Ch. 2, 3 & 4 Flashcards
Surveillance of a firm’s external environment to predict environmental changes and detect changes already under way.
Is a big picture viewpoint of the industry/competition, looking for key indicators of emerging trends – what catches your eye?
Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them.
Environmental Scanning
A firm’s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities.
Monitor the trends that have the potential to change the competitive landscape – what do you want to track?
Firms need to choose the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process.
Environmental Monitoring
A firm’s activities of collecting and interpreting data on competitors, defining and understanding the industry, and identifying competitors’ strengths and weaknesses.
Be careful - aggressive efforts to gather competitive intelligence may lead to unethical or illegal behaviors.
Competitive Intelligence
Predicts change. The development of plausible projections about the direction, scope, speed, and intensity of environmental change.
Environmental Forecasting
An in-depth approach to environmental forecasting that involves experts’ detailed assessments of societal trends, economics, politics, technology, or other dimensions of the external environment.
Asks what would happen if the environment should change dramatically?
Addresses the need to consider a wider context than the narrow, traditional markets, laying down guidelines for at least 10 years in the future to anticipate rapid change.
Scenario Analysis
A framework for analyzing a company’s internal and external environment and that stands for strengths, weaknesses, opportunities, and threats.
The firm’s strengths come from within, and are where your firm excels; while the weaknesses are where your firm is lacking relative to competitors. The opportunities and threats can come from the general environment and/or from the specific industry’s competitive environment.
What is a SWOT analysis?
Forces managers to consider both internal & external factors simultaneously.
Makes firms act proactively
Raises awareness about role of strategy.
- A firm's strategy must build on its strengths. - Remedy the weaknesses or work around them. - Take advantage of the opportunities presented by the environment. - Protect the firm from the threats.
How is a SWOT analysis useful?
Composed of factors that are both hard to predict and difficult to control that affects a firm’s strategy.
- Demographic
- Socioculture
- Political/Legal
- Technological
- Economic
- Global
General Environment
Easily understandable and quantifiable.
- Aging population
- Rising affluence
- Changes in ethnic composition
- Geographic distribution of population.
- Greater disparities in income levels.
General Environment trend: Demographics
Forces influence the values, beliefs, and lifestyles of a society.
These forces might enhance the sales of products and services in many industries but depress sales in others.
-More women in the workforce.
-Dual-income families
-Increase in temporary workers.
-Greater concern for healthy diets & physical fitness (increasing levels of obesity)
Postponement of marriage & family formation, having children.
General Environment trend: Socioculture
Processes and legislation influence environmental regulations with which industries must comply.
- Tort reform
- Americans with Disabilities Act (ADA)
- Increases in minimum wages.
- Taxation at local, state, federal levels.
- Legislation on corporate governance reforms
- Affordable Health Care Act
General Environment trend: Political/Legal
Developments lead to new products and services; can create new industries and alter existing ones.
Innovation and state of knowledge in industrial arts, engineering, applied sciences, and pure science; and their interaction with society.
- Genetic engineering.
- computer-aided design/computer-aided manufacturing systems (CAD/CAM)
- Research in synthetic and exotic materials
- Pollution/global warming
- Wireless communications
- Nanotechnology
General Environment trend: Technological
Forces affect all industries.
Characteristics of the economy, including national income and monetary conditions.
- Interest rates
- Unemployment
- Consumer Price Index
- Trends in GDP & net disposable income
- Changes in stock market valuations
General Environment trend: Economic
Forces offer both opportunities and risks. Influences from foreign countries, including foreign market opportunities, foreign-based competition, and expanded capital markets.
-Increasing global trade
-Currency exchange rates
-Emergence of the Indian & Chinese economies
-Trade agreements among regional blocs (NAFTA, EU, ASEAN)
-Creation of WTO (leading to decreasing tariffs/free trade in services)
Increased risks associated with terrorism.
General Environment trend: Global
Consists of factors in the task or industry environment that are particularly relevant to a firm’s strategy.
- Competitors (existing or potential) including those considering entry into an entirely new industry.
- Customers (or buyers)
- Suppliers; including those considering forward integration.
Competitive Environment
- Potential Entrants
- Buyers
- Substitutes
- Suppliers
- Potential Entrants
- Industry Competitors
What are the 5 competitive forces in Porter’s model?
Possibility that the profits of established firms in the industry may be eroded by new competitors.
Depends on existing barriers to entry.
- Economies of scale
- Product differentiation
- Capital requirements
- Switching costs
- Access to distribution channels
- Cost disadvantages independent of scale
Threat of New Entrants
Have bargaining power.
Can force down prices, bargain for higher quality or more services, play competitors against each other.
Groups are powerful when:
-Purchasing standard products in large volumes.
-Profits are low & switching costs are few.
-Backward integration is possible.
-Quality is not affected by industry product.
Bargaining Power of Buyers
Can exert barraging power by threatening to raise prices or red the quality of purchased goods and services.
Groups are powerful when:
-Only a few firms dominate the industry.
-No competition from substitute products.
-Suppliers sell to several industries.
-Buyers quality is affected by industry product.
-Products are differentiated and have switching costs.
-Forward integration is possible.
Bargaining Power of Suppliers
Limit the potential returns of an industry by placing a ceiling on the prices that firms can profitably charge.
Come from another industry
Can perform the same function as the industry’s offerings
The more attractive the price/performance ratio, the more the substitute erodes industry profits.
Threat of Substitute Products & Services
Tactics include price competition, advertising battles, new product introductions, increased customer service or warranties.
Interacting factors lead to intense rivalry:
-Numerous or equally balanced competitors.
-Slow industry growth.
-High fixed or shortage costs.
-Lack of differentiation or switching costs.
-Capacity augmented in large increments.
-High exit barriers.
Intensity of Rivalry Among Competitors in an Industry
A form of vertical integration that involves the purchase of suppliers. Companies will pursue this integration when it will result in improved efficiency and cost savings.
Backward Integration
A form of vertical integration whereby a firm expands activities to include control of the direct distribution of its products, e.g. a farmer sells his/her crops at the local market rather than to a distribution center for eventual sale to a supermarket.
Forward Integration
- Economies of scale - decreases in cost per unit as absolute output per period increases. Forces the new entrant to come in at a large scale and risk strong reaction from existing firms, or come in at a small scale and accept a cost disadvantage.
- Product differentiation - the degree that a product has strong brand loyalty or customer loyalty.
- New entrants must spend heavily to overcome existing customer loyalties.
- Switching cost - one-time costs that a buyer/supplier faces when switching from one supplier/buyer to another.
- In some industries, large financial resources or access to distribution channels are required in order to set up operations.
- Other advantages that existing competitors might have include proprietary products; favorable access to raw materials; government subsidies; or favorable government policies.
What are the 6 major sources of entry barriers?
How can each make it difficult for competitors to enter?
- Purchasing standard products in large volumes.
- Profits are low & switching costs are few.
- Backward integration is possible.
- Quality is not affected by industry product.
Buyer groups are powerful under which conditions?
- Only a few firms dominate the industry.
- No competition from substitute products.
- Suppliers sell to several industries.
- Buyer quality is affected by industry product.
- Products are differentiated & have switching costs.
- Forward integration is possible.
Supplier groups are powerful under which conditions?
Occurs when competitors sense the pressure or act on an opportunity to improve their position.
Rivalry is high under which conditions?
Both have fundamentally changed the ways businesses interact with each other and with consumers. These changes have affected industry forces in ways that have created many new strategic challenges.
How is the internet and digital technology affecting each of the five competitive forces?
- Managers must not always avoid low profit industries – these can still yield high returns for players who pursue sound strategies.
- Five forces analysis implicitly assumes a zero -sum game.
– yet mutually beneficial relationships can still be established with buyers & suppliers. - Five forces analysis is essentially a static analysis.
– yet external forces can still change the structure of all industries. See the value net
—Vertical dimension = suppliers & customers.
—Horizontal dimension = substitutes & complements.
What are the 3 major caveats to the 5 forces model?
Products or services that have a potential impact on the value of a firm’s own products or services.
Complements
Clusters of firms that share similar strategies.
- Breadth of product & geographic scope.
- Price/quality
- Degree of vertical integration.
- Type of distribution.
Strategic Group
- Helps identify barriers to mobility that protect a group from attack by other groups.
- Helps identify groups whose competitive position may be marginal or tenuous.
- Helps chart the future direction of firms’ strategies.
- Helps to think through the implications of each industry trend for the strategic group as a whole.
What value is the strategic groups concept as an analytical tool?
- High-end luxury (those with exclusive clientele, and little rivalry from other groups).
- Low-price/quality (those with a narrow market of bargain shoppers who aren’t that concerned with quality).
- High-price/quality (with some product-line breadth).
- Firms with a broad range of products/multiple price points (products that compete at both the lower end and higher end of the market).
What are the four factors that help explain the extent to which employees will be able to obtain a proportionally high level of a firm’s profits?
What are the two approaches to use when evaluating a firm’s performance?
Financial ratio analysis Stakeholder perspective (balanced scorecard)
A technique for measuring the performance of a firm according to its balance sheet, income statement, and market valuation.
What is financial ratio analysis?
When evaluating a firm’s financial performance, it is very useful to compare its financial position over time. This provides a means of evaluating trends.
How can historical comparisons serve as useful reference points?
When evaluating a firm’s financial performance, also compare it with industry norms. A firm’s current ratio or profitability may appear impressive at first glance. Comparing a firm with all other firms in the same industry assesses relative performance.
How can industry norm comparisons serve as useful reference points?
Firms with similar strategies are members of a strategic group in an industry. Competition is more intense among competitors within groups than across groups. You can gain valuable insights into a firm’s financial and competitive position if you make comparisons between a firm and its most direct rivals.
How can competitor comparisons serve as useful reference points?
Liquidity Ratio
Which category of financial ratios is used to measure the ability of a firm to meet its short-term financial obligations?
A method of evaluating a firm’s performance using performance measures from customers’, internal, innovation and learning, and financial perspectives.
Balanced Scorecard
