Chapter 2 - External Environment

Question 1

Industry

Answer 1

a set of firms that produce similar products or services, sell to similar customers, and use similar methods of production.

Question 2

• SWOT Analysis:

Answer 2

• a framework for analyzing a company’s internal and external environments and that stands for strengths, weaknesses, opportunities, and threats.
• o 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 3

• General Environment

Answer 3

• factors external to an industry, and usually beyond a firm’s control, that affect a firm’s strategy.
• 6 segments: demographic, sociocultural, political/legal, technological, economic, global

Question 4

• Competitive environment

Answer 4

factors that pertain to an industry and affect a firm’s strategies. competitors (existing or potential), customers, and suppliers.

Question 5

• Porter’s five forces model of industry competition

Answer 5

o The threat of new entrants
o The bargaining power of buyers
o The bargaining power of suppliers
o The threat of substitute products and services
o The intensity of rivalry among competitors in an industry

Question 6

 Threat of Entry is HIGH if:

Answer 6

•	Economies of scale are low
•	Customer switching costs are low
•	Capital needs are low
•	Retaliation is not expected
•	Incumbents don’t have
o	Proprietary technology
o	Established brands
o	Closed distribution channels

Question 7

 Bargaining Power of Buyers is HIGH if

Answer 7

• A few large buyers
• Large buyers relative to a seller
• Buyers face few switching costs/supplier’s product not important
• Product are standardized
• Backward integration is credible
• Buyer has full information

Question 8

o The bargaining power of suppliers.

Answer 8

• Suppliers are concentrated more than buyers
• Forward integration is a credible threat
• No substitutes for supplier products
• Suppliers’ product are differentiated
• Incumbents face high switching costs
• Product is important input to buyer

Question 9

 Threat of substitute is HIGH if:

Answer 9

• Substitute is good price performance trade-off

* Buyers switching costs to the substitute is low

Question 10

 Incumbent rivalry is HIGH if:

Answer 10

•	Many competitors in the industry
•	Firms are equal size
•	Fixed costs/storage costs are high
•	Industry growth is slow or shrinking
•	Exit barriers are high
o	Contractual obligations
o	Geographical or historical attachments
•	Products and services are directly replaceable

Question 11

• Strategic groups:

Answer 11

clusters of firms that share similar strategies

Question 12

What are the two assumptions of strategic groups?

Answer 12

 No two firms are totally different

 No two firms are exactly the same

Question 13

o Perfect Competition:

Answer 13

 Many small firms in commodity products (like milk)

Question 14

o Monopolistic Competition

Answer 14

 Many firms – differentiated products (computer hardware, organic foods)

Question 15

o Oligopoly

Answer 15

 Few large firms – interdependent (soft drinks, express mail)

Question 16

o Monopoly

Answer 16

 One supplier – often government approved (utilities, electricity, gas, water)

Question 17

• Three important processes to gathering competitive intelligence:

Answer 17

o Environmental scanning:
o Environmental monitoring
o Competitive intelligence:

Question 18

o Environmental scanning:

Answer 18

surveillance of a firm’s external environment to predict environmental changes and detect changes already under way.

Question 19

o Environmental monitoring:

Answer 19

a firm’s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities.

Question 20

o Competitive intelligence:

Answer 20

a firm’s activities of collecting and interpreting data on competitors, defining and understanding the industry, and identifying competitors’ strengths and weaknesses.

Question 21

• Environmental Forecasting:

Answer 21

the development of plausible projections about the direction, scope, speed, and intensity of environmental change.

Question 22

3. Discuss and describe the six elements of the external environment.

Answer 22

a. the six elements of the external environment are demographic, sociocultural, political/legal, technological. Economic, and global.The demographic element assess statistical information about a population including age, affluence, and ethnic composition. Understanding consumer demographics are important in designing sellable products or services. Sociocultural elements are the values, beliefs, and lifestyles of consumers. Factors include the percentage of women in the workforce and temporary workers and society’s concern for fitness and the environment. The political and legal element refers to the creation and use of power and the political processes and regulations businesses’ must comply with. Factors include environmental, health care and disability regulations, taxes, and minimum wage. The technological segment refers to the development of new products and services and the improvement to the production processes which often lead to the eventual creation of new industries. Factors include genetic engineering, computer-aided design and manufacturing systems, the use of synthetic or exotic materials, pollution and global warming, miniaturization of computing technologies, wireless communication, and nanotechnology. The economic segment looks at key economic indicators such as interest rates, unemployment rates, the consumer price index, changes in market values, the gross domestic product, and net disposable income. Lastly the

Question 23

5. Describe how the five forces can be used to determine the average expected profitability in an industry.

Answer 23

a. The five forces model is a tool used to analyze the competitive environment. The model organizes the competitive model into five forces. The forces are 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, and 5. The intensity of rivalry among competitors in an industry. As a whole the forces determine an industry’s profit potential. The threat of new entrants is the possibility of new competitors entering the industry and disrupting profits of already established companies. The likelihood of new competitors depends on barriers to entry and reactions and retaliation from existing competitors. The bargaining power of buyers limits a company’s ability to raise prices by playing competitors against each other. The bargaining power of suppliers limits the ability to lower cost and control the quality of the goods produced. The threat of substitute products and services place a price ceiling on goods and services that companies can profitably charge before consumers switch to substitutes. Intense rivalry among competitors in an industry forces price competitions, strategic advertising, new products, and enhanced customer service. Price competition limits the ability to raise prices.

Question 24

Types of competition for strategic groups

Answer 24

• perfect competition
• monopolistic competition
• oligopoly
• monopoly

Question 25

Technology segment

Answer 25

innovation and state of knowledge in industrial arts, engineering, applied sciences, and pure science; and their interaction with society.
 Genetic engineering, big data, 3d printing