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CHAPTER 3
The External Assessment True/False
Introduction 1. Industry analysis is also referred to as external strategic management audit. Ans: T 2. Page: 82

An external audit focuses on identifying and evaluating trends and events within the control of management. Ans: F Page: 82

The Nature of an External Audit 3. The aim of an external audit is to develop an exhaustive list of every possible factor that could influence the business. Ans: F 4. Page: 83

External audits attempt to identify key variables that offer actionable responses. Ans: T Page 83

5.

Five major categories of external variables are: (1) economic forces, (2) social and cultural forces, (3) political, governmental and legal forces, (4) technological forces and (5) demographic forces. Ans: F Page: 83

6.

As many managers and employees as possible should be involved in the process of performing an external audit. Ans: T Page: 83

7.

To perform an external audit, a company first must gather competitive intelligence and information about social, cultural, demographic, environmental, economic, political, legal, governmental and technological trends. Ans: T Page: 84

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8.

Freund argues that key external factors must not be hierarchical. Ans: F Page: 84

The Industrial Organization (I/O) View 9. Research findings suggest that a greater percentage of a firms profitability can be explained by the industry than can be explained by the firms internal factors. Ans: F Economic Forces 10. An economic trend in America is the increasing numbers of two-income households. Ans: T 11. Page: 85 Page: 85

Economic factors do not have much impact on the attractiveness of strategies. Ans: F Page: 85

12.

An increase in interest rates is directly related to an increase in discretionary income and an increase in the demand for discretionary goods. Ans: F Page: 85

13.

Motor vehicle firms in the United States are vulnerable when the value of the dollar falls. Ans: F Page: 86

14.

A low value of the dollar means lower exports and higher imports. Ans: F Page: 86

15.

In 2005, the Yen rose to a five-year high against the dollar. Ans: T Page 86

16.

The economic standard of living varies little between cities and countries. Ans: F Page 86

17.

The cost of living in London is greater than the cost of living in New York City. Ans: T Page 87

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18.

The cost of living in Boston is greater than the cost of living in New York City. Ans: F Page 87

19.

According to the Wall Street Journal, the political bureaucracy in Russia has been able to stimulate economic progress, free enterprise, and entrepreneurship. Ans: F Page 87

20.

Russian businesses are more likely to fall victim to illegal actions by officials and policemen than by criminals. Ans: T Page 87

Social, Cultural, Demographic and Environmental Forces 21. The United States is getting older and less Caucasian. Ans: T 22. Page: 88

It is predicted that, by 2025, over 18% of the population in the United States will be over 65 years old. Ans: T Page 88

23.

Recent consumption trends in the United States indicate that wine consumption is increasing at 5% while beer consumption is increasing at 10%. Ans: F Page 88

24.

Hispanics are expected to become a larger minority group in the United States than African Americans by 2021. Ans: T Page: 88

25.

In the United States, the population has been moving from the south and west to the Northeast and Midwest. Ans: F Page: 89

26.

In 2003, China replaced Mexico as the largest exporter to the United States. Ans: T Page 89

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Political, Governmental and Legal Forces 27. Political, governmental, and legal factors are considered key threats for most small and large organizations. Ans: F 28. Page 90

Political forecasts can be the most important part of an external audit for firms that depend heavily on government contracts. Ans: T Page: 83

29.

Within the European Union (EU), tax rates have been standardized to end competitive tax breaks among member countries. Ans: F page 90

Technological Forces 30. The Internet is changing the very nature of many industries by altering product life cycles and changing the historical trade-off between production standardization and flexibility. Ans: T 31. Page: 93

In practice, critical technology decisions are too often delegated to lower organizational levels or are made without an understanding of their strategic implications. Ans: T Page: 94

Competitive Forces 32. A characteristic that describes the most competitive companies in America is whether its broke or not, fix itmake it better; not just products, but the whole company if necessary. Ans: T 33. Page: 96

Innovate or evaporate; particularly in technology-driven businesses, nothing quite recedes like success, is a characteristic given that describes the most competitive companies in America. Ans: T Page: 96

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34.

Corporate intelligence can be defined as a systematic and ethical process for gathering and analyzing information about the competitions activities and general business trends to further a businesss own goals. Ans: F Page 96

35.

Internal opportunities can be represented by major competitors weaknesses. Ans: F Page: 96

36.

According to Business Week, there are less than 500 corporate spies now actively engaged in intelligence activities. Ans F: Page 96

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According to Business Week, and 9 out of 10 large companies have employees dedicated solely to gathering competitive intelligence. Ans: T Page: 96

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An effective CI program allows all areas of a firm to access consistent and verifiable information in making decisions. Ans: T Page: 97

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Competitive intelligence is not considered corporate espionage because 95 percent of the information a company needs to make strategic decisions is available and accessible to the public. Ans: T Page: 97

40.

Because companies are fearful of corporate espionage, cooperative agreements between competitors are becoming less popular. Ans: F Page 98

41.

Learning from the partner is a major reason why U.S. firms enter into cooperative agreements. Ans: F Page: 99

42.

Market commonality is the extent to which the type and amount of a firms internal resources are comparable to a rival. Ans: F page 99

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Competitive Analysis: Porters Five-Forces Model 43. According to Michael Porter, five competitive forces create vital opportunities and threats to organizations: (1) new entrants, (2) substitute products or services, (3) bargaining power of suppliers, (4) bargaining power of buyers, and (5) rivalry among existing firms. Ans: T 44. Page: 100

The first step for using Porters Five-Forces Model is to evaluate the relative strength of each competitive force. Ans: F Page 101

45.

Bargaining power of consumers is usually the most powerful of Porters five competitive forces. Ans: F Page: 101

46.

Significant barriers to entry are not always sufficient to keep some new firms from entering industries with higher-quality products, lower prices and substantial marketing resources. Ans: T Page: 102

47.

Laser eye surgery would be considered a substitute product for eyeglasses and contact lenses. Ans: T Page 102

48.

Forward integration is used by firms to gain control or ownership of suppliers. Ans: F Page: 102

49.

The bargaining power of consumers can be the most important force impacting competitive advantage. Ans: T page 103

Forecasting Tools and Techniques 50. Forecasts are educated assumptions about future trends and events. Ans: T Page: 104

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51.

Qualitative forecasts are most appropriate when historical data are available and when the relationships among key variables are expected to remain the same in the future. Ans: F page 104

52.

Quantitative forecasts become less accurate as historical relationships become less stable. Ans: T Page: 104

53.

Linear regression is based on the assumption that the future will be different from the past. Ans: F Page: 104

54.

Linear regression is a popular technique for qualitative forecasts. Ans: F Page 104

55.

Without reasonable assumptions, the strategy-formulation process could not proceed effectively. a. Ans: T Page: 104

The Global Challenge 56. Globalization is a process of worldwide integration of strategy formulation, implementation and evaluation activities. Ans: T 57. Page: 106

A global strategy seeks to meet the needs of customers worldwide with the lowest cost at the highest value. Ans: T Page: 106

58.

Rampant corruption and the absence of a legal system are risks that still restrain firms from initiating business with China. Ans: T Page: 106

59.

China is the worlds fastest-growing economy. Ans: T Page 107

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60.

Hong Kong serves as the gateway to China. Ans: T Page: 108

Industry Analysis: The EFE Matrix 61. In an EFE Matrix, opportunities often receive higher weights than threats, but threats too can receive high weights if they are especially severe or threatening. Ans: T 62. Page: 109

Regardless of the number of key opportunities and threats included in an External Factor Evaluation Matrix, the highest possible total weighted score for an organization is 4.0, and the lowest possible total weighted score is 0.0. Ans: F Page: 109

The Competitive Profile Matrix (CPM) 63. Both a Competitive Profile Matrix and an EFE Matrix have the same meaning in the weights, ratings and total weighted scores. a. 64. Ans: T Page: 111

The critical success factors in a Competitive Profile Matrix are often the same as those in an EFE Matrix. a. Ans: F Page: 111

Multiple Choice
The Nature of an External Audit 65. __________ is not part of an external audit. a. Analyzing competitors b. Analyzing financial ratios c. Analyzing available technologies d. Studying the political environment e. Analyzing social, cultural, demographic and geographic forces Ans: b Page: 83

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66.

Identifying and evaluating key social, political, economic, technological and competitive trends and events comprise a. developing an effective mission statement. b. conducting an internal audit. c. performing an external audit. d. formulating strategy. e. implementing strategy. Ans: c Page: 83

67.

The process of performing an external audit needs to include: a. only top level managers, as its a planning function. b. as many managers and employees as possible. c. primarily front-line supervisors d. between 15 to 20 managers for it to be valid e. stockholders and external government agencies Ans: b Page: 83

68.

To perform an external audit, a company first must: a. get an approval from the Securities and Exchange Commission b. perform an internal audit c. gather competitive intelligence and information about external trends d. hire a consultant to develop a comprehensive strategic plan. e. all of these Ans: c Page: 84

69.

Freund emphasizes that key external factors should be all of these except: a. important to achieving long-term and annual objectives. b. measurable. c. relatively few in number. d. applicable to all competing firms. e. hierarchical in the sense that some will pertain to the overall company while others will be more narrowly focused. Ans: c Page: 84

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The Industrial Organization (I/O) View 70. The I/O approach to competitive advantage advocates that external factors are ________ internal factors in a firm achieving competitive advantage. a. less important than b. as important as c. more important than d. more common than e. less common than Ans: c 71. Page: 84

According to I/O theorists, which of the following contributes least to firm performance? a. Economies of scale b. Barriers to market entry c. Product differentiation d. Internal resources e. Level of competitiveness Ans: d Page: 84

Economic Forces 72. Which type of trend is exemplified by the increasing numbers of two-income households in America? a. social b. economic c. cultural d. technological e. historical Ans: b 73. Page: 85

What happens to the demand for discretionary goods when interest rates rise? a. rises b. declines c. stays the same d. first rises then declines e. no way to tell Ans: d Page: 85

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74.

What effect do trends in the dollars value have on companies in different industries and in different locations? a. significant and equal b. marginal and equal c. significant and unequal d. insignificant and unequal e. no significant impact Ans: c Page: 86

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In general, what happens to American goods in overseas markets when there is a strong dollar? a. less expensive b. more attractive c. cheaper d. more expensive e. desirable Ans: d Page: 86

76.

Which city has the highest cost of living? a. Tokyo b. Boston c. New York City d. Sydney e. Toronto Ans: a Page: 87

77.

In 2004, which country had the most foreign investment in Russia? a. United States b. Netherlands c. United Kingdom d. Germany e. Cyprus Ans: e Page: 87

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Social, Cultural, Demographic and Environmental Forces 78. It is predicted that the United States will have how many racial or ethnic majorities by the year 2075? a. none b. one c. two d. three e. five Ans: a 79. Page: 88

Which minority group is predicted to be the largest by 2021? a. African Americans b. Whites c. Hispanics d. Indians e. Japanese Ans: c Page: 88

80.

Who are the worlds longest-living people? a. Americans. b. Mexicans. c. Indians d. Filipinos. e. Japanese. Ans: e Page: 88

81.

Americans are on the move in a population shift to a. the frost belt b. the South and West c. the Northeast and Midwest d. the Midwest and South e. Canada. Ans: b Page: 89

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82.

What are assembly plants on the Mexican side of the border called? a. Maquiladoras b. Assembladoras c. Veskels d. XMLs e. Tijuana Ans: a Page: 89

83.

Who is the largest exporter to the United States? a. Mexico b. China c. Canada d. United Kingdom e. Japan Ans: b Page: 89

Political, Governmental and Legal Forces 84. When an industry relies heavily on government contracts, which forecasts can be the most important part of an external audit. a. economic b. political c. technological d. competitive e. multinational Ans: b 85. Page: 90

The world of biopolitics includes a. assisted suicide. b. cloning. c. genetic engineering. d. abortion. e. All of the above Ans: e Page: 90

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86.

Which country voted no to the European Unions proposed constitution in mid 2005? a. Germany b. Portugal c. France d. The Czech Republic e. Greece Ans: c Page: 90

87.

The term that refers to the EUs effort to end competitive tax breaks among member countries is a. double taxation. b. taxation bias. c. equity taxation. d. tax reconciliation. e. tax harmonization. Ans: e Page: 90

Technological Forces 88. Technological advancements can create new ______ advantages that are more powerful than existing advantages. a. economic b. social c. environmental d. competitive e. comparative Ans: d 89. Page: 93

Which sector of the economy would be most impacted by technological developments? a. forestry b. pharmaceuticals c. textiles d. metals e. paper Ans: b Page: 94

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Competitive Forces 90. Collecting and evaluating information on competitors is essential for successful a. internal analysis. b. strategy evaluation. c. strategy formulation. d. strategy implementation. e. strategy management. Ans: c 91. Page: 95

In 2004, which company had the dominant market share in the beverages industry? a. PepsiCo b. Coca-Cola Enterprises c. Anheuser-Busch d. Pepsi Bottling Group e. Molson Brewing Ans: a Page 95

92.

Which of the following is not a characteristic that describes the most competitive companies in America? a. Divestiture is essential to growth b. People make a difference c. Innovate or evaporate d. There is no substitute for quality and no greater threat than failing to be costcompetitive on a global basis. e. Whether its broke or not, fix it Ans: a Page: 96

93.

A systematic and ethical process for gathering and analyzing information about the competitions activities and general trends to further a business own goals is called a. unethical business practice. b. artificial intelligence. c. competitive intelligence. d. information sharing. e. competitive advantage. Ans: c Page: 96

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___________ is not a basic mission of a competitive intelligence program. a. To provide a general understanding of an industry b. To provide a general understanding of a companys competitors c. To identify industry executives who could be hired by the firm d. To identify areas where competitors are vulnerable and to assess the impact strategic actions would have on competitors e. To identify potential moves a competitor might make that would endanger a firms position in the market Ans: c Page: 97

95.

Which statement about business intelligence is least accurate? a. Intelligence gathering is an unethical business practice. b. Running an intelligence program requires many people. c. Running an intelligence program requires many computers and other resources. d. Collecting intelligence about competitors violates antitrust laws. e. Business intelligence is not equal to espionage. Ans: e Page: 97

96.

Keeping strategies secret from employees and stakeholders can do all of the following except: a. inhibit employee and stakeholder communication. b. inhibit employee and stakeholder understanding. c. inhibit employee and stakeholder commitment. d. provide competitive advantage to competitors. e. forego valuable employee or stakeholder input. Ans: d Page: 97-98

97.

Learning from the partner is a major reason why ______ firms enter into cooperative agreements. a. Asian b. American c. African d. European e. Mexican Ans: a Page: 92

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Competitive Analysis: Porters Five-Forces Model 98. Intensity of competition _______ in lower-return industries. a. is lowest b. is non-existent c. is highest d. is not important e. fluctuates Ans: c 99. Page: 99

What is not one of Michael Porters five competitive forces? a. New entrants b. Rivalry among existing firms c. Bargaining power of unions d. Bargaining power of suppliers e. Bargaining power of buyers Ans: c Page: 100

100.

According to Porter, what is usually the most powerful of the five competitive forces? a. Potential development of substitute products b. Bargaining power of suppliers c. Bargaining power of consumers d. Rivalry among competing firms e. Potential entry of new competitors Ans: d Page: 101

101.

Whenever new firms can easily enter a particular industry, the intensity of competitiveness among firms a. stays the same. b. increases. c. decreases. d. neutralizes. e. fluctuates. Ans: b Page: 102

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102.

If suppliers are unreliable or too costly, which of these strategies may be appropriate? a. Horizontal integration b. Backward integration c. Market penetration d. Forward integration e. Concentric diversification Ans: b Page: 102

103.

What level of bargaining power do consumers have when the products being purchased are standard or undifferentiated? a. marginal b. low c. high d. negative e. not necessary Ans: c Page: 103

Sources of External Information 104. Because of the Internet, barriers to personal and business success are a. being eliminated. b. being built. c. acting like glass walls. d. significantly enhanced. e. lower. Ans: a Page: 103

Forecasting Tools and Techniques 105. What are educated assumptions about future trends and events? a. Guesses b. Forecasts c. Facts d. Statistics e. Predictions Ans: b Page: 104

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106.

Planning would be impossible without a. assumptions. b. employees. c. data. d. competitive intelligence. e. intuition. Ans: a Page: 104

The Global Challenge 107. The international challenge faced by U.S. business is twofold: a. how to gain and maintain exports to other nations and how to defend domestic markets against imported goods. b. how to enhance imported goods in domestic markets and minimize exports to other nations. c. how to gain exports to other nations and enhance market share for imported goods in domestic markets. d. how to defend domestic markets against imported goods while minimizing exports. e. how to increase exports to other countries and how to increase imports from other countries. Ans: a 108. Page: 105

Which of the following is a process of worldwide integration of strategy formulation, implementation and evaluation activities? a. Mission development b. Globalization c. Brainstorming d. Industry analysis e. Industrialization Ans: b Page: 106

109.

Globalization of industries is occurring for all of these reasons except: a. a worldwide trend toward similar consumption patterns. b. the emergence of global buyers. c. a worldwide trend toward different consumption patterns. d. e-commerce and the instant transmission of money and information across continents. e. the emergence of global sellers. Ans: c Page: 106

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110.

All of these are risks that still restrain firms from initiating business with China except: a. absence of a legal system. b. severe human rights violations. c. freedom of press and religion. d. rampant corruption. e. little respect for patents, copyrights, brands and logos. Ans: c Page: 108

Industry Analysis: The EFE Matrix 111. What is the first step in designing an EFE Matrix? a. Identifying key external factors in the industry b. Summing the weighted score for each competitor c. Calculating the sales of each competitor d. Drawing the horizontal and vertical lines for the matrix e. Determining four competitors Ans: a 112. Page: 109

What is the range for a firms total weighted score in an External Factor Evaluation Matrix? a. 0 to 5 b. 0 to 4 c. 1 to 5 d. 1 to 4 e. 0 to 10 Ans: d Page: 109

The Competitive Profile Matrix (CPM) 113. One difference between CPM and EFE is that a. CPM includes both internal and external issues. b. the weight and total weighted score mean opposite. c. CPM ratings range from 1 to 10. d. CPM is performed only for the company, whereas EFE is performed for both the company and the competitors. e. CPM is only used in small firms. Ans: a Page: 111

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Essay Questions
114. What are the five major types of external forces that should be examined as part of an external audit? Give an example of each type of force. External forces can be divided into five broad categories: (1) economic forces, (2) social, cultural, demographic and environmental forces, (3) political, governmental and legal forces, (4) technological forces and (5) competitive forces. Relationships among these forces and an organization are depicted in Figure 3-2. Page: 83 115. Discuss the process of performing an external audit. To perform an external audit, a company first must gather competitive intelligence and information about economic, social, cultural, demographic, environmental, political, governmental, legal and technological trends. Once information is gathered, it should be assimilated and evaluated. A meeting or series of meetings of managers is needed to collectively identify the most important opportunities and threats facing the firm. These key external factors should be listed on flip charts or a blackboard. A prioritized list of these factors could be obtained by requesting that all managers to rank the factors identified, from 1 for the most important opportunity/threat to 20 for the least important opportunity/threat. Page: 83-84 116. Discuss the I/O approach in relation to competitive advantage. The I/O approach to competitive advantage advocates that external factors are more important than internal factors in a firm achieving competitive advantage. Proponents of the I/O view contend that organizational performance will be primarily determined by industry forces, rather than the firms internal functional decisions made. Research findings suggest that approximately 20 percent of a firms profitability can be explained by the industry, whereas 36 percent of the variance in profitability is attributed to the firms internal factors. Effective integration of both external and internal factors is the key to securing and keeping a competitive advantage. Page: 84-85

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117.

Identify five key economic variables that could represent major opportunities or threats to a bank in your town or city. Student answers will vary. However, they should look at economic, social/cultural, political/legal, technological and competitive factors. Refer to Table 3-1 on page 85. Page: 85-86

118.

List three opportunities and three threats that could represent key factors facing your college or university. Student answers will vary. However, they should look at economic, social/cultural, political/legal, technological and competitive factors. Page: 85-92

119.

Explain how the Internet is changing businesses around the world. The Internet is acting as a national and even global economic engine that is spurring productivity. The Internet is saving companies billions of dollars in distribution and transaction costs from direct sales to self-service systems. The Internet is changing the very nature of opportunities and threats by altering the life cycles of products, increasing the speed of distribution, creating new products and services, erasing limitations of traditional geographic markets and changing the historical trade-off between production standardization and flexibility. It is also altering economies of scale, changing entry barriers and redefining the relationship between industries and various suppliers, creditors, customers and competitors. An emerging consensus holds that technology management is one of the key responsibilities of strategists. Page: 93

120.

Agree or disagree with (and discuss) the following statement: Corporate intelligence is not corporate espionage because 95 percent of the information a company needs to make strategic decisions is available and accessible to the public. Agree. Firms need an effective competitive intelligence (CI) program. The three basic missions of a CI program are (1) to provide a general understanding of an industry and its competitors, (2) to identify areas in which competitors are vulnerable and to assess the impact strategic actions would have on competitors and (3) to identify potential moves a competitor might make that would endanger a firms position in the market. An effective CI program allows all areas of a firm to access consistent and verifiable information in making decisions. Page: 97

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121.

According to Michael Porter, what are the five competitive forces that create vital opportunities and threats for organizations? Which force do you feel is most important in the computer industry today? Why? The first one is rivalry among competing firms. The second is potential entry of new competitors. The third is potential development of substitute products. The fourth is bargaining power of suppliers. The last one is bargaining power of consumers. Page: 99-103

122.

Discuss the following statement: Planning would be impossible without assumptions. By identifying future occurrences that could have a major effect on the firm and by making reasonable assumptions about those factors, strategists can carry the strategic-management process forward. Assumptions are needed only for future trends and events that are most likely to have a significant effect on the companys business. Assumptions can serve as checkpoints on the validity of strategies. If future occurrences deviate significantly from assumptions, strategists know that corrective actions may be needed. Without reasonable assumptions, the strategyformulation process could not proceed effectively. Firms that have the best information generally make the most accurate assumptions, which can lead to major competitive advantages. Page: 104-105

123.

Discuss the opportunities and threats China presents to an international firm interested in doing business with China. U.S. firms increasingly are doing business in China as market reforms create a more businesslike arena daily. Risks that still restrain firms from initiating business with China include the following: (1) poor infrastructure, (2) disregard for the natural environment, (3) absence of a legal system, (4) rampant corruption, (5) lack of freedom of press, speech and religion, (6) severe human-rights violations, (7) little respect for patents, copyrights, brands and logos, (8) counterfeiting, fraud and pirating of products, (9) little respect for legal contracts and (10) no generally accepted accounting principles. Both the European community and the U.S. have approved Chinas membership in the WTO. This action integrated the worlds most populated country into the global trading order. Some key changes resulting from this action are as follows: (1) foreign companies can take increased stakes in mobile phone companies; (2) tariffs on high-tech products will be phased out and eliminated by 2005; (3) import tariffs on automobiles will drop to 25 percent by mid-2006 from 90 percent today; (4) foreign banks may conduct domestic currency business with Chinese firms; (5) foreign banks may do business anywhere in China by 2006; (6) foreign firms will be

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allowed a 49 percent stake in securities joint ventures by 2004; (7) foreign insurance firms may own operations in China; and (8) retail oil distribution will open in China by 2004. Page: 107-109 124. List five steps that comprise an effective framework for conducting an EFE Matrix. Explain the details involved in performing any one of the steps. The EFE Matrix can be developed in five steps: 1) list key external factors as identified in the external-audit process with a total of from 10 to 20 factors, including both opportunities and threats that affect the firm and its industry; 2) assign to each factor a weight that ranges from 0.0 to 1.0; 3) assign a 1 to 4 rating to each key external factor to indicate how effectively the firms current strategies respond to the factor, where 4 = the response is superior, 3 = the response is above average, 2 = the response is average, and 1 = the response is poor; 4) multiply each factors weight by its rating to determine a weighted score; and 5) sum the weighted scores for each variable to determine the total weighted score for the organization. Page: 109-111