specific objectives. Motivation helps explain why some people work hard and others do not. Strategies have little chance of succeeding if employees are not motivated to implement them once they are formulated. The
100 PART 2 • STRATEGY FORMuLATIONmotivating function of management includes such activities as developing leaders, managing groups, communicating effectively, and managing organizational change.When managers and employees of a firm strive to achieve high levels of productivity, this indicates that the firm’s strategists are excellent leaders—persons that establish rap-port with subordinates, empathize with their needs and concerns, set a good example, and are trustworthy and fair. An excellent leader communicates a vision of the firm’s future and inspires people to work hard to achieve that vision. Stressing the importance of leader-ship, Sun Tzu stated, “Weak leadership can wreck the soundest strategy.” According to Peter Drucker:Leadership is not a magnetic personality. That can just as well be demagoguery. It is not “making friends and influencing people.” That is flattery. Leadership is the lifting of a person’s vision to higher sights, the raising of a person’s performance to a higher standard, the building of a person’s personality beyond its normal limitations.3An organization’s system of communication determines whether strategies can be imple-mented successfully. Good two-way communication is vital for gaining support for departmen-tal and divisional objectives and policies. Top-down communication can encourage bottom-up communication. The strategic-management process becomes a lot easier when subordinates are encouraged to discuss their concerns, reveal their problems, provide recommendations, and give suggestions. A primary reason for instituting strategic management is to build and support effec-tive communication networks throughout the firm.Human resource management (HRM) includes activities such as recruiting, interviewing, testing, selecting, orienting, training, developing, caring for, evaluating, rewarding, disciplining, promoting, transferring, demoting, and dismissing employees, as well as managing union rela-tions. The complexity and importance of HRM has increased to such a degree that all but the smallest organizations generally have a full-time human resource manager. As employees and managers come and go, HRM must manage this process effectively to maintain employee morale and minimize workplace stress. Table 4-2 reveals several of many ways that effective HRM can help create and maintain a competitive advantage for organizations. The type of HRM informa-tion listed in Table 4-2 could be the source of a firm’s strengths or weaknesses with respect to the overall motivation of managers and employees.ControllingAll managers in an organization have controlling responsibilities, such as conducting performance evaluations and taking necessary action to minimize inefficiencies. The controlling function of management is particularly important for effective strategy evaluation (the focal topic of Chapter 9). Controlling consists of four basic steps:1. Establishing performance standards2. Measuring individual and organizational performance3. Comparing actual performance to planned performance standards4. Taking corrective actionsTABLE 4-2 Six Ways Human Resource Management Can Provide a Competitive Advantage1. Analyze turnover rates to determine where problems may lie.2. Measure and monitor employee engagement and morale scores.3. Track employee data to identify high and low performers.4. Determine going market rates for talent and align compensation with company goals.5. Design employee development and training pathways that take into account the strategic and long-term needs of the organization.6. Provide guidance on legal issues related to all personnel matters.Source: Based on information from http://hrdailyadvisor.blr.com/2017/08/21/using-hr-competitive-advantage/
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.
102 PART 2 • STRATEGY FORMuLATIONsupportive, strategic changes may be ineffective or even counterproductive. A firm’s culture can become antagonistic to new strategies, with the result being confusion and disorientation.To achieve and maintain competitive advantage, firms must continually learn, adapt, and evolve. Adapting to change can be difficult, particularly when change includes forging new alliances, partnerships, or mergers between different companies, each of which likely has its own unique culture and unique identity. Table 4-4 provides some example (possible) aspects of an organization’s culture and possible considerations for identifying strengths and weaknesses within the firm.When one firm acquires another firm, integrating the two cultures effectively can be vital for success. For example, in Table 4-4, one firm may score mostly 1s (low) and the other firm may score mostly 5s (high), which would present a challenging strategic problem. Regardless of a firm’s industry, geography, or company history, it is imperative that firms effectively inte-grate corporate strategy and culture, even as they continuously adapt and evolve overtime.An organization’s culture should infuse individuals with enthusiasm for implementing strategies. Internal strengths and weaknesses associated with a firm’s culture sometimes are overlooked because of the interfunctional nature of this phenomenon. This is a key reason why strategists need to view and understand their firm as a sociocultural system. Success is often determined by links between a firm’s culture and strategies. The challenge of strategic manage-ment today is to bring about the changes in organizational culture and individual mind-sets that are needed to support the formulation, implementation, and evaluation of strategies.Management Audit Checklist of QuestionsThe following checklist of questions can help determine specific strengths and weaknesses in the management functional area of business. An answer of no to any question could indicate a potential weakness, although the strategic significance and implications of negative answers, of course, will vary by organization, industry, and severity of the weakness. Positive or yes answers to the checklist questions suggest potential areas of strength.1. Does the firm use strategic-management concepts?2. Are company objectives and goals measurable and well communicated?3. Do managers at all hierarchical levels plan effectively?4. Do managers delegate authority well?5. Is the organization’s structure appropriate?6. Are job descriptions and job specifications clear?7. Is employee morale high?TABLE 4-4 15 Aspects of an Organization’s CultureDimensionLowDegreeHigh1. Strong work ethic; arrive early and leave late123452. High ethical beliefs; clear code of business ethics followed123453. Formal dress; shirt and tie expected123454. Informal dress; many casual dress days123455. Socialize together outside of work123456. Do not question supervisor’s decision123457. Encourage whistle-blowing123458. Be health conscious; have a wellness program123459. Allow substantial “working from home”1234510. Encourage creativity, innovation, and open-mindedness1234511. Support women and minorities; no glass ceiling1234512. Be highly socially responsible; be philanthropic1234513. Have numerous meetings1234514. Have a participative management style1234515. Preserve the natural environment; have a sustainability program12345
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 105Most firms have no choice but to continually develop new and improved products because of changing consumer needs and tastes, new technologies, shortened product life cycles, and increased domestic and foreign competition. A shortage of ideas for new products, increased global competition, increased market segmentation, strong special-interest groups, and increased government regulations are several factors making the successful development of new products more and more difficult, costly, and risky. In the pharmaceutical industry, for example, only one of every few thousand drugs created in the laboratory ends up on pharma-cists’ shelves.Strengths and weaknesses with respect to products could relate to (1) the value of a firm’s brands relative to competitors’ brands, (2) the firm’s product assortment or cannibalism among the firm’s existing products, or (3) features of the firm’s products relative to those of similar products found in the marketplace.PricingPricing refers to deciding the amount an individual must exchange to receive a firm’s product offering. Pricing objectives often include setting prices at levels which maximize profit, sales, or market share or setting prices to weaken the competition’s marketing efforts, to enhance cus-tomer satisfaction, or to enhance the image and prestige of a product. Pricing strategies are often based on costs, demand, the competition, or on customers’ needs. Sometimes “free is a good price,” as evidenced by what Google and Facebook charge basic customers.Widespread Internet use and advances in technology have enabled firms to quickly adjust prices to meet changes in the marketplace. In dynamic pricing strategies, the same product may be sold to different customers for different prices, or even to the same customer for dif-ferent prices. Intense price competition, coupled with Internet price-comparative shopping, has reduced profit margins to bare minimum levels for many companies. Target and Best Buy are among the many companies that now offer to match online prices of rival retailers. Both companies are seeking to combat “showrooming” by shoppers who check out products in their stores but buy them on rivals’ websites. Issues related to pricing can represent key strengths or weaknesses for firms.Firms must be aware of government constraints on pricing, including regulations regard-ing price fixing, price discrimination, predatory pricing, unit pricing, price advertising, and price controls. For example, the Robinson-Patman Act prohibits manufacturers and wholesal-ers from discriminating in price among channel member purchasers (retailers and wholesal-ers) if competition is lessened. Pricing products in digital currencies, as discussed in Global Capsule 4, is increasingly a necessary consideration. Strengths and weaknesses with respect to pricing could relate to whether the focal firm price matches or not and why, or how the firm’s prices (including currencies in which the products can be paid) compare to similar products sold by competitors.PromotionSuccessful strategy implementation generally rests on the ability of an organization to sell some good or service. Promotion includes many marketing activities, such as advertising, sales pro-motion, public relations, personal selling, and direct marketing. Common promotional tools designed to inform consumers about products include TV advertising, magazine ads, billboards, websites, and public relations, among others. Discounts, coupons, and samples are often used to encourage purchase. Promotional tools such as personal selling, buzz building, and social media are often used to build relationships with customers. The effectiveness of various promotional tools for consumer and industrial products varies. Personal selling is especially important for industrial goods companies, whereas advertising and social-media marketing are more impor-tant for consumer goods companies. Determining organizational strengths and weaknesses in the promotional function of marketing is an important part of performing an internal strategic-management audit.Promotion in general and advertising in particular can be expensive, a primary reason marketing is a major business function to be studied carefully. Without marketing, even the best products have little chance of being successful. Worldwide advertising expenditures are increasing around 5 percent annually and are expected to reach $700 billion in 2021. Digital
106 PART 2 • STRATEGY FORMuLATIONadvertising, especially on mobile devices, is fueling the increased ad spending because global Internet advertising recently surpassed television advertising and is expected to reach nearly $280 billion in 2020.7 Many successful brands are now using digital platforms and social media to build relationships and establish emotional bonds with consumers. As social networks, virtual worlds, product review sites, and location-based social apps become increasingly popular among consumers, marketers spend heavily on social-media marketing. In performing a strategic- planning analysis, in addition to comparing rival firms’ websites, it is important to compare rival firms’ handling of social-media issues.Strengths and weaknesses with respect to promotion could relate to a firm’s (1) website and social media engagement (or lack thereof), (2) association with key celebrities or spokespersons, or (3) advertising and brand slogans or images.Channels of DistributionChannels of distribution is a term that refers to the various intermediaries that take a product from a producer to an end customer. These intermediaries bear a variety of names such as whole-salers, retailers, brokers, facilitators, agents, vendors—or simply distributors. In this regard mar-keters often make decisions related to warehousing, distribution channels, distribution coverage, retail site locations, sales territories, inventory location, transportation carriers, wholesaling, and retailing.Marketers must determine how widely available their product should be for consumers to find and purchase. Some firms offer their products through as many wholesalers and retailers that will sell them while other firms offer products only through several select outlets or autho-rized outlets.Some of the most complex and challenging decisions facing a firm concern product distri-bution. Successful organizations identify and evaluate alternative ways to reach their ultimate market. Many companies today are increasingly making their products available for purchase online, directly through their website, but this practice can upset retailers. Efficient supply chain and distribution systems are essential for any firm to gain and sustain a competitive advantage.Strengths and weaknesses with respect to promotion could relate to the effectiveness of brick-and-mortar versus online sales or the average return on investment (ROI) of various pur-chase locations.GLOBAL CAPSULE 4Bitcoin: The New Global CurrencyUsing cryptography, a new worldwide digital payment system has emerged in which money can be exchanged without the involvement of a central authority or bank. Cryptocurrencies, also referred to as digital currencies or altcoins, are becoming popular among investors, businesses, and consumers around the world. Much like cash for the Internet, but with no physical backing, digital currencies are increasingly prevalent as a means of value exchange between individuals and businesses.With a total market value of more than $600 billion, the digital currency market is made up of several players including Bitcoin, Ethereum, Ripple, and Litecoin. Bitcoin is the most well-known and widely used digital currency, making up over half of the cryptocurrency market value. Simply put, Bitcoin is a mobile app that provides individuals with a personal Bitcoin wallet that can be used to exchange Bitcoin with other users. Bitcoin is increasingly being used; Bloomberg, Dish, Fidelity, Expedia, Overstock.com, Reddit, Reeds Jeweler, United Way, and USAA are among a growing number of busi-nesses accepting Bitcoin. Key advantages of Bitcoin include a simple payment pro-cess that can easily and quickly be done 24 hours a day and across international borders, all while protecting one’s iden-tity, protecting against fraud, and avoiding typical transaction fees imposed by banks or other intermediaries.Companies are increasingly being faced with difficult decisions regard-ing Bitcoin. Should firms accept Bitcoin as a method of payment? Should products be priced in Bitcoin? If so, should firms price their products in both the local currency and Bitcoin? Executives are currently addressing these and other such questions.Source: Based on https://bitcoin.org/en/how-it-works and Paul Vigna, “Rival Digital Currencies Nip at Bitcoin,” Wall Street Journal, (December 20, 2017): B16.Is this money?Travis Wolfe/123RF
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
112 PART 2 • STRATEGY FORMuLATIONFinancial analysis provides an excellent tool for identifying many strengths and weaknesses of the firm but the numbers themselves generally do not reveal the source of issues, which could stem for example from marketing and promotional effectiveness, HRM and employee produc-tivity, accounting errors, and so on. Therefore, carefully study your firm’s Form 10K or Annual Report and other company documents including quarterly reports to uncover strengths and weak-nesses associated within the functional areas. Finance and accounting strengths and weaknesses could relate to issues such as the firm’s use of debt versus equity to raise capital, the firms divi-dend policy, or the firm’s acquisition versus organic growth practices.Management Information SystemsInformation ties all business functions together and provides the basis for all managerial decisions. Information can represent a major source of competitive advantage or disadvan-tage and a major source of a firm’s internal strength and weakness factors. A management information system (MIS) collects, codes, stores, synthesizes, and presents information in such a manner that it aids in operational and strategic decision making. The heart of an infor-mation system is a database containing the kinds of records and data important to managers. If a business fails to manage information well, this is an internal weakness that needs fixing.Business AnalyticsBusiness analytics is a business technique that involves using software to mine huge volumes of data to help executives make decisions. Sometimes called predictive analytics, machine learning, or data mining, this software enables a researcher to assess and use the aggregate experience of an organization, which is a priceless strategic asset for a firm. The history of a firm’s interaction with its customers, suppliers, distributors, employees, rival firms, and more can all be tapped with data mining to generate predictive models. Business analytics is similar to the actuarial methods used by insurance companies to rate customers by the chance of posi-tive or negative outcomes. Every business is basically a risk management endeavor! Therefore, like insurance companies, all businesses can benefit from measuring, tracking, and computing the risk associated with hundreds of strategic and tactical decisions made every day.Strategists use business analytics to provide a firm with proprietary business intelligence regarding, for example, which segment(s) of customers choose your firm versus those who defer, delay, or defect to a competitor and why. In addition to understanding consumer behavior better, which yields more effective and efficient marketing, business analytics also is being used to slash expenses by, for example, withholding retention offers from customers who are going to stay with the firm anyway, or managing fraudulent transactions involving invoices, credit-card pur-chases, tax returns, insurance claims, mobile phone calls, online ad clicks, and more. Business analytics can also reveal where competitors are weak so that marketing activities can be directly targeted to take advantage of resultant opportunities.Business analytics enables a firm to learn from experience and to make current and future decisions based on prior information. Deriving robust predictive models from data mining to support hundreds of commonly occurring business decisions is the essence of learning from experience. The mathematical models and analysis of thousands, millions, or even billions of prior data points can reveal patterns of behavior for optimizing the deployment of resources and can dramatically enhance decision making at all organizational levels and all stages of strategic management. Business analytics can identify and analyze patterns, but perhaps more impor-tantly, they can reveal the likelihood of an event, and that information can be worth millions of dollars to companies, organizations, and governments.In 2018, global data analytics software is expected to reach $21.7 billion, a 64 percent increase from 2012.9 Leading firms providing the software include IBM, SAP, Oracle, Microsoft, Qlik Technologies, Tibco Software, and Tableau Software. CEOs are increasingly worried about cybersecurity issues. The number of U.S. data breaches reached a record of 791 in the first 6 months of 2017, up 29 percent from the same period the prior year.10 Fearing potential data breaches, CEOs are emphasizing to individuals throughout the company the importance of data security and are prioritizing cybersecurity efforts.In terms of cyberthreats, a recent Wall Street Journal article revealed what companies should be most concerned about and what they can do to mitigate the threat.11 The biggest threat currently LO 4.5
CHAPTER 4 • THE INTERNAL ASSESSMENT 113facing firms is that too many people in too many organizations have too much access to too much information not needed to do their particular job, whether it is access to sales data, patent informa-tion, or even material about the next new product being developed. Technical controls must be put in place in organizations to prevent employees from having broad access to company information and data because hackers from various countries and companies and lone wolves are increasingly gain-ing access to corporate files through employees and managers who unknowingly allow the access to seemingly honest “constituencies.” Cyberthreats are more a people threat than a technology threat.The Internal Factor Evaluation (IFE) MatrixThe internal topics discussed so far in this chapter provide a foundation for identifying strengths and weaknesses of a firm as they relate to a firm’s current strategies, paying careful attention to strengths and weaknesses that are unique and lead to or hinder sustaining a com-petitive advantage. An internal assessment reveals key strengths and weaknesses confronting an organization; this is vital information for managers in formulating strategies that capitalize on strengths and mitigate/overcome/improve upon weaknesses. The Actionable-Quantitative-Comparative-Divisional (AQCD) TestWhen identifying and prioritizing key internal factors in strategic planning, make sure the factors 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).As mentioned in the prior chapter, factors that meet the four criteria pass what can be called the “Actionable-Quantitative-Comparative-Divisional (AQCD) Test,” that is a measure of the quality of an internal factor. In addition to passing the AQCD Test, make sure that internal fac-tors are indeed internal (not external). Also, make sure the internal factors relate closely to the firm achieving its mission (strengths) or hindering its mission (weaknesses). Factors selected for inclusion in an internal assessment should be mission-driven.Regarding the AQCD criteria, strive to include all high quality factors in an internal 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. Engage in an engineering hunt for facts to make sure as many factors as possible pass the AQCD Test. It is important to state internal factors to the extent possible in actionable, quantitative, comparative, and divisional terms. Vagueness in stating factors must be avoided because vagueness gives little guidance in assigning weights or ratings in developing an IFE Matrix.High quality and low quality internal factors (hypothetical) for Exxon Mobil Corporation are given below to further exemplify this important concept:ASK YOuRSELF IS THE FACTORActionableQuantitativeComparativeDivisionalA High Quality Internal FactorExxon’s natural gas segment sales grew 14% in 2018.yesyesyesyesA Low Quality Internal FactorExxon’s price earn-ings ratio in 2018 was 14.4.noyesnonoLO 4.6
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
CHAPTER 4 • THE INTERNAL ASSESSMENT 115or weakness, where 4 = the response is superior, 3 = the response is above average, 2 = the response is average, and 1 = the response is poor. Even though both strengths and weaknesses can receive a rating of 1, 2, 3, or 4 at any time, generally there should be a compelling reason to assign a rating of 3 or 4 to a weakness; it is more common for a firm to be responding in a superior fashion to strengths because competitive advantages are built on strengths; strategies that result in strengths are generally excellent. Responding well to a weakness may not lead to competitive advantage, whereas turning a strength into a distinctive competency could yield a competitive advantage. Ratings are based on the effectiveness of a firm’s strategies in capital-izing on strengths or improving weaknesses. Ratings are company-based, not industry-based.Assignment of numerical values down the rating column in an IFE 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 some unique strength(s) that yield prosperity amid rivals that are so strong in various areas the focal firm will rarely, if ever, want to attack those areas. This is not to say weaknesses are not important because they are, and firms need to continually strive to improve weaknesses, but strengths versus rivals are of paramount importance. If a firm possesses many highly-weighted strengths, this is likely the result of effective strategies, so higher ratings in general are warranted for strengths; higher ratings increase the total weighted score in an IFE Matrix.Step 4: Obtain Weighted ScoresAlong each row in an IFE 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 IFE 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 internally, 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 internal position, whereby a continuation of current strategies may be pru-dent. (Note: The IE Matrix presented in Chapter 6 focuses on matching of EFE and IFE total weighted scores in formulating strategies.)TABLE 4-10 Guidelines for Developing an IFE Matrix1. Use the Narrow (Not Broad) Industry the Firm Competes InExample: Burger King competes in the fast-food industry (as opposed to the more general restaurant industry). Therefore, for Burger King, if including a weakness regarding the lack of healthy options on their menu, this factor should likely receive a low weight because healthy menu options are not as vital to the fast-food industry, whose customer base mostly desire quick service, good taste, and filling food. Similarly, Burger King’s weakness related to low-quality meats should not receive a high weight either because quality meats are not that important in the fast-food industry; customers simply are not willing to pay for them. Similarly, Burger King’s strength of providing low-priced coffee would re-ceive a high weight if the analyst views coffee as being especially important in the fast-food industry for success. If however the analysts views coffee not to be especially important in the fast-food indus-try for success, then this strength of Burger King should receive a relatively low weight.2. State Factors So They Pass the Actionable-Quantitative-Comparative-Divisional (AQCD) TestExample: A firm’s revenues may have decreased 15 percent from one year to the next, but stated in this manner, this “weakness” is not actionable because it does not reveal the reason, or reasons, why rev-enues declined; the reason(s) could range from competition driving down prices to raw materials being unavailable for one product or division of the firm. Nonactionable factors could lead managers astray if they make false assumptions regarding what to do about the factor. Therefore, state the “revenue decline factor” perhaps as follows: Revenues in the chocolate segment of the firm declined 21 percent in the most recent quarter because of factory recall problems. Now the factor passes the AQCD Test in providing insightful, relevant, useful, information for formulating strategies.
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
118 PART 2 • STRATEGY FORMuLATIONIMPLICATIONS FOR STUDENTSTo obtain the most recent management, marketing, and financial information about your case company, read the firm’s most recent quarterly report; the narrative that accompanies quarterly reports is excellent for revealing what a company is doing and the most recent financial results. Use these reports to obtain comparative informa-tion for developing an IFE Matrix.Gaining and sustaining competitive advantage is the essence or purpose of strategic planning. In the internal portion of your case analysis, emphasize how and why your internal strengths and weak-nesses can both be leveraged to gain competitive advantage and overcome competitive disadvantage, in light of the direction you are taking the firm. Maintain your project’s upbeat, insightful, and forward-thinking demeanor during the internal assessment, rather than being mundane, descriptive, and vague. Focus on how your firm’s resources, capabilities, structure, and strategies, with your rec-ommended improvements, can lead the firm to prosperity.Although the numbers must provide the basis for your analysis and must be accurate and reasonable, do not bore a live audience or class with overreliance on numbers. In contrast, throughout your presenta-tion or written analysis, refer to your recommendations, explaining how your plan of action will improve the firm’s weaknesses and capitalize on strengths in light of anticipated competitor countermoves. Keep your audience’s attention, interest, and suspense, rather than “reading” to them or “defining” ratios for them.William King believes a task force of managers from different units of the organization, supported by staff, should be charged with determining the 20 most important strengths and weaknesses that should influence the future of the firm. According to King,The development of conclusions on the 20 most important organizational strengths and weaknesses can be, as any ex-perienced manager knows, a difficult task, when it involves managers representing various organizational interests and points of view. Developing a 20-page list of strengths and weaknesses could be accomplished relatively easily, but a list of the 20 most important ones involves significant analysis and negotiation. This is true because of the judgments that are required and the impact that such a list will inevitably have as it is used in the formulation, implementation, and evaluation of strategies.12Strategic planning is most successful when managers and em-ployees from all functional areas work together to provide ideas and information. Financial managers, for example, may need to restrict the number of feasible options available to operations managers, or R&D managers may develop products for which mar-keting managers need to set higher objectives.A key to organizational success is effective coordination and understanding among managers from all functional business areas. Through involvement in performing an internal strategic- management audit, managers from different departments and divisions of the firm come to understand the nature and effect of decisions in other functional business areas in their firm. Knowledge of these relationships is critical for effectively establishing objectives and strategies. Financial ratio analysis, for example, exemplifies the complexity of relationships among the functional areas of business. A declining return on investment or profit margin ratio could, for example, be the result of ineffective marketing, poor management policies, R&D errors, or a weak MIS.Strategists should follow the guidelines presented in this chap-ter and throughout this book to help assure that their firm is head-ing in the right direction for the right reasons, and rewarding the right people for doing the right things, in the right places.Chapter SummaryManagement, marketing, finance and accounting, and MIS represent the core operations of most businesses and the sources of competitive advantages. A strategic-management audit of a firm’s internal operations is vital to organizational health. Many companies still prefer to be judged solely on their bottom-line performance. However, it is essential that strategists identify and evaluate internal strengths and weaknesses to effectively formulate and choose among alterna-tive strategies. The IFE Matrix, coupled with the CPM, the EFE Matrix, and clear statements of vision and mission provide the basic information needed to successfully formulate competitive strategies. The process of performing an internal audit represents an opportunity for managers and employees throughout the organization to participate in determining the future of the firm. Involvement in the process can energize and mobilize managers and employees.Understanding both external and internal factors and relationships among them (see SWOT analysis in Chapter 6) is the key to effective strategy formulation. Because both external and inter-nal factors continually change, strategists seek to identify and take advantage of positive changes and buffer against negative changes in a continuing effort to gain and sustain a firm’s competitive advantage. This is the essence and challenge of strategic management, and oftentimes survival of the firm hinges on this work. Adherence to the AQCD Test regarding internal (and external) factors statements will enable excellent “matching matrices” to be constructed (in Chapter 6).
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?
120 PART 2 • STRATEGY FORMuLATION 4-22. Discuss how the nature of marketing has changed in the last few years. 4-23. Explain why it is best not to have more than 30 percent of the factors in an IFE Matrix be financial ratios. 4-24. List three firms you are familiar with and give a distinc-tive competence for each firm. 4-25. Give some key reasons why it is essential to prioritize strengths and weaknesses. 4-26. Why may it be easier in performing an internal assessment to develop a list of 80 strengths and weaknesses than to decide on the top 20 to use in formulating strategies? 4-27. Think of an organization with which you are familiar. List three resources of that entity that are empirical indicators. 4-28. Think of an organization with which you are familiar. Rate that entity’s organizational culture on the 15 example dimensions listed in Table 4-4. 4-29. If you and a partner were going to visit a foreign country where you have never been before, how much planning would you do ahead of time? What benefit would you expect that planning to provide? 4-30. Even though planning is considered the foundation of management, why do you think it is commonly the task that managers neglect most? 4-31. Are you more organized than the person sitting beside you in class? If not, what problems could that present in terms of your performance and rank in the class? How analogous is this situation to rival companies? 4-32. List the three ways that financial ratios should be com-pared or used. Which of the three comparisons do you feel is most important? Why? 4-33. In an IFE Matrix, would it be advantageous to list your strengths, and then your weaknesses, in order of decreasing “weight”? Why? 4-34. In an IFE Matrix, a critic may say there is no significant dif-ference between a “weight” of 0.08 and 0.06. How would you respond? What is the mathematical difference? 4-35. Why do many firms consistently pay out dividends? 4-36. What is marketing promotion? Name several example forms of promotion commonly used by marketers. 4-37. Explain why prioritizing the relative importance of strengths and weaknesses in an IFE Matrix is an im-portant strategic-management activity. 4-38. How can delegation of authority contribute to effective strategic management? 4-39. Explain how you would motivate managers and em-ployees to implement a major new strategy. 4-40. Why do you think production and operations managers often are not directly involved in strategy-formulation ac-tivities? Why can this be a major organizational weakness? 4-41. Give two examples of human resource management (HRM) strengths and two examples of HRM weak-nesses of an organization with which you are familiar. 4-42. Define, compare, and contrast weights versus ratings in an EFE Matrix versus an IFE Matrix. 4-43. If a firm has zero debt in its capital structure, is that always an organizational strength? Why or why not? 4-44. After conducting an internal audit, a firm discovers a total of 100 strengths and 100 weaknesses. What procedures then could be used to determine the most important of these? Why is it important to reduce the total number of key factors? 4-45. Why is it important for companies to conduct marketing research? What type of information might they discover from marketing research? 4-46. What are 10 activities that comprise human resource management? 4-47. Explain the difference between data and information in terms of each being useful to strategists. 4-48. What are the most important characteristics of an effec-tive management information system? 4-49. Do you agree or disagree with the resource-based view theorists that internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage? Explain your and their position. 4-50. What makes a resource valuable to a company? 4-51. List five financial ratios that may be used by your uni-versity to monitor operations. 4-52. What is the most severe cyberthreat facing companies today, and how can firms best mitigate against this threat?MyLab Management Writing AssignmentsIf your instructor is using MyLab Management, go to www.pearson.com/mylab/management for Auto-graded writing questions as well as the following Assisted-graded writing questions: 4-53. List three ways that financial ratios should be compared or used. Which of the three comparisons do you feel is most important? Why? 4-54. Would you ever pay out dividends when your firm’s annual net profit is negative? Why or why not? What effect could this have on a firm’s strategies?
CHAPTER 4 • THE INTERNAL ASSESSMENT 121ASSURANCE-OF-LEARNING EXERCISESSET 1: STRATEGIC PLANNING FOR COCA-COLAEXERCISE 4A Perform a Financial Ratio Analysis for Coca-ColaPurposeFinancial ratio analysis is one of the best techniques for identifying and evaluating internal strengths and weaknesses. Potential investors and current shareholders look closely at firms’ financial ratios, making detailed comparisons to industry averages and to previous periods of time. Financial ratio analyses provide vital input information for developing an IFE Matrix.InstructionsStep 1 Using the resources listed in Table 4-8, find as many Coca-Cola financial ratios as possible. Record your sources. Report your research to your classmates and your professor.EXERCISE 4B Construct an IFE Matrix for Coca-ColaPurposeThis exercise will give you experience in developing an IFE Matrix. Identifying and prioritizing factors to include in an IFE Matrix fosters communication among functional and divisional man-agers. Preparing an IFE Matrix allows managers to articulate their concerns and thoughts regard-ing the business condition of the firm. This results in an improved collective understanding of the business.InstructionsStep 1 Join with two other individuals to form a three-person team. Develop a team IFE Matrix for Coca-Cola. Use information from Exercise 1B on page 38.Step 2 Compare your team’s IFE Matrix to other teams’ IFE matrices. Discuss any major differences.Step 3 What strategies do you think would allow Coca-Cola to capitalize on its major strengths? What strategies would allow Coca-Cola to improve on its major weaknesses?SET 2: STRATEGIC PLANNING FOR MY UNIVERSITYEXERCISE 4C Construct an IFE Matrix for Your College or UniversityPurposeThis exercise gives you the opportunity to evaluate your university’s major strengths and weaknesses. As will become clearer in the next chapter, an organization’s strategies are largely based on striving to take advantage of strengths and improving on weaknesses.InstructionsStep 1 Join with two other individuals to form a three-person team. Develop a team IFE Matrix for your university.Step 2 What was your team’s total weighted score?Step 3 Compare your team’s IFE Matrix to other teams’ IFE matrices. Discuss any major differences.Step 4 What strategies do you think would allow your university to capitalize on its major strengths? What strategies would allow your university to improve on its major weaknesses?
122 PART 2 • STRATEGY FORMuLATIONSET 3: STRATEGIC PLANNING FOR MYSELFEXERCISE 4D Construct an IFE Matrix for YourselfPurposeThis exercise gives you the opportunity to evaluate your own personal strengths and weaknesses. As will become clearer in the next chapter, an organization’s strategies are largely based on striving to take advantage of strengths and improving on weaknesses. Similarly, in planning for your career, you should formulate and implement personal strategies based on capitalizing on your strengths and improving on your weaknesses.InstructionsStep 1 Develop an IFE Matrix for yourself. As you assign weights, consider the relative importance of each factor for success in your desired career.Step 2 What was your team’s total weighted score? Compare your total weighted score to the aver-age score of 2.5.Step 3 What strategies might enable you to capitalize on your major strengths? What strategies might help you improve on your major weaknesses?SET 4: INDIVIDUAL VERSUS GROUP STRATEGIC PLANNINGEXERCISE 4E What Internal Functional Areas Are Most Important to Examine in Strategic Planning?PurposeA prioritized list of internal factors is needed for effective strategic planning. Often, the process en-tails all managers individually ranking the factors identified, from 1 (most important) to 20 (least important). Prioritization is absolutely essential in strategic planning because no organization can do everything that would benefit the firm; tough choices among good choices have to be made.Internal functional areas that yield strengths/weaknesses can be divided into five broad categories or areas: (1) management, (2) marketing, (3) finance, (4) accounting, and (5) MIS. For some compa-nies or organizations at various times, some areas are more important than others. This exercise re-veals the authors’ ranking of the relative importance of six functional areas for inclusion in a strategic planning internal assessment.The purpose of this exercise is to examine more closely the functional areas of business. In ad-dition, the purpose of this exercise is to examine whether individual decision making is better than group decision making. Academic research suggests that groups make better decisions than individu-als about 80 percent of the time.InstructionsRank five internal areas as to their relative importance (1 = most important, 5 = least important) in doing strategic planning. First, rank the areas as an individual. Then, rank the areas as a group of three. Thus, determine what person(s) and what group(s) here today can come closest to the expert ranking. This exercise enables examination of the relative effectiveness of individual versus group decision making in strategic planning.Steps1. Fill in Column 1 in Table 4-12 to reveal your individual ranking of the relative importance of the six areas (1 = most important, 2 = next most important, etc.). For example, if you feel man-agement is the third-most important functional area in doing strategic planning, then enter a 3 in Table 4-12 in Column 1 beside Management.2. Fill in Column 2 in Table 4-12 to reveal your group’s ranking of the relative importance of the five areas (1 = most important, 2 = next most important, etc.).3. Fill in Column 3 in Table 4-12 to reveal the expert’s ranking of the relative importance of the five functional areas.
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.
David, Fred R., Meredith E. David, and Forest R. David. “How Important Is Finance Coverage in Strategic Management? A Content Analysis of Textbooks.” International Journal of Business, Marketing, and Decision Sciences (IJBMDS) 4, no. 1 (Winter 2016): 64–78.David, Meredith E. and Fred R. David. “Are Key Marketing Topics Adequately Covered in Strategic Management?” Journal of Strategic Marketing 24, (March 2016): 1–13.Fleit, Caren. “The Evolution of the CMO.” Harvard Business Review 95, no. 4 (July–August 2017): 60.Furr, Nathan and Rahul Kapoor. “Capabilities, Technologies, and Firm Exit During Industry Shakeout: Evidence from the Global Solar Photovoltaic Industry.” Strategic Management Journal 39, no. 1 (January 2018): 33–61.Grigoriou, Konstantinos and Frank T. Rothaermel. “Organizing for Knowledge Generation: Internal Knowledge Networks and the Contingent Effect of External Knowledge Sourcing.” Strategic Management Journal 38, no. 2 (February 2017): 395–414.Hoisl, Karin, Marc Gruber, and Annamaria Conti. “R&D Team Diversity and Performance in Hypercompetitive Environments.” Strategic Management Journal 38, no. 7 (July 2017): 1455–1477.Lee, Joon Mahn, Byoung-Hyoun Hwang, and Hailiang Chen. “Are Founder CEOs More Overconfident than Professional CEOs? Evidence from S&P 1500 Companies.” Strategic Management Journal 38, no. 3 (March 2017): 751–769.Menon, Anoop R. and Dennis A. Yao. “Elevating Repositioning Costs: Strategy Dynamics and Competitive Interactions.” Strategic Management Journal 38, no. 10 (October 2017): 1953–1963.Morris, Shad S., Sharon A. Alvarez, Jay B. Barney, and Janice C. Mollo. “Firm-Specific Human Capital Investments as a Signal of General Value: Revisiting Assumptions about Human Capital and How It Is Managed.” Strategic Management Journal 38, no, 4 (April 2017): 912–919.Quigley, Timothy J., Craig Crossland, and Robert J. Campbell. “Shareholder Perceptions of the Changing Impact of CEOs: Market Reactions to Unexpected CEO Deaths, 1950–2009.” Strategic Management Journal 38, no. 4 (April 2017): 939–949.Selladurai, Raj and Carraher, Shawn. Servant Leadership: Research and Practice, 1st edition, Business Science Reference, 2014, 406 pages.Theeke, Matt and Hun Lee. “Multimarket Contact and Rivalry over Knowledge-Based Resources.” Strategic Management Journal 38, no. 12, (December 2017): 2508–2531.Vanacker, Tom, Veroniek Collewaert, and Shaker A. Zahra. “Slack Resources, Firm Performance, and the Institutional Context: Evidence from Privately Held European Firms.” Strategic Management Journal 38, no. 6 (June 2017): 1305–1326.Endnotes 1. Robert Grant, “The Resource-Based Theory of Competi-tive Advantage: Implications for Strategy Formulation,” California Management Review (Spring 1991): 116. 2. Adam Smith, The Wealth of Nations (New York: Modern Library, 1937), 3–4. 3. Peter Drucker, Management Tasks, Responsibilities, and Practice (New York: Harper & Row, 1973), 463. 4. Timothy Aeppel, “Robots Work Their Way into Small Factories,” Wall Street Journal (September 18, 2004): B1. 5. Edgar Schein, Organizational Culture and Leadership (San Francisco: Jossey-Bass, 1985), 9. 6. Quoted in Robert Waterman, Jr., “The Renewal Factor,” BusinessWeek (September 14, 1987): 108. 7. ____http://www.nasdaq.com/article/the-current-and- future-trends-of-digital-advertising-cm669129 8. J. Van Horne, Financial Management and Policy (Upper Saddle River, NJ: Prentice-Hall, 1974): 10. 9. G. George, M. Haas, and A. Pentland, “Big Data and Management,” Academy of Management Journal 52, no. 2 (April 2014): 321–326. See also P. Barlas, “Data Analytics Gets in the Sports Game,” Investor’s Business Daily (July 11, 2014): A1 10. Vanessa Fuhrmans, “CEOs Make Protecting Data a Top Goal,” Wall Street Journal (October 13, 2017): B4. 11. Stephen Schmidt and Scott Smith, “Where the Cyberthreats Are,” Wall Street Journal (December 19, 2017): R1. 12. Reprinted by permission of the publisher from “Integrating Strength–Weakness Analysis into Strategic Planning,” by William King, Journal of Business Research 2, no. 4: 481. Copyright 1983 by Elsevier Science Publishing Co., Inc. CHAPTER 4 • THE INTERNAL ASSESSMENT 125
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.
66 PART 2 • STRATEGY FORMuLATIONCompanies and organizations continually deal with external uncertainties and must quickly adapt to change to survive, as indicated in the following story:Once there were two company presidents who competed in the same industry. These two presidents decided to go on a camping trip to discuss a possible merger. They hiked deep into the woods. Suddenly, they came upon a grizzly bear that rose up on its hind legs and snarled. Instantly, the first president took off his knapsack and got out a pair of jogging shoes. The second president said, “Hey, you can’t outrun that bear.” The first president responded, “Maybe I can’t outrun that bear, but I surely can outrun you!”As illustrated in Figure 3-1, this chapter focuses on the concepts and tools needed to manage external uncertainties by conducting an external audit (sometimes called industry analysis). An external audit focuses on identifying and evaluating trends and events beyond the control of a single firm, such as increased foreign competition, population shifts to coastal areas, an aging society, and a social-media revolution. An external audit reveals key opportunities and threats confronting an organization; an external audit guides managers in formulating strategies that take advantage of the opportunities and avoid or reduce the impact of threats.This chapter presents a practical framework for gathering, assimilating, analyzing, and prioritizing external information that provides a foundation for formulating strate-gies effectively. Specifically, the first two-thirds of this chapter address external oppor-tunity/threat areas in terms of what, where, how, and why to obtain this information; the latter one-third of this chapter explains how to develop and use an External Factor Evaluation (EFE) Matrix and Competitive Profile Matrix (CPM) to assimilate all the op-portunity/threat factors/information.The exemplary strategist showcased in this chapter is Ben Silbermann, CEO and co-founder of Pinterest, the popular social-media company. Silbermann is outstanding at rec-ognizing external opportunities and threats and formulating effective strategies accordingly.EXEMPLARY STRATEGIST SHOWCASEDBen Silbermann, CEO and Cofounder of PinterestIt is 2018 and Pinterest has grown to a valuation of more than $13 billion and a customer base of about 200 million users who have “pinned” more than 110 billion ideas on Pinterest boards. Led by CEO and strategist Ben Silbermann, Pinterest is one of the fastest-growing companies in the world. The Pinterest website (www. pinterest .com) is free to use and available in nearly 30 foreign languages. Headquartered in San Francisco, Pinterest has about 900 employees. Hundreds of companies advertise on Pinterest with display ads and “pin” their products and services on boards. The Pinterest website is a visual discovery, collection, and storage tool used by customers in the United States (60 percent) and abroad (40 percent). Thousands of busi-nesses and marketers use Pinterest to access data collected on Pinterest customers, who interestingly are about 80 percent women, typically age 35 to 44. Silbermann has turned Pinterest into a global gold mine of data for advertisers and retailers. He says Pinterest is “only beginning to understand” how social media impacts consumers’ lives, and he is blaz-ing a new trail with an innovative, entrepreneurial company. Pinterest takes no commission or cut on transactions it processes and has no plans to go public to raise capital. A key advantage of staying private is to keep the ins and outs of business including the finance and market-ing operations of the company, secret from rival companies, who may want to imitate and replicate Pinterest strategies and offerings.Source: Erin Griffith, “Ben Silbermann,” Fortune, (September 1–17, 2017): 69. Also, http://fortune.com/2015/07/13/pinterest-ceo-ben-silbermann/Pixellover RM 2/Alamy Stock Photo
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
70 PART 2 • STRATEGY FORMuLATIONimpact where companies locate facilities and where people desire to live. Nine U.S. states, for example, have zero state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire, and Tennessee.Governmental legislation can significantly impact where businesses sell their products. For example, rapidly developing shifts in legislation surrounding the legality of marijuana are open-ing new markets for investors. Nearly a decade ago, Colorado passed the world’s first legislation that would treat marijuana like alcohol, taxing and regulating its sales. U.S. consumers spent $6.7 billion on legal marijuana in 2016; this number is expected to reach $208 billion in 2021.Example categories of political, governmental, and legal variables that often yield AQCD opportunities and threats to organizations are provided in Table 3-3. Political, governmental, and legal factors must be stated in AQCD terms to the extent possible to be useful in strate-gic planning. Local, state, and federal laws, as well as regulatory agencies and special-interest groups, can have a major impact on the strategies of small, large, for-profit, and nonprofit orga-nizations. Many companies have altered or abandoned strategies in the past because of politi-cal or governmental actions. As indicated in Ethics Capsule 3, new pending federal legislation regarding Alaska oil drilling could create business opportunities and threats and present ethical dilemma issues.TABLE 3-2 Key SCDE VariablesPopulation changes by race, age, and geographic areaAttitudes toward retirementRegional changes in tastes and preferencesEnergy conservationNumber of marriagesAttitudes toward product qualityNumber of divorcesAttitudes toward customer serviceNumber of birthsPollution controlNumber of deathsAttitudes toward foreign peoplesImmigration and emigration ratesEnergy conservationSocial Security programsSocial programsLife expectancy ratesNumber of churchesPer-capita incomeNumber of church membersSocial-media pervasivenessSocial responsibility issuesETHICS CAPSULE 3Preserve Alaska Wildlife or Boost Alaska Economy?Alaska is home to the largest wildlife refuge in the United States, the Arctic National Wildlife Refuge, which spans more than 19 million acres. The refuge serves an important role in the migra-tion of wildlife including birds, caribou, and polar bears, and it is also believed to hold significant oil reserves. In December 2017, Congress voted to authorize drilling in Alaska’s Arctic National Wildlife Refuge to boost the nation’s energy independence and help the Alaskan economy. However, from an ethical perspective, the arctic program director for the Wilderness Society, Lois Epstein, states that, “Opening the Arctic refuge coastal plain to oil leas-ing, exploration, and production unacceptably threatens the Arctic refuge’s globally significant wilderness and wildlife values.” In per-forming an external strategic-management analysis, tradeoffs such as this abound and judgments must be made; decisions regarding tradeoffs are evidenced in the choice of factors, weights, and rat-ings assigned in an EFE Matrix presented in this chapter. Do you think the benefits from the potential drilling in the Refuge would offset the potential harm to Arctic wildlife? Government and envi-ronmental officials are weighing in on the issue as Congress dis-cusses proposed legislation. What assurances would have to be made, if any, for you to approve of your company drilling in the Refuge?Source: Based on Jim Carlton, “Interior Official Urges Arctic Drilling,” Wall Street Journal, (November 3, 2017): A3.Where Are We Going Mom?Tony Campbell/Shutterstock
CHAPTER 3 • THE ExTERNAL ASSESSMENT 71Technological ForcesA variety of new technologies such as the Internet of Things, three-dimensional (3D) printing, predictive analytics, quantum computing, robotics, and artificial intelligence are fueling innova-tion in many industries and impacting strategic-planning decisions. Businesses are using mobile technologies and applications to better determine customer trends and are employing advanced analytics to make enhanced strategy decisions. The vast increase in the amount of data coming from mobile devices and social-media sites is astonishing. A primary reason that Cisco Systems recently entered the data analytics business is that sales of hardware, software, and services con-nected to the Internet of Things is expected to increase to $7.1 billion by 2020 from approximately $2.0 billion in 2015. A recent report by Cognizant Technology Solutions Corp., an IT services and consulting firm, predicts that more than 20 new job categories are soon to emerge from techno-logical advances.Online retail is crushing traditional retail. Credit Suisse reports that more U.S. brick-and-mortar retail stores closed in 2017 than in the 2008 economic recession. U.S. online retail sales increased a whopping 24 percent in 2017, as consumers prefer having boxes delivered to their door. This technological trend is so pervasive that Walmart Stores, Inc. in 2018 changed their name to Walmart, Inc.—removing the word stores. In fact, in terms of online selling of groceries, Walmart is the leader in China, even though there are more than four hundred Walmart stores in China.Advances in technology impact the manufacturing labor market. Ben Pring, Director of Cogniant’s Center for the Future of Work estimates that nearly 19 million jobs in the United States will become obsolete or be replaced by automation in the next 15 years.4 In a dra-matic shift from using cheap labor in countries such as Vietnam, Adidas is shifting to produce footwear in developed countries using fully robotic plants called “speed-factories.” Adidas’s speed- factories are now located across the world, including in Germany, the United States, France, China, and Japan. This shift from cheap manpower to complete automation is a techno-logical revolution occurring in the footwear industry. Before new speed-factories, Adidas owned no factories, instead using more than one thousand suppliers that employ millions of people to assemble shoes at low-wage facilities globally. Adidas’ new strategy aims to eventually surpass its major rival Nike.No company or industry today is insulated against emerging technological developments. In high-tech industries, identification and evaluation of key technological opportunities and threats can be the most important part of the external strategic-management audit. In performing an external assessment, technology-related factors must be stated in AQCD terms to the extent possible to be useful in strategic planning. Technological advancements impact firms in countless ways, such as the following:1. They can dramatically affect organizations’ products, services, markets, suppliers, distribu-tors, competitors, customers, manufacturing processes, marketing practices, and competi-tive position.2. They can create new markets, result in a proliferation of new and improved products, change the relative competitive cost positions in an industry, and render existing products and services obsolete.3. They can reduce or eliminate cost barriers between businesses, create shorter production runs, create shortages in technical skills, and result in changing values and expectations of employees, managers, and customers.4. They can create new competitive advantages that are more powerful than existing advantages.TABLE 3-3 Example Political, Governmental, and Legal Categories To Be MonitoredNatural environmental regulationsUnited States versus other country relationshipsProtectionist actions by countriesPolitical conditions in countriesChanges in patent lawsGlobal price of oil changesEqual employment opportunity lawsLocal, state, and federal lawsLevel of defense expendituresImport–export regulationsUnionization trendsTariffs, particularly on steel and aluminumAntitrust legislationLocal, state, and national elections
72 PART 2 • STRATEGY FORMuLATIONA chief information officer (CIO) and chief technology officer (CTO) are common positions in firms today, reflecting the growing importance of information technology (IT) in strategic management. A CIO and CTO work together to ensure that information needed to formulate, implement, and evaluate strategies is available on demand. The CIO is primarily a manager, managing the firm’s relationship with stakeholders; the CTO is primarily a technician, focusing on technical issues such as data acquisition, data processing, decision-support systems, and software and hardware acquisition.Monitoring online reviews for businesses, large or small, has become a burdensome but essential task, especially given social-media channels, such as Twitter, that empowers opinionated customers. Benign neglect of a company’s online reputation can quickly hurt sales, especially given the new normal behavior of customers consulting their smartphones for even the smallest of purchases.Competitive ForcesArguably the most important part of an external audit is identifying rival firms and deter-mining their strengths, weaknesses, capabilities, objectives, and strategies. George Salk stated, “If you’re not faster than your competitor, you’re in a tenuous position, and if you’re only half as fast, you’re terminal.” As indicated in Global Capsule 3, Netflix is faster than its rival firms but staying ahead requires constant monitoring of what those firms are doing and why. Go to www.owler.com for information about competitors.Competition in virtually all industries is intense—and sometimes cutthroat. Within the smartphone and personal tech industry, for example, GoPro Inc. is struggling to maintain market share. To differentiate its offerings from the latest smartphone camera technologies offered by Apple and Samsung, GoPro developed a new product called Fusion that features a 360-degree spherical camera with a unique Over-Capture capability, enabling users to capture pictures from every angle simultaneously.Addressing questions about competitors, such as those presented in Table 3-4, is essential in performing an external audit. Competitive intelligence (CI), as formally defined by the Society of Competitive Intelligence Professionals (SCIP), is a systematic and ethical process for gather-ing and analyzing information about the competition’s activities and general business trends to further a business’s own goals (SCIP website). Quality competitive intelligence in business, as in the military, is one of the keys to success. Major competitors’ weaknesses can represent external opportunities; major competitors’ strengths may represent key threats.Various legal and ethical ways to obtain competitive intelligence include the following:• Reverse-engineer rival firms’ products.• Use surveys and interviews of customers, suppliers, and distributors of rival firms.• Analyze rival firm’s Form 10-K.• Conduct fly-over and drive-by visits to rival firm operations.• Search online databases and websites such as www.owler.com.• Contact government agencies for public information about rival firms.TABLE 3-4 Key Questions about Competitors 1. What are the strengths and weaknesses of our major competitors? 2. What products and services do we offer that are unique in the industry? 3. What are the objectives and strategies of our major competitors? 4. How will our major competitors most likely respond to current economic, SCDE, political, govern-mental, legal, technological, and competitive trends affecting our industry? 5. How vulnerable are our major competitors to our new strategies, products, and services? 6. How vulnerable is our firm to successful counterattack by our major competitors? 7. How does our firm compare to rivals in mastering the social-media conversation in this industry? 8. To what extent are new firms entering and old firms leaving this industry? 9. What key factors have resulted in our present competitive position in this industry?10. How are supplier and distributor relationships changing in this industry?
CHAPTER 3 • THE ExTERNAL ASSESSMENT 73GLOBAL CAPSULE 3What Company Is Growing Fastest Globally?The answer to the question posed may be Netflix, a firm that pursues global expansion with a ven-geance. Netflix added 4.45 million new inter-national subscribers in the third quarter (Q3) of 2017 alone, with Q3 revenue increasing 30 per-cent. Netflix is taking advantage of the opportu-nity associated with the population of the world approaching 7.5 billion; the United States has slightly more than 320 million people. That leaves billions of people outside the United States who may be interested in the products and services produced through domestic firms. Remaining solely domestic is an increasingly risky strategy, especially as the world population continues to grow to an estimated 8.6 billion in 2030, 9.8 bil-lion in 2050, and 11.2 billion in 2100.Netflix is also mitigating an external threat in that some content owners such as Walt Disney Company are planning to offer their own movie- and video-streaming services instead of working with Netflix. Apple also expects to spend more than $1 billion in 2018 to produce its own original content. To combat this threat, Netflix is spending over $8 billion on content annually, sub-stantially more than its rivals Hulu, Amazon.com, and HBO. Netflix is focused on signing creative tal-ent and acquiring its own production and intellec-tual property. For example, the company recently made it first acquisition, taking onboard the comic-book publisher Millarworld. In addition to contin-ued global expansion, Netflix’s long-term strategy is to continue international expansion, rely less on licensing programs from content suppliers, and focus increasingly on acquiring original content. Source: Based on Austen Hufford, “Netflix Subscriber Growth Surges,” Wall Street Journal, (October 17, 2017): B2.Enjoying a Netflix MovieWavebreak Media Ltd/123RF• Monitor relevant trade publications, magazines, and newspapers.• Purchase social-media data about customers of all firms in the industry.• Hire top executives from rival firms.Information gathering from employees, managers, suppliers, distributors, customers, creditors, and consultants can make the difference between having superior or just average intelligence and overall competitiveness. All members of an organization—from the CEO to custodians—are valuable intelligence agents for the firm. Special characteristics of a successful CI program include flexibility, usefulness, timeliness, and cross-functional cooperation. CI is not corporate espionage. Unethical tac-tics such as bribery, wiretapping, and computer hacking should never be used to obtain information. Due to cybersecurity threats, CI must assure however that persons in a firm cannot access data and information unrelated to their job description because hackers exploit this avenue in firms.In performing an external assessment, competitor-related factors must be stated in AQCD terms to the extent possible to be useful in strategic planning.Porter’s Five-Forces ModelHarvard Business School Professor, Michael Porter, suggests that firms should strive to compete in attractive industries, avoid weak or faltering industries, and gain a full understanding of key external factors within that attractive industry. Given that competitive positioning within an indus-try is a key determinant of competitive advantage, Porter established the Five-Forces Model.One of the major contributions of Porter’s work is he shifted focus away from viewing com-petition directed toward a few rival firms to a broader analysis that includes forces from current competitors, new competitors, substitute products, suppliers, and buyers. Competitive advantage can be created in each area of the five forces by offering value to the consumer that exceeds cost. Rather than focusing solely on a top competitor, it is important that firms examine how suppliers and others listed in the five forces are trying to siphon off as much value as possible in all busi-ness transactions.Porter’s Model is also used to determine which industries to enter because generally the stronger the five forces are, the less profitable the industry. Porter is an advocate of external vari-ables rather than internal ones being a larger driver of competitive advantage, similar to a rising or falling tide; it is difficult to overcome a rising tide no matter your internal capabilities. Porter’s Model also prompts managers to focus on the medium- and longer-term factors that determine LO 3.3
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
76 PART 2 • STRATEGY FORMuLATIONIn some cases, firms pursue a backward-integration strategy to compete with suppliers. This strategy is especially effective when suppliers are unreliable, too costly, not capable of meeting a firm’s needs on a consistent basis, or simply have too much bargaining power and are able to charge absorbent prices. Boeing and Airbus, the two largest jetliner manufacturers, are beginning to make a portion of the parts that go into planes because both firms determined too high of a proportion industry profitability was going to suppliers. A key lesson for suppliers is that if your customer has the means to backward-integrate, it may be best to renegotiate prices.Overall, firms are in a better position when numerous suppliers exist. It is often in the best interest of both suppliers and producers to assist each other with reasonable prices, improved quality, development of new services, just-in-time deliveries, and reduced inventory costs, thus enhancing long-term profitability for all concerned. In more and more industries, sellers are forg-ing strategic partnerships with select suppliers in an effort to (1) reduce inventory and logistics costs, (2) accelerate the availability of next-generation components, (3) reduce defect rates, and (4) squeeze out important cost savings for both themselves and their suppliers.5Bargaining Power of ConsumersBargaining power of buyers refers to the ability of buyers to drive down prices for products offered by companies in a given industry. This force is strong when firms operate in industries that contain a limited number of buyers or that are made up of buyers that have multiple choices of where to buy from; this force is also strong when buyers purchase in volume or have low switching costs. Consumers (buyers) gain bargaining power under the following circumstances:1. If they can inexpensively switch to competing brands or substitutes2. If they are particularly important to the seller3. If sellers are struggling in the face of falling consumer demand4. If they are informed about sellers’ products, prices, and costs5. If they have discretion in whether and when they purchase the product6The impact of this “force” on industry competitiveness is higher when the products being purchased are standard or undifferentiated, enabling consumers to negotiate selling price, war-ranty coverage, and accessory packages to a greater extent. Rival firms may offer extended war-ranties or special services to gain customer loyalty whenever the bargaining power of consumers is substantial. New car buyers, for example, often compare prices of their desired car across several dealerships, often negotiating lower prices and additional services from dealerships in exchange for their business.As a result of Porter’s Five Forces, the intensity of competition among firms varies widely across industries. Table 3-6 reveals the average operating profit for firms in different industries. Note substantial variation among industries, with the lowest being for bookstores. The collective impact of competitive forces is so brutal in some industries that the market is TABLE 3-6 Competitiveness Across a Few Industries (2018 data)IndustryOperating Profit (%)Banking30.8Hotels18.4Pharmaceutical8.7Oil and Gas Extraction7.5Fragrances/Cosmetics7.1Telecommunications6.1Food Manufacturing5.4Machinery/Construction4.9Paper Manufacturing4.9Bookstores2.9
CHAPTER 3 • THE ExTERNAL ASSESSMENT 77clearly “unattractive” from a profit-making standpoint. Strategists must continually monitor the five forces to identify new opportunities and threats facing the firm, and alter strategies accordingly.Eliminating competition is a possibility and common strategy employed by firms in an indus-try with high rivalry. Firms use mergers and acquisitions and purchase suppliers or buyers (dis-tributors) all as a means to eliminate rivalry, but there are problems associated with this level of thinking. Acquiring the competition often is associated with paying a premium and dealing with different organizational cultures; although there may be no competitors currently, new competitors may enter with different products and ultimately better serve many current customers. Purchasing suppliers or distributors takes a firm away from the business they do best, possibly allowing com-petitors to better develop and improve their products without being bogged down with supply chain issues they know little about.Several pitfalls firms should avoid when using the Five Forces Analysis, include (1) placing equal weight on all five forces instead of identifying the most pressing forces for their industry, (2) defining the industry too broad or too narrow, and (3) using the five forces to pin labels such as attractive or unattractive on an industry rather than using the model to more efficiently formulate strategies. When using Porter’s Five Forces Model as an external assessment tool in doing strategic planning, strive to identify AQCD opportunities and threats most important for success in a given industry, and most relevant to the firm’s vision and mission.Key Sources of Information for an External AuditA wealth of strategic information is available to organizations from both published and unpub-lished sources. Unpublished sources include customer surveys, market research, speeches at pro-fessional and shareholders’ meetings, television programs, interviews, and conversations with stakeholders. Published sources of strategic information include periodicals, journals, reports, government documents, abstracts, books, directories, newspapers, and manuals. A company website is usually an excellent place to start to find information about a firm, particularly on the Investor Relations web pages.There are many excellent websites for gathering strategic information, but six outstanding ones that the authors use routinely in performing an external audit are:1. http://finance.yahoo.com2. www.hoovers.com3. www.morningstar.com4. www,mergentonline.com5. http://globaledge.msu.edu/industries/6. Corporate website of companiesThe fifth website listed is operated by Michigan State University and provides industry pro-files that are an excellent source for information, news, events, and statistical data for any industry. Most college libraries subscribe to excellent online business databases that can then be used free by students to gather information to perform a strategic-management case analysis. Simply ask your reference librarian. Some outstanding library database sources of external audit information are described in Table 3-7; the authors use all of these sources, especially S&P Net Advantage’s Industry Surveys and IBISWorld, to obtain AQCD external factors for inclusion in an external assessment. Note also in Table 3-7 the PrivCo source is helpful for obtaining information about privately held firms; use www.owler.com for information about rival firms.Forecasting and Making AssumptionsForecasts are educated assumptions about future trends and events. Forecasting is a complex activity because of factors such as technological innovation, cultural changes, new products, improved services, stronger competitors, shifts in government priorities, changing social values, unstable economic conditions, and unforeseen events. Managers often must rely on published forecasts to effectively identify key external opportunities and threats.LO 3.4LO 3.5
78 PART 2 • STRATEGY FORMuLATIONA sense of the future permeates all action and underlies every decision a person makes. People eat expecting to be satisfied and nourished in the future. People sleep assuming that in the future they will feel rested. They invest energy, money, and time because they believe their efforts will be rewarded in the future. They build highways assuming that automobiles and trucks will need them in the future. Parents educate children on the basis of forecasts that they will need certain skills, attitudes, and knowledge when they grow up. The truth is we all make implicit forecasts throughout our daily lives. The question, therefore, is not whether we should forecast but rather how we can best forecast to enable us to move beyond our ordinarily unarticulated assumptions about the future. Can we obtain information and use it to make educated assumptions (forecasts) that better guide our current decisions and foster a more desirable future state of affairs? Assumptions must be made based on facts, figures, trends, and research. Strive for the firm’s assumptions to be more accurate than rival firms’ assumptions.No forecast is perfect; some are even wildly inaccurate. This fact accents the need for strate-gists to devote sufficient time and effort to study the underlying bases for published forecasts and to develop internal forecasts of their own. Key external opportunities and threats can be effec-tively identified only through good forecasts.Making AssumptionsPlanning would be impossible without assumptions. McConkey defines assumptions as the “best present estimates of the impact of major external factors, over which managers have little if any control, but which may exert a significant impact on performance or the ability to achieve desired results.”7 Strategists are faced with countless variables and imponderables that TABLE 3-7 Excellent Online Sources to Obtain EFE Matrix Factor Information• IBISWorld—Provides online USA Industry Reports (NAICS), U.S. Industry iExpert Summaries, and U.S. Business Environment Profiles. A global version of IBIS is also available.• Nexis Uni Academic—Provides online access to newspaper articles (including New York Times and Washington Post) and business information (including SEC filings).• Nexis Uni Company—Provides online access to extensive, current data on 13 millionIt collects and compiles information into excellent documents.• Mergent Online—Provides online access to Mergent’s Manuals, which include trend, descriptive, and statistical information on hundreds of public companies and industries. Unconsolidated company income statements and balance sheets are provided.• PrivCo—Provides information on privately held companies, including private financials and rev-enues; private M&A deals and deal multiples, private firm valuations, VC funding, private equity deal history. (Go to www.owler.com for information about competitors.)• Regional Business News—Provides comprehensive full-text coverage for regional business publica-tions; incorporates coverage of more than 80 regional business publications covering all metropolitan and rural areas within the United States.• Standard & Poor’s NetAdvantage—Provides online access to Standard & Poor’s (S&P) Industry Surveys, stock reports, corporation records, The Outlook, mutual fund reports, and more. Locate the “Company” tab at the top of the page or the “Simple Search” option located on the right side of the page. Use the “Company Profile” option.• Value Line Investment Survey—Provides excellent online information and advice on approximately 1,700 stocks, more than 90 industries, the stock market, and the economy. Company income state-ments and balance sheets are provided.• U.S. Securities and Exchange Commission—Provides the Form 10K for publicly held companies in the United States. Use the search box at the top of the page or look under the “Filings” tab along the top of the page.• Company Annual Reports On-Line (CAROL)—Provides direct links to publicly held companies’ financial statements in both Europe and the United States.Source: Based on information at www.fmarion.edu/library. companies.
CHAPTER 3 • THE ExTERNAL ASSESSMENT 79can be neither controlled nor predicted with 100 percent accuracy. Wild guesses should never be made in formulating strategies, but reasonable assumptions based on available information must always be made.By identifying future occurrences that could have a major effect on the firm and by making reasonable assumptions about those factors, strategists can carry the strategic-management process forward. Assumptions are needed only for future trends and events that are most likely to have a significant effect on the company’s business. Based on the best information at the time, assumptions serve as checkpoints on the validity of strategies. If future occurrences deviate significantly from assumptions, strategists know that corrective actions may be needed. Firms that compile the best information generally make the most accurate assumptions, which can lead to major competitive advantages.The External Factor Evaluation MatrixAn External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, techno-logical, and competitive information. The EFE Matrix provides an empirical assessment of how well a firm is handling external factors overall, including the firm’s effectiveness at capitalizing on opportunities and minimizing threats.Steps to Develop an EFE MatrixAn EFE Matrix can be developed in five steps:Step 1: Develop a Full and Narrow List of Key External FactorsConduct research about the focal company using the resources listed in Table 3.7. Compile and organize information into two data sets, opportunities and threats, developing a full list of per-haps 50 to 100 opportunity and threat factors relevant to the 10 external areas described previ-ously. Include factors most important to your firm’s industry, vision, mission, and strategies, considering the five forces just discussed. Then, narrow your data sets down to 20 key external factors that include specifically 10 opportunities and 10 threats. (Note: We use 10 and 10 because organizations commonly use this breakdown and the template at www.strategyclub.com uses 10 and 10). List opportunities first and then threats. Also, do not include strategies as opportunities, so for example, “to build two new manufacturing plants in Europe” is a strategy, not an oppor-tunity; there may be an underlying opportunity that could make that strategy reasonable, such as “eight European countries have repealed restrictions on the sale of generic drugs.”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, someone recently included as a threat in his EFE Matrix that “a hurricane can come.” Ninety-nine percent of the time that factor should not be included in the matrix; instead, conduct research to identify external factors that relate to the firm’s vision, mis-sion, strategies, and competitive advantages.When determining particular factors to include in an EFE Matrix, and when assigning weights and ratings (Step 2) focus on a narrow industry perspective. For example, for Spirit Airlines, the industry is discount airlines, rather than all airlines, and for Lamborghini, the industry is high-end sports cars, not simply automobiles. This narrow industry perspective is important to facilitate external factors being stated in terms that meet the AQCD Test discussed earlier.In developing a list of key external factors, be mindful of the AQCD Test because vagueness in stating factors must be avoided; vagueness gives analysts no guidance in assigning weights or ratings in developing an EFE Matrix. Recall that Edward Deming said, “In God we trust. Everyone else bring data.” Include “actionable” factors as defined previously in this chapter.LO 3.6
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
CHAPTER 3 • THE ExTERNAL ASSESSMENT 83TABLE 3-10 An Example Competitive Profile MatrixCompany 1Company 2Company 3Critical Success FactorsWeightRatingScoreRatingScoreRatingScoreAdvertising0.2010.2040.8030.60Global Expansion0.2040.8010.2020.40Financial Position0.1540.6020.3030.45Management0.1040.4030.2010.10Product Quality0.1040.4030.3020.20Customer Loyalty0.1040.4030.3020.20Price Competitiveness0.1030.3020.2010.10Market Share0.0510.0540.2030.15Total1.003.152.502.20Note: The ratings values are as follows: 1 = response is poor, 2 = response is average, 3 = response is above average, 4 = response is superior. As indicated by the total weighted score of 2.20, Company 3 is performing worst. Only 8 critical success factors are included for simplicity; in actuality, however, this is too few. The template asks that 12 factors be included and to tailor factors to a given industry.of competitive advantage within an industry, as well as other factors that are crucial for a firm to succeed within a given industry; critical success factors in a CPM can include both internal and external issues. List critical success factors from highest weight to lowest weight in a CPM.Weights in a CPM are industry-based and sum to 1.0. Ratings in a CPM are assigned to quantify how well a firm and its key competitors are performing on each critical success factor; ratings reveal the degree of effectiveness of the firm’s strategies. Assign a rating between 1 and 4 to each key factor to indicate how effectively the firm’s current strategies respond to the fac-tor, where 4 = the response is superior, 3 = the response is above average, 2 = the response is average, and 1 = the response is poor. Ratings are company-based; weights are industry-based.A sample CPM is provided in Table 3-10. In this example, the two most important factors to being successful in the industry are “advertising” and “global expansion,” as indicated by weights of 0.20. If there were no weight column in this analysis, note that each factor then would be equally important. Thus, including a weight column yields a more robust analysis because it enables the analyst to capture perceived or actual levels of importance. Note in Table 3-10 that Company 1’s strategies are responding in a superior fashion to “product quality,” as indicated by a rating of 4, whereas Company 2’s strategies are superior regarding “advertising.” Overall, Company 1’s strategies are responding best, as indicated by the total weighted score of 3.15 and Company 3 is responding worst. Never duplicate ratings in a row in a CPM; go ahead and make judgments or decisions as to appropriate ratings based on your research and knowledge of the focal firm and rival companies. (Note: The point of this example is to illustrate the mechanics of developing a CPM rather than having industry-specific factors.)Other than the critical success factors listed in the sample CPM, factors often included in this analysis include breadth of product line, effectiveness of sales distribution, proprietary or patent advantages, location of facilities, production capacity and efficiency, experience, union relations, technological advantages, and e-commerce expertise. In generating the list of critical success factors, strive to include factors that differentiate firms within the industry (i.e., factors that determine competitive advantages).Just because one firm receives a 3.20 overall total weighted score and another receives a 2.80 in a CPM, it does not necessarily follow that the first firm is precisely 14.3 percent better than the second, but it does suggest that the first firm is performing better on the variables included in the CPM. Regarding weights in a CPM or EFE Matrix, be mindful that 0.08 is mathematically 33 percent higher than 0.06, so even small differences can reveal important perceptions regarding the relative importance of various factors. The aim with numbers is to assimilate and evaluate information in a meaningful way that aids in decision making.
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.”
CHAPTER 3 • THE ExTERNAL ASSESSMENT 85Establish 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 3-4How to Gain and Sustain Competitive AdvantagesIMPLICATIONS FOR STUDENTSIn developing and presenting the external assessment for your firm, be mindful that gaining and sustaining competitive advantage is the overriding purpose of developing the EFE Matrix and CPM. During this “external” section of your written or oral project, emphasize how and why particular factors can yield competitive advantage for the firm. In other words, instead of robotically going through the weights and ratings (which, by the way, are critically important), highlight various factors in light of where you are leading the firm. Make it abundantly clear in your discussion how your firm, with your recommendations, can subdue rival firms or at least profitably compete with them. Showcase during this part of your project the key underlying reasons how and why your firm can prosper among rivals. Remember to be prescriptive, rather than descriptive, in the manner that you present your entire project. If presenting your proj-ect orally, be self-confident and passionate rather than timid and uninterested. Definitely “bring the data” throughout your project because “vagueness” is the most common downfall of students in doing case analysis. To obtain the most recent information about your case company, read the firm’s most recent quarterly report; the narrative that accompanies quarterly reports is excellent.It is necessary for students in developing an EFE Matrix to in-clude specific (AQCD) factors related to direct competitors, trends in the economy, legal or tax issues, consumer attitudes, consumer demographics, and other similar facts, trends, and events. In ad-dition, there are factors associated with Porter’s Five Forces that may need including. For example, you may want to include factors such as the following:1. China recently established four free-trade zones allowing for-eign companies to establish operations in the country without having a Chinese partner; this may be an external threat because rival firms can enter the market more easily, such as in the au-tomobile industry.2. Potential substitute products may be a threat. For example, con-sumption of bottled water rising 8 percent annually is a threat for Dr Pepper Snapple.3. Suppliers in any industry can potentially siphon away profits as easily as a direct competitor; suppliers raising prices by 10 percent may be an external threat.
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 87MyLab Management Writing AssignmentsIf your instructor is using MyLab Management, go to www.pearson.com/mylab/management for Auto-graded writing questions as well as the following Assisted-graded writing questions: 3-40. Describe the “process of performing an external audit” in an organization doing strategic planning for the first time. 3-41. Compare and contrast the duties and responsibilities of a Chief Information Officer (CIO) with a Chief Technol-ogy Officer (CTO) in a large firm. 3-20. Explain why it is appropriate for ratings in an EFE Matrix to be 1, 2, 3, or 4 for any opportunity or threat. 3-21. Why is inclusion of about 20 factors recommended in the EFE Matrix rather than about 10 factors or about 40 factors? 3-22. In developing an EFE Matrix, explain why is it advan-tageous to arrange your opportunities according to the highest weight, and your threats likewise? 3-23. In developing an EFE Matrix, would it be best to have 10 opportunities and 10 threats or would 17 opportuni-ties (or threats) be fine with 3 of the other to achieve a total of 20 factors as desired? 3-24. Could or should critical success factors in a CPM in-clude external factors? Explain. 3-25. Explain how to conduct an external strategic- management audit in a business versus as a student performing case analysis. 3-26. Identify a recent economic, social, political, or techno-logical trend that significantly affects the local Pizza Hut. 3-27. Discuss the following statement: Major opportunities and threats usually result from an interaction among key environmental trends rather than from a single external event or factor. 3-28. Use Porter’s Five-Forces Model to evaluate competi-tiveness within the U.S. banking industry. 3-29. How does the external audit affect other components of the strategic-management process? 3-30. Construct an EFE Matrix for an organization of your choice. 3-31. Let’s say your boss develops an EFE Matrix that in-cludes 62 factors. How would you suggest reducing the number of factors to 20? 3-32. Discuss the ethics of gathering competitive intelligence. 3-33. Discuss the ethics of cooperating with rival firms. 3-34. Do you agree with Porter’s view that competitive positioning within an industry is a key determinant of competitive advantage(s)? 3-35. Define, compare, and contrast the weights versus rat-ings in an EFE Matrix. 3-36. What is the different between factors listed in an EFE Matrix versus critical success factors listed in a CPM? In which matrix is it particularly important to include specific, actionable factors? Why? 3-37. List the 10 external forces that give rise to opportunities and threats. 3-38. Why do annual reports often state external risk informa-tion in really vague terms; why should strategists avoid including such vagueness in developing an EFE Matrix? 3-39. Explain the AQCD Test for determining the quality of an external factor. Why should the AQCD Test be met to the extent possible in performing an external assessment?ASSURANCE-OF-LEARNING EXERCISESSET 1: STRATEGIC PLANNING FOR COCA-COLAEXERCISE 3ADevelop an EFE Matrix for Coca-ColaPurposeThis exercise will give you practice in developing an EFE Matrix. An EFE Matrix summarizes the results of an external audit. This is an important strategic-planning tool widely used by strategists.InstructionsStep 1 Join with two other students in class, and jointly prepare an EFE Matrix for Coca-Cola. Refer to the Cohesion Case (p. 28) and to Exercise 1A (p. 37), if necessary, to identify exter-nal opportunities and threats. Make sure the factors you include are actionable, quantitative, comparative, and specific. Use the online sources listed in Table 3-7. Be sure not to include strategies as opportunities; but do include as many monetary amounts, percentages, num-bers, and ratios as possible.Step 2 All three-person teams participating in this exercise should record their EFE total weighted scores on the board. Put your initials after your score to identify it as your team’s score.Step 3 Compare the total weighted scores. Which team’s score came closest to the instructor’s an-swer? Discuss reasons for variation in the scores reported on the board.
88 PART 2 • STRATEGY FORMuLATIONEXERCISE 3BDevelop a Competitive Profile Matrix for Coca-ColaPurposeMonitoring competitors’ performance and strategies is a key aspect of an external audit. This exercise is designed to give you practice in evaluating the competitive position of organizations in a given in-dustry and assimilating that information in a CPM.InstructionsStep 1 Turn back to the Cohesion Case and review the section on competitors (p. 28). Also view online resources that compare Coca-Cola with Pepsi. Use the sources listed in Table 3-7.Step 2 Prepare a CPM that includes Coca-Cola, Pepsi, and Dr Pepper.Step 3 Turn in your CPM for a classwork grade.SET 2: STRATEGIC PLANNING FOR MY UNIVERSITYEXERCISE 3CDevelop an EFE Matrix for Your College or UniversityPurposeMost colleges and universities do strategic planning. Institutions are consciously and systematically identifying and evaluating external opportunities and threats facing higher education in your state, the nation, and the world.InstructionsStep 1 Join with two other individuals in class and jointly prepare an EFE Matrix for your institution.Step 2 Go to the board and record your total weighted score in a column that includes the scores of all three-person teams participating. Put your initials after your score to identify it as your team’s score.Step 3 Which team viewed your college’s strategies most positively? Which team viewed your col-lege’s strategies most negatively? Discuss the nature of the differences.EXERCISE 3DDevelop a Competitive Profile Matrix for Your College or UniversityPurposeYour college or university competes with all other educational institutions in the world, especially those in your own state. State funds, students, faculty, staff, endowments, gifts, and federal funds are areas of competitiveness. Other areas include athletic programs, dorm life, academic reputation, loca-tion, and career services. The purpose of this exercise is to give you practice in thinking competitively about the business of education in your state.InstructionsStep 1 Identify two colleges or universities in your state that compete directly with your institu-tion for students. Interview several persons, perhaps classmates, who are aware of particular strengths and weaknesses of those universities. Record information about the two competing universities.Step 2 Prepare a CPM that includes your institution and the two competing institutions. Include the following 10 factors in your analysis:1. Tuition costs2. Quality of faculty3. Academic reputation4. Average class size5. Campus landscaping
CHAPTER 3 • THE ExTERNAL ASSESSMENT 896. Athletic programs7. Quality of students8. Graduate programs9. Location of campus10. Campus cultureStep 3 Submit your CPM to your instructor for evaluation.SET 3: STRATEGIC PLANNING TO ENHANCE MY EMPLOYABILITYEXERCISE 3EHow Competitive Is Your State Among All States for Finding a Job?PurposeJust like companies, states compete against each other across numerous variables. For more than a decade, CNBC has been conducting annual research to determine where each U.S. state ranks (out of the 50 states) in terms of their quality of life, job prospects, business attractiveness, and education, among many other things. Each year, data is collected on more than 60 measures of competitiveness and all 50 states are scored on each measure, ranging from economic policies and taxes, to the cost of food, to the quality of their workforces.The purpose of this exercise is to determine how your state ranks in terms of its job outlook and prospects. This information can enhance your job search as you near completion of a business admin-istration degree.InstructionsStep 1 Go to the following website https://www.cnbc.com/2017/07/11/top-states-to-find-a-job-in-america-in-2017.html and take a while to explore the types of reports offered, as well as the source of data collected and used to create such reports.Step 2 Review where your state ranks on the list of top states for business, top states to get an education, and top states to find a job. Determine the three best competitive aspects of your state.Step 3 Are there similarities between your state’s ranking on each of these three reports? Do you think job outlooks, education, and business attractiveness are inherently related? Develop a report explaining your answer. Use information from the reports to support your arguments. What actions could your state take to improve its competitiveness overall?EXERCISE 3FCompare and Contrast CareerBuilder, Glassdoor, Monster Jobs, and ZipRecruiterPurposeJob hunting websites compete against each other for your business. Both job seekers and companies with job openings use job hunting websites, especially CareerBuider, Glassdoor, Monster Jobs, and ZipRecruiter. The purpose of this exercise is to familiarize you with the operation, strengths, and weaknesses of these four websites.InstructionsStep 1 Review the four named websites taking note of what you especially like and dislike.Step 2 Prepare a CPM for CareerBuilder. Include the three rival websites in your analysis.EXERCISE 3GA Template Competency TestPurposeThe free Excel strategic planning template at www.strategyclub.com is widely used for strategic planning by students and small businesses; this exercise aims to enhance your familiarity with the
90 PART 2 • STRATEGY FORMuLATIONtemplate. Developing competence with the template will enable you to place this skill appropriately on your resume, in addition to facilitating your development of a comprehensive strategic plan for an assigned case company.InstructionsAnswer the following six questions about the template. Discuss your answers with classmates to de-termine any issues or concerns.Questions1. How many factors does the template include in an EFE Matrix; in a CPM?2. What happens using the template if you enter an inappropriate rating or weight such as a weak-ness rating of 4 or a weight of 1.2?3. In using the template, why are changes to a matrix done on Part I or Part II rather than on a matrix itself?4. Why is it best to transform a firm’s income statement and balance sheet into the template finan-cial statement format early in developing a strategic plan for a case company?5. What are key differences between Part I and Part II in the template?6. Does the template address vision and/or mission statements?SET 4: INDIVIDUAL VERSUS GROUP STRATEGIC PLANNINGEXERCISE 3H What External Forces Are Most Important In Strategic Planning?PurposeA prioritized list of external factors is needed for effective strategic planning. Oftentimes the process entails all managers individually ranking the factors identified, from 1 (most important) to 20 (least important). Prioritization is absolutely essential in strategic planning because no organization can do everything that would benefit the firm; tough choices among good choices have to be made.External forces can be divided into five broad categories: (1) economic forces; (2) social, cultural, demographic, and natural environment forces; (3) political, governmental, and legal forces; (4) tech-nological forces; and (5) competitive forces. For some companies or organizations at various times, some forces may be more important to include than others. This exercise reveals the authors’ ranking of the relative importance of five external forces for inclusion in an external assessment.The purpose of this exercise is to examine more closely the external areas of a business. In ad-dition, the purpose of this exercise is to examine whether individual decision-making is better than group decision-making. Academic research suggests that groups make better decisions than individu-als about eighty percent of the time.InstructionsRank the five external forces as to their relative importance (1 = most important, 5 = least important). First, rank the forces as an individual. Then, rank the forces as part a group of three. Thus, determine what person(s) and what group(s) here today can come closest to the expert ranking. This exercise enables examination of the relative effectiveness of individual versus group decision-making in stra-tegic planning.Steps1. Fill in Column 1 in Table 3-12 to reveal your individual ranking of the relative importance of the five forces (1 = most important, 2 = next most important, etc.). For example, if you feel Economic factors are the 4th most important external force, then enter a 4 in Table 3-12 in Column 1 beside Economic.2. Fill in Column 2 in Table 3-12 to reveal your group’s ranking of the relative importance of the five forces (1 = most important, 2 = next most important, etc.).3. Fill in Column 3 in Table 3-12 to reveal the expert’s ranking of the five forces.
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.