External Environment

Question 1

A Firm’s External Environment

Answer 1

The general environment (segments and elements in the broader society that affect industries and the firms competing in them)

The industry environment (factors that influence a firm, its competitive actions and responses, and the industry’s profitability potential)

The competitor environment (in which the firm analyzes each major competitor’s future objectives, current strategies, assumptions and capabilities)

Question 2

The External Environmental analysis process (helps firms identify opportunities and threats)

Answer 2

Scanning
Monitoring
Forecasting
Assessing

Question 3

The General Environmental (It is essential for firms to

determine the strategic relevance of environmental changes and trends in each of these seven segments)

Answer 3

Demographic
Economic
Political/legal
Sociocultural
Technological
Global
Sustainable physical

Question 4

The Industry Environmental (By studying these forces, a firm can identify a position in an industry where it can influence the forces in its favor or protect itself from the power of the forces in order to achieve strategic competitiveness and earn above-
average returns)

Answer 4

The Five Competitive Forces
•The threat of entry
•The power of suppliers
•The power of buyers
•Product substitutes
•The intensity of rivalry among competitors

Question 5

§Strategic Groups

Answer 5

Collections of firms within a given industry all following similar
strategies along similar dimensions

Question 6

§Competitor Analysis

Answer 6

Firms need to collect competitor intelligence in order to analyze the future objectives, current strategies, assumptions, and capabilities of rivals. Different techniques can be used, but firms should only use legal and ethical practices

Question 7

The Importance of Analyzing & Understanding

the Firm’s External Environment (slide 1 of 4)

Answer 7

Given that the external environment will continue to change—and that change may be unpredictable in terms of timing and strength—a firm’s management is challenged to be aware of, understand the implications of, and identify patterns represented in these changes by taking actions to improve the firm’s competitive position, to improve operational efficiency, and to be effective global competitors

External environmental factors—like war and political unrest, variations in the strength of national economies, and new technologies—affect firm growth and profitability in Canada and beyond

Question 8

Environmental conditions in the current global economy differ from those previously faced by firms:

Answer 8

o Technological advances require more timely and effective competitive actions and responses

o Rapid sociological changes abroad affect labor practices and product demand of diverse consumers

o Governmental policies and laws affect where and how firms may choose to compete

o Changes to nations’ financial regulatory systems have increased the complexity of organizations’ financial transactions

Question 9

Understanding the external environment helps build the firm’s base of knowledge and information that can be used to:

Answer 9

1. Help build new capabilities and core competencies
2. Buffer the firm from negative environmental impacts
3. Pursue opportunities to better serve stakeholders’ needs

Question 10

§The general environment is composed of elements in the broader society that can indirectly influence an industry and the firms within the industry. But firms cannot directly control the general environment’s segments and elements

Answer 10

The dimensions are grouped into seven environmental segments:

1. Demographic
2. Economic
3. Political/legal
4. Sociocultural
5. Technological
6. Global
7. Sustainable physical environment

Question 11

§The industry environment

Answer 11

is the set of factors—threat of new
entrants, suppliers, buyers, product substitutes, and the intensity of rivalry among competitors—that directly influence a firm and its competitive decisions and responses

Question 12

Competitor analysis

Answer 12

represents the firm’s understanding of its
current competitors. This understanding will complement information and insights derived from investigating the general and industry environments

Question 13

Distinctions Between External Analyses

Answer 13

The following are important distinctions to make regarding different external analyses:

Analysis of the general environment focuses on the future of Industry analysis focuses on factors and conditions influencing firm profitability within its industry

Competitor analysis focuses on predicting the dynamics of rivals’ actions, responses, and intentions

Performance improves when the firm integrates the insights provided by analyses of the general environment, the industry environment, and the competitor environment

Question 14

Influencing the External Environment

§

Answer 14

It should be noted that, although firms cannot directly control the elements of the external environment, they may be able to influence, and will be influenced by, these factors

The strategic challenge is to develop an understanding of the
implications of these elements and factors for a firm’s
competitive position

Question 15

External Environmental Analysis

Answer 15

§In addition to increasing a firm’s awareness and understanding of an increasingly turbulent, complex, and global general environment, external environmental analysis also is necessary
to enable the firm’s managers to interpret information to identify opportunities and threats

§Opportunities represent conditions in the general environment that may help a company achieve strategic competitiveness by presenting it with possibilities

§threats are conditions that may hinder or constrain a company’s efforts to achieve strategic competitiveness

§Information used to analyze the general environment can come from multiple sources: publications, observation, attendance at trade shows, or conversations with customers, suppliers, and
employees of public-sector organizations

§This information can be formally gathered by individuals occupying traditional “boundary spanning” roles (such as a position in sales, purchasing, or public relations) or by assigning information-gathering responsibility to a special
group or team

Question 16

Scanning

Answer 16

entails the study of all segments in the general
environment. Firms use the scanning process to detect either early warning signals regarding potential changes or changes that are already underway. In most cases, information and data being collected or observed are ambiguous, incomplete, and
appear to be unconnected. Scanning is most important in highly volatile environments, and the scanning system should fit the organizational context (e.g., scanning systems designed for volatile environments are not suitable for firms competing in a stable environment)

Scanning may signal a future change in the needs and lifestyles of baby boomers as they approach retirement age. This may not
only provide opportunities for financial institutions as they prepare for an increase in the number of retirees, but also may provide opportunities for packagers and marketers of retirement communities and other products specifically targeted to this segment

Question 17

Monitoring

Answer 17

represents a process whereby analysts observe
environmental changes over time to see if, in fact, an important trend begins to emerge. The critical issue in monitoring is that analysts be able to detect meaning from the data and information collected during the scanning process (These data are generally ambiguous, incomplete, and unconnected)

Effective monitoring requires the firm to identify important stakeholders. Because the importance of different stakeholders can vary over a firm’s life cycle, careful attention must be given to the firm’s needs and its stakeholder groups over time. Scanning and monitoring can also provide information about
successfully commercializing new technologies

Question 18

Forecasting

Answer 18

represents the process where analysts develop feasible projections of what might happen—and how quickly—as a result of the changes and trends detected through scanning and monitoring. Because of uncertainty, forecasting events and outcomes accurately is a challenging task

Question 19

Assessing

Answer 19

represents the step in the external analysis process
where all of the other steps come together. The objective of assessing is to determine the timing and significance of the effects of changes and trends in the environment on the strategic management of a firm. Getting the strategy right will depend on the accuracy of the assessment

Question 20

Segments of the General Environment

Answer 20

§The general environment is composed of the following segments that are external to the
firm:

Demographic
Economic
Political/legal
Sociocultural
Technological
Global
Sustainable physical environment

§These environmental segments affect all industries and the firms competing in them

For each segment, firms have to determine the strategic relevance of environmental changes
and trends

Question 21

The demographic segment

Answer 21

is concerned with a population’s size, age structure, geographic distribution, ethnic mix, and income distribution

Question 22

Population Size

Answer 22

§It is projected that population growth will continue in the twenty-first century, but at a slower pace
§Firms may want to recognize the market potential that may exist for them in the following five nations, which are expected to be the most populous nations in the world by 2050:
1. India
2. China
3. United States
4. Indonesia
5. Pakistan

Question 23

Age Structure

Answer 23

§The world’s population is rapidly aging.
§The aging of the population:

Has significant implications for availability of qualified labor, health care, retirement policies,
and business opportunities among others.

Threatens the ability of firms to hire and retain a workforce that meets their needs.

Question 24

Geographic Distribution

Answer 24

§How a population is distributed within countries and regions is subject to change over
time.

Examples: In the United States, the shift from states in the Northeast and Great Lakes region to
states in the West, South, and Southwest; in China, the shift from rural areas to urban
communities

Question 25

Ethnic Mix

Answer 25

The ethnic mix of countries’ populations continues to change.
• Example: The increase in the Hispanic population in the United States

The ethnic diversity of the population is important because of:
• Consumer needs
• The labor force composition

Question 26

Income Distribution

Answer 26

§Income distribution within and across populations informs firms of different groups’
purchasing power and discretionary income.

Example: The rise in domestic consumption of consumer goods by India’s middle class has 
positioned it as a market of interest.

Of particular interest to firms are the average incomes of households and individuals.

Question 27

§The economic environment

Answer 27

refers to the nature and direction of the economy in which a firm competes or may compete.

§In general, firms seek to compete in relatively stable economies with strong growth potential.

§It is challenging for firms studying the economic environment to predict economic trends that may occur and their effects on them.

§When facing economic uncertainty, firms especially want to study closely the economic environment in multiple regions and countries throughout
the world.

Question 28

The political/legal segment

Answer 28

is the arena in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding interactions among nations as well as between firms and various local governmental agencies.

§Essentially, this segment is concerned with:

How organizations try to influence governments

How they try to understand the current and projected influences of those governments on their
competitive actions and responses

§The relationship between national, regional, and local laws and regulations creates a
highly complex environment within which businesses must navigate.

Question 29

The sociocultural segment

Answer 29

is concerned with a society’s attitudes and cultural values.

Attitudes and values:
•Form the cornerstone of a society
•Often drive demographic, economic, political/legal, and technological conditions and changes
•Are relatively stable, but can and often do change over time
• Firms must identify these changes in order to stay ahead of their competitors and stay relevant in the minds of their consumers.

Question 30

The technological segment

Answer 30

includes the institutions and activities involved in creating new knowledge and translating that knowledge into new outputs, products, processes,
and materials.

§Firms should continuously scan the general environment to identify:

Potential substitutes for technologies that are in current use

Newly emerging technologies from which their firm could derive competitive advantage

§New technology and innovations are changing many industries.

Examples: The Internet and wireless communication technology

Thus, firms in all industries must become more innovative in order to survive.

Question 31

The global segment

Answer 31

includes relevant new global markets and their
critical cultural and institutional characteristics, existing markets that are changing, and important international political events.

§When studying the global segment, firms should recognize that globalization of business markets may create opportunities to enter new markets, as well as threats that competitors from other economies may enter their market.

Globalfocusing:
• Is a more cautious approach to globalization in which firms focus on global niche markets
• Allows firms to build onto and use their competencies while limiting their risks within the
niche market

Question 32

Firms competing in global markets should recognize each

Answer 32

market’s sociocultural and institutional attributes.
Examples: Korean ideology emphasizes

communitarism; Chinese
ideology emphasizes guanxi—personal connections;

Japanese ideology emphasizes wa—group harmony and social cohesion.

§The informal economy is another aspect of the global segment requiring analysis.

Question 33

The sustainable physical environment segment

Answer 33

refers to potential and actual changes in the physical environment and business practices that are
intended to positively respond to those changes in order to create a sustainable environment.

§Concerned with trends oriented to sustaining the world’s physical environment, firms recognize that ecological, social, and economic systems
interactively influence what happens in this particular segment and that they are part of an interconnected global society.

§An increasing number of companies are investing in sustainable
development

Question 34

An industry is a group of firms producing products that are close substitutes.

Answer 34

§Companies use a mix of different competitive strategies to pursue above-average returns
when competing in a particular industry.

An industry’s structural characteristics influence a firm’s choice of strategies.

§Compared with the general environment, the industry environment has a more direct
effect on firms’ competitive actions and responses.

§To study an industry, the firm examines five forces that affect the ability of all firms to operate profitably within a given industry:

1. The threats posed by new entrants
2. The power of suppliers
3. The power of buyers
4. Product substitutes
5. The intensity of rivalry among competitors

Question 35

Threat of New Entrants

Answer 35

§Identifying new entrants is important because they can threaten the market share of existing competitors.

§How likely firms will enter an industry is a function of two factors:

1. Barriers to entry
2. The retaliation expected from current industry participants

Barriers to Entry
•Companies competing within a particular industry study entry barriers to determine the
degree to which their competitive position reduces the likelihood of new competitors
being able to enter the industry to compete against them.

•Firms considering entering an industry study entry barriers to determine the likelihood
of being able to identify an attractive competitive position within the industry.

§There are several significant entry barriers:
oEconomies of scale
oProduct differentiation
oCapital requirements
oSwitching costs
oAccess to distribution channels
oCost disadvantages independent of scale
oGovernment policy

Economies of Scale
With economies of scale, the cost of producing each unit declines as the quantity of a product
produced during a given period increases.

A new entrant is unlikely to quickly generate the level of demand for its product that would
allow it to develop economies of scale.

Product Differentiation
Over time, customers may come to believe that a firm’s product is unique and
consistently purchase that firm’s product.

To combat the perception of uniqueness, new entrants frequently offer products at
lower prices.
• However, this may result in lower profits or even losses.

Capital Requirements
Competing in a new industry requires a firm to have capital for physical facilities,
inventories, marketing activities, and other critical business functions.

The capital required for successful market entry may not be available to pursue the
market opportunity.

Switching Costs
Switching costs are the one-time costs customers incur when they buy from a different
supplier.

If switching costs are high, a new entrant must attract buyers by offering either:
• A substantially lower price
• A much better product
Access to Distribution Channels

After building a relationship with its distributors, a firm will nurture it, thus creating
switching costs for the distributors.

New entrants may use price breaks and cooperative advertising allowances to
persuade distributors to carry their products.
• However, those practices can reduce new entrants’ profit potential.

Cost Disadvantages Independent of Scale
Successful competition requires new entrants to reduce the strategic relevance of cost
advantages held by established competitors that cannot be duplicated.

• Examples: Proprietary product technology, favorable access to raw materials, desirable
locations, and government subsidies
Government Policy

Governmental decisions and policies that can control entry into an industry include:
• The granting of licenses and permits
• Deregulation
• Antitrust issues

Question 36

Bargaining Power of Suppliers

Answer 36

§Suppliers can exert power over firms competing within an industry by:

Increasing prices

Reducing the quality of their products

§A supplier group is powerful when:

It is dominated by a few large companies and is more concentrated than the industry to which
it sells.

Satisfactory substitute products are not available to industry firms.

Industry firms are not a significant customer for the supplier group.

Suppliers’ goods are critical to buyers’ marketplace success.

The effectiveness of suppliers’ products has created high switching costs for industry firms.

It poses a credible threat to integrate forward into the buyers’ industry.

To reduce their costs, buyers bargain for:
oHigher quality
oGreater levels of service
oLower prices

§Customers (buyer groups) are powerful when:

They purchase a large portion of an industry’s total output.

The sales of the product being purchased account for a significant portion of the
seller’s annual revenues.

They could switch to another product at little, if any, cost.

The industry’s products are undifferentiated or standardized, and the buyers pose a
credible threat if they were to integrate backward into the sellers’ industry.

Question 37

Substitute products

Answer 37

are goods or services from outside a given industry that perform similar or the same functions as a product that the industry produces.

§In general, product substitutes present a strong threat to a firm when:
Customers face few, if any, switching costs

The substitute product’s price is lower

The substitute product’s quality and performance capabilities are equal to or greater than those
of the competing product

To reduce a substitute’s attractiveness, a firm can differentiate a product along
dimensions that are valuable to customers, such as:
• Quality
• Service after the sale
• Location

Question 38

Intensity of Rivalry among Competitors

Answer 38

§Competitive rivalry intensifies when:
A firm is challenged by a competitor’s actions
A company recognizes an opportunity to improve its market position

§Common dimensions on which rivalry is based include:
oPrice
oService after the sale
oInnovation

§Factors that increase the intensity of rivalries among firms include:
oNumerous or equally balanced competitors
oSlow industry growth
oHigh fixed costs or high storage costs
oLack of differentiation or low switching costs
oHigh strategic stakes
oHigh exit barriers

Question 39

Interpreting Industry Analyses

Answer 39

§Analysis of the five forces within a given industry allows the firm to determine the industry’s attractiveness in terms of the potential to earn average or above-average returns.

Stronger competitive forces usually mean a lower potential to earn profits.

§An unattractive industry has:
oLow entry barriers
oSuppliers and buyers with strong bargaining positions
oStrong competitive threats from product substitutes
oIntense rivalry among competitors

§An attractive industry has:
oHigh entry barriers
oSuppliers and buyers with little bargaining power
oFew competitive threats from product substitutes
oRelatively moderate rivalry

Question 40

Strategic Groups

Answer 40

§A set of firms emphasizing similar strategic dimensions and using a similar strategy is called a strategic group.

§Competitive rivalry is greater within a strategic group than between strategic groups

Analyzing strategic groups can be helpful in diagnosing competition,
positioning, and the profitability of firms competing within an industry.

Using strategic groups to understand an industry’s competitive structure requires the firm to plot companies’ competitive actions and responses along strategic 
dimensions, such as:
• Pricing decisions
• Product quality
• Distribution channels

This shows the firm how certain companies are competing similarly in terms of how
they use similar strategic dimensions.

Strategic groups have several implications:
oBecause firms within a group offer similar products to the same customers, the competitive rivalry among them can be intense.

•The more intense the rivalry, the greater is the threat to each firm’s profitability.

oThe strengths of the five forces differ across strategic groups.
oThe closer the strategic groups are in terms of their strategies, the greater is the likelihood of rivalry between the groups.

Question 41

Competitor Analysis

Answer 41

Competitor analysis focuses on each company against which a firm competes directly

§In a competitor analysis, the firm seeks to understand the following:
What drives the competitor, as shown by its future objectives
What the competitor is doing, as revealed by its current strategy
What the competitor believes about the industry, as shown by its assumptions
What the competitor’s capabilities are, as shown by its strengths and weaknesses

•Knowledge about these four dimensions helps the firm prepare an anticipated response
profile for each competitor

Competitor intelligence is the set of data and information the firm gathers to better understand and anticipate competitors’ objectives, strategies,
assumptions, and capabilities

§When gathering competitive intelligence, a firm must pay attention to the complementors of its products and strategy

Complementors are companies or networks of companies that sell complementary
goods or services that are compatible with the focal firm’s good or service.
• Example: Intel and Microsoft