Strategic Management CHPT 2 Flashcards
External Scanning
surveillance of a firm’s external environment to predict environmental changes and detect changes already under way.
Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them
External Monitoring
A firm’s analysis of the external environment that tracks evolution of environmental trends, sequences of events, or streams of activities
How to Spot Hot Trends
Listen
Pay attention
Follow trends online
Go old school
Example: Spotting Trends
Zara’s designers, marketing managers, and buyers work side by side in an open office plan that fosters frequent discussions and promotes the sharing of real-time data as well as field observations and anecdotes
This allows them to break out of their silos and develop a holistic feel for the market, see how their work fits, and sense new opportunities as they arise.
Competitive intelligence
A firm’s activities of collecting and interpreting data on competitors, defining and understanding the industry, and identifying competitors’ strengths and weaknesses.
Environmental forecasting
The development of plausible projections about direction, scope, speed and intensity of environmental change
Scenario analysis
An in-depth approach to environmental forecasting that involves experts’ detailed assessments of societal trends, economics, politics, technology, or other dimensions of the external environment
Firm’s strategy must:
Build on its strengths
Remedy the weaknesses or work around them
Take advantage of the opportunities presented by the environment
Protect the firm from threats
SWOT analysis
A framework for analyzing a company’s internal and external environment and that stands for strengths, weaknesses, opportunities, and threats.
Factors external to an industry, usually beyond a firm’s control
Demographic Sociocultural Legal/Political Technological Economic Global
Demographic Segment
Aging population Rising or declining affluence Changes in ethnic composition Geographic distribution of population Greater disparities in income levels
Sociocultural Segment
More women in the workforce Dual-income families Increase in temporary workers Greater concern for healthy diets and physical fitness Greater interest in the environment Postponement of having children
Legal/Political Segment
Tort reform
Americans with Disabilities Act (ADA)
Repeal of Glass-Steagall Act in 1999
Deregulation of utility and other industries
Increases in federally mandated minimum wages
Taxation at local, state, federal levels
Legislation on corporate governance reforms (Sarbanes-Oxley Act)
Technological Segment
Genetic engineering Emergence of Internet technology Computer-aided design/computer-aided manufacturing systems (CAD/CAM) Wireless communication Nanotechnology
Economic Segment
Interest rates Unemployment Consumer Price index Trends in GDP Changes in stock market valuations
Global Segment
Increasing global trade
Currency exchange rates
Emergence of the Indian and Chinese economies
Trade agreements (NAFTA, EU, ASEAN)
Creation of WTO (decreasing tariffs/free trade in services)
Profits of established firms in the industry may be eroded by new competitors
Sources of entry barriers
Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale
Buyers threaten an industry by
Forcing down prices
Bargaining for higher quality or more services
Playing competitors against each other
A buyer group is powerful when
It is concentrated or purchases large volumes relative to seller sales
The products it purchases from the industry are standard or undifferentiated
The buyer faces few switching costs
It earns low profits
The buyers pose a credible threat of backward integration
The industry’s product is unimportant to the quality of the buyer’s products or services
Suppliers can exert power by
threatening to raise prices or reduce the quality of purchased goods and services
A supplier group will be powerful when
The supplier group is dominated by a few companies and is more concentrated than the industry it sells to
The supplier group is not obliged to contend with substitute products for sale to the industry
The industry is not an important customer of the supplier group
The supplier’s product is an important input to the buyer’s business
The supplier group’s products are differentiated or it has built up switching costs for the buyer
The supplier group poses a credible threat of forward integration
The Threat of Substitute Products and Services
the threat of limiting the potential returns of an industry by placing a ceiling on the prices that firms in that industry can profitably charge without losing too many customers to substitute products.
The Intensity of Rivalry among Competitors in an Industry
Price competition
Advertising battles
Product introductions
Increased customer service or warranties
Interacting factors lead to intense rivalry
Numerous or equally balanced competitors Slow industry growth High fixed or shortage costs Lack of differentiation or switching costs Capacity augmented in large increments High exit barriers
Using Industry Analysis: A Few Caveats
Managers must not always avoid low profit industries
Can still yield high returns for players with sound strategies
Implicitly assumes a zero-sum game, determining how a firm can enhance its position relative to the forces
Five Forces analysis is essentially a static analysis
Good industry analysis looks rigorously at the structural underpinnings of profitability.
A first step is to understand the time horizon
The point of industry analysis is not to declare the industry attractive or unattractive but to understand the underpinnings of competition and the root causes of profitability.
Two unassailable assumptions in industry analysis
No two firms are totally different
No two firms are exactly the same
Strategic groups
Cluster of firms that share similar strategies
Value of strategic groups as an analytical tool
Identify barriers to mobility that protect a group from attacks by other groups
Identify groups whose competitive position may be marginal or tenuous
Chart the future direction of firms’ strategies
Thinking through the implications of each industry trend for the strategic group as a whole
