2. The External Environment Flashcards
What is a general environment?
The broader society that influences industries.
What are the seven environmental segments?
1) Demographic
2) Economic
3) Political/legal
4) Sociocultural
5) Technological
6) Global
7) Physical environment
What does a demographic segment entail?
- population size
- age
- geographic distribution
- income distribution
What does an economic segment entail?
- inflation rates
- interest rates
- trade deficits/surplus
- budget deficits/surplus
- gross domestic product
Define gross domestic product.
The total value of goods and services produced by a country in one year.
What does the political/legal segment entail?
How firms and governments influence each other.
- antitrust laws
- taxes
- labor training laws
- policies
What does the sociocultural segment entail?
Society’s attitudes and cultural values (e.g. workforce diversity).
What does the technological segment entail?
Institutions and activities involved in knowledge processes (e.g. innovation, R&D).
What does the global segment entail?
- critical global markets
- newly industrialised countries
- different culture and institutions
How do firms increase internationalisation?
Focusing on global niche market.
What does the physical environment segment entail?
- natural resources
- sustainable technology
- environmental risk management
Define opportunity.
Conditions in the general environment to exploit for competitive advantages.
Define threat.
Conditions in the general environment that hinder firm’s competitive advantages.
What are the four parts of the external environment analysis? Elaborate on each part.
Scanning: studying all environmental segments
Monitoring: observing environmental changes
Forecasting: future projections of what might happen and how fast
Assessing: determining the time and effects of environmental changes and trends
What is an industry?
A group of firms producing products that are close substitutes.
What is an industry environment?
Factors that influence a firm - Porter’s five forces.
What do Porter’s five forces analyse?
Facotrs that influence a firm’s profitability potential.
What are Porter’s five forces?
- competitive rivalry
- bargaining power of buyers
- bargaining power of suppliers
- threat of new entrants
- threat of substitutes
What is the likelihood of new entrants based on? Give two answers.
1) Barriers to entry
2) Retaliation expected
What are the barriers to entry?
- economies of scale
- product differentiation
- capital requirements
- switching costs
- access to distribution channels
- incumbents have more cost advantage
- government policy
Describe expected retaliation.
- vigorous retaliation from firms with high stakes in the industry
- reduced retaliation by locating niche markets without incumbents
Supplier power is strong when:
- more concentrated than industry it sells to
- no substitutes
- firms are not significant customers
- high switching costs for firms to other suppliers
- threat to forward integrate into firm’s industry
Buyer power is strong when:
- purchase large portions of industry output
- product sales are large part of seller’s venue
- face no switching costs
- undifferentiated products
- threat to integrate backwards into supplier industry
What factors affect the intensity of rivalry between competitors? Elaborate on them.
- Numerous or balanced competitors: firms fighting for the same customers
- Slow industry growth: no new customers so attract rival’s customers
- High fixed costs or high storage costs: maximising productivity leads to excess products which firms get rid of through discounts
- Lack of differentiation or low switching costs
- High strategic stakes: sales is vital to a firm
- High exit barriers: firms continue to invest even though profit is below-average
What are exit barriers?
- fixed costs of exit (labor agreements)
- specialised assets (linked to a business or location)
- strategic interrelationships (mutual dependence)
- emotional barriers (loyalty to employees)
- government and social restrictions (government concern for job losses)
Define a strategic group.
A group of firms using similar strategies. (high rivalry)
What is a competitor analysis?
A firm’s interpretation of information on a rival.
What do firms seek to understand about their rivals?
- future objectives
- current strategy
- their assumptions about the industry
- capabilities (as seen from strengths, weaknesses)
Define competitor intelligence.
Data firms gather to understand a rival’s objectives, strategies, assumptions and capabilities.
Define complementors.
Firms that sell complementary products.
