L2: External Environment Analysis

Question 1

Strategic drift

Answer 1

the tendency to develop the strategy incrementally on the basis of historical and cultural influences but fails to keep pace with the changing environment.

Question 2

The process of strategic drift

Answer 2

Incremental change > Strategic drift > Flux > Transformational change or dead

Question 3

Four tendencies towards the strategic drift

Answer 3

• Building on the familiar
• Core rigidities
• Relationships become shackles
• Lagged performance effects

Question 4

Lagged performance effects

Answer 4

the financial performance of the organization may hold up initially (e.g. due to loyal customers or cost cutting) masking the need for change.

Question 5

Relationships become shackles

Answer 5

organizations become reluctant to break relationships with customers, suppliers or the workforce even if they need to change.

Question 6

Core rigidities

Answer 6

old capabilities that are taken for granted and deeply ingrained in routines are difficult to change even when they are no longer suitable.

Question 7

Building on the familiar

Answer 7

uncertainty of change is met with a tendency to stick to the familiar.

Question 8

Which technique to analyze the industry environment?

Answer 8

Scenario thinking, Five forces model and Industry Lifecycle.

Question 9

Which technique to analyze the macro environment?

Answer 9

PESTLE analysis and Scenario thinking

Question 10

Strengths of PESTLE

Answer 10

• Understand how and how much the nonmarket aspects impact upon the firm.
• Lead to the identification of Opportunity and Threat.

Question 11

Limitation of PESTLE

Answer 11

• Require too many information and data, so the company must outsource.
• Data can change quickly, while data collection takes a lot of time.
• Data isn’t really found, and it must be in assumption.

Question 12

Five basic steps to analyze in scenario thinking

Answer 12

1. Defining the scenario scope
2. Identify key drivers for change (PESTLE, forecast, cube)
3. Develop distinct scenarios
4. Identify impacts (check and adapt strategies)
5. Monitor progress (early warning indicators)

Question 13

Five Forces Framework (Porter)

Answer 13

to identify the attractiveness of an industry in terms of five competitive forces: threat of entry and substitutes, power of buyers and suppliers. extent of rivalry between competitors.

Question 14

3 benefits of using Five Forces Framework

Answer 14

• In-depth analysis of the competitive structure.
• Evaluate the attractiveness of the industry.
• Manage strategies in relation to promote long-term survival and competitive advantage.

Question 15

4 limitations of using Five Forces Framework

Answer 15

• Lack of quantifying evaluation => Create ambiguity or foster subjectivity.
• Neglect the role of complementor and network effects.
• Difficult for companies with many product lines to apply.
• The complexity of converging industries concept and selecting the ‘right’ industry.

Question 16

Complementors

Answer 16

It enhances business attractiveness to customers or suppliers.

• on the demand side: app providers are complementors for Apple since customers value more application.
• on the supply side: for airlines companies, Boeing suppliers benefits more to invest in all companies.

Question 17

Network effects

Answer 17

One customer of a product or service has a positive effect on the value of that product for other customers.
Example: eBay or Facebook.

Question 18

3 main types of industry structures

Answer 18

Monopolistic, Oligopolistic, and Perfectly competitive.

Question 19

Oligopolistic

Answer 19

Ex: Airbus vs. Boeing

Few often large firms dominate an industry, with limited rivalry/entrants but great power over buyers/suppliers.

Question 20

Perfectly competitive

Answer 20

Countless equal rivals with identical products and available information about prices, products, and competitors.
Ex: small firm service industries - restaurants, pubs, cabs

Question 21

Hypercompetition

Answer 21

Ex: Apple vs. Samsung

Frequent, bold and aggressive competitor interactions. Heavy investment in destablishing innovation, mkt, price cuts.

Question 22

Monopolistic

Answer 22

Ex: Google, Facebook, Microsoft.

Only one firm with unique product/service and no competitive rivalry.

Question 23

The dynamics of industry structure includes 5 stages

Answer 23

Development, Growth, Shake-out, Maturity, Decline

Question 24

Key issues to consider about Industry Life-cycle stages

Answer 24

Industry vary widely in the length of their growth stage. Some industries (especially digital and Internet) can rapidly ‘demature’ through radical innovation.

Question 25

Detailed in industry life cycle

Answer 25

1. Educating on consumers => Innovation
2. Economies of scales => Growth ability
3. Companies start to exit => Financial and managerial strength
4. Market saturation, replacement demand over new demand => Cost and market share
5. Price competition => Cost and commitment

Question 26

Pricing across life product cycle

Answer 26

• Skimming price: Introduction (no rivals), Growth
• Maturity (stabilized technology, maximum rivals, potential financial problem, develop new product): break-even point price
• Penetration price: Decline

Question 27

Detailed in Five forces model

Answer 27

• Buyer/Supplier power: concentration, low/high switching cost, threat of backward/forward vertical integration.
• Competitive force: concentration and balance, industry growth rate, low differentiation, high fixed cost
• Threat of substitute: price/performance ratio and extra-industry effect.
• Threat of entry: legislation or government action, incumbency advantage, scale of economies

Question 28

Detailed in PESTLE

Answer 28

• Political: change in government, M&A policy control, trade agreement
• Economic: currency exchange rates, interest rates, fluctuating economic growth rates.
• Socio-cultural: shift in value and culture, lifestyle, attitude education
• Technological: IoT, R&D, new patent
• Ecological: minimize pollution, energy consumption
• Legal: labor force regulation, product safety

Question 29

Scenario thinking

Answer 29

What: A set of distinct stories (rich images) about
alternative possible futures, focused on the external
environment. Presented as a set to capture a range of
uncertain futures
Why: To facilitate robust strategic decision making.
When: Required under conditions of high complexity
and uncertainty, or when there is little historical
information.