External Analysis

Question 1

Political

Answer 1

• Process and actions of government bodies can be shaped through:
  (1) Lobbying
  (2) Public relations
  (3) Contributions
  (4) Litigation

Question 2

Economic

Answer 2

Largely macro-economic
Economy wide phenomena
- growth rates
- levels of employment
- interest rates
- price stability
- currency exchange rates

Question 3

Growth rates:

Answer 3

: measures the change in the value of goods/services produced by a nation’s economy

Question 4

Levels of employment:

Answer 4

boom times unemployment is low and skilled human capital becomes scare and more expensive, economic downturns, unemployment rises

Question 5

Interest rates:

Answer 5

the amount that creditors can earn for lending money and the amount that debtors pay to use that money

Question 6

Price stability

Answer 6

little or no change in the prices of goods/services
- inflation: the general and sustained increase in overall price level
- deflation: sustained decrease in the overall price level, sereve threat to economic growth

Question 7

Currency Exchanage rates

Answer 7

determines how many dollars one must pay for a unit of foreign currency

Question 8

Sociocultural

Answer 8

Society’s cultures, norms, and values
- Are constantly in flux
- Differ across groups

Question 9

Demographic Trends

Answer 9

Population characteristics: age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class

Question 10

Technological

Answer 10

• Application of new knowledge: new processes.
• innovations/process technology - lean manufacturing/six sigma
• innovation in product technology (smartphones)

Question 11

Ecological

Answer 11

• Broad environmental issues:
• Natural environment
• Global warming
• Sustainable economic growth

Question 12

Legal

Answer 12

• Official outcomes of political processes:
• Laws
• Mandates
• Regulations
• Court decisions

Question 13

Industry

Answer 13

• Group of incumbent companies
• Relatively similar suppliers and buyers
• Similar products and services

Question 14

Industry analysis, a method to:

Answer 14

• Identify an industry’s profit potential
• Derive implications for a firm’s strategic position

Question 15

Strategic Positioning

Answer 15

• A firm’s ability to:
• Create value for customers (V)
• Contains costs (C)

Goal: generate a large gap between:
- The value the firm’s products or service creates
- The cost required to product it

Question 16

Threat of Entry

Answer 16

The risk that potential competitors will enter the industry

Question 17

Threat of Entry: Entry Barriers

Answer 17

• economies of scale
• network effects
• customer switching costs
• capital requirements
• government policy
• credible threat of retaliation

Question 18

Advantages of independent size

Answer 18

• brand loyalty
• propriety technology
• preferential access
• favourable locations
• cumulative learning and experience

Question 19

Threat of entry is strong

Answer 19

• entry barriers are low
• industry members are unwilling/unable to strongly contest the entry of newcomers
• a large pool of potential entrants, some of which have the capabilities to overcome high entry barriers
• existing industry members are looking to expand their market reach by entering new product segements/geographic areas
• buyer demand is growing rapidly and newcomers can expect to earn attractive profits

Question 20

Entry threats are weaker when

Answer 20

• entry barriers are high:
• high economies of scale
• significant experiences based on cost advanatge
• other cost advanatge held by indsutry members (access to inputs, technology, favourable location), strong product differentiation/ brand loyalty, strong network effects, high capital requirement,
• industry outlook is risky and uncertain

Question 21

Supplier Power

Answer 21

• Pressures that industry suppliers can exert on an industry’s profit potential
• Lowers industry profit potential if:
• Suppliers demand higher prices for their inputs
• Suppliers reduce quality

Question 22

Supplier power is stronger

Answer 22

• Supplier products/ services are in short supply (which gives suppliers leverage in setting prices)
• Supplier products/services are differentiated
• Supplier products/services are critical to industry members’ production processes
• Industry members incur high costs in switching their purchases to alternative suppliers
• There are no good substitutes for what the suppliers provide
• Suppliers are not dependent on the industry for a large portion of their revenues
• The supplier industry is more concentrated than the industry it sells to and is dominated by a few large companies

Question 23

Supplier power is weaker

Answer 23

• There is a large surge in the availability of supplies
  The item being supplied is a “commodity” that is readily available from many suppliers at the going market price
• Industry members switching costs to alternative suppliers are low
• Good substitutes for supplier products/services exist industry members account for a big fraction of suppliers’ sales
• The number of suppliers is large relative to the number of industry members and there no suppliers with large market shares
• Industry members have the potential to integrate backward into the business of suppliers and to self-manufacture their own requirements

Question 24

Buyer Power

Answer 24

• Pressure customers put on an industry
• Lowers industry profit potential if:
• Buyers obtain price discounts – reduces revenue
• Buyers demand higher quality/service – raises production costs

Question 25

Buyer bargaining power is stronger when

Answer 25

- Buyer costs of switching to competing products are low - The industry’s products are standardized or undifferentiated - Buyers are large and few in the number relative to the number of industry sellers - Buyer demand is weak in relation to industry supply - Buyers are well informed about the quality, prices, and costs of sellers Buyers have the ability to postpone purchases Buyers are price sensitive Buyers earn low profits or low income The product represents a significant fraction of their purchases Product quality has limited consequences

Question 26

Buyer power is weaker

Answer 26

- Buyer costs of switching to competing brands or substitutes is high - Sellers’ products are differentiated - Buyers are small and numerous relative to sellers - Industry supply is insufficient to satisfy buyer demand - Buyers information regarding sellers is limited in quantity and quality - Buyers are not very price-sensitive (higher profits or income; small part of cost structure or total purchases, product performance really matters)

Question 27

Threat of Substitutes

Answer 27

- Meet the same basic customer need - But in a different way - Available from outside the given industry Ex – energy drinks vs coffee Video Conferencing vs business travel Email vs express mail

Question 28

Substitutes pressure stronger when

Answer 28

- Good substitutes are readily available or new ones are emerging - Substitutes are attractively priced - Substitutes have comparable or better performance features - Buyers have low costs in switching to substitutes

Question 29

Substitutes pressure weaker when

Answer 29

- Good substitutes are not readily available or do not exist - Substitutes are higher priced relative to the performance they deliver - Buyers have high costs in switching to substitutes