Chapter 3: Evaluating a Company's External Environment Flashcards
Which 2 facets of a company’s situation are especially pertinent?
- Its external environment (competitors)
2. Its internal environment (resources and capabilities)
What must a manager do prior to forming a strategic vision of where the company needs to head?
Analyze the company’s internal and external environment.
What are the 6 principal components of the macro-environment that every company operates in? (PESTEL analysis)
- Political factors
- Economic conditions in the general environment
- Sociocultural forces
- Technological factors
- Environmental factors
- Legal/regulatory conditions
What does PESTEL analysis stand for?
Political, Economic, Sociocultural, Technological, Environmental, Legal/regulatory
What is the Five Forces Framework?
Holds that competitive pressures on companies within an industry come from 5 sources:
- Competition from rival sellers
- Competition from potential new entrants
- Competition from producers of substitute products
- Supplier bargaining power
- Customer bargaining power
What are the 3 steps involved in using the Five Forces Model to determine the nature & strength of competitive pressures in a given industry?
- Identify the parties involved, along with specific factors that bring competitive pressures
- Evaluate how strong the pressures stemming from each of the 5 forces are
- Determine whether the 5 forces are supportive of high industry profitability
What is often the strongest of the 5 competitive forces in the Five Forces model?
Competition from rival sellers
What are the situations where rivalry among competing sellers would grow (under the 5 forces model)?
- Buyer demand is growing slowly or declining
- If it becomes less costly to switch brands
- Products of rival sellers become less strongly differentiated
- Too much inventory or significant amounts of idle production capacity
- Number of competitors increases
- Diversity of competitors increases
- High exit barriers keep unprofitable firms from leaving the industry
What happens to profit margins when rivalry is strong?
The battle for market share is so vigorous that profit margins of most industry members are squeezed to bare-bones levels.
What are some common “competitive weapons”?
- Discounting prices
- Offering coupons
- Advertising
- Innovation
- New/improved features
- Increasing customization
- Building a bigger, better dealer network
- Improving warranties
- Offering low-interest financing
What does credible threat of new entrants to a market do?
Often prompts industry members to lower their prices and initiate defensive actions in an attempt to deter new entrants.
What does the seriousness of a threat to entry in a particular market depend on?
Whether entry barriers are high or low and the expected reaction of existing members to the entry of newcomers.
What are the options for new market entrants when there are sizeable economies of scale existing in a given market?
Outsiders must either enter on a large scale which can be costly and risky or accept a cost disadvantage and lower profitability.
When is threat of new entrants low?
- Incumbents have large cost advantages over potential entrants
- Existing strong loyalty from customers
- Patents and other forms of intellectual property protection
- Strong network effects
- High capital requirements
- Limited new access to distribution channels and shelf space
- Restrictive government policies
- Restrictive trade policies
Where do substitute products come from?
Outside the industry, not other brands within your industry. Example: contact lenses producers face pressure from doctors who do corrective laser surgery.
What does competitive pressure from buyers depend on?
The degree to which buyers have bargaining power and the extent to which buyers are price sensitive.
