chapter 2 - analyzing the external environment of the firm

Question 1

perpetual acuity

Answer 1

So how do managers become environmentally aware?4 Ram Charan, an adviser to many Fortune 500 CEOs, provides some useful insights with his concept of perceptual acuity….. v

He defines it as “the ability to sense what is coming before the fog clears.” Charan draws on Ted Turner as an example: Turner saw the potential of 24-hour news before anyone else did. All the ingredients were there, but no others connected them until he created CNN.

Question 2

three examples of high-performing CEOs who constantly meet with people and search out info

Answer 2

1. one geo gets together with critical people for half a day every eight weeks to discuss whats new and whats going on in the world
2. another ceo meets four times a year with about four other ceos of large, but noncompeting, diverse global companies. the ceo then goes back to their own weekly management meeting and throws out a “bunch of hand grenades to shake up people’s thinking”
3. two companies ask outsiders to critique strategy during their board’s strategy sessions, such input typically leads to spirited discussions that provide valued input on hinge assumptions and options that are under consideration.

Question 3

environmental scanning

Answer 3

Environmental Scanning involves surveillance of a firm’s external environment to predict environmental changes and detect changes already underway. This alerts the organization to critical trends and events before changes develop a discernible pattern and before competitors recognize them. Otherwise, the firm may be forced into a reactive mode

Question 4

environmental monitoring

Answer 4

Environmental Monitoring tracks the evolution of environmental trends, sequences of events, or streams of activities. They may be trends that the firm came across by accident or ones that were brought to its attention from outside the organization. Monitoring enables firms to evaluate how dramatically environmental trends are changing the competitive landscape

Question 5

competitive intelligence (CI)

Answer 5

Competitive Intelligence - (CI) helps firms define and understand their industry and identify rivals’ strengths and weaknesses.14 This includes the intelligence gathering associated with collecting data on competitors and interpreting such data. Done properly, competitive intelligence helps a company avoid surprises by anticipating competitors’ moves and decreasing response time

websites:
quora
ispionage
youtube

Question 6

ethical concerns and competitive intelligence questions

Answer 6

1. have i done anything that coerced somebody to share this info?
2. am i in a place where i should not be?
3. is the contemplated technique for gathering information evasive?
4. have i misled somebody ina. way that the person believed sharing information with me was required or would be protected by a confidentiality agreement?
5. have i done something to evade or circumvent a system intended to secure or protect information?

Question 7

environmental forecasting

Answer 7

Environmental scanning, monitoring, and competitive intelligence are important inputs for analyzing the external environment. Environmental forecasting involves the development of plausible projections about the direction, scope, speed, and intensity of environmental change.

Its purpose is to predict change.
It asks: How long will it take a new technology to reach the marketplace? Will the present social concern about an issue result in new legislation? Are current lifestyle trends likely to continue?

Question 8

humans don’t want accuracy…

Answer 8

they want assurance . . . people can’t stand ignoring all predictions; admitting that the future is unknowable is just too frightening

jason zweig ^

Question 9

scenerio analysis

Answer 9

scenario analysis is an in-depth approach to forecasting. It draws on a range of disciplines and interests, among them economics, psychology, sociology, and demographics.

It usually begins with a discussion of participants’ thoughts on ways in which societal trends, economics, politics, and technology may affect an issue.

Scenario analysis involves the projection of future possible events. It does not rely on extrapolation of historical trends. Rather, it seeks to explore possible developments that may only be connected to the past. That is, several scenarios are considered in a scenario analysis in order to envision possible future outcomes

Question 10

swot analysis

Answer 10

One of the most basic techniques for analyzing firm and industry conditions is SWOT analysis.

SWOT stands for strengths, weak environmental conditions external to the firmesses, opportunities, and threats. It provides “raw material”—a basic listing of conditions both inside and surrounding your company.

The Strengths and Weaknesses refer to the internal conditions of the firm—where your firm excels (strengths) and where it may be lacking relative to competitors (weaknesses). Opportunities and Threats are environmental conditions external to the firm.

Question 11

why is the SWOT approach popular?

Answer 11

First, it forces managers to consider both internal and external factors simultaneously.

Second, its emphasis on identifying opportunities and threats makes firms act proactively rather than reactively.

Third, it raises awareness about the role of strategy in creating a match between the environmental conditions and the firm’s internal strengths and weaknesses.

Finally, its conceptual simplicity is achieved without sacrificing analytical rigor

Question 12

general environment and its 6 segment

Answer 12

The general environment is composed of factors that can have dramatic effects on firm strategy.

We divide the general environment into six segments: demographic, sociocultural, political/legal, technological, economic, and global.

DSPTEG

Question 13

general environment - segment 1: demographic

Answer 13

Demographics are the most easily understood and quantifiable elements of the general environment. They are at the root of many changes in society. Demographics include elements such as older adults, rising or declining affluence, changes in ethnic composition, geographic distribution of the population, and disparities in income level

Question 14

general environment - segment 2: sociocultural

Answer 14

“Sociocultural forces influence the values, beliefs, and lifestyles of a society. Examples include a higher percentage of women in the workforce, dual-income families, increases in the number of temporary workers, greater concern for healthy diets and physical fitness, greater interest in the environment, and postponement of having children. Such forces enhance sales of products and services in many industries but depress sales in others”

Question 15

general environment - segment 3: the political/legal segment

Answer 15

Government legislation can also have a significant impact on the governance of corporations. The U.S. Congress passed the Sarbanes-Oxley Act in 2002, which greatly increases the accountability of auditors, executives, and corporate lawyers. This act responded to the widespread perception that existing governance mechanisms failed to protect the interests of shareholders, employees, and creditors.

Legislation can also affect firms in the high-tech sector of the economy by expanding the number of temporary visas available for highly skilled foreign professionals

Question 16

general environment - segment 4: technological

Answer 16

Developments in technology lead to new products and services and improve how they are produced and delivered to the end user. Innovations can create entirely new industries and alter the boundaries of existing industries.

Technological developments and trends include genetic engineering, internet technology, research in synthetic materials, and, on the downside, pollution and global warming

Question 17

general environment - segment 5: economic

Answer 17

The economy affects all industries, from suppliers of raw materials to manufacturers of finished goods and services, as well as all organizations in the service, wholesale, retail, government, and nonprofit sectors.

Key economic indicators include interest rates, unemployment rates, the consumer price index, the gross domestic product, and net disposable income.

Interest rate increases have a negative impact on the residential home construction industry but a negligible (or neutral) effect on industries that produce consumer necessities such as prescription drugs or common grocery items.

Question 18

general environment - segment 6: global segment

Answer 18

More firms are expanding their operations and market reach beyond national borders. Globalization provides both opportunities to access larger potential markets and a broad base of production factors such as raw materials, labor, skilled managers, and technical professionals. However, such endeavors also carry many political, social, and economic risks

Question 19

the digital economy

Answer 19

Digital economy: a fundamental shift in the business environment

The term Digital Economy refers to economic transactions and business operations that are based on digital computing technologies. It reflects the economic activity and means of organizing that results from billions of everyday online connections among people, businesses, devices, and processes.

The rise of the digital economy has disrupted existing industries, altering how firms structure themselves and how they interact with business partners and customers.

Question 20

the effects of the digital economy include the following:

Answer 20

1. globalization of business - connections on a global scale
2. disintermediation of markets - online transactions allow firms to more directly interact with suppliers and customers
3. reducing the asset intensity of business operations - firms can easily ally with outside firms to provide critical business operations
4. increasing collaboration
5. increasing customer expectations
6. infusion of internet technology into products

Question 21

data analytics

Answer 21

this has facilitated the rise of data analytics (or alternatively “Big Data”), the analysis of large data sets to uncover hidden patterns, market trends, and customer preferences.

these efforts enable firms to better customize their product and service offerings to customers and to better differentiate the firm from its rivals while simultaneously using the firm’s resources more efficiently.

Question 22

competitive environment

Answer 22

The competitive environment consists of many factors that are particularly relevant to a firm’s strategy. These include competitors (existing or potential), customers, and suppliers. Potential competitors may include a supplier considering forward integration, such as an automobile manufacturer acquiring a rental car company, or a firm in an entirely new industry introducing a similar product that uses a more efficient technology

Question 23

porter’s five forces model of industry competition

Answer 23

The “five forces” model developed by Michael E. Porter has been the most commonly used analytical tool for examining the competitive environment. It describes the competitive environment in terms of five basic competitive forces:

1. The threat of new entrants
2. The bargaining power of buyers
3. The bargaining power of suppliers
4. The threat of substitute products and services
5. The intensity of rivalry among competitors in an industry”

Question 24

porter’s five forces model of industry competition - 1. the threat of new entrants

Answer 24

The Threat of New Entrants - The threat of new entrants refers to the possibility that the profits of established firms in the industry may be eroded by new competitors

if entry barriers are high and/or the newcomer can anticipate a sharp retaliation from established competitors, the threat of entry is low. These circumstances discourage new competitors.

Question 25

porter’s five forces model of industry competition - 2. economies of scale

Answer 25

Economies of scale refers to spreading the costs of production over the number of units produced. The cost of a product per unit declines as the absolute volume per period increases. This deters entry by forcing the 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. Both are undesirable options.

Question 26

porter’s five forces model of industry competition - 3. product differentiation

Answer 26

When existing competitors have strong brand identification and customer loyalty, product differentiation creates a barrier to entry by forcing entrants to spend heavily to overcome existing customer loyalties.

Question 27

porter’s five forces model of industry competition - 4. capital requirements

Answer 27

The need to invest large financial resources to compete creates a barrier to entry, especially if the capital is required for risky or unrecoverable up-front advertising or research and development (R&D).

Question 28

porter’s five forces model of industry competition - 5. switching costs

Answer 28

A barrier to entry is created by the existence of one-time costs that the buyer faces when switching from one supplier’s product or service to another.

Question 29

porter’s five forces model of industry competition - 6. access to distribution channels

Answer 29

The new entrant’s need to secure distribution for its product can create a barrier to entry.

Cost Disadvantages Independent of Scale - Some existing competitors may have advantages that are independent of size or economies of scale.

These derive from:
- Proprietary products
- Favorable access to raw materials
- Government subsidies
- Favorable government policies

Question 30

the bargaining power of buyers

Answer 30

Buyers threaten an industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other. These actions erode industry profitability.

The power of each large buyer group depends on attributes of the market situation and the importance of purchases from that group compared with the industry’s overall business.

Question 31

A buyer group is powerful when:

Answer 31

1. it is concentrated or purchases large volumes relative to seller sales
2. the products it purchases from the industry are standard or undifferentiated
3. the buyer faces few switching costs
4. it earns low profits
5. the buyers pose a credible threat of backward integration
6. the industry’s product is unimportant to the quality of the buyer’s products or services

Question 32

the bargaining power of suppliiers

Answer 32

Suppliers can exert bargaining power by threatening to raise prices or reduce the quality of purchased goods and services. Powerful suppliers can squeeze the profitability of firms so far that they can’t recover the costs of raw material inputs. The factors that make suppliers powerful tend to mirror those that make buyers powerful.

Question 33

A supplier group will be powerful when:

Answer 33

1. the supplier group is dominated by a few companies and is more concentrated than the industry it sells to
2. the supplier group is not obliged to contend with substitute products for sale to the industry
3. the industry is not an important customer of the supplier group
4. the supplier’s product is an important input to the buyer’s business
5. the supplier group’s products are differentiated or it has built up switching costs for the buyer
6. the supplier group poses a credible threat of forward integration

Question 34

The Threat of Substitute Products and Services -

Answer 34

all firms within an industry compete with industries producing substitute products and services. Substitutes limit the potential returns of an industry by placing a ceiling on the prices that firms in that industry can profitably charge. The more attractive the price/performance ratio of substitute products, the tighter the lid on an industry’s profits.

Question 35

The Intensity of Rivalry among Competitors in an Industry

Answer 35

irms use tactics like price competition, advertising battles, product introductions, and increased customer service or warranties. Rivalry occurs when competitors sense the pressure or act on an opportunity to improve their position

Question 36

Using industry analysis: a few caveats

Industry analysis helps a firm not only to evaluate the profit potential of an industry but also to consider various ways to strengthen its position vis-à-vis the five forces. However, we’d like to address a few caveats

Answer 36

First, managers must not always avoid low-profit industries (or low-profit segments in profitable industries). Such industries can still yield high returns for some players who pursue sound strategies.

Second, five-forces analysis implicitly assumes a zero-sum game, determining how a firm can enhance its position relative to the forces. Yet such an approach can often be shortsighted; that is, it can overlook the many potential benefits of developing constructive win–win relationships with suppliers and customers. Establishing long-term mutually beneficial relationships with suppliers improves a firm’s ability to implement just-in-time (JIT) inventory systems, which let it manage inventories better and respond quickly to market demands.

Third, the five-forces analysis also has been criticized for being essentially a static analysis. External forces as well as strategies of individual firms are continually changing the structure of all industries. The search for a dynamic theory of strategy has led to greater use of game theory in industrial organization economics research and strategy research

Question 37

complements

Answer 37

Complements typically are products or services that have a potential impact on the value of a firm’s own products or services. Those who produce complements are usually referred to as complementors. Powerful hardware is of no value to a user unless there is software that runs on it. Similarly, new and better software is possible only if the hardware on which it can be run is available. This is equally true in the video game industry, where the sales of game consoles and video games complement each other.

Question 38

porter and two critical issues in conducting a good industry analysis which yield an improved understanding of the root causes of profitability

Answer 38

He addresses two critical issues in conducting a good industry analysis, which will yield an improved understanding of the root causes of profitability:

(1) choosing the appropriate time frame and
(2) a rigorous quantification of the five forces.

1 - good industry analysis looks rigorously at the structural underpinnings of profitability. a first step is to understand the time horizon

2 - the point of industry analysis is not to declare the industry attractive or unattractive but to understand the underpinnings of competition and the root causes of profitability

Question 39

In an industry analysis, two assumptions are unassailable:

Answer 39

(1) No two firms are totally different, and

(2) no two firms are exactly the same. The issue becomes one of identifying groups of firms that are more similar to each other than firms that are not, otherwise known as strategic groups.

Question 40

What value is the strategic groups concept as an analytical tool?

Answer 40

First, strategic groupings help a firm identify barriers to mobility that protect a group from attacks by other groups.87 Mobility barriers are factors that deter the movement of firms from one strategic position to another.

The second value of strategic grouping is that it helps a firm identify groups whose competitive position may be marginal or tenuous. We may anticipate that these competitors may exit the industry or try to move into another group

Third, strategic groupings help chart the future directions of firms’ strategies. Arrows emanating from each strategic group can represent the direction in which the group (or a firm within the group) seems to be moving.

Fourth, strategic groups are helpful in thinking through the implications of each industry trend for the strategic group as a whole. Is the trend decreasing the viability of a group?