2. The External Environment

Question 1

What is a general environment?

Answer 1

The broader society that influences industries.

Question 2

What are the seven environmental segments?

Answer 2

1) Demographic
2) Economic
3) Political/legal
4) Sociocultural
5) Technological
6) Global
7) Physical environment

Question 3

What does a demographic segment entail?

Answer 3

• population size
• age
• geographic distribution
• income distribution

Question 4

What does an economic segment entail?

Answer 4

• inflation rates
• interest rates
• trade deficits/surplus
• budget deficits/surplus
• gross domestic product

Question 5

Define gross domestic product.

Answer 5

The total value of goods and services produced by a country in one year.

Question 6

What does the political/legal segment entail?

Answer 6

How firms and governments influence each other.

• antitrust laws
• taxes
• labor training laws
• policies

Question 7

What does the sociocultural segment entail?

Answer 7

Society’s attitudes and cultural values (e.g. workforce diversity).

Question 8

What does the technological segment entail?

Answer 8

Institutions and activities involved in knowledge processes (e.g. innovation, R&D).

Question 9

What does the global segment entail?

Answer 9

• critical global markets
• newly industrialised countries
• different culture and institutions

Question 10

How do firms increase internationalisation?

Answer 10

Focusing on global niche market.

Question 11

What does the physical environment segment entail?

Answer 11

• natural resources
• sustainable technology
• environmental risk management

Question 12

Define opportunity.

Answer 12

Conditions in the general environment to exploit for competitive advantages.

Question 13

Define threat.

Answer 13

Conditions in the general environment that hinder firm’s competitive advantages.

Question 14

What are the four parts of the external environment analysis? Elaborate on each part.

Answer 14

Scanning: studying all environmental segments

Monitoring: observing environmental changes

Forecasting: future projections of what might happen and how fast

Assessing: determining the time and effects of environmental changes and trends

Question 15

What is an industry?

Answer 15

A group of firms producing products that are close substitutes.

Question 16

What is an industry environment?

Answer 16

Factors that influence a firm - Porter’s five forces.

Question 17

What do Porter’s five forces analyse?

Answer 17

Facotrs that influence a firm’s profitability potential.

Question 18

What are Porter’s five forces?

Answer 18

• competitive rivalry
• bargaining power of buyers
• bargaining power of suppliers
• threat of new entrants
• threat of substitutes

Question 19

What is the likelihood of new entrants based on? Give two answers.

Answer 19

1) Barriers to entry

2) Retaliation expected

Question 20

What are the barriers to entry?

Answer 20

• economies of scale
• product differentiation
• capital requirements
• switching costs
• access to distribution channels
• incumbents have more cost advantage
• government policy

Question 21

Describe expected retaliation.

Answer 21

• vigorous retaliation from firms with high stakes in the industry
• reduced retaliation by locating niche markets without incumbents

Question 22

Supplier power is strong when:

Answer 22

• more concentrated than industry it sells to
• no substitutes
• firms are not significant customers
• high switching costs for firms to other suppliers
• threat to forward integrate into firm’s industry

Question 23

Buyer power is strong when:

Answer 23

• purchase large portions of industry output
• product sales are large part of seller’s venue
• face no switching costs
• undifferentiated products
• threat to integrate backwards into supplier industry

Question 24

What factors affect the intensity of rivalry between competitors? Elaborate on them.

Answer 24

• Numerous or balanced competitors: firms fighting for the same customers
• Slow industry growth: no new customers so attract rival’s customers
• High fixed costs or high storage costs: maximising productivity leads to excess products which firms get rid of through discounts
• Lack of differentiation or low switching costs
• High strategic stakes: sales is vital to a firm
• High exit barriers: firms continue to invest even though profit is below-average

Question 25

What are exit barriers?

Answer 25

- fixed costs of exit (labor agreements) - specialised assets (linked to a business or location) - strategic interrelationships (mutual dependence) - emotional barriers (loyalty to employees) - government and social restrictions (government concern for job losses)

Question 26

Define a strategic group.

Answer 26

A group of firms using similar strategies. (high rivalry)

Question 27

What is a competitor analysis?

Answer 27

A firm's interpretation of information on a rival.

Question 28

What do firms seek to understand about their rivals?

Answer 28

- future objectives - current strategy - their assumptions about the industry - capabilities (as seen from strengths, weaknesses)

Question 29

Define competitor intelligence.

Answer 29

Data firms gather to understand a rival's objectives, strategies, assumptions and capabilities.

Question 30

Define complementors.

Answer 30

Firms that sell complementary products.