Ch3 - Evaluating External Environment Flashcards
Learning Objectives
- What is the macro environment and why is it important to organizations?
- How is the PESTEL framework used to evaluate the external environment?
- How is the Porter’s Five Forces tool used to perform a competitive analysis of an industry?
- What are strategic groups and how are they useful to evaluating the competitive environment?
PESTEL Model for understanding the external environment
- P -political
- E-economic
- S-socio-cultural
- T-Technological
- E-Environmental/Ecological
- L- Legal
Porter’s 5 Forces Industry Analysis Tool
- for evaluating the external environment
- Competitive rivalry
- Supplier power
- Buyer power
- Threat of substitution
- Threat of new entry
3 reasons that the environment matters
- Source of resources needed
- Source of opportunities
- Source of threats
Influences the strategic decisions that executives must make
PESTEL in depth
Political (~4 aspects)
- Tax policies
- Trade restrictions
- Tariffs
- Stability of governments
Others: immigration, “clean” energy subsidizing, child labor overseas/national
PESTEL in depth
Economic (6)
- Interest rates
- inflation rates
- GDP
- Unemployment rate
- Level of disposable income
- Growth/Decline of the economy
Others: housing stats (construction signals) important for many industries, discretionary income (for non-essentials).
PESTEL
Socio-cultural
- Population size
- Age
- Ethnic mix
- Cultural trends (obesity, activism, etc.)
PESTEL in-depth
Technological
- rate of new product development
- increases in automation
- advancements in service industry delivery
Others: online shopping, smartphones, social media, etc.
PESTEL in-depth
Legal (4)
Laws about
- Employment (min. wage)
- Health & safety (safety conditions, OSHA)
- Discrimination (race, religion, gender, age, etc)
- Antitrust
intellectual property laws
unemployment rate
% of the labor force actively looking for employment within the last 4 weeks
Barriers to entry for new competitors
- Economies of scale
- Capital requirements
- Access to distribution channels
- Government policy
- Differentiation
- Switching costs
- Expected retaliation
- Cost advantages independent of size
Power of Suppliers
Factors that give suppliers more power
- Few companies dominate the industry
- No substitutes
- If the product makers rely heavily on them to be profitable
- High costs of switching to the competition
- Differentiated products
- Ability to credibly threaten to compete in the industry
Factors that increase the power of buyers
- Few buyers
- Standardized goods and services
- Little to no switching costs in changing vendors
- Ability to threaten to compete (credibly)
- When the good or service is of limited importance to the quality or price of the buyer’s offering
Interpreting the Forces
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.
Limitations of Porter 5 Forces Tool
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.
Strategic Groups
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)
3 Important Reasons why you should understand and keep track of your
Strategic Groups
- Best way you have of benchmarking your performance
- Highlight alternative paths to success
- Highlight opportunities/threats for your firm.
Strategic Group Map
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.
Factors that drive rivalry between competitors to higher levels
- Numerous competitors, and roughly equal in size/power
- Growth rate of the industry is low - leads to fighting over existing customers
- Competitors are not differentiated from each other. Leads to competition based on price instead of uniqueness.
- High fixed costs in the industry - these costs must always be covered even if you have to slash prices to do so
- High barriers to exit
- Excess capacity/production exists in the industry
- The product is perishable - must be sold before it spoils
