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Case

Overview

Founded by Jeff Bezos, online giant Amazon.com, Inc. (Amazon), was incorporated in the state of Washington in July, 1994, and sold its first book in July, 1995. In May 1997, Amazon (AMZN) completed its initial public offering and its common stock was listed on the NASDAQ Global Select Market. Amazon quickly grew from an online bookstore to the world's largest online retailer, greatly expanding its product and service offerings through a series of acquisitions, alliances, partnerships, and exclusivity agreements. Amazon's financial objective was to achieve long-term sustainable growth and profitability. To attain this objective, Amazon maintained a lean culture focused on increasing its operating income through continually increasing revenue and efficiently managing its working capital and capital expenditures, while tightly managing operating costs.

The name "Amazon" was evocative for founder Jeff Bezos of his vision of Amazon as a huge natural phenomenon, like the longest river in the world. He envisioned the company to be the largest online marketplace on earth someday.

By 2008, Amazon had become a global brand, with websites in Canada, the United Kingdom, Germany, France, China, and Japan, with order fulfillment in more than 200 countries.1 Its operations were organized into two principal segments: North America and International Operations, which grew to include Italy in 2010 and Spain in 2011. By 2012, Amazon employed more than 56,200 people around the world wo

Amazon Corporate Governance

Jeff Bezos is the Chairman of the Board and CEO of Amazon and owns 19.4% of the company.

Amazon has three board committees of which two are standard: the audit committee and the governance committee. The third committee, the Leadership Development and Compensation Committee, is uncommon. Most publicly traded companies have a compensation committee; however, it is unusual for the compensation committee to have leadership development as part of its mandate. The Leadership Development and Compensation Committee "monitors and periodically assesses the continuity of capable management, including succession plans for executive officers."

Amazon's board is not populated by CEOs or retired CEOs. It includes several venture capitalists, a number of senior-level executives from varied industries, an eminent scientist, and a representative from the non-profit sector.

Amazon's board has served together for a long time. This implies a deeper understanding of the company and increasing familiarity and even friendship amongst the group. This tends to discourage independent thinking and objectivity.

All of it is further proof that Jeff Bezos is a strong CEO and runs the company.

Retail Operations/Amazon's Superior Website

Retail Operations/Amazon's Superior Website

As people became more comfortable shopping on line, Amazon developed its website to take advantage of increased Internet traffic and to serve its customers most effectively.2 The hallmarks of Amazon's appeal were ease of use; speedy, accurate search results; selection, price, and convenience; a trustworthy transaction environment; timely customer service; and fast, reliable fulfillment3all of it enabled by the sophisticated technology the company encouraged its employees to develop to better serve its customers. The site, which offered a huge array of products sold both by itself and by third parties, was particularly designed to createa personalized shopping experience that helped customers discover new products and make efficient, informed buying decisions.

Key to Amazon's success was continual website improvement. A huge part of the technological work done for Amazon was dedicated to identifying problems, developing solutions, and enhancing customers' online experience. Jacob Lepley, in his "Amazon Marketing Strategy: Report One," notes that, "when you visit Amazon...you can use [it] to find just about any item on the market at an extremely low price. Amazon has made it very simple for customers to purchase items with a simple click of the mouse....When you have everything you need, you make just one payment and your orders are processed."4 This simple system is the same whether a customer purchases directly from Amazon or from one of its associates.

Pursuing perfection, Amazon was aggressive in analyzing its website's traffic and modifying the website accordingly. Amazon particularly excelled at customer tracking, collecting data from every visit to its website. Utilizing the information, Amazon then directed users to products that it surmised they might be interested in because the item was either related to a product that they had previously searched for or purchased by another Amazon customer looking for a similar product.

Recommendations were also customized based on the information customers provided about themselves and their interests, and their ratings prior purchased. Amazon also collected data on those who had never visited any of its websites, but who had received gifts from those who had used the site.

One of Amazon's most distinctive features was the community created based on the ratings/reviews provided by private individuals to help others make more informed purchasing decisions. Anyone could provide a narrative review and rate a product on a scale of 1-5 stars, and/or comment on others' reviews. Individuals could also create their own "So You'd Like..." guides and "Listmania" lists based on Amazon's products offerings and post them or send them to friends and family. To streamline customer research, Amazon also consolidated different versions of a product (e.g., DVD, VHS, Blu-ray disk) into a single product available for commentary that simplified commentary and user accessibility.5

To further target potential customers, Amazon engaged in permission marketing, eliciting permission to e-mail customers regarding specific production promotions based on prior purchases on the assumption that a targeted e-mail was more likely to be read than a blanket e-mail. This strategy was hugely appreciated by Amazon customers, further contributing to Amazon's success.

In addition, Amazon purchased pay-per-click advertisements on search engines such as Google to direct browsing customers to its websites. The ads appeared on the left-hand side of the search list results, and Amazon paid a fee for each visitor who clicked on its sponsored link.

At the same time, as "TV and billboard ads were roughly ten times less effective when compared to direct or online marketing when concerning customer acquisition costs"6, Amazon reduced its offline marketing. The strategy was simple: as customers shopped online, online marketing was key. However, in 2010, Amazon initiated a small television advertising campaign to increase brand awareness.

Finally, to round out its customer care, Amazon expedited shipping by strategically locating its fulfillment centers near airports7 where rents were also cheaper, giving Amazon the two-pronged advantage of speed and low cost over its competitors. Furthermore, in the United States, the United Kingdom, Germany, and Japan, Amazon offered subscribers to Amazon Prime the added convenience of free express shipping. Amazon Prime's free next-day delivery endeared it to Amazon customers, again contributing to the customer loyalty that was key to Amazon's success. Amazon Prime cost $79 annually to join and included free access to Amazon Instant Video. The overarching objective of the company was to offer low prices, convenience, and a wide selection of merchandise, a pared down, yet wide-reaching strategy that made Amazon such a huge success.

Diversified Product Offerings

Amazon diversified its product portfolio well beyond simply offering books, which in turn allowed it to diversify its customer mix. In 2007, Amazon successfully launched the Kindle, its $79 e-book reader, which offered users more than one million reasonably priced books and newspapers easily accessed on its handheld device. Competitor Apple, Inc., then introduced the iPad, the first tablet computer, in January 2010, sparking further development of mobile e-readers. E-book sales took off immediately, increasing by more than 100%, according to the Association of American Publishers. Eager to compete in a market for which it was uniquely positioned, Amazon quickly developed its own low-cost tablet, the Kindle Fire, an Android-based tablet with a color touchscreen priced at $199, more than $300 lower than the iPad, sacrificing profit margins in search of sales volume and market-share gains. Other tech giants such as RIMM and HP were unable to compete with the iPad. Only the Sony Nook, the Amazon Kindle and Kindle Fire, and the Samsung Galaxy and Series 7 tablets challenged Apple's consistent 60% of market share. Ultimately, however, Amazon's huge growth derived not simply from the sale of Kindle hardware and the growth of e-book sales, but from its diversification and the continual expansion of the easy website access created by mobile devices.

By 2010, 43% of Amazon net sales were from media, including books, music, DVDs/video products, magazine subscriptions, digital downloads, and video games. More than half of all Amazon sales came from computers, mobile devices including the Kindle, Kindle Fire, and Kindle Touch, and other electronics, as well as general merchandise from home and garden supplies to groceries, apparel, jewelry, health and beauty products, sports and outdoor equipment, tools, and auto and industrial supplies.

Amazon also offered its own credit card, a form of co-branding that benefited all parties: Amazon, the credit card company (Chase Bank), and the consumer. Amazon benefited because it received money from the credit card company both directly from Amazon purchases and indirectly from fees generated from non-Amazon purchases. In addition, Amazon benefited from the company loyalty generated by having its own credit card the consumer sees and uses every day. The credit card company gained from Amazon's high visibility, increasing its potential customer base and transactions. And the consumer earned credit toward gift certificates with each use of the card.

Partnerships

Amazon leveraged its expertise in online order taking and order fulfillment and developed partnerships with many retailers whose websites it hosted and managed, including (currently or in the past) Target, Sears Canada, Bebe Stores, Timex Corporation, and Marks & Spencer. Amazon offered services comparable to those it offered customers on its own websites, thus freeing those retailers to focus on the non-website, non-technological aspects of their operations.8

In addition, Amazon Marketplace allowed independent retailers and third-party sellers to sell their products on Amazon by placing links on their websites to Amazon.com or to specific Amazon products. Amazon was "not the seller of record in these transactions, but instead earn[ed] fixed fees, revenue share fees, per-unit activity fees, or some combination thereof."9 Linking to Amazon created visibility for these retailers and individual sellers, adding value to their websites, increasing their sales, and enabling them to take advantage of Amazon's convenience and fast delivery. Sellers shipped their products to an Amazon warehouse or fulfillment center, where the company stored it for a fee, and when an order was placed, shipped out the product on the seller's behalf. This form of affiliate marketing came at nearly no cost to Amazon. Affiliates used straight text links leading directly to a product page and they also offered a range of dynamic banners that featured different content.

Amazon's Acquisition of Zappos, Quidsi, Living Social, and Lovefilm

On July 22, 2009, Amazon acquired Zappos, the online shoe and clothing retailer, for $1.2 billion. At that time, Zappos was reporting over $1 billion in annual sales without any marketing or advertising. According to founder Tony Hsieh, the secret to Zappos' success was superior customer service, from its 365-day return guarantee to the company tours with which it regaled visitors, picking them up at the airport, then returning them to the airport afterward. Zappos' employees were also very well treated, earning it a place at the top of the list of the "best companies to work for." Tony Hsieh felt that Amazon was the perfect partner to fuel Zappo's sales growth going forward.

On November 8, 2010, Amazon announced the acquisition of Quidsi, the parent company of Diapers.com, an online baby care specialty site, and Soap.com, an online site for everyday essentials. Amazon paid $500 million in cash, and assumed $45 million in debt and other obligations. As Jeff Bezos explained, "This acquisition brings together two companies who are committed to providing great prices and fast delivery to parents, making one of the chores of being a parent a little easier and less expensive."12

On December 2, 2010, Amazon announced that it had invested $175 million in Groupon competitor LivingSocial, a site whose up-to-the-minute research offered users immediate access to the hottest restaurants, shops, activities, and services in a given area, while saving them 50% to 70% through special site deals.

On January 20, 2011, Amazon acquired Lovefilm for 200 million, a 1.6-million-subscriber-strong European Web-based DVD rental service based in London. Lovefilm had followed Netflix's business model, offering unlimited DVD rentals by mail for a monthly subscription fee of 9.99, but planned to challenge Netflix and expand its digital media business by entering the live-streaming subscription business.

Competitors

Competition was fierce for Amazon on all fronts, from catalogue and mail order houses to retail stores from book, music, and video stores to retailers of electronics, home furnishings, auto parts, and sporting goods. Amazon's Kindle contended with Apple's iPad, among many lesser competitors. And Amazon's competitors in the service sector included other e-commerce and Web service providers. The company faced direct competition from companies such as eBay, Apple, Barnes & Noble, Overstock.com, MediaBay, Priceline.com, PCMall.com, and RedEnvelope.com. Amazon had to compete with companies that provided their own products or services, sites that sold or distributed digital content such as iTunes and Netflix, and media companies such as The New York Times. Many of the company's competitors had greater resources (eBay), longer histories (Barnes & Noble), more customers (Apple), or greater brand recognition (iTunes).

The companies offering the most direct threat to Amazon were eBay and Metro AG. Pierre Omidyar founded eBay in 1995, a website that connected individual buyers and sellers, including small businesses to buy and sell virtually anything. In 2010, the total value of goods sold on eBay was $62 billion, making eBay the world's largest online marketplace, serving 39 markets with more than 97 million active users worldwide.10 eBay and Amazon subscribed to similar growth strategies: each acquired a broad spectrum of companies. Over the 15 years from 1995-2010 eBay acquired PayPal, Shopping.com, StubHub, and Bill Me Later, which have brought new e-commerce efficiencies to eBay.

Metro AG, headquartered in Dusseldorf, Germany, one of the world's leading international retail and wholesale companies, was formed through the merger of retail companies Asko Deutsche Kaufhaus AG, Kaufhof Holding AG and Deutsche SB-Kauf AG. In 2010, the total value of goods sold by Metro AG was 67 billion.11 Serving 33 countries, Metro AG offered a comprehensive range of products and services designed to meet the specific shopping needs of private and professional customers. Metro AG, like Amazon, focused on customer orientation, efficiency, sustainability, and innovation.

Amazon had to be vigilant, negotiating more favorable terms from suppliers, adopting more aggressive pricing and devoting more resources to technology, infrastructure, fulfillment, and marketing. To maintain competitiveness, Amazon also strengthened its edge by entering into alliances with other businesses (i.e., Amazon Marketplace). Nevertheless, growing competition from global and domestic players continually threatened to erode Amazon's desired share of the market. Across the industries in which it competed, however, Amazon fought to maintain its edge based on its core principles of "selection, price, availability, convenience, information, discovery, brand recognition, personalized services, accessibility, customer service, reliability, speed of fulfillment, ease of use, and ability to adapt to changing conditions, as well as...customers' overall experience and trust."12

Frustration-Free Packaging

To stay current, Amazon took the initiative to reduce its carbon footprint by implementing a "Frustration Free Packaging" program. Recyclable Frustration Free Packaging came without excess packaging materials such as hard plastic enclosures or wire twists and was designed to be opened by hand without a scissors or a knife. Amazon then went one further and worked with the original manufacturers to package products in Frustration Free Packaging right off the assembly line, further reducing the use of plastic and paper. Units shipped that utilized Frustration Free Packaging has increased very rapidly, from 1.3 million in 2009 to 4.0 million in 201013. Amazon also utilized software to determine the right size box for any product the company shipped, achieving a dramatic reduction in the number of packages shipped in oversized boxes and significantly reducing waste.

Financial Operations

Amazon sales doubled from 2009 to 2011, growing from $24,509 million (2009) to $48,077 million (2011) (see Exhibits 1a and 1b), growth attributable especially to increased sales in electronics and other general merchandise, and the adoption of a new accounting standard update, reduced prices (including free shipping offers), increased in-stock inventory availability, and the impact of the acquisition of Zappos in 2009.

Imcome Statement Exhibits 1a

Amazon.com Inc.	BUS 480
Consolidated Statements of Earnings
($ in millions, except per share amounts)
					Common Size Percentages
Income Statement Currency in (Millions of U.S. Dollars)as of:	December 31, 2008	December 31, 2009	December 31, 2010	December 31, 2011	2008	2009	2010	2011
Revenues	19,166.0	24,509.0	34,204.0	48,077.0
Total Revenues	19,166.0	24,509.0	34,204.0	48,077.0	100.0%	100.0%	100.0%	100.0%
Cost of Goods Sold	14,896.0	18,978.0	26,561.0	37,288.0	77.7%	77.7%	77.7%	77.6%
Gross Profit	4,270.0	5,531.0	7,643.0	10,789.0	22.3%	22.3%	22.3%	22.4%
Selling, General, & Admin
Expenses Total	2,419.0	3,060.0	4,397.0	6,864.0	12.6%	12.6%	12.9%	14.3%
R&D Expenses	1,033.0	1,240.0	1,734.0	2,909.0	5.4%	5.4%	5.1%	6.1%
Other Operating Expenses	29.0	51.0	106.0	154.0	0.2%	0.2%	0.3%	0.3%
Other Operating Expenses, Total	3,481.0	4,351.0	6,237.0	9,927.0	18.2%	18.2%	18.2%	20.6%
Operating Income	789.0	1,180.0	1,406.0	862.0	4.1%	4.1%	4.1%	1.8%
Interest Expenses	-71.0	-34.0	-39.0	-65.0	-0.4%	-0.4%	-0.1%	-0.1%
Interest and Investment Income	83.0	37.0	51.0	61.0	0.4%	0.4%	0.1%	0.1%
Net Interest Expense	12.0	3.0	12.0	-4.0	0.1%	0.1%	0.0%	0.0%
Income (Loss) on Equity Investments	-9.0	-6.0	7.0	-12.0	0.0%	0.0%	0.0%	0.0%
Currency Exchange Gains (Loss)	23.0	26.0	75.0	64.0	0.1%	0.1%	0.2%	0.1%
Other Non- operating Income (Expenses)	22.0	-1.0	3.0	8.0	0.1%	0.1%	0.0%	0.0%
Ebt, Excluding Unusual Items	837.0	1,202.0	1,503.0	918.0	4.4%	4.4%	4.4%	1.9%
Gain (Loss) on Sale of Investments	2.0	4.0	1.0	4.0	0.0%	0.0%	0.0%	0.0%
Gain (Loss) on Sale of Assets	53.0				0.3%	0.3%	0.0%	0.0%
Other Unusal Items, Total		-51.0
Legal Settlements		-51.0
Ebt, Including Unusal Items	892.0	1,155.0	1,504.0	922.0	4.7%	0.0	4.4%	1.9%
Income Tax Expense	247.0	253.0	352.0	291.0	1.3%	0.0129	1.0%	0.6%
Earnings form Continuing Operations	645.0	902.0	1,152.0	631.0	3.4%	0.0337	3.4%	1.3%
Net Income	645.0	902.0	1,152.0	631.0	3.4%	0.0337	3.4%	1.3%
Net Income to Common Including Extra Items	645.0	902.0	1,152.0	631.0	3.4%	0.0337	3.4%	1.3%
Net Income to Common Excluding Extra Items	645.0	902.0	1,152.0	631.0	3.4%	0.0337	3.4%	1.3%
Report Data Issue

Balance Sheet Exhibit B

Balance Sheet Currency in Millions of U.S. Dollars as of:	December 31, 2008	December 31, 2009	December 31, 2010	December 31, 2011
Assets
Cash and Equivalents	2,769.0	3,444.0	3,777.0	5,269.0
Short-term Investments	958.0	2,922.0	4,985.0	4,307.0
Total Cash and Short-Term Investments	3,727.0	6,366.0	8,762.0	9,576.0
Accounts Receivable	827.0	988.0	1,587.0	2,571.0
Total Receivables	827.0	988.0	1,587.0	2,571.0
Inventory	1,399.0	2,171.0	3,202.0	4,992.0
Deferred Tax Assets, Current	204.0	272.0	196.0	351.0
Total Current Assets	6,157.0	9,797.0	13,747.0	17,490.0
Grosss Property Plant and Equipment	1,078.0	1,517.0	2,769.0	5,143.0
Accumulated Depreciation	-396.0	-418.0	-587.0	-1075.0
Net Property Plant And Equipment	682.0	1,099.0	2,182.0	4,068.0
Goodwill	438.0	1,234.0	1,349.0	1,955.0
Deferred Tax Assets, Long Term	145.0	18.0	22.0	28.0
Other Intangibles	332.0	758.0	795.0	996.0
Other Long Term Assets	560.0	907.0	702.0	741.0
Total Assets	8,314.0	13,813.0	18,797.0	25,278.0
Liabilities and Equity
Accounts Payable	3,594.0	5,605.0	8,051.0	11,145.0
Accrued Expenses	632.0	901.0	1,357.0	2,106.0
Current Portion of Long- Term
Debt/Capital Lease	59.0			395.0
Current Portion of Capital
Lease Obligations				395.0
Unearned Revenue, Current	461.0	858.0	964.0	1,250.0
Total Current Liabilities	4,746.0	7,364.0	10,372.0	14,896.0
Long- Term Debt	409.0	109.0	184.0	255.0
Capital Leases	124.0	143.0	457.0	1,160.0
Other Non- Current Liabilities	363.0	940.0	920.0	1,210.0
Total Liabilities	5,642.0	8,556.0	11,933.0	17,521.0
Common Stock	4.0	5.0	5.0	5.0
Additional Paid in Capital	4,121.0	5,736.0	6,325.0	6,990.0
Retained Earings	-730.0	172.0	1,324.0	1,955.0
Treasuy Stock	-600.0	-600.0	-600.0	-877.0
Comprehensive Income and Other	-123.0	-56.0	-190.0	-316.0
Total Common Equity	2,672.0	5,257.0	6,864.0	7,757.0
Total Equity	2,672.0	5,257.0	6,864.0	7,757.0
Total Liabilites and Equity	8,314.0	13,813.0	18,797.0	25,278.0
Report Data Issue

Amazon's annual net income for 2009, 2010, and 2011 were $902 million, $1,152 million, and $645 million, respectively. The significant increase from 2009 to 2010 was due in large part to aggressive net sales growth and a large portion of its expenses and investments being fixed. Management explained that net income decreased from 2010 to 2011 as a result of: (1) selling Kindle hardware at a market price slightly below the cost of manufacture; (2) increased spending on technology infrastructure; and (3) increases in payroll expenses.

Challenges for Amazon

1. Amazon developed very quickly into a major player in the online retail market, yet challenges remained:

From its inception, Amazon was not required to collect state or local sales or use taxes, an exemption upheld by the U.S. Supreme Court. However, in 2012, states began to consider superseding the Supreme Court decision.15 "If the states were to prevail, Amazon would be forced to collect sales and use tax, creating administrative burdens for it, and putting it at a competitive disadvantage if similar obligations are not imposed on all of its online competitors, potentially decreasing its future sales."16 Massachusetts and other states were motivated both by the desire (to tap into new sources of revenues for their state budgets and to protect local retailers.

In 2012, reports had it that Amazon was making deals to collect sales tax in all 50 states, so that they could open warehouses near population centers and provide same-day delivery, a major shift in its business model that would ratchet up competition with big box stores like Best Buy and Target as well as local retailers. However, there were no guarantees of the profitability of same-day delivery, given the added warehouse and delivery costs.

2. With the new social trend of "buying local," Amazon faced the threat of some regular consumers preferring to buy from their local stores rather than from an online retailer.17

3. Amazon always had to grapple with the threat of customer preference for instant gratification, the customer's desire to get a product immediately in the store, rather than waiting several days for the product to be shipped to them.

4. Breaches of security from outside parties trying to gain access to its information or data were a continual threat for Amazon.18 As of 2012, Amazon had systems and processes in place that were designed to counter such attempts; however, failure to maintain these systems or processes could be detrimental to the operations of the company.

5. As more media products were sold in digital formats, Amazon's relatively low-cost physical warehouses and distribution capabilities no longer provided the same competitive advantages. In addition, Amazon had felt that its worldwide free shipping offers and Amazon Prime were effective worldwide marketing tools, and intended to offer them indefinitely, yet it began to suffer from soaring shipping expenses cutting into profits. In quarter three of 2011, Amazon's shipping fees generated $360 million in revenue, which was dwarfed by $918 million in shipping expenses.

6. Amazon had to contend with absorbing losses from its unsuccessful ventures such as its A9 search engine, Amazon Auctions, and Unbox, Amazon's original video-on-demand service.

7. Recent hires from Microsoft, Robert Williams, former senior program manager, and Brandon Watson, head of Windows Phone development prompted speculation that Amazon was developing a smartphone, possibly a Kindle-branded device. Bloomberg reported that Amazon had gone so far as to strike a manufacturing deal with Foxconn, the controversial Taiwanese company responsible for assembling Apple's iPhone and Google Android devices. Amazon has not commented on the reports. A smartphone would have given Amazon another mobile device to sell, but some analysts felt it wouldn't have made sense for Amazon to enter into the already crowded smartphone arena. "Since tablets skew more heavily toward media consumption than smartphones, they are a natural fit for Amazon's commerce and media platform," said Baird & Co. analyst Colin Sebastian, in a research note. "In contrast, smartphones require specialized native apps (e.g., maps, voice, search, e-mail) that would be costly for Amazon to replicate." Sebastian also noted that hardware is a low-margin business. Amazon's Kindle Fire sold for $199, a price that some analysts believed was below cost, suggesting Amazon hoped the Kindle Fire would more than pay for itself by boosting sales of e-books and other digital content. Thus, by 2012 Amazon had proved itself as a retail giant, yet as with any vibrant company, faced continual challenges, particularly regarding the overarching questions of whether to spend its money developing media products such as the Kindle Smartphone, or to stick with its strengths as an online retailer, perhaps acquiring more holdings such as Zappos, and pushing for same-day delivery despite the added cost to compete with other online retailers, and with the big box stores as well.

In 2012, Amazon was at a crossroads. It needed to decide if it should invest in the infrastructure for same-day delivery, and take on local retailers, or invest in high-technology and compete at a deeper level with Sony, Apple, and Samsung.

Question

What do you have to do?

Fill in the table in TemplateSA-EXH 1-EFAS.docx available in this location and Course Resources. The table has five columns: External Factors, Weight, Rating, Weighted Score, and Comments.

Use short names for the factors, but flesh them out in the comments so they make sense when you approach them later on.

The textbook is clear enough to work on all columns but the Comments. Your comments make all the difference in the quality of the EFAS.

Use the template for Exhibit 1 - EFAS

Use the Template EFAS as the template for your work. Ensure that your format displays correctly and is readable. Do NOT copy from the text or from the Template EFAS text! Use your own critical analysis and critical thinking. The template is provided to assist you with the layout--i.e., make it easy for you to construct the chart. The template also gives you a good idea of the appropriate explanations required in the Comments blocks about the why an SF, potential quantified impact, how weighted, and how rated.

Comments Column

Comments are expected to be four to five sentances in length and depth and offer a clear explanation of the strategic factor (SF) in four aspects:

• Why it is a strategic factor (SF); (onetotwo sentances
• A quantified estimate of the potential impact (QPI) of the SF; (1one sentances
• How you assign the weight; (1one sentances
• How you assign the rating. (1one sentance

Keep the fourtofive sentances of your Comments in order for clarity and ease of understanding. The recommended order is: Why SF comments; QPI comments; Weight comments; and finally Rating comments.

Example

How to write the Why SF and QPI comments: For the Why SF, explain WHY you selected this SF, WHY it is important to your firm, and WHAT is the potential impact on the firm in the future.

For the QPI comments, estimate the potential impact on the firm in the future in a quantitative manner using some metric: sales, revenues, costs, market share, profits, logistics pipeline, CSI, etc. Express the quantitative potential impact (QPI) in Dollars $$. If you express the potential impact in $$, that makes each strategic factor comparable against the other strategic factors. And expressing the impact in sales makes them even more easily comparable. Make sure you are making significant estimates based on the size of your company based on annual revenue values in your 5-Y financials. You develop this estimate.

The monetary value of the QPI is useful to compare the strategic factors and rank them in relevance. Ranking them will help you to assign the Weights (2^nd column in the table) to each strategic factor. Use a positive analysis (quantitative) rather than a normative analysis (feelings, desires). Focus on what is the potential gain for your SF opportunities or the potential loss from an SF threat in the future. History lessons are not needed nor applicable. You should estimate and predict the impact in the future. Be creative.

Don't develop future actions or alternatives here in the EFAS about how a firm may, or should take action on a particular SF. The brainstorming development of those alternative actions comes with the TOWS Analysis that we will start presenting in Module 4.

HINT: To focus your thinking on addressing "why" you selected each SF and "why it is important," start your "why select/important" sentence with words like this: "I selected this SF because....." or "This SF is important because..." By using this lead-in phrase you should be able to concisely state why that particular SF is important.

HINT: To focus your thinking on addressing the quantitative potential impact (QPI) in the future of each SF, be sure your QPI sentence contains words like this: "potential impact of $____" or "potential increases to ____ are $____ per year" or "reduction in sales by $____ per year." Be sure to state the potential impact in dollars so you can compare the potential impacts of your various SF.

How to write the Weight and Rank comments: To assign weights, explain the importance of the SF to the firm's future survival. Is the SF of vital importance or low importance on a scale of 1 to 0? What is the impact of the SF on the future survival of the firm? What SF has the biggest impact? Which one(s) are the Big Dogs? Make a logical explanation of why the weight you have assigned is what it is. Comparison and ranking between SF is a useful technique to assign the weight. See your potential $$$ impacts from your "Why" analysis above. The bigger the $$$ impact is, the bigger the weight should be. Remember the weight column adds to 1.0.

HINT: To focus your thinking on addressing the importance of the SF to the firm's future survival, be sure to include the keyword "survival" in your weight sentence.

To assign ratings, provide an explanation of how well, or how badly, the firm is handling each specific external SF RIGHT NOW - not in the future or not in the distant past - but right now. Use the scale of 1 - 5, poor to outstanding; comparing the firm's performance against the industry standard rating of 3. Give a logical explanation of why the rating you have assigned is what it is. Do they handle it well or are they lost? Are they performing in average way as other competitors are? Remember the industry average performance is rated at 3.

HINT: To focus your thinking on addressing how well your firm is handling each SF, understand what the 1-5 scale means and then use your rating number from the rating column with matching words (low, average, above average, high, etc) in your rating sentence.

Example of a good comments block:

SF - International Growth Opportunities in SE Asia, Japan, and Korea

This SF was selected because of its very significant potential impact on profit growth. Successful expansion into overseas markets could potentially result in doubling the size of OPC to a firm with $800M in sales per year and an increase in profits from $50M to $100M per year. This SF is weighted highest at .25 since expanding internationally is vital to the future survival of OPC in light of worldwide competitors and markets. I rated this low at 2.5 since OPC does not have any international experience or markets at this time.

Point of View

Remember to keep your decision-making at the strategic level --the Big Picture level. You are acting at the CEO/SVP level. But you are also acting at the lower levels to brainstorm, generate alternatives, perform critical analysis, and make recommendations to the CEO/SVP levels. The decision-maker CEO/SVP decides on the most important strategic factors.

Example template

EXHIBIT 1

EXTERNAL FACTOR ANALYSIS SUMMARY (EFAS) on OLALLIEBERRY PIE COMPANY (OPC)

External Factors	Weight:	Rating:	Weighted Score	Comments
Opportunities:
O1: Growing Market in Western States	.05	3.5	.175	This SF was chosen because of its significant potential impact on sales growth. Population increases of 1-3% per year in the primary market area should lead directly to sales growth of at least 2-3% per year and add between $8M -$12M to top line sales revenues per year. Capturing those additional revenues from the population growth are not very important to the OPC survival so the weight has a relatively low score of .05. I rated this a 3.5 since OPC does an above average job of marketing to new customers.
O2: International Growth Opportunities in SE Asia, Japan, and Korea	.25	2.5	.625	This SF was selected because of its very significant potential impact on profit growth. Successful expansion into overseas markets could potentially result in doubling the size of OPC to a firm with $800M in sales per year and increase profits from $50M to $100M per year. This SF is weighted highest at .25 since expanding internationally is vital to the survival of OPC in light of worldwide competitors and markets. I rated this low at 2.5 since OPC does not have any international experience or markets at this time.
O3: Aging U.S. Population and Demographics	.05	4.0	.20	This SF was added because of the potential for increasing sales to the older population groups as the U.S. population ages. Potential increases to sales are between $15-$20M per year due to the exceptional word-of-mouth promotion network among customers. This SF is weighted relatively low since increasing sales is important to the firm's survival but not as important as other SF. This SF is rated high at 4.0 since OPC has a very good word-of-mouth marketing program for seniors already in operation.
O4: Internet Availability	.15	2.0	.30	I selected this SF because the expansion of Internet availability to more and more U.S. families is an important SF for all food companies to take advantage of. With consumers' online orders expected to increase at a yearly rate of 20% across all consumer goods, OPC has an outstanding opportunity to take advantage of this trend. We can expect internet sales to become 25% of our sales revenues or about $100M per year in the next 5 years. Internet sales also could boost our market share from 50% to 70% in the western states. This SF could have a very significant impact on sales and on survival so the weight is high at .15. OPC scores well below industry standard here at 2.0 because their Internet marketing/sales process is not well developed.
O5:Trend to Healthy Lifestyles	.025	3.5	.0875	I added this SF because the trend is encompassing more and more of the U.S. and world population with important potential impact on the sales and market share of OPC. Potential positive impact of 1% (+$4M/YR) to top line sales is expected. I weighed this .025 because compared to other opportunities it is of lesser impact on the survival of OPC. I rated this 3.5 because OPC has consistently exceeded industry standard average performance in providing a healthy product to consumers.
Threats:
T1: U.S. Competition from Raspberry Pie Company (RPC) and Others	.20	4.0	.80	This SF is important because strong competition from the RPC and others threaten OPC's market share and sales. RPC has increased its marketing efforts in the western states. Potential loss of market share from 50% to 40% or lower would directly result in sales revenues being reduced by $160M-$200M per year. This is weighted high at .20 as OPC survival depends on maintaining its market share against competition. Rated high at 4.0 as OPC market share has been maintained with an aggressive marketing program in the western states .
T2: Imports from China	.10	2.5	.25	I selected this SF because strong worldwide competition is starting to come from Chinese imports to the west coast. These low-cost, high- quality products threaten to take away 10-20% of OPC's west coast market share and reduce sales by $40-80M per year. This is weighted relatively high at .10 since losing that amount of sales revenues would threaten the survival of the firm. This SF is rated low at 2.5 because OPC has not countered the emergence of Chinese competition with a new marketing effort.
T3: Increasing Government Regulations	.10	4.0	.40	This SF is important because government regulations on labor use, raw material quality, environment protection and financial reform are placing an increasing additional future cost burden on OPC of about 18% ($72M/YR) of sales. Compliance costs are hurting the bottom line significantly. These costs are potentially fatal for the survival of OPC unless relief is obtained so the .10 weight is high. This SF rating is high at 4.0 because OPC is an industry leader in lobbying operations to reduce government regulation.
T4: Unionization Pressures	.05	4.0	.20	I chose this SF because potential unionization of OPC's workforce could add 10-15% ($24M - $36M/YR) to direct labor costs and reduce the workforce's efficiency by 10%. These adverse effects will directly increase costs and drive our prices higher which may result in lost sales and market share. Unionization is a small threat to the survival and expansion of the firm so it is weighted as .05. OPC has a very proactive employee relations program and an exceptional corporate culture that obviates unionization attempts. Rated much higher than industry standard at 4.0.
T5: New Product Competition	.025	3.0	.075	This SF is important because new products from the frozen pie sector are coming on the market to compete with OPC's fresh pie product. This trend will continue as the population demographics supports easy-to-prepare food products. This trend could have a negative impact on future sales at a 2-3% ($8M-$12M/YR) level of impact. This is not weighted high on survival impact to OPC as frozen pies will potentially not capture a significant market share. Rating is industry average at 3.0 as OPC effectively markets the freshness and healthiness of its Olallieberry pies.
Total Scores:	1.00		3.1125