External environment Flashcards
Technological change
Technological change creates both opportunity, as firms begin to explore how to use technology to create new products and services, and threats, as technological change forces firms to rethink their technological strategies
Demographic trends
Demographics is the distribution of individuals in a society in terms of age, sex, marital status, income, ethnicity, and other personal attributes that may determine buying patterns. Understanding the basic information about a population can help a firm determine whether its products or services will appeal to customers and how many potential customers for these products and services will appeal to its customers.
Cultural trends
Culture is the values, beliefs, and norms that guide behavior in a society. These values, beliefs, and norms define what is “right and wrong” in a society or what is acceptable and unacceptable. Failure to understand changes in culture, or differences between cultures, can have a very large impact on the ability of a firm to gain a competitive advantage. This becomes most obvious when a firm operates in multiple countries.
The economic climate
The economic climate is the overall health of the economic systems within which a firm operates. The economic climate can vary over time, examples of this is the recession (activity in an economy is relatively low).
Legal and political conditions
The legal and political dimensions of an organization’s general environment are the laws and the legal system’s impact on business, together with the general nature of the relationship between government and business.
Specific international events
These events include civil wars, political coups, terrorism, wars between countries, famines, and country or regional economic recessions. All these events can have an enormous impact on the ability of a firm’s strategies to generate competitive advantage.
Structure-conduct-performance (S-C-P model)
A model which offers a causal theoretical explanation for firm performance through economic conduct on incomplete markets.
The term structure in this model refers to industry structure, measured by such factors as the number of competitors in an industry, the heterogeneity of products in an industry, the cost of and exit in an industry.
Conduct refers to the strategies that firms in an industry implement.
Performance in the model has two meanings:
1. The performance of individual firms
2. The performance of the economy as a whole.
Environmental threats
I. Threat from new competition,
II. Threat from competition among existing competitors,
III. Threat from superior or low-cost substitutes,
IV. Threat of supplier leverage,
V. Threats from buyers’ influence.
Threat from new competition
New competitors are firms that either recently started operating in an industry or that threaten to begin operations in the industry soon. Because of this four important barriers have been identified in the strategy literatures. These four barriers are:
1. Economies of scale
2. Product differentiation
3. Cost advantages independent of scale
4. Government regulation of entry
Threat from exisiting competitors
New competitors are an important threat to the ability of firms to maintain or improve their level of performance. A second threat comes from the intensity of competition among a firm’s current direct competitors. Direct competition threatens firms by reducing their economic profits. High levels of direct competition are indicated by the following actions:
1. Frequent price cutting (For example, price discounts among airline industries)
2. Frequent introduction of new products by firms in an industry (continuous product introductions in consumer electronics)
3. Intense advertising campaigns (Pepsi versus Coca Cola advertising)
4. Rapid competitive actions and reactions in an industry (matching the price of competitors)
Threat of substitute products
Substitutes are products that meet approximately the same customer needs but do so in different ways. For example, a substitute for physical music sales is streaming music on Spotify.
Substitutes place a ceiling on the prices firms in an industry can charge and on the profits firms in an industry can earn. In an extreme, substitutes can ultimately replace an industry’s product and services. This happens when a substitute is superior to previous products. Substitutes have an important role when it comes to reducing the potential profit in industries.
Threat of supplier leverage
Suppliers make a wide variety of raw materials, labor, and other critical assets available to firms.
Suppliers can threaten the performance of firms in an industry by increasing the price of their supplies or by reducing the quality of those supplies. Any profits that were being earned in an industry can be transferred to suppliers in this way.
The following supplier attributes can lead to a high level of threat of supplier leverage:
1. Suppliers’ industry is dominated by small number of firms
2. Suppliers sell unique or highly differentiated products
3. Suppliers are not threatened by substitutes
4. Suppliers threaten forward vertical integration
5. Firms are not important customers for suppliers
Threat from buyers’ influence
Buyers purchase a firm’s products or services. In contrary to powerful suppliers, powerful buyers act to decrease a firm’s revenues. Threat of buyers’ influence is high in the following cases:
1. Number of buyers is small
2. Products sold to buyers are undifferentiated and standard
3. Products sold to buyers are a significant percentage of a buyer’s final costs
4. Buyers are not earning significant economic profits
5. Buyers threaten backward vertical integration
Complements
Another firm is a complementor if your customers value your product more when they have this other firm’s product than when they have your product alone.
A firm can be a complementor for one firm and a competitor for another. For example, the invention of Videoland is a competition for satellite television but is a complementor of RTL. Another example of a complementor is the addition of blue ray to DVDs.
Fragmented industry
Industries in which a large number of small- or medium sized firms operate, and no small set of firms has dominant market share or creates dominant technologies. (service industries: small retail stores)
Opportunities: Consolidation, where firms in fragmented industries have the opportunity to implement strategies that begin to consolidate the industry into a smaller number of firms.
