Chapter 2- External Analysis: The Identification of Opportunities and Threats

Question 1

Opportunities

Answer 1

Elements and conditions in a company’s environment that allow it to formulate and implement strategies that enable it to become more profitable.

Question 2

Threats

Answer 2

Elements in the external environment that could endanger the integrity and profitability of the company’s business.

Question 3

Industry

Answer 3

A group of companies offering products or services that are close substitutes for each other. (They satisfy the same customer needs).

Question 4

Porter’s Competitive Forces Model

Answer 4

Focuses on six forces that shape competition within an industry:
1) The risk of entry by potential competitors.
2) The intensity of rivalry among established companies within an industry.
3) The bargaining power of buyers.
4) The bargaining power of suppliers.
5) The closeness of substitutes to an industry’s products, and
6) The power of complement providers. (Note that Portion did not recognize this sixth force, but it is an extension of his model).

Question 5

Potential Competitors

Answer 5

Companies that are currently not competing in the industry but have the potential to do so.

Question 6

What are the barriers of entry?

Answer 6

1) Economies of Scale
2) Brand Loyalty
3) Absolute Cost Advantage
4) Customer Switching Costs
5) Government Regulations

Question 7

Economies of Scale

Answer 7

Reductions in unit costs attributed to large output.

Question 8

What are some sources of economies of scale?

Answer 8

Sources include:
1) Cost reductions gained through mass-producing a standardized output.
2) Discounts on bulk purchases of raw material inputs and component parts
3) The advantages gained by spreading fixed production costs over a large production volume; and
4) The cost savings associated with distribution, marketing, and advertising costs over a large volume of output.

Question 9

Brand Loyalty

Answer 9

Preference of consumers for the products of established companies.

Question 10

Absolute Cost Advantage

Answer 10

A cost advantage that is enjoyed by incumbents in an industry and that new entrants cannot expect to match.

Question 11

How can a company create brand loyalty?

Answer 11

They can create this by continuously advertising its brand-name products and company name, patent protection of its products, product innovation achieved through company research and development (R&D) programs, an emphasis on high-quality products, and exceptional after-sales service.

Question 12

What are the three main sources that can lead to an absolute cost advantage?

Answer 12

1) Superior production operations and processes due to accumulated experience, patents, or trade secretes.
2) Control of particular inputs required for production, such as labor, materials, equipment, or management skills, that are limited in supply.
3) Access to cheaper funds because existing companies represent lower risks than new entrants.

Question 13

Switching Costs

Answer 13

Costs that consumers must bear to switch from the products offered by one established company to the products offered by a new entrant.

Question 14

What four factors have a major impact on the intensity of rivalry among established companies within an industry?

Answer 14

1) Industry competitive structure.
2) Demand conditions.
3) Cost conditions,
4) The height of exit barriers in the industry.

Question 15

Industry Competitive Structure

Answer 15

Revers to the number and size distribution of companies within it, something that strategic managers determine at the beginning of an industry analysis.

Question 16

Fragmented Industry

Answer 16

This type of industry consists of a large number of small or medium-sized companies, non of which is in a position to determine industry price.

Question 17

Consolidated Industry

Answer 17

This type of industry is dominated by a small number of large companies (an oligopoly) or, in extreme cases, by just one company (a monopoly).

Question 18

Exit Barriers

Answer 18

These are economic, strategic, and emotional factors that prevent companies from leaving an industry.

Question 19

What are instances when the buyer has more power?

Answer 19

Buyers have more power when:
1) When buyers have a choice.
2) When the buyers purchase in large quantities, they can use their purchasing power as leverage to bargain for price reductions.
3) When the supply industry depends upon buyers for a large percentage of its total orders.
4) When switching costs are low and buyers can pit the supplying companies against each other to force down prices.
5) When it is economically feasible for buyers to purchase an input from several companies at once, they can pit one company in that industry against another.
6) When buyers can threaten to enter the industry and independently produce the product, then supplying their own needs, they can force down industry prices.

Question 20

Bargaining Power of Suppliers

Answer 20

Refers to the ability of suppliers to raise input prices, or to raise the costs of the industry in other ways.

Question 21

In what situations do suppliers have more bargaining power?

Answer 21

1) The product that suppliers sell has few substitutes and is vital to the companies in an industry.
2) The profitability of suppliers is not significantly affected by the purchases of companies in a particular industry; in other words, when the industry is not an important customer to the supplier.
3) Companies in an industry would experience significant switching costs if they moved to the product of a different supplier because a particular supplier’s products are unique or different.
4) Suppliers can threaten to enter their customers’ industry and use their inputs to produce products that would compete directly with those of companies already in the industry.
5) Companies in the industry cannot threaten to enter their suppliers’ industry and make their own inputs as a tactic for lowering the price of inputs.

Question 22

Substitute Products

Answer 22

The products of different businesses or industries that can satisfy similar customer needs.

Question 23

Complementors

Answer 23

Companies that sell products that add value to (complement) the products of companies in an industry because, when used together, the combined products better satisfy customer demands.

Question 24

Mobility Barriers

Answer 24

These are within-industry factors that inhibit the movement of companies between strategic groups.

Question 25

What are the five stages in the industry life-cycle model?

Answer 25

1) Embryonic
2) Growth
3) Shakeout
4) Mature
5) Decline

Question 26

Embryonic Industry

Answer 26

This is an industry that is just beginning to develop. Growth at this stage is slow because of factors such as buyer’s unfamiliarity with the industry’s product, high prices due to the inability of companies to leverage significant scale economies, and poorly developed distribution channels.

Question 27

Growth Industries

Answer 27

In this type of industry, first-time demand is expanding rapidly as many new customers enter the market. Typically, this occurs when customers become familiarity with the product, prices fall because scale economies have been attained, and distribution channels develop.

Question 28

Industry Shakeout

Answer 28

In this phase the rate of growth slows and demand approaches saturation levels: more and more of the demand is limited to replacement because fewer potential first-time buyers remain.

Question 29

Mature Industries

Answer 29

In this stage the market is totally saturated, demand is limited to replacement demand, and growth is low or zero.

Question 30

Declining Industries

Answer 30

In this phase, growth becomes negative for a variety of reasons, including technological substitution, social changes, demographics, and international competition.

Question 31

What is the main limitation with the industry life-cycle model?

Answer 31

This model serves as a generalization. In practice, industry life cycles do not always follow the pattern this model depicts. Some stages can be skipped and the length of time in each stage can vary.

Question 32

Punctuated Equilibrium

Answer 32

A view of the evolution of industry structure where long periods of equilibrium (refreezing), when an industry’s structure is stable, are punctuated by period of rapid change (unfreezing), when industry structure is revolutionized by innovation.

Question 33

What are the macroenvironment forces?

Answer 33

1) Political and Legal Forces
2) Demographic Forces
3) Global Forces
4) Technological Forces
5) Social Forces
6) Macroeconomic Forces

Question 34

what are the four primary macroeconomic forces?

Answer 34

1) The growth rate of the economy.
2) Interest rates.
3) Currency exchange rates.
4) Inflation (or deflation) rates.