Ch3 - Evaluating External Environment

Question 1

Learning Objectives

Answer 1

1. What is the macro environment and why is it important to organizations?
2. How is the PESTEL framework used to evaluate the external environment?
3. How is the Porter’s Five Forces tool used to perform a competitive analysis of an industry?
4. What are strategic groups and how are they useful to evaluating the competitive environment?

Question 2

PESTEL Model for understanding the external environment

Answer 2

1. P -political
2. E-economic
3. S-socio-cultural
4. T-Technological
5. E-Environmental/Ecological
6. L- Legal

Question 3

Porter’s 5 Forces Industry Analysis Tool

• for evaluating the external environment

Answer 3

1. Competitive rivalry
2. Supplier power
3. Buyer power
4. Threat of substitution
5. Threat of new entry

Question 4

3 reasons that the environment matters

Answer 4

1. Source of resources needed
2. Source of opportunities
3. Source of threats

Influences the strategic decisions that executives must make

Question 5

PESTEL in depth

Political (~4 aspects)

Answer 5

1. Tax policies
2. Trade restrictions
3. Tariffs
4. Stability of governments

Others: immigration, “clean” energy subsidizing, child labor overseas/national

Question 6

PESTEL in depth

Economic (6)

Answer 6

1. Interest rates
2. inflation rates
3. GDP
4. Unemployment rate
5. Level of disposable income
6. Growth/Decline of the economy

Others: housing stats (construction signals) important for many industries, discretionary income (for non-essentials).

Question 7

PESTEL

Socio-cultural

Answer 7

1. Population size
2. Age
3. Ethnic mix
4. Cultural trends (obesity, activism, etc.)

Question 8

PESTEL in-depth

Technological

Answer 8

1. rate of new product development
2. increases in automation
3. advancements in service industry delivery

Others: online shopping, smartphones, social media, etc.

Question 9

PESTEL in-depth

Legal (4)

Answer 9

Laws about

1. Employment (min. wage)
2. Health & safety (safety conditions, OSHA)
3. Discrimination (race, religion, gender, age, etc)
4. Antitrust

intellectual property laws

Question 10

unemployment rate

Answer 10

% of the labor force actively looking for employment within the last 4 weeks

Question 11

Barriers to entry for new competitors

Answer 11

1. Economies of scale
2. Capital requirements
3. Access to distribution channels
4. Government policy
5. Differentiation
6. Switching costs
7. Expected retaliation
8. Cost advantages independent of size

Question 12

Power of Suppliers

Factors that give suppliers more power

Answer 12

1. Few companies dominate the industry
2. No substitutes
3. If the product makers rely heavily on them to be profitable
4. High costs of switching to the competition
5. Differentiated products
6. Ability to credibly threaten to compete in the industry

Question 13

Factors that increase the power of buyers

Answer 13

1. Few buyers
2. Standardized goods and services
3. Little to no switching costs in changing vendors
4. Ability to threaten to compete (credibly)
5. When the good or service is of limited importance to the quality or price of the buyer’s offering

Question 14

Interpreting the Forces

Answer 14

Porter’s Five Forces tool for analyzing industry can help you determine if the forces are strong, moderate, or medium. And these are a good indicator of whether it would be a good idea to join said industry.

Question 15

Limitations of Porter 5 Forces Tool

Answer 15

Tends to assume that the market is a zero-sum game. When there are well-documented cases that teamwork makes the dreamwork.

Example: just in time inventories - require a close and collaborative relationship b/w buyers and suppliers.

Question 16

Strategic Groups

Answer 16

Strategic groups are sets of firms that follow similar strategies to one another

More specifically, a strategic group consists of a set of industry competitors that have similar characteristics to one another but differ in important ways from the members of other groups (Table 3.15)

Question 17

3 Important Reasons why you should understand and keep track of your

Strategic Groups

Answer 17

1. Best way you have of benchmarking your performance
2. Highlight alternative paths to success
3. Highlight opportunities/threats for your firm.

Question 18

Strategic Group Map

Answer 18

Two axes for which to choose competitive factors

For example: Airlines: number of routes, auto manufacturers: breadth of models offered, etc.

The most important competitive factors should be chosen and examined first.

Question 19

Factors that drive rivalry between competitors to higher levels

Answer 19

1. Numerous competitors, and roughly equal in size/power
2. Growth rate of the industry is low - leads to fighting over existing customers
3. Competitors are not differentiated from each other. Leads to competition based on price instead of uniqueness.
4. High fixed costs in the industry - these costs must always be covered even if you have to slash prices to do so
5. High barriers to exit
6. Excess capacity/production exists in the industry
7. The product is perishable - must be sold before it spoils