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Business Management > Block 2: Evaluating a Company's External Environment > Flashcards

Block 2: Evaluating a Company's External Environment Flashcards

1
Q

Complete the sentence

The macro-environment encompasses…

A

The macro-environment encompasses the broad environmental context in which a company’s industry is situated that includes strategically relevant components over which the firm has no direct control.

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2
Q

What does PESTEL analysis?

A

PESTEL analysis focuses on the six principal components of strategic significance in the macro-environment

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3
Q

State the six principles of PESTEL

A
  • Political factors
  • Economic conditions (local to world-wide)
  • Sociocultural forces
  • Technological factors
  • Environmental factors (the natural environment)
  • Legal and regulatory conditions
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4
Q

State Porter’s Five Forces

A

-Competition from rival sellers
- Competition from potential new entrants
- Competition from producers of substitute products
- Supplier bargaining power
- Customer bargaining power

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5
Q

State the three steps of using the five forces model of competition

A
  • Step 1: For each of the five forces, identify the different parties involved, along with the specific factors that bring about competitive pressures
  • Step 2: Evaluate how strong the pressures stemming from each of the five forces are (strong, moderate, or weak)
  • Step 3: Determine whether the five forces, overall, are supportive of high industry profitability.
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6
Q

What does the strongest of five forces determine?

A

The strongest of the five forces determines the extent of the downward pressure on an industry’s profitability. Having more than one strong force means that an industry has multiple competitive challenges with which to cope.

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7
Q

What are the two aspects of effectively matching a firm’s business strategy to prevailing competitive conditions?

A

● Pursuing avenues that shield the firm from as many competitive pressures as possible
● Initiating actions calculated to shift competitive forces in the firm’s favor by altering underlying factors driving the five forces

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8
Q

When is the company’s strategy increasingly effective?

A

A company’s strategy is increasingly effective the more it provides some insulation from competitive pressures, shifts the competitive battle in the company’s favor, and positions firms to take advantage of attractive growth opportunities.

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9
Q

Who are the complementors?

A

Complementors are the producers of complementary products, which are products that enhance the value of the focal firm’s products when they are used together

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10
Q

State the three steps of driving forces analysis has

A
  1. Identifying what the driving forces are
  2. Assessing whether the drivers of change are, on the whole, acting to make the industry more or less attractive
  3. Determining what strategy changes are needed to prepare for the impact of the driving forces
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11
Q

What are driving forces?

A

Driving forces are the major underlying causes of change in industry and competitive conditions.

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12
Q

State the most common value drivers of industry change

A
  • Changes in the long-term industry growth rate
  • Increasing globalization
  • Emerging new Internet capabilities and applications
  • Shifts in buyer demographics
  • Technological change and manufacturing process innovation
  • Product and marketing innovation
  • Entry or exit of major firms
  • Diffusion of technical know-how across companies and countries
  • Changes in cost and efficiency
  • Reductions in uncertainty and business risk
  • Regulatory influences and government policy changes
  • Changing societal concerns, attitudes, and lifestyles
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13
Q

What is the most important part of driving forces analysis?

A

The most important part of driving forces analysis is to determine whether the collective impact of the driving forces will increase or decrease market demand, make competition more or less intense, and lead to higher or lower industry profitability

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14
Q

What is the real payoff of driving forces analysis?

A

The real payoff of driving-forces analysis is to help managers understand what strategy changes are needed to prepare for the impacts of the driving forces

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15
Q

Explain strategic group

A

Consists of those industry members with similar competitive approaches and positions in the market

  • Having comparable product-line breadth
  • Emphasizing the same distribution channels
  • Depending on identical technological approaches
  • Offering the same product attributes to buyers
  • Offering similar services and technical assistance
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16
Q

Define strategic group

A

A strategic group is a cluster of industry rivals that have similar competitive approaches and market positions.

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17
Q

Define strategic group mapping

A

Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms occupy in the industry.

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18
Q

True or false

Strategic group maps reveal which firms are close competitors and which are distant competitors

A

True

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19
Q

True or false

Some strategic groups are more unfavorably positioned than others because they confront weaker competitive forces or because they are more unfavorably impacted by industry driving forces.

A

False

Some strategic groups are more favorably positioned than others because they confront weaker competitive forces or because they are more favorably impacted by industry driving forces.

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20
Q

Disclose signals of the likelihood of strategic moves

A

● Rivals under pressure to improve financial performance
● Rivals seeking to increase market standing
● Public statements of rivals’ intentions
● Profiles developed by competitive intelligence units

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21
Q

True or False

Studying competitors’ past behavior and preferences provides a valuable assist in anticipating what moves rivals are likely to make next and outmaneuvering them in the marketplace.

A

False

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22
Q

Disclose the indicators of a rival firm’s likely strategic moves and countermoves

A

● The rival firm’s current strategy
● The rival firm’s objectives
● The rival firm’s capabilities
● The rival firm’s assumptions about itself and its industry

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23
Q

Discuss creating a strategic profile of a rival competitor firm

A

-Resources and capabilities
- Assumptionns

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24
Q

Discuss the industry outlook for profitibility

A
  • An industry environment is fundamentally attractive if it presents a company with good opportunity for above-average profitability.
  • An industry environment is fundamentally unattractive if a firm’s profit prospects in the industry are unappealingly low.
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25
Q

True or False

The degree to which an industry is attractive or unattractive is the same for all industry participants and all potential entrants.

A

False

The degree to which an industry is attractive or unattractive is not the same for all industry participants and all potential entrants.

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26
Q

Discuss industry attractiveness is not the same for all participants

A
  • Industry outsiders may conclude that they have the resources to easily hurdle the barriers to entering an attractive industry while other outsiders may find the same industry unattractive because they do not want to challenge market leaders and have better opportunities elsewhere.
  • A particular industry’s attractiveness depends in large part on whether a company has the resources and capabilities to be competitively successful and profitable in that environment.
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27
Q

Why is crafting and executing strategy is an important tasks?

A
  1. A clear strategy is vital for doing business, it is a map to competitive advantage and will help to please customers it also provides a manner to increase performance which create a long-term standout.
  2. Strategies must be competently executed. If a company wants to be successful, crafting and executing strategies must happen interchangeably.
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28
Q

True or false
Crafting is core management tasks.

A

False

Crafting and executing strategy is core management tasks.

29
Q

True or false

A company will stand out more, if it has a good strategy and can execute it in a good manner.

A

True

30
Q

What is crafting a strategy

A
  • Addresses a series of strategic how’s.
  • Requires choosing among strategic alternatives.
  • Promotes actions to do things differently from competitors rather than running with the herd.
  • Is a collaborative team effort that involves managers in various positions at all organizational levels.
31
Q

What is PESTAL analysis?

A

Is a method that focuses on analyzing and monitoring the six principal components of strategic significance in the macro-environment: political, economic, social, technological, environmental, and legal/ regulatory forces.

32
Q

Discuss political factors

A

Includes: tax policy, fiscal policy, tariffs, political climate, the strength of institutions, (e.g., Federal banking system), political stability, political stability, policies, etc.

33
Q

Explain economic factors/conditions

A

Includes: General economic climate, interest rates, exchange rates, inflation rate, unemployment rates, rates of economic growth, trade surplus/deficits, savings rates, per-capita domestic product, etc.
- Some industries are positively affected by factors such as low-interest rates

34
Q

Discuss socio-cultural factors

A

Includes: societal values, attitudes, cultural influences, lifestyles, demographic factors (population size, growth rate, and age distribution), etc.

35
Q

Discuss technological factors

A

Includes: the pace of technological change and development

36
Q

Discuss environmental factors

A

Weather, climate, climate change, and similar such as water shortages

37
Q

Discuss legal and regulatory factors

A

Includes: regulations and laws with which companies must comply with consumer laws, labour laws, health and safety regulations, antitrust laws
- Some are industry specific

38
Q

Discuss competition from rival sellers

A
  • The factors determine whether rivalry in an industry is strong, weak, or moderate.
  • When rivalry is strong = the battle for market share is so vigorous that the profit margins of industry members are.
  • When rivalry is moderate = industry members are still allowed to earn acceptable profits.
  • When rivalry is weak = most companies in the industry are relatively well satisfied with sales growth and market shares and rarely take action to steal customers.
  • Rivalry among industry members will be high when there is excess supply in the market.
39
Q

What are the factors that increase rivalry and strength of rivalry?

A
  • Buyer demand is growing slowly or declining (industry members must fight for customers)
  • Buyer costs (monetary costs, time, inconvenience, psychological costs) to switch brands are low.
  • The products of industry members are identical or weakly differentiated (buyers have less reason to be brand loyal)
  • The firms in the industry have too much production capacity and/or inventory (sellers cut prices in a desperate effort to get rid of unsold inventory)
  • The firms in the industry have high fixed costs or high storage costs.
  • The number of competitors increases, and they become more equal in size and capability.
  • Rivals have diverse objectives, strategies, and/or countries of origin.
  • Rivals have emotional stakes in the business or face high exit barriers (deep price discounting can destabilize the industry)
40
Q

State the different types of competitive weapons of rivalry

A
  • Discounting prices, holding clearance sales
  • Offering coupons, advertising on sale items
  • Advertising product/services characteristics using ads to enhance a company’s image
  • Introducing new/improved features and increasing the number of styles to provide greater product selection
  • Increasing customization of products or services.
  • Building a bigger, better dealer network.
  • Improving warranties, offering low-interest financing.
41
Q

What are the effects of discounting prices and holding clearance sales?

A
  • Lowers price (P)clearance sales.
  • Increase total sales volume, market share.
  • Lower profits if price cuts are not offset by large increases. in sales volume
42
Q

What are the effects of offering coupons and advertising on sale items?

A

▪ Increases sales volumes, total revenues.
▪ Lowers price (P).
▪ Increases units’ costs (c).
▪ Lower profit margins, per unit sold (P-C)

43
Q

Discuss the threat of new entry

A
  • New entrants into an industry threaten the position of rival firms since they will compete fiercely for market share, add to the number of industry rivals, and add to the industry’s production capacity.
  • This puts more pressure on present industry members and therefore new entrants are an NB competitive force.
  • The credible threat of entry often prompts industry members to lower prices and initiate defensive actions to prevent new entrants.
44
Q

What are the dependents that determine the seriousness of the threat of new entry?

A
  • Expected Reaction of incumbent firms to new entry: if current/ established industry members retaliate against new entrants with sharp price discounting and other moves to make entry unprofitable, the threat of entry is low.
  • Barriers to entry: – if barriers are high, the threat of entry is low.
45
Q

What industry entry barriers should be considered?

A

Whether an industry’s entry barriers ought to be considered high or low depends on the resources and capabilities possessed by the pool of potential entrants. High entry barriers and weak entry threats today do not always translate into high entry barriers and weak entry threats tomorrow.

46
Q

When is the entry barrier high and the threat low?

A
  • There are sizable economies of scale in production, distribution, advertising, or other activities.
  • Current/ established firms have other hard-to-replicate cost advantages over new entrants.
  • Customers have strong brand preferences and high degrees of loyalty to current/ established firms in the industry.
  • Patents and other forms of intellectual property protection are in place.
  • There are strong network effects (when buyers are more attracted to a product when there are many other users of the product) in customer demand.
  • Capital requirements are high.
  • There are difficulties in building a network of distribution/dealers or in securing adequate space on retailers’ shelves.
  • There are restrictive regulatory policies.
  • there are restrictive trade policies (tariffs and trade restrictions)
47
Q

Discuss the competitive pressures from sellers of substitute products

A

Companies in one industry are vulnerable to competitive pressure from actions of companies in a closely adjoining industry whenever buyers view products of 2 industries as good substitutes.

48
Q

State the factors that determine whether the competitive pressures from substitute products are weak/strong

A
  1. Competitive pressure is stronger good substitutes are readily available and attractively priced
  2. Competitive pressure is stronger when buyers view substitutes as comparable or better in quality, performance and other relevant attributes
  3. Competitive pressures is stronger when the cost that buyers incur in switching to substitutes are low
49
Q

Explain competitive pressure is stronger good substitutes are readily available and attractively priced

A

The presence of readily available and well-priced substitutes creates competitive pressure by placing a ceiling on prices industry members can charge without risking sales erosion. The price ceiling puts a lid on the profits that industry members can earn unless they find ways to cut costs.

50
Q

Explain competitive pressure is stronger when buyers view, substitutes as comparable or better in quality, performance, and other relevant attributes

A

Availability of substitutes invites customers to compare performance ease of use, and Other Attributes

51
Q

Explain competitive pressure is stronger when the cost that buyers incur in switching to substitutes are low

A

Low switching costs make it easier for sellers of attractive substitutes to lure buyers to their offerings, and high switching costs prevent customers from buying substitute products.

52
Q

State the signs that competition from substitutes is strong

A
  • Sales of substitutes are growing faster than sales of the industry being analyzed.
  • Producers of substitutes are moving to add new capacity.
  • Profits of the producers of substitutes are on the rise.
53
Q

When is supplier’s bargaining power stronger?

A
  • Demand for their products is high, and when the products’ supply is short.
  • When suppliers offer differentiated input, which leads to the enhancement of the performance of industries’ products.
  • It becomes difficult / expensive for the industry members to switch purchases from I supplier to the other.
  • When supplier industry only are a few large companies, and it is more concentrated than industry it sells to.
  • Industry members are not capable of implementing backward / self-manufacture items which they get from suppliers.
  • When suppliers offer an item that accounts for no more than small fraction of costs of industry’s products.
  • When there are no good substitutes for the suppliers’ products.
  • Industry members are not major customers of suppliers.
54
Q

Why are suppliers with stronger bargaining power are a source of competitive pressure?

A

They can charge industry members higher prices, pass costs on to them and limit opportunities to find better deals

55
Q

What is supplier bargaining power

A
  • Analyses how much power a business’s supplier has and how much control it has over the potential to raise its prices, which, in turn, lowers a business’s profitability.
  • It also assesses the number of suppliers of raw materials and other resources that are available.
56
Q

What is supplier bargaining power

A
  • Analyses how much power a business’s supplier has and how much control it has over the potential to raise its prices, which, in turn, lowers a business’s profitability.
  • It also assesses the number of suppliers of raw materials and other resources that are available.
57
Q

True or false

The greater suppliers there are, the more power they have because businesses are in a better position when there are multiple suppliers.

A

False

The fewer suppliers there are, the more power they have because businesses are in a better position when there are multiple suppliers.

58
Q

State the 2 dependent factors where a buyer can exert strong competitive pressure on industry members

A
  • The degree to which buyers have bargaining power.
  • The extent to which buyers are price sensitive.
59
Q

What are the effects of a buyer having strong bargaining power?

A

They can limit industry profitability by:
- Demanding better price concessions
- Better payment terms
- Or extra features which can increase the industry member’s costs.

60
Q

True or false

Buyer price sensitivity can limit the profit potential of industry members because it restricts the ability of the seller to raise prices without losing sales and thus revenue.

A

True

61
Q

True or false

Individual consumers usually do have a lot of bargaining power when negotiating price concessions / other favourable terms.

A

False

Individual consumers usually do not have that much bargaining power when negotiating price concessions / other favourable terms.

62
Q

True or false

Small businesses usually have weak bargaining power, because of small-size orders and large businesses have considerable bargaining power.

A

True

63
Q

When are buyers bargaining power stronger?

A
  • In cases where the demand of customers is weak to the availability of supply.
  • Where industry goods are standardized or where differentiation is weak.
  • Customer’s costs of switching to competing brands/substitutes are relatively low.
  • Customers are large and few relative to sellers.
  • When customers are a credible threat and can integrate back into the business of sellers.
  • When customers have well informed about the products of the sellers: the features, quality, prices, and buyer reviews.
  • When customers are discrete to delay their purchase or not make a purchase at all.
64
Q

What increases buyer price sensitivity and leads to greater competitive pressures on the industry?

A
  1. When buyers are earning low profits or have low income.
  2. Buyers tend to be more price sensitive when the product takes a big fraction of their total purchases.
65
Q

What increases buyer price sensitivity and leads to greater competitive pressures on the industry?

A
  1. When buyers are earning low profits or have low income.
  2. Buyers tend to be more price sensitive when the product takes a big fraction of their total purchases.
66
Q

Is the collective strength of the 5 competitive forces conducive to good profitability?

A
  • Intense competitive pressures from one of the forces can destroy the conditions for good profitability and can encourage businesses to exit the business.
  • The strongest competitive forces determine the extent of competitive pressure on industry profitability.
  • When evaluating the strength of the five forces, managers should look to the strongest forces.
  • When there is more than 1 strong force, may not decrease industry profitability, BUT it is an indication that industries will have numerous challenges.
  • An industry with more than 3 strong forces can be seen as an unattractive place to compete in.
  • An industry is attractive when the five competitive forces are moderate to weak!
67
Q

Which ideal competitive environment leads to great profits?

A
  • Where suppliers and buyers have weak bargaining power.
  • There are no good substitutes.
  • High barriers to entry
  • Rivalry amongst sellers is muted.
68
Q

Which ideal competitive environment leads to great profits?

A
  • Where suppliers and buyers have weak bargaining power.
  • There are no good substitutes.
  • High barriers to entry
  • Rivalry amongst sellers is muted.

Business Management (6 decks)

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