External Environment

Question 1

PESTEL Framework

Answer 1

Political, Economic, Socio-cultural, Technological, Ecological, Legal

Question 2

Example Political factors

Answer 2

PESTEL analysis: Policy & Regulations, such as … subsidies.. child labor… tariffs… regime (in)stability… taxes

Question 3

Example Economic factors

Answer 3

PESTEL analysis: unemployment… housing starts… GDP recession… inflation… interest rates.. discretionary income

Question 4

Example Socio-Cultural factors

Answer 4

PESTEL analysis: upscale specialty stores… fertility & family size… obesity… Hemline theory… hoarding… female workforce…

Question 5

Example Technological factors

Answer 5

PESTEL analysis: tech adoption rate… eCommerce.. gaming.. mobile.. social media

Question 6

Example ENVIRONMENTAL factors

Answer 6

PESTEL analysis: zero landfill… carbon neutral… solar.. three R’s… electric transport… food coops

Question 7

Example of LEGAL factors

Answer 7

PESTEL analysis: mandatory elecronic recycling… antitrust… anti-discrimination… OSHA… nutrition info… Sarbanes Oxley CEO accountability

Question 8

Who crafted 5 FORCES ANALYSIS ?

Answer 8

Introduced by Prof. Michael Porter of Harvard Business School over 30 years ago

Question 9

What are the forces in 5 FORCES ANALYSIS

Answer 9

• RIVALRY of competitors (center)
• bargaining power of SUPPLIERS (left)
• bargaining power of BUYERS (right)
• threat of potential ENTRANTS (top)
• threat of potential SUBSTITUTES (bottom)

Question 10

What are characteristics of competitor RIVALRY in 5 Forces analysis?

Answer 10

Numerous competitors… slow industry growth… undifferentiated competitors… high fixed costs… high exit barriers… excess supply in the industry… perishable product…

Question 11

What are the thresholds for HIGH, MEDIUM, LOW of Industry Concentration. (more concentration = less rivalry)

Answer 11

Top 4 competitors own
more than 80% of market (HIGH)
between 50%-80% (MEDIUM)
less than 50% (LOW)

Question 12

What are 4 ways to enter an industry

Answer 12

1. STARTUPS created by entrepreneurs
2. FOREIGN FORMS moving to new geography
3. SUPPLIERS moving into their customer’s business
4. BUYERS moving into their supplier’s business

Question 13

What are barriers to ENTRY in 5 Forces analysis?

Answer 13

economies of scale… capital requirements… access to distribution… government policy… differentiation… switching costs… expected retaliation… IP… geography

Question 14

What characteristics empower SUPPLIERS in 5 Forces analysis

Answer 14

• Suppliers more CONCENTRATED than industry they supply (Debeers diamonds)
• NO SUBSTITUTE supplier available (diamonds)
• RELIED UPON for industry to be profitable (microchips)
• High COST TO CHANGE suppliers (university computers)
• Supplier products are DIFFERENTIATED (Dolby)
• Competes in the industry itself

Question 15

What characteristics empower BUYERS in 5 Forces analysis

Answer 15

• FEWER BUYERS than suppliers (Walmart)
• Industry’s products are UNDIFFERENTIATED (wheat & yeast)
• low supplier SWITCHING COST
• Product cost is HIGH % OF BUYER’S COSTS (buying toothpaste vs new car)
• If the buyers can BACKWARDLY INTEGRATE into the industry as a competitor themselves (Ford auto parts)
• If product has low importance to the buyer (spark plugs for automakers)

Question 16

What is relationship of 5 Forces and industry profitability?

Answer 16

Higher forces = lower profit potential
Lower forces = higher profit potential

Question 17

What is definition of Recession

Answer 17

Two consecutive quarters of GDP decline

Question 18

How much of a company’s results are driven by INDUSTRY effects, vs. FIRM effects, vs. OTHER effects?

Answer 18

20% Industry, 55% Firm, 25% other

Question 19

What makes for high threat of Substitution force?

Answer 19

when substitute offers ATTRACTIVE PRICES and/or COST OF SWITCHING is low

Question 20

How can firms influence the POLITICAL factors in an industry

Answer 20

Through NON-MARKET strategies like lobbying, public-relations, contributions, litigation

Question 21

A RECESSION will negatively impact ALL industries (T/F) ?

Answer 21

False

Question 22

INFLATION negatively impacts ALL industries (T/F)?

Answer 22

False

Question 23

Define the MACRO-ECONOMIC environment

Answer 23

The set of EXTERNAL CONDITIONS and FORCES that influence organizations

Question 24

What is the term that captures a capture a society’s cultures, norms, societal values, and trends?

Answer 24

SOCIO-CULTURAL FACTORS

Question 25

What is the difference between POLITICAL factors and LEGAL factors?

Answer 25

POLITICAL centers on the role of GOVERNMENT & their leader’s decisions

LEGAL centers on influence of COURTS & LAWS, & how decisions are implemented, where greater uncertainty lies

Question 26

Issues relating to natural environment, natural disasters, pollution levels, global warming, weather patterns, and sustainable economic growth relate to which PESTEL factor?

Answer 26

Environmental or Ecological

Question 27

What is the impact of STRONG forces vs WEAKER forces in the Porter 5 Forces model?

Answer 27

Strong forces = less profit potential
Weaker forces = more profit potential

Question 28

How do firms mitigate the force/threat of NEW ENTRANTS in 5 forces model?

Answer 28

Erect ENTRY BARRIERS, such as
- Economies of scale
- Capital requirements
- Access to distribution channels
- Government policy
- Differentiation
- Switching costs
- Expected retaliation
- Cost advantages independent of size (e.g. proximity to matrials)

Question 29

SUBSTITUTE products come from both competitors and also outside the industry (T/F)

Answer 29

FALSE. Substitutes come from only outside the industry

Question 30

What are 3 LIMITATIONS of the 5 Forces Model?

Answer 30

• Assumes a ZERO-SUM GAME
• Assumes ADVERSARIAL dynamic among rivals
• Assumes ADVERSARIAL dynamic among buyers & suppliers