Chapter 2: Analyzing the External Environment of the Firm

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What are the 3 steps to Develop forecasts?

1. Scanning
2. Monitoring
3. Gathering competitive intelligence

What is environmental SCANNING?

involves surveillance of a firm's external environment to predict environmental changes and detect changes already underway

What is environmental MONITORING?

tracks the evolution of environmental trends, sequences of events, or streams of activities

What is Competitive Intelligence?

helps firm define & understand their industry and identify rivals' strengths & weaknesses. This includes intelligence gathering associated with collecting data on competitors and interpreting such data

What is environmental FORECASTING?

development of plausible projections about the direction, scope, speed, and intensity of environmental change

What is 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

What is SWOT analysis?

a framework for analyzing a company's internal & external environment that stands for strengths, weaknesses, opportunities, and treats

The general idea of SWOT analysis is that a firm's strategy must...

Build on its strengths, try to remedy the weaknesses or work around them, take advantage of the opportunities presented by the environment, and protect the firm from the threats

What is the general environment composed of?

factors that can have dramatic effects on firm strategy

What kinds of things do Demographics include?

elements such as the aging population, rising or declining affluence changes in ethnic composition, geographic distribution of the population, and disparities in income level

What do socio-cultural forces influence?

influence the values, beliefs, and lifestyles of a society (ie. a higher percentage of women in the workforce, dual-income families, increases in the number of temporary workers, etc)

What do political processes and legislation influence?

influence the environmental regulations with which industries must comply

Competitive environment

consists of many factors that are particularly relevant to a firm's strategy (ie. existing or potential competitors, customers, and suppliers)

Threat of New Entrants

refers to the possibility that the profits of established firms in the industry may be eroded by new competitors

What are the 6 major sources of entry barriers?

1. Economies of scale - spreading the costs of production over the number of units produced
2. Product differentiation - creating a barrier to entry by forcing entrants to spend heavily to overcome existing customer loyalties
3. Capital requirements - the need to invest large financial resources to compete creates a barrier to entry
4. Switching costs - a barrier to entry is created by the existence of one-time costs that the buyer faces when switching from one supplier's product or service to another
5. Access to distribution channels - the new entrant's need to secure distribution for its product can create a barrier to entry
6. Cost disadvantages independent of scale - some existing competitors may have advantages that are independent of size or economies of scale

Bargaining power of buyers

Buyers threaten an industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other

When is a buyer group powerful?

1. It is concentrated or purchases large volumes relative to seller sales
2. Products it purchases from the industry are standard or undifferentiated
3. Buyer faces few switching costs
4. It earns low profits
5. Buyers pose a credible threat of backward integration
6. Industry's product is unimportant to the quality of the buyer's products or services

Bargaining power of suppliers

Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods and services

When will a supplier group be powerful?

1. when supplier group is dominated by a few companies and is more concentrated than the industry it sells to
2. the SG is not obliged to contend with substitute products for sale to the industry
3. The industry is not an important customer of the supplier group
4. the supplier's product is an important input to the buyer's business
5. the supplier group's products are differentiated or it has built up switching costs for the buyer
6. the SG poses a credible threat of forward integration

What are several interacting factors that result in Intense Rivalry?

Numerous or equally balanced competitors, slow industry growth, high fixed or storage costs, lack of differentiation or switching costs, capacity augmented in large increments, high exit barriers

What are complements?

Typically products or services that have a potential impact on the value of a firm's own products or services

What are the 2 assumptions in an industry analysis?

1. No two firms are totally different
2. No two firms are exactly the same

What are the 4 values of strategic groups?

1. Help a firm identify barriers to mobility that protect a group from attacks by other groups
2. Helps a firm identify groups whose competitive position may be marginal or tenuous
3. It helps chart the future directions of firms' strategies
4. It is helpful in thinking through the implications of each industry trend for the strategic group as a whole

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