Competitive Forces of Banking Industry

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					                             THE EXTERNAL ASSESSMENT


     The Nature of an External Audit
     Economic Forces
     Social, Cultural, Demographic, and Environmental Forces
     Political, Governmental, and Legal Forces
     Technological Forces
     Competitive Forces
     Competitive Analysis: Porter’s Five-Forces Model
     Sources of External Information
     Forecasting Tools and Techniques
     The Global Challenge
     Industry Analysis: The External Factor Evaluation (EFE) Matrix
     The Competitive Profile Matrix (CPM)



1.    Describe how to conduct an external strategic-management audit.
2.    Discuss 10 major external forces that affect organizations: economic, social, cultural,
      demographic, environmental, political, governmental, legal, technological, and competitive.
3.    Identify key sources of external information, including the Internet.
4.    Discuss important forecasting tools used in strategic management.
5.    Discuss the importance of monitoring external trends and events.
6.    Explain how to develop an EFE Matrix.
7.    Explain how to develop a Competitive Profile Matrix.
8.    Discuss the importance of gathering competitive intelligence.
9.    Describe the trend toward cooperation among competitors.
10.   Discuss the political environment in Russia.
11.   Discuss the global challenges facing American firms.

OVERVIEW

This paper examines the tools and concepts needed to conduct an external strategic-management audit
(sometimes called environmental scanning or 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 the Sun Belt, an aging society, information technology, and
the computer revolution. An external audit reveals key opportunities and threats confronting an
organization, so managers can formulate strategies to take advantage of the opportunities and avoid or
reduce the impact of threats. This paper presents a practical framework and guidelines for gathering,
assimilating, and analyzing environmental information.

EXTENDED OUTLINE WITH TIPS

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I.     THE NATURE OF AN EXTERNAL AUDIT
       The purpose of an external audit is to develop a finite list of opportunities that could benefit a
       firm and avoid threats.

VTN (Visit the Net): http://horizon.unc.edu/projects/seminars/futuresresearch/strategic.asp#planning
describes how strategic planning evolved from long range planning and environmental scanning.

       A. Key External Forces
           1. 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.
           2. Relations among these forces and an organization are depicted in Figure 3-2 in the
              textbook. External trends and events significantly affect all products, services, markets,
              and organizations in the world.
           3. Changes in external forces translate into changes in consumer demand for both
              industrial and consumer products and services.
       B. The Process of Performing an External Audit
           1. The process of performing an external audit must involve as many managers and
              employees as possible. As emphasized in earlier papers, involvement in the strategic-
              management process can lead to understanding and commitment from organizational
              members.
           2. 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.
               a. Individuals can be asked to monitor various sources of information such as key
                  magazines, trade journals, and newspapers.
               b. The Internet is another source for gathering strategic information, as are corporate,
                  university, and public libraries.
               c. Suppliers, distributors, salespersons, customers, and competitors represent other
                  sources of vital information.
           3. Once information is gathered, it should be assimilated, evaluated, and prioritized.

           4. Key external factors should be important to achieving long term and annual objectives,
              measurable, applicable to all competing firms, and hierarchical in the sense that some
              will pertain to the overall company while others will be more narrowly focused.

VTN (Visit the Net): http://horizon.unc.edu/projects/seminars/futuresresearch/stages.asp describes the
external audit process in a university setting.
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Tip: Many organizations are scrambling to collect information about how to conduct business on the
Internet. The following is a list of the premier magazines that are available online that focus on e-
commerce and the Internet.
    Business 2.0 {http://www.business2.com/}
    The Industry Standard {http://www.thestandard.com/}
    Red Herring {http://www.redherring.com/}
    Upside {http://www.upside.com/}
    Yahoo! Internet Life {http://www.yil.com/}

Tip: There are a number of Internet sites that provide a wealth of information on publicly traded
corporations, including EDGAR filings, company press releases, newspaper articles, and analysts’
estimates. The following is a sample of the sites that are particularly useful.

    Hoovers Online {http://www.hoovers.com/}
    Companies Online {http://www.companiesonline.com/}
    Morningstar.com {http://www.morningstar.com/}
    Wall Street Research Net {http://www.wsrn.com/}
    Yahoo! Company Information {http://finance.yahoo.com/}

II.      ECONOMIC FORCES
         A. Economic Factors Have a Direct Impact
             1. Economic factors have a direct impact on the potential attractiveness of various
                strategies. For example, if interest rates rise, then funds needed for capital expansion
                become more costly or unavailable.
             2. The key economic variables that a firm should monitor are listed in Table 3-1 in the
                textbook. The list includes (1) shifts to a service economy in the United States; (2)
                availability of credit; (3) level of disposable income; (4) propensity of people to spend;
                (5) interest rates; (6) inflation rate; (7) unemployment trends; and so on.

VTN (Visit the Net): http://www.hq.nasa.gov/office/nsp/toc.htm explains NASA’s strategic
management process and provides NASA’s entire strategic plan.

             3. Russia’s Economy
                 a. Economy. The Russian economy is in shambles. Business Week magazine calls
                    the Russian economy bizarre because real money, goods, and output play such a
                    small role.
                 b. Trade. The major barriers to increased U.S. exports to Russia are a substantial
                    value-added tax, high import duties, and onerous Russian excise levies. In addition,
                    the government has imposed strict quality and safety standards on the majority of
                    goods entering Russia.
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Tip: The Economist is a high-quality British magazine that is available online. The magazine
publishes insightful articles on economic and political issues that are of interest to business strategists
{http://www.economist.com}.

III.    SOCIAL, CULTURAL, DEMOGRAPHIC, AND ENVIRONMENTAL FORCES
        A. Social, Cultural, Demographic, and Environmental Impact
            1. Social, cultural, demographic, and environmental changes have a major impact on
               virtually all products, services, markets, and customers.
            2. Social, cultural, demographic, and environmental trends are shaping the way
               Americans live, work, produce, and consume. New trends are creating a different type
               of consumer and, consequently, a need for different products, services, and strategies.
            3. Significant trends for the future include consumers becoming more educated, the
               population aging, minorities becoming more influential, people looking for local
               rather than federal solutions to problems, and fixation on youth decreasing.

        B. The U.S.-Mexican Border
            1. Stretching 2,100 miles from the Pacific Ocean to the Gulf of Mexico, this 180-mile
               wide strip of land is North America’s fastest-growing region.
            2. There are now over 1,500 maquiladoras, assembly plants on the Mexican side of the
               border. Most analysts contend that the maquiladora area is a vital key to continued
               U.S. global competitiveness.

Natural Environment Perspective: Is Your Business Polluting the Air or Water?

E-Commerce Perspective: Should Internet Sales Remain Tax Free? While a tax on Internet sales
will slow the growth of the Internet economy and create logistical issues for interstate retailers,
local and state governments argue the need for these tax dollars to cover public expenses.


IV.     POLITICAL, GOVERNMENTAL, AND LEGAL FORCES
        A. Political, Governmental, and Legal Factors Represent Key Forces . Federal, state, local,
           and foreign governments are major regulators, deregulators, subsidizers, employers, and
           customers of organizations.

        B. Political, governmental, and legal factors therefore can represent key opportunities or
           threats for both small and large organizations.
            1. For industries and firms that depend heavily on government contracts or subsidies,
               political forecasts can be the most important part of an external audit.
            2. Changes in patent laws, antitrust legislation, tax rates, and lobbying activities can affect
               firms significantly.
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       C. The increasing global interdependence among economies, markets, governments, and
          organizations make it imperative that firms consider the possible impact of political
          variables on the formulation and implementation of competitive strategies. Increasing
          global competition accents the need for accurate political, governmental, and legal
          forecasts.

       D. Several websites provide legal information: www.findlaw.com, www.lawguru.com,
          www.freeadvice.com, www.nolo.com, www.lectlaw.com, and www.abanet.org.

       E. Local, state, and federal laws, regulatory agencies, and special interest groups can have a
          major impact on the strategies of small, large, for-profit, and nonprofit organizations.

       F. Key political, governmental, and legal variables.

       G. Russia is the last large country outside of the World Trade Organization (WTO). In efforts
          to join the WTO, Russia has agreed to open its markets in banking, insurance, and
          agriculture but not in the automobile and aircraft industries. The Russian parliament is
          currently passing legislation to pave the way for WTO rules and policies. Russia’s
          government has failed at adequately collecting taxes and consequently has difficulty
          paying for social services and military and government payroll and expenditures. Russian
          tax laws are also among the most confusing in the world so many businesses avoid
          keeping accurate records to eliminate tax implications.

Tip: CEO Express is an excellent website that provides managers with links to broad ranges of
resources that are helpful in following changes in the external environment. The website is available at
{http://www.ceoexpress.com}.

V.     TECHNOLOGICAL FORCES
       A. Technological Forces Play a Key Role. 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.

       B. To effectively capitalize on information technology, a number of organizations are
          establishing two new positions in their firms: chief information officer (CIO) and chief
          technology officer (CTO).

Tips: There are a number of on-line periodicals that focus specifically on technology related business
issues. A sample of these magazines, which provide information to strategists in terms of monitoring
changes in their businesses technological environments, are as follows:

 CIO {http://www.cio.com/CIO/}
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 ComputerWorld {http://www.computerworld.com/}
 Intranet Journal {http://www.intranetjournal.com/}
 MIT TechReview {http://www.techreview.com/}

VI.    COMPETITIVE FORCES
       A. An Awareness of Competitive Forces Is Essential for Success
           1. The top five U.S. competitors in four different industries are identified in Table 3-5.
              An important part of an external audit is identifying rival firms and determining their
              strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies.
           2. Collecting and evaluating information on competitors are essential for successful
              strategy formulation.

VTN (Visit the Net): www. fuld.com provides information on the importance of gathering competitive
information. It offers an audio frequently asked questions section on intelligence systems.
       B. Competitive Intelligence (CI) Programs
           1. Good CI in business, as in the military, is one of the keys to success. The more
              information and knowledge a firm can obtain about competitors, the more likely it can
              formulate and implement effective strategies.
               a. What is CI? CI, as formally defined by the Society of Competitive Intelligence
                  Professionals (SCIP), is a systematic and ethical process of gathering and
                  analyzing information about the competition’s activities and general business
                  trends to further a business’ own goals (SCIP website).
           2. Firms need an effective competitive intelligence 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 assesses
              the impact strategic actions would have on competitors, and (3) to identify potential
              moves that a competitor might make that would endanger a firm’s position in the
              market.
           3. Unethical tactics such as bribery, wiretapping, and computer break-ins should never be
              used to obtain information.

VTN (Visit the Net): www2.hawaii.edu/uhhilo/strategic provides the strategic plan for the University
of Hawaii including its planning assumptions.

Tip: The Company Sleuth is an example of a web-based firm that conducts competitive intelligence
for business organizations {http://www.company.sleuth.com}. The website is interesting to look at
and lists the 10 companies that are being “watched” the most by subscribers to the service. The most
heavily watched companies from week to week typically include AOL, Microsoft, Yahoo!, Dell
Computer, Cisco Systems, Lucent Technologies, Intel, and Amazon.com.
       C. Cooperation Among Competitors
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           1. Strategies that stress cooperation among competitors are being used more. For
              example, Lockheed recently teamed up with British Aerospace PLC to compete
              against Boeing Company to develop the next generation U.S. fighter jet.
           2. The idea of joining forces with a competitor is not easily accepted by Americans, who
              often view cooperation and partnerships with skepticism and suspicion. Indeed, joint
              ventures and cooperative arrangements among competitors demand a certain amount
              of trust to combat paranoia about whether one firm will injure the other.

VTN (Visit the Net): http://www.noaa.gov/strplan/planCover.html gives the National Oceanic and
Atmospheric (NOAA) Strategic Plan including its external assessment.

VII.    COMPETITIVE ANALYSIS: PORTER’S FIVE-FORCES MODEL
        A. Porter’s Five-Forces Model

           1. The intensity of competition among firms varies widely from industry to industry.

           2. According to Porter, the nature of competitiveness in a given industry can be viewed
              as a composite of five forces.
               a.   Rivalry among competitive firms.
               b.   Potential entry of new competitors.
               c.   Potential development of substitute products.
               d.   Bargaining power of suppliers.
               e.   Bargaining power of consumers.
           2. Rivalry among competing firms. Usually is the most powerful of the five competitive
              forces. The strategies pursued by one firm can be successful only to the extent that
              they provide competitive advantage over the strategies pursued by rival firms.
           3. Potential entry of new competitors. Whenever new firms can easily enter a particular
              industry, the intensity of competitiveness among firms increases.
           4. Potential development of substitute products. In many industries, firms are in close
              competition with producers of substitute products in other industries.
           5. Bargaining power of suppliers. The bargaining power of suppliers affects the intensity
              of competition in an industry, especially when there are a large number of suppliers,
              when there are only a few good substitute raw materials, or when the cost of switching
              raw materials is especially costly.
           6. Bargaining power of consumers. When customers are concentrated, large, or buy in
              volume, their bargaining power represents a major force affecting intensity of
              competition in an industry.

VIII.   SOURCES OF EXTERNAL INFORMATION
        A. Information Is Available from Both Published and Unpublished Sources
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           1. Unpublished sources include customer surveys, market research, speeches at
              professional and shareholders’ meetings, television programs, interviews, and
              conversations with stakeholders.
           2. Published sources of strategic information include periodicals, journals, reports,
              government documents, abstracts, books, directories, newspapers, and manuals.
       B. Internet
           1. Millions of people today use on-line services for both business and personal purposes.
           2. The Internet offers consumers and businesses a widening range of services and
              information resources from all over the world.

VTN (Visit the Net): http://www.people.hbs.edu/oporter/ is the website of Dr. Michael Porter who
heads the Institute for Strategy and Competitiveness at Harvard Business School.

IX.    FORECASTING TOOLS AND TECHNIQUES
       A. Forecasts
           1. Forecasts are educated assumptions about future trends and events.
           2. Forecasting is a complex activity due to 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.
           3. Forecasting tools can be broadly categorized into two groups: quantitative techniques
              and qualitative techniques.
              a. Quantitative forecasts are most appropriate when historic data are available and
                 when the relationships among key variables are expected to remain the same in the
                 future. The three basic types of quantitative forecasting techniques are econometric
                 models, regression, and trend extrapolation.
              b. Qualitative forecasts. The six basic qualitative approaches to forecasting are: (1)
                 sales force estimates, (2) juries of executive opinions, (3) anticipatory surveys or
                 market research, (4) scenario forecasts, (5) Delphi forecasts, and (6) brainstorming.
       B. Making Assumptions
           1. By identifying future occurrences that could have a major effect on the firm and
              making reasonable assumptions about those factors, strategists can carry the strategic-
              management process forward.

X. THE GLOBAL CHALLENGE
           The global challenge faced by U.S. business is twofold: 1) how to gain and maintain
           exports to other nations and 2) how to defend domestic markets against imported goods.
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Global Perspective: The Old Way versus the New Way to Take a Company Global. This
includes doing extensive homework regarding culture, distributors, suppliers, and customers
prior to conducting operations in a foreign land.

          A. Globalization
              1. Globalization is the process of worldwide integration of strategy formulation,
                 implementation, and evaluation activities. Strategic decisions are made based on
                 their impact on global profitability of the firm, rather than on just domestic or
                 other individual country considerations.
              2. Globalization of industries is occurring for many reasons, including a worldwide
                 trend toward similar consumption patterns, the emergence of global buyers and
                 sellers, e-commerce, and instant transmission of money and information across
                 continents.
          B. China: Opportunities and Threats
              1. U.S. firms are increasingly doing business in China as market reforms create a
                 more businesslike arena daily. Foreign direct investment in China is about $50
                 billion annually. This places China second behind the United States as the most
                 desirable country in the world for foreign investment.
              2. There are several key changes in China resulting from its membership in the WTO:

                 a.   Foreign companies can take increased stakes in mobile phone companies.
                 b.   Tariffs on high-tech products will be phased out and eliminated by 2005.
                 c.   Import tariffs on automobiles will drop to 25% by mid-2006 from 90% today.
                 d.   Foreign banks may conduct domestic currency business with Chinese firms.
                 e.   Foreign banks may do business anywhere in China by 2006.
                 f.   Foreign firms will be allowed 49% stake in securities joint ventures by 2004.
                 g.   Foreign insurance firms may own operations in China.
                 h.   Retail oil distribution will open in China by 2004.

             3. Risks still exist in China:
                a. Poor infrastructure.
                b. Disregard for natural environment.
                c. Absence of legal system.
                d. Rampant corruption.
                e. Lack of freedom of press, speech, and religion.
                f. Severe human rights violations.
                g. Little respect for patents, copyrights, brands, and logos.
                h. Counterfeiting, fraud, and pirating of products.
                i. Little respect for legal contracts.
                j. No generally accepted accounting principles.
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             4. Evidence of the success of China’s market reforms is the government’s attitude
                toward Hong Kong. Figure 3-4 shows Hong Kong’s strategic location.
                 a. China is operating Hong Kong as a separate democratic state with freedom of
                    religion, press, speech, and a fair legal system.
                 b. Hong Kong is the centerpiece of China’s efforts to reform, privatize, and
                    expand imports and exports worldwide. As the twenty-first century begins,
                    Hong Kong is still an attractive city/nation to establish business operations, but
                    China is moving Hong Kong more towards regulation and government control,
                    thus being more like China.
             5. Taiwan
                 a. Fifty years of separation between China and Taiwan have pushed the two
                    countries so far apart politically, socially, and culturally that it is hard to
                    imagine them ever being part of the same whole.
                 b. China and Taiwan are cooperating more and more economically.

XI.    INDUSTRY ANALYSIS: THE EXTERNAL FACTOR EVALUATION
       (EFE) MATRIX
       A. An EFE Matrix
          1. An EFE Matrix allows strategists to summarize and evaluate economic, social,
             cultural, demographic, environmental, political, governmental, legal, technological,
             and competitive information.

          2. There are five steps in developing an EFE Matrix.
             a. List key external factors as identified in the external-audit process. Include a total
                of 10-20 factors from both the opportunities and threats.
             b. Assign to each factor a weight from .0 (not important) to 1.0 (very important).
                These weights show the relative importance. The total of all the weights should
                equal 1.0.
             c. Assign a 1-4 rating to each factor to indicate how effectively the firm’s current
                response strategy is: 1= the response is poor, 2 = the response is average, 3 = the
                response is above average, and 4 = the response is superior.
             d. Multiply each factor’s weight by its rating to get a weighted score.
             e. Sum the weighted scores for each variable to determine the total weighted score
                for the organization.
XII.   THE COMPETITIVE PROFILE MATRIX (CPM)
       A. The CPM Matrix
          1. The CPM, identifies a firm’s major competitors and their particular strengths and
             weaknesses in relation to a sample firm’s strategic position.
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            2. There are some important differences between the EFE and CPM. First, the critical
               success factors in a CPM are broader. These factors are also not grouped into
               opportunities and threats as in the EFE. In a CPM, the ratings and weighted scores can
               be compared to rival firms.

ISSUES FOR REVIEW AND DISCUSSION

1. Explain how to conduct an external strategic-management audit.

     Answer: An effective approach for conducting an external strategic-management audit
     consists of four basic steps: (1) select key variables, (2) select key sources of information, (3)
     use forecasting tools and techniques, (4) construct an EFE Matrix.

2. Identify a recent economic, social, political, or technological trend that significantly affects
   financial institutions.

     Answer:
     Economic—Interest rates remain low.
     Social—Many states are passing no smoking ordinances.
     Political—Eastern European countries are experiencing political instability.
     Technological—Use of the Internet is doubling every 100 days.

3. Discuss the following statement: Major opportunities and threats usually result from an
   interaction among key environmental trends rather than from a single external event or
   factor.

     Answer: This statement is accurate. It reveals how complex the external audit part of strategy
     formulation can be. There are an infinite number of interactions among key external factors.

4. Identify two industries experiencing rapid technological changes and three industries that
   are experiencing little technological change. How does the need for technological forecasting
   differ in these industries? Why?
     Answer: The computer industry, communications industry, and aerospace industry are
     technologically changing rapidly. Three industries that are experiencing little technological change
     are the forest products industry, the shipping industry, and the dairy industry.

5. Use Porter’s five-forces model to evaluate competitiveness within the U.S. banking industry.
     Answer: Porter identifies five competitive forces that determine the intensity of competition in an
     industry and the total value of profits created in a particular industry. The five forces are 1) new
     entrants, 2) substitute products or services, 3) bargaining power of suppliers, 4) bargaining power
     of buyers, and 5) rivalry among existing firms. A key to selecting appropriate generic strategies is
     to analyze these competitive forces in terms of trends, opportunities, and threats facing the firm.
     Ask your persons to apply an analysis of these forces to the banking industry.
                                                                                                        49



6. What major forecasting techniques would you use to identify (1) economic opportunities
   and threats and (2) demographic opportunities and threats? Why are these techniques most
   appropriate?
    Answer: With the advent of sophisticated computers, simultaneous systems of regression
    equations have become the most widely used approach for forecasting economic variables.
    Scenario development is the most popular of all techniques for social and demographic forecasting,
    although surveys and market research are also widely used.

7. How does the external audit affect other components of the strategic-management process?
    Answer: In countless ways, external audit results can and often do affect all other components of
    the strategic-management model.

8. As the owner of a small business, explain how you would organize a strategic-information
   scanning system. How would you organize such a system in a large organization?
    Answer: In both small and large organizations, strategists could assign specific publications to
    particular individuals who could then monitor their assigned source and regularly report strategic
    information to a coordinator. Also, both small businesspeople and chief executive officers of large
    businesses could effectively use on-line databases.

&10. Construct an EFE Matrix.
    Answer: An EFE Matrix allows strategists to summarize and evaluate economic, social, cultural,
    demographic, environmental, political, governmental, legal, technological, and competitive
    information.

    There are five steps in developing an EFE Matrix.
   List key external factors as identified in the external-audit process. Include a total of 10-20 factors
    from both the opportunities and threats.
   Assign to each factor a weight from .0 (not important) to 1.0 (very important). These weights
    show the relative importance. The total of all the weights should equal 1.0.
   Assign a 1-4 rating to each factor to indicate how effectively the firm’s current response strategy:
    1= the response is poor, 2 = the response is average, 3 = the response is above average, and 4 = the
    response is superior.
   Multiply each factor’s weight by its rating to get a weighted score.
   Sum the weighted scores for each variable to determine the total weighted score for the
    organization.

Give some advantages and disadvantages of cooperative versus competitive strategies.
    Answer: Cooperative strategies are generally less costly than competitive strategies. Cooperative
    strategies between domestic and foreign companies can facilitate entry into world markets.
    However, competitive strategies recognize that survival of the fittest is an underlying philosophy
50

     of business not only in the United States , but also in most of the world. Identifying competitors’
     strengths and weaknesses is, thus, an integral and vital part of the external audit.

 As strategist for a local bank, explain when you would use qualitative versus quantitative
forecasts.
     Answer: Qualitative forecasts are most appropriate when historical data are not available and
     when relationships among key variables are expected to vary greatly in the future. In addition,
     when conditions are exploratory in nature, qualitative data can be very useful. Quantitative
     forecasts require access to quantitative data.

 What is your forecast for interest rates and the stock market in the next several months? As
the stock market moves up, do interest rates always move down? Why? What are the strategic
implications of these trends?

14. Discuss the opportunities and threats a firm faces in doing business with China.
    Answer: U.S. firms increasingly are doing business with China as market reforms create a more
    businesslike arena daily. Foreign direct investment in China is about $50 billion annually. This
    places China second behind the United States as the most desirable country in the world for
    foreign investment.
     China is modernizing its stock and bond markets so that companies can depend less on banks for
     financing.
     Hong Kong is the centerpiece of China’s efforts to reform, privatize, and expand imports and
     exports worldwide. As the twenty-first century begins, Hong Kong is still an attractive city/nation
     to establish business operations, but China is moving Hong Kong more towards regulation and
     government control, thus being more like China.

     There are several key changes in China resulting from its membership in the WTO:
    Foreign companies can take increased stakes in mobile phone companies.
    Tariffs on high-tech products will be phased out and eliminated by 2005.
    Import tariffs on automobiles will drop to 25% by mid-2006 from 90% today.
    Foreign banks may conduct domestic currency business with Chinese firms.
    Foreign banks may do business anywhere in China by 2006.
    Foreign firms will be allowed 49% stake in securities joint ventures by 2004.
    Foreign insurance firms may own operations in China.
    Retail oil distribution will open in China by 2004.

     Risks still exist in China:
    Poor infrastructure.
    Disregard for natural environment.
    Absence of legal system.
    Rampant corruption.
    Lack of freedom of press, speech, and religion.
                                                                 51

   Severe human rights violations.
   Little respect for patents, copyrights, brands, and logos.
   Counterfeiting, fraud, and pirating of products.
   Little respect for legal contracts.
   No generally accepted accounting principles.

				
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