Ch. 2 Analyzing the External Environment of the Firm Essay

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*KEY TERMS* Environmental scanning
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surveillance of a firm’s external environment to predict environmental changes and detect changes already under way.
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Environmental monitoring
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a firm’s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities
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Hard trend
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a projection based on measurable facts, events, or objects. It is something that will happen.
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Soft trend
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something that might happen and for which the probability that it might happen can be estimated.
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Competitive intelligence
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A firm’s activities of collecting and interpreting data on competitors, defining and understanding the industry, and identifying competitors’ strengths and weaknesses
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Environmental forecasting
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the development of plausible projections about the direction, scope, speed, and intensity of environmental change
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Scenario analysis
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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.
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SWOT analysis
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a framework for analyzing a company’s internal and external environment and that stands for strengths, weaknesses, opportunities, and threats.
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General environment
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factors external to an industry, and usually beyond a firm’s control, that affect a firm’s strategy.
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Demographic segment of the general environment
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genetic and observable characteristics of a population, including the levels and growth of age, density, sex, race, ethnicity, education, geographic region, and income
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Sociocultural segment of the general environment
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the values, beliefs, and lifestyles of a society.
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Political/legal segment of the general environment
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how a society creates and exercises power, including rules, laws, and taxation policies.
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Technological segment of the general environment
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innovation and state of knowledge in industrial arts, engineering, applied sciences, and pure science; and their interaction with society.
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Economic segment of the general environment
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characteristics of the economy, including national income and monetary conditions.
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Global segment of the general environment
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influences from foreign countries, including foreign market opportunities, foreign-based competition, and expanded capital markets.
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Crowdsourcing
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practice wherein the Internet is used to tap a broad range of individuals and groups to generate ideas and solve problems
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Industry
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a group of firms that produce similar goods or services.
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Competitive environment
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factors that pertain to an industry and affect a firm’s strategies
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porter’s five-forces model of industry competition
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a tool for examining the industry-level competitive environment, especially the ability of firms in that industry to set prices and minimize costs.
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Threat of new entrants
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the possibility that the profits of established firms in the industry may be eroded by new competitors.
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Product differentiation
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the degree that a product has strong brand loyalty or customer loyalty.
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Economies of scale
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decreases in cost per unit as absolute output per period increases.
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Switching cost
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one-time costs that a buyer/supplier faces when switching from one supplier/buyer to another.
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Bargaining power of buyers
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the threat that buyers may force down prices, bargain for higher quality or more services, and play competitors against each other.
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Bargaining power of suppliers
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the threat that suppliers may raise prices or reduce the quality of purchased goods and services.
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Threat of substitute products and services
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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.
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Substitute products and services
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products and services outside the industry that serve the same customer needs as the industry’s products and services.
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Intensity of rivalry among competitors in an industry
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the threat that customers will switch their business to competitors within the industry.
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Internet
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a global network of linked computers that use a common transmission format, exchange information and store data.
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Zero-sum game
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a situation in which multiple players interact, and winners win only by taking from other players.
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Complements
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products or services that have an impact on the value of a firm’s products or services.
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Strategic groups
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clusters of firms that share similar strategies.
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*SUMMARY REVIEW QUESTIONS* 1. Why must managers be aware of a firm’s external environment?
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Being responsive to the external environment enables firms to avoid strategic mistakes. It is possible for firms to become internally focused, efficient producers of obsolete goods and services (e.g. buggy whips, carbon paper). Rather, managers need to respond to opportunities and threats from the external environment in order to develop the most successful products and services.
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2. What is gathering and analyzing competitive intelligence and why is it important for firms to engage in it?
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Competitive intelligence is a firm’s activities of collecting and interpreting data on competitors, defining and understanding the industry, and identifying competitors’ strengths and weaknesses. It is not spying, fortune-telling, simple data collection, or an isolated activity within a firm. The purpose of competitive intelligence is to increase management’s awareness of developments in the external environment, thereby increasing the quality of strategic decisions.
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3. Discuss and describe the six elements of the external environment.
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The 6 elements of the general environment are the demographic segment, the sociocultural segment, the political/legal segment, the technological segment, the economic segment, and the global segment. The demographic segment refers to the statistics of a population, such as age, income characteristics, ethnic groups, and geographic distribution. The sociocultural segment refers to the values, beliefs, and lifestyles of a country. The political/ legal segment refers to the creation and use of power within a country, including the effect of various regulations, including the areas of environmental protection, employment discrimination protection, and taxes. The technological segment refers to new products and services derived from advances in engineering, applied science, and/or pure science. These new products and services can change manufacturing processes, create new industries, and alter the boundaries between industries. The economic segment refers to the level and change in monetary and macroeconomic factors such as unemployment, inflation, interest rates, and economic growth. The global segment refers to effects on a country’s business environment from abroad, and include factors such as competition, foreign market opportunities, foreign supply opportunities, legal changes due to international treaties, and regional economic integration.
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5. Describe how the five forces can be used to determine the average expected profitability in an industry.
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The 5 forces model consists of the threat of new entrants, the bargaining power of buyers, and the bargaining power of suppliers, the threat of substitute products and services, and the intensity of rivalry among competitors in an industry. Each force can be looked at as a way that the industry environment limits a firm’s ability to earn profits through either raising prices or lowering costs. The threat of new entrants limits a firm’s ability to raise prices because then a new entrant may decide to enter the industry and offer a lower price. The bargaining power of buyers directly limits a firm’s ability to raise prices. The bargaining power of suppliers directly limits a firm’s ability to lower costs. The threat of substitute products and services limits a firm’s ability to raise prices because customers would then buy the substitutes. The intensity of rivalry among competitors in an industry limits a firm’s ability to raise prices because then customers would buy from a competitor.
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6. What are some of the limitations (or caveats) in using five-forces analysis?
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3 limitations of the 5-forces analysis are 1) the implication that low-profitability industries should be avoided may not be optimal. Low-profitability industries many be profitable opportunities for firms with innovative business models that change the competitive landscape. 2) The 5 forces model assumes a zero-sum game, with a firm’s loss of profitability associated with another firm’s gain. However, through strategic alliances or other forms of collaboration with suppliers, buyers, or other industry players, firms can gain both profitability and competitiveness. 3) The 5 forces model is static and does not account for constant changes in competitive postition that characterize many industries. Included in the dynamic analyses is the effect of complements, or other products and services that affect the value of a firm’s own products and services. For example, software is a complement to hardware. Dynamic interactions between firms and complements can affect the profitability prospects for a firm outside of the 5 forces model.
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7. Explain how the general environment and industry environment are highly related. How can such inter-relationships affect the profitability of a firm or industry?
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The general environment can affect all of the 5 forces in various ways. A growing economy can reduce the intensity of rivalry within the industry because firms will be scrambling to meet growing demand.
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8. Explain the concept of strategic groups. What are the performance implications?
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Strategic groups are groups of firms, usually within an industry, that share similar strategies. The performance implications are that firms can group themselves with close competitors and 1) identify barriers between groups, 2) identify positions within the industry that are marginal or tenuous, and 3) chart directions for future strategic development. Strategic group analysis is a more fine-grained way to conduct competitor analysis, as the competitive environment of an industry may differ from the competitive environment of the strategic group.
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*PRACTICE QUIZ* 1. Global monitoring only tracks environmental trends, sequences of events and streams of activities that the firm comes across by accident. A) True B) False
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B) False
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2. In recent years, major airlines have changed hundreds of fares daily in response to competition. This pricing tactic is an example of using_________. A) scenario analysis B) competitive intelligence C) switching costs D) corporate espionage
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B) competitive intelligence
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3. A firm can predict general environmental trends and events, thereby permitting it to control them. A) True B) False
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B) False
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4. In studying the general environment, organizations look at the effects of currency exchange rates on their business activity. In the general environment, the evaluation of exchange rates fall under which category? A) demographic B) political/legal C) economic D) global
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D) global
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5. If another major airline enters the marketplace, competitor profits can be affected. Which of the following aspects of the Porter five-forces model is described by this phenomenon? A) the bargaining power of suppliers B) the threat of substitute products C) the threat of new entrants D) the intensity of rivalry among competitors
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C) the threat of new entrants
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6. Proctor and Gamble is considered to be a firm with high economies of scale. It competes with other firms of similar economies of scale. This competitive environment is likely to deter new entrants, according to the Porter five-forces model. A) True B) False
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A) True
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7. If a supplier group wants to gain market power, according to the Porter five-forces model, what conditions must exist? A) there is low differentiation by the supplier B) there is a lack of importance of the buyer to the supplier group C) there is not a dominance by a few suppliers D) there is a significant importance of the buyer to the supplier group
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B) there is a lack of importance of the buyer to the supplier group
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8. If unable to maintain a credible threat of forward integration, the power of suppliers will be enhanced. A) True B) False
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B) False
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9. In the slow-growing airline industry, there are many equally balanced competitors selling products that lack differentiation. This marketplace is most likely to experience high ___________. A) bargaining power of suppliers B) intensity of rivalry among competitors C) threat of new entrants D) threat of substitute products
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B) intensity of rivalry among competitors
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10. In the automobile manufacturing industry, there are many competitors who do not compete on the same basis. Because all of them are automobile manufacturers, they would be classified in the same strategic group. A) True B) False
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B) False

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