U2 The Strategic Environment

Question 1

Where Are We in the Market Place? The Macro-Environment
Organizations do not exist in isolation—they exist ?

Answer 1

within the environment in which they operate.

Question 2

The environment, in turn, influences ?

Answer 2

the corporate strategy.

Question 3

A comparison can be made with the solar system, with our organization being ?

Answer 3

the center and various factors orbiting around it, just as the planets move around the sun.

Each of these factors influences our strat­egic plan.

Question 4

The factors closer to the organization, ————————————————————————- are in the micro-environment.

Answer 4

namely competitors, substitute products, suppliers, and buyers,

Question 5

The macro-environment consists of?

Answer 5

political,
economic,
social,
technological,
environmental,
and legal factors that influence how business is conducted.

Question 6

Substitute products

Answer 6

Substitute products can be used as replacements for existing products.

Question 7

Figure 2: The Macro-Environment of an Organization

Question 8

Figure 2: The Macro-Environment of an Organization

Question 9

Figure 2: The Macro-Environment of an Organization

Question 10

The PESTEL analysis can be used to?

Answer 10

analyze the macro-environment of our organization.

Question 11

PESTEL is an acronym of?

Answer 11

the first letters of all the factors in the macro-environment of an organization:

Answer 12

Political factors
Economic factors
Social factors

Answer 13

Technological factors
Environmental or ecological factors Legislative or legal factors

Question 14

The PESTEL analysis is a strategic and qualitative method that helps to?

Answer 14

align the organization with its environment or with developments in the environment.

Answer 15

It also looks at changes in the environment that may influence the future success or failure of the organization.

Question 16

PESTEL Analysis of an Airline

The following section applies a PESTEL analysis to?

Answer 16

an airline, exploring what is considered in each category.

Question 17

Political factors

This involves :

Answer 17

an analysis and forecast of political developments and trends.

Question 18

If the government enforces higher security standards in the airline industry, our company will have to invest more in ?

Answer 18

its security measures.

Question 19

Investments in other projects will therefore need to be ?

Answer 19

reduced or cut completely.

This has a direct impact on the company strategy.

Question 20

Economic factors

This involves:

Answer 20

This involves an analysis and forecast of economic developments and trends.

Question 21

Changes in the price of oil will influence ?

Answer 21

the price of aviation gasoline. Since the price of gasoline is a critical factor for airline profitability, the oil price will have an influence on the bottom line of an airline company.

Answer 22

If gas prices go up, airlines are forced to increase ticket prices. This could lead to a decline in air travel, which impacts the strategy of an airline.

Question 23

Social factors
This involves:

Answer 23

an analysis and forecast of socio-cultural developments such as trends in the areas of demography or changes in values of the customers.

Question 24

In the western world, the population is aging and many retire earlier. As such, there are many more elderly people traveling today than in the past. Airlines have to ?

Answer 24

accommodate this customer group and cater to their specific needs by providing wheelchairs and luggage services.

Question 25

Demography

Answer 25

Demography looks at the development of a population in terms of age, structure, etc.

Question 26

Technological factors

This involves :

Answer 26

an analysis and forecast of technological developments and trends.

Question 27

Check-in

Answer 27

Check-in is the process of registering travelers and their luggage in order to confirm their presence on the flight.

Question 28

The check-in process for flights has changed through the widespread use of the Internet for this procedure. A few years ago,

Answer 28

a traveler had to be at the airport on time in order to go through the check-in process at the airline counter. There were often long lines in front of the check-in counters. Today, most airlines offer online check-in in order to process the passengers at the airport faster. Airlines are forced to invest in the technology required to support online check-in procedures, which again influences the strategic plan.

Question 29

Ecological factors

This involves ?

Answer 29

an analysis and forecast of ecological developments and trends.

Question 30

The airline industry is faced with flight restrictions over certain areas such as larger cities and nuclear power plants.

Answer 30

Therefore, they are forced to re-route planes and engage in major planning efforts to align operations with ecological developments.

Answer 31

This leads to stronger investments in the planning department and takes resources away from other departments.

Question 32

Legal factors

This involves?

Answer 32

an analysis and forecast of legal developments regionally, domestically, or internationally.

Question 33

Domestic airlines are often given preference when it comes?

Answer 33

to airport access.

Question 34

Smaller airlines are thus forced to resort to?

Answer 34

smaller, more remote airports.

Question 35

Cheaper charter airlines, such as Irish company Ryanair, build this factor into?

Answer 35

their strategy and operate from smaller airports.

Question 36

The PESTEL analysis is?

Answer 36

comprehensive and extensive.

Its usage is not limited to one organization or one competitive situation;

it can also be applied to a team or a department within the organization.

Question 37

A brainstorming session often forms part of a PESTEL analysis with the goal of ?

Answer 37

finding specific features or trends in any of the six areas.

Question 38

These can then be evaluated to inform ?

Answer 38

a specific decision or situation.

Question 39

The PESTEL analysis is therefore a tool that can be used for location decisions as well as?

Answer 39

for strategic decisions, such as the product portfolio or techno­logical innovations.

Question 40

In our case study,

Answer 40

the first three questions concern the macro-environment of Lars Bank.

Question 41

The first question: “What business opportunities will the change in the legal framework open up for foreign financial services providers?”

Answer 41

addresses the political and legal aspects of such an investment in Turkey.

Question 42

The changes in the legal framework for financing real estate should make it easier for?

Answer 42

European banks to finance real estate in Turkey.

Question 43

The second question: “Is the market economically attractive?” looks at the economic aspects of an investment decision. Even if ?

Answer 43

the legal framework supports foreign investments, it might not be economically lucrative for the organization.

Question 44

The third question: “Would Turkish customers accept foreign financial service providers?”

Answer 44

looks at the socio-cultural implications of the investment.

Question 45

Financial services companies need to ?

Answer 45

establish a relationship of trust with the customer in order to succeed.

Question 46

Despite today’s global markets, it might be difficult for a foreign bank to gain the trust of?

Answer 46

Turkish customers.

Answer 47

This question needs to be explored further before making the decision to enter the Turkish market.

Question 48

Where Are We in the Market Place? The Micro-Environment

The direct environment in the market place impacting an organization is called ?

Answer 48

the micro-environment.

Question 49

This includes?

Answer 49

the buyers or customers of an organization,
the competitors,
possible substitute products,
and the suppliers.

Question 50

The Five Forces Model

Michael Porter’s (1979) Five Forces model takes a look at?

Answer 50

the micro-environment and helps analyze various strategies for the strategic planning process.

Question 51

This model is built on the following assumptions.

Answer 51

==The foundation of the model is that the market’s attractiveness is defined by its structure.

== The structure of the market in turn impacts the strategic behavior of an organization operating in this market.

Answer 52

==Since the market structure is defined by the competition, the competitive strategy of an organization is decisive for its success.

Question 53

Porter’s model analyzes the forces in the micro-environment that impact?

Answer 53

a specific market.

Question 54

The information gained through this model analysis allows organizations to ?

Answer 54

make decisions regarding activities that influence forces in their micro-environment.

Question 55

The attractiveness of a business is identified by the following five forces:

Answer 55

Buyers\/customers: analysis of their buying power

Competitors: analysis of the degree of rivalry among existing competitors

Answer 56

New market entrants: analysis of threats from new competitors

Substitutes: analysis of threats from substitute products

Suppliers: analysis of their negotiating power

Question 57

The stronger these five forces are, the less
———————–the business is and the more difficult it is for an organization to build and maintain a ———————————-. These forces are now explained in greater depth.

Answer 57

attractive

competitive advantage

Question 58

Buyers\/customers

Customers are the direct buyers of the products or services of?

Answer 58

an organization; however, they are not necessarily the consumers.

Question 59

When buyers are powerful (i.e. they buy large amounts), they can enforce lower prices for the products. This would lead to?

Answer 59

a decrease in the profits of the organization.

Question 60

Consumer

Answer 60

The consumer is the individual using the product or service. In many families, mothers are often the grocery shoppers who buy the chocolate. In this instance, the mother is the direct buyer; how­ever, it is the children who are the consumers of the chocolate.

Question 61

Buyers have purchasing power over an organization when:

Answer 61

They buy large quantities.

The producer has high fixed costs and little flexibility in lowering the price for the product or service.

The product is undifferentiated and can easily be replaced by substitute products.

Answer 62

The switch to an alternative product is simple and inexpensive.

The margins are relatively small.

The customers could produce the product or service themselves.

Answer 63

The product or service is not of high value to the customer.

The customer knows the production cost of the product.

A backward integration is possible for the customer. Backward integration means that the customer produces the product or service themselves by buying the company or developing it.

Question 64

Margin

Answer 64

Margin is the differ­ence between the production costs and the sales price.

Question 65

Competition

Answer 65

This force describes the intensity of the competition among the current players in the market.

Question 66

High competitive pressure, which is often reflected in?

Answer 66

price competition,

leads to shrinking margins and profits for all the organizations in the business.

Question 67

price competition, leads to shrinking margins and profits for all the organizations in the business.

Answer 67

–There are numerous companies of similar size in the market.

–The companies have similar strategies.

–The business sector shows little growth and therefore an increase in sales is only possible if business is taken away from a competitor.

Answer 68

–The products or services offered in the market are undifferentiated and therefore all companies compete on price.

–The exit barriers for the organization to leave the business and switch to a different business are very high (e.g. highly specialized machines or personnel are required to produce the product or service).

Question 69

New market entrants

When the competitive pressure by new market entrants on existing organizations is higher, the easier it is/

Answer 69

for new companies to enter a certain sector.

Question 70

Important elements in the market such as ?

Answer 70

market share,
price levels,
customer base, etc.
can be changed when new companies enter the market.

Question 71

There is a constant pressure on the existing organizations to react and adjust to this pressure. The threat of new market entrants is defined by?

Answer 71

business specific market entry barriers.

Question 72

Market entry barriers are high if there are:

Answer 72

==economies of scale (i.e. organizations need to be a certain size in order to be more efficient)

==high initial costs and high fixed costs

==cost advantages of existing organizations through experience effects or through employment of depreciated but still functioning machines and equipment

Answer 73

==brand loyal customers

==patents, licenses, etc. which protect the intellectual property of organizations

==scarce resources (e.g. qualified human resources)

==controlled resources by existing organizations

Answer 74

–controlled distribution channels by existing organizations

–close customer relationships through service or maintenance contracts

–high switching costs for customers who want to change suppliers in the business

Question 75

Economies of scale

Answer 75

Economies of scale occur when the production volume depends on the number of production factors deployed. Product­ion costs do not necessarily decrease when the production volume increases.

Question 76

Loyal

Answer 76

Loyal customers have a close rela­tionship to a company or brand.

Question 77

Switching costs

Answer 77

Switching costs are the costs involved when a customer switches to a different supplier. These costs are monetary and psych­ological.

Question 78

Substitutes

The threat of substitute products is critical if?

Answer 78

the substitute is cheaper or more effective than the current product.

Question 79

These may then replace a large portion of the sales volume of the existing product and thus?

Answer 79

reduce sales and profit of existing organizations.

Question 80

Similar to the threats of new market entrants, the threat of substitute products depends on various factors such as:

Answer 80

==the degree of customer loyalty

==the intensity of the customer relationship

==how high the switching costs are for the customer

Question 81

Intensity

Answer 81

Intensity describes the degree and frequency of the customer contact.

Question 82

Suppliers

Answer 82

Suppliers are all the supply sources that are necessary for an organization to be able to produce the product or service.

Suppliers provide the necessary input to make the product.

Question 83

Powerful suppliers can increase the prices for their products and therefore reduce?

Answer 83

the profit of the organization to which they supply the product.

Question 84

Intensity

Answer 84

Intensity describes the degree and frequency of the customer contact.

Question 85

Input

Answer 85

Input includes all efforts such as materials, personnel, etc. that are necessary to produce the product or service.

Question 86

Suppliers are powerful if:

Answer 86

The market is dominated by few large suppliers.

The product supplied is highly specialized or rare.

The company that buys from the supplier is small and insignificant to the supplier.

Answer 87

There are no substitutes for this specific input.

The switching costs to a new supplier are high.

A forward integration is feasible for the supplier, meaning that the supplier could buy the company to whom it supplies.

Question 88

The example of the forward integration is ?

Answer 88

evident in the case of charter airlines.

Question 89

Many airlines do not sell through travel agents as a distribution channel but rather sell directly to the traveler via?

Answer 89

the internet.

Question 90

This example demonstrates how these airlines have?

Answer 90

forward integrated their distribution.

Question 91

If a supplier is powerful, the businesses that operate in this market experience?

Answer 91

a high pressure on their profit margins.

It is more difficult to maintain a profitable business.

Question 92

The relationship with important suppliers can have a strong impact on?

Answer 92

the strategic plan of an organization.

Question 93

Let us return to our case study of the Lars bank, which is?

Answer 93

looking at opportunities for financing real estate in Turkey.

Questions four to ten on the employee’s list concern Porter’s Five Forces model.

Question 94

Firstly, the questions: “Which customers should we target, private investors or real estate companies?”

Answer 94

and “How could the customers influence the financing terms of the bank?” look at the customer and how much power he has.

Question 95

Small private customers who are buying a home will certainly have less power than?

Answer 95

large real estate companies.

Question 96

Real estate companies regularly invest in
large apartment buildings and therefore have a?

Answer 96

great deal more power in negotiating financing terms with the bank. The bank has to decide who their customer is.

Question 97

The next questions: “What is the competition like in the Turkish market?” and “What other European competitors might become active in the Turkish market?

Answer 97

To what extent and how?” evaluate both the existing competitive situation in Turkey and potential new competitors.

Question 98

Certainly, Lars Bank will not be the only bank to consider entering the Turkish market once ?

Answer 98

the legal changes are finalized.

Therefore, a possible strategy has to look at the competitive landscape.

Question 99

The next question: “What alternative financing options are available to Turkish customers?” is concerned with?

Answer 99

possible substitutes or, in this case, other financing options.

Question 100

Other financing options may be available in Turkey, such as?

Answer 100

loans supported by the employer.

Question 101

The second to last question: “How are real estate projects sold? Who mediates real estate projects in Turkey?” looks at the supply situation. In this case, the bank needs to?

Answer 101

find out where and how to get information on real estate projects.

Question 102

Analysis, Strategic Capabilities, and the Five Forces Model

The analysis of Porter’s Five Forces in business can be used for three areas of a strategic plan.

Answer 102

1-Analysis of the market attractiveness (static)
2-Analysis of the development of the market attractiveness (dynamic)
3-Analysis of the strategic possibilities

Question 103

Analysis of the market attractiveness (static)

Answer 103

The model helps to define the market attractiveness of a business.

It helps with decisions concerning entering or remaining in a specific market segment.

The model also allows the analysis of the influence of the forces on the individual organization and on its competitors.

This helps to determine the organization’s position in the market.

Question 104

Different companies have different resources and competences that permit different strategic decisions. The strategic decisions of the companies in turn influence?

Answer 104

the competitive structure of a business.

Question 105

Analysis of the development of the market attractiveness (dynamic)

Answer 105

Together with the PESTEL analysis, the Five Forces model can show developments and changes in a business.

This trend analysis can be used to look at the attractiveness of the business in the future.

Question 106

The political,
economic,
social,
technological,
ecological,
and legal developments

can influence one or several of the five forces. This can significantly influence?

Answer 106

the distribution of power of the forces.

Question 107

Analysis of the strategic possibilities

The analysis of the intensity of the different forces on the organization provides?

Answer 107

insight into opportunities to influence or use the forces to the organization’s advantage.

Question 108

This might lead to a completely new strategic orientation, which could influence?

Answer 108

the position of the organization in the market place, or the differentiation of the products or services, or even the decision to form strategic partnerships.

Question 109

In our case study, the Lars Bank is investigating the question: “Would the Turkish market be of interest to Lars bank?” This is the basic strategic question that follow the macro- and micro-analysis of the environment. Thus,?

Answer 109

Porter’s model allows a systematic and structured analysis of the competitive situation and position of an organization.

Question 110

As stated earlier, the model can be used to ?

Answer 110

analyze a specific situation, a specific market segment, or a specific region.

Question 111

Position

Answer 111

Position is the active communication of a product or brand to the market place.

Question 112

Thus, Porter’s model allows a systematic and structured analysis of ؟

Answer 112

the competitive situation and position of an organization.

Question 113

As stated earlier, the model can be used to?

Answer 113

analyze a specific situation, a specific market segment, or a specific region.

Question 114

What Are The Strategic Options For an Organization?

After thoroughly examining the current and possibly the future development of the five forces, the organization can develop strategies to influence ?

Answer 114

one or several of the forces.

Question 115

Possible strategies should not just take the environment into account but should also look at?

Answer 115

the internal resources, capabilities, and goals of the organization.

Question 116

The following strategies are available to organizations:

Answer 116

1-Reducing the power of the suppliers
2-Reducing the power of buyers
3-Reducing the threat of new market entrants
4-Reducing the threat from substitutes:
5-Reducing the pressure from existing competitors

Question 117

Reducing the power of the suppliers

Answer 117

1-The organization can form partnerships with companies that use the same supplier, enabling them to buy higher quantities at lower prices. Edeka is a buying partnership of several supermarkets in Germany. The partnership started in 1898 and Edeka is now Germany’s largest food retailer.

Answer 118

2-Systems integration. Organizations can try to integrate (i.e. computer systems, ordering processes, etc.) with their supplier. This will streamline the process and make it cheaper for both companies. At the same time, it will become more difficult and more costly for the supplier to switch customers. Systems integration consolidates the relationship between companies.

Answer 119

2-An example of successful systems integration is Wal-Mart, a US-based retailer. In June 2003, Wal-Mart announced that its 100 largest suppliers would have to supply all their products with radio frequency identification (RFID) technology by January 2005. RFID allows products to be identified and located automatically. The reordering process is therefore automated as the system recognizes when the shelf is empty and products need to be reordered.

Answer 120

3-Companies can try to obtain knowledge regarding the production costs and methods of the supplier in order to use this information in negotiations.

Answer 121

4-Systems integration. Organizations can try to integrate (i.e. computer systems, ordering processes, etc.) with their supplier. This will streamline the process and make it cheaper for both companies. At the same time, it will become more difficult and more costly for the supplier to switch customers. Systems integration consolidates the relationship between companies.

Question 122

Reducing the power of buyers

Answer 122

1-Organizations can form partnerships with other suppliers to reduce the buying power of customers. These cooperatives can be seen in many areas.

Answer 123

For example, olive farmers in Italy deliver the olives together to the oil producer to guarantee the same prices for all farmers.

Answer 124

2-System integration works in both directions: from buyer to supplier and from supplier to buyer. It leads to optimized processes and lowers the costs for both parties.

Answer 125

It makes switching more difficult for both supplier and buyer. In the medical equipment market, some manufacturers of medical imaging equipment also supply data management systems to hospitals.

Answer 126

The imaging systems are then compatible with the patient data management system of the hospital. This creates a close relationship between manufacturer and hospital.

Answer 127

3-Increasing customer loyalty will also reduce the power of buyers and tie the buyer to the organization. L

Answer 128

loyal customers who buy repeatedly reduce the purchasing costs of an organization as they are familiar with the process and know how to order.

Answer 129

This de­­creases the process costs and increases the profitability of the organizations. Organizations can increase loyalty by consolidating relationships and by offering loyalty benefits to the customer.

Answer 130

4-The decision to purchase a specific product should not be based on the price. Apple understood that the highly competitive consumer electronics market is price driven.

Answer 131

However, through excellent marketing, they created a trendy image for their products and evaded price competition with the many other electronic companies in the market.

Answer 132

5-Organizations can also try to bypass influential distributors and sell directly to the customers. We have already provided the example of charter airlines that no longer sell tickets through travel agencies but directly to the customer.

Question 133

Reducing the threat of new market entrants

Answer 133

1-Organizations can weaken the threat of new market entrants by building a brand and creating customer loyalty. Both will make it more difficult for new entrants to establish a customer base.

Answer 134

2-Patents and licenses protect products and processes for a limited time and make it impossible for new entrants to sell similar products in the respective markets.

Answer 135

3-Organizations can increase the barriers to entry (see above).

Answer 136

4-Alliances with complementary products and services can improve customers’ choice of product from a single source. Travel agencies often have alliances with insurance companies to be able to offer travel insurance policies to their customers.

Answer 137

5-Alliances with suppliers or distributors build closer relationships, making it more difficult for new companies to enter the market.

Answer 138

6-Increasing efficiency in producing the product or service will give the organization cost and time advantages over new entrants. This can be attained through constant quality and process management.

Question 139

Alliance

Answer 139

An alliance is a partnership between two com­panies with similar interests and goals.

Question 140

Reducing the threat from substitutes:

Answer 140

1-In order to reduce the threat from substitutes, organizations can again integrate systems with their customers to make it more difficult for them to switch to substitute products.

Answer 141

2-Creating industry standards makes it difficult for substitutes to gain a market share. Wal-Mart’s RFID technology has expanded in the retail business in the US and may become an industry standard.

Answer 142

3-Forming alliances is another strategy to protect the organization from possible substitutes.

Answer 143

4-Market research and constant analyses of customer preferences can also protect from substitutes.

Answer 144

5-Organizations may decide to enter the substitute market themselves. Some manufacturers of glass bottles have invested in the production of plastic containers.

Question 145

Reducing the pressure from existing competitors

Answer 145

1-Companies should avoid price competition.

Answer 146

2-Differentiating products from competitive products, as Apple has done with many of their products, avoids direct competition.

Answer 147

3-Taking over a competitor is another strategy to ease the pressure, as the organization becomes larger.

Answer 148

4-Focusing on specific market segments (niche marketing) will avoid head-on competition in these smaller market segments.

Answer 149

5-Communicating with competitors establishes better relationships and avoids fierce competition.

Question 150

Critical Issues

Porter’s Five Forces model has received some criticism. Its main weakness is ?

Answer 150

a result of the historic context it was created in.

Question 151

At the beginning of the —————, the world economy was shaped by strong ——————————————————–patterns. Therefore, organizations’ primary goal was to guarantee their ——————————————————.

Answer 151

1980s

competition and cyclical growth

existence and profitability

Question 152

They had to optimize their strategy in relation to the competition. Today’s market is quite different. It is much more?

Answer 152

dynamic and less stable and predictable in its development.

Question 153

Therefore, the Five Forces model has limited applicability in today’s?

Answer 153

market place.

Question 154

the Five Forces model

Answer 154

—The model is based on a stable and static market structure. It is difficult to apply it to today’s dynamic markets. The technological advances and aggressive new market entries by companies from different businesses change the markets constantly.

Answer 155

The internet as a selling tool has put many established brick-and mortar companies that ignored this trend completely out of business.

Answer 156

—The Five Forces model is best used to analyze simply structured markets. It is difficult to analyze complex businesses with many intertwined structures and networks, products, and distribution structures using this model.

Answer 157

—Moreover, the model is also based on the classic free market. The stronger a business is regulated, the less effectively the model can be used to design sound strategies.

Question 158

More Information

Porter’s answer to such criticism can be found in Porter (2008).

Question 159

Each organization exists within an environment which influences its ———————-. The environment can be divided into the ——————————–(direct influences) and the ———————————— (factors in the wider environment of the organization). There are various methods of analyzing these factors.

Answer 159

strategy

micro-environment

macro-environment

Question 160

The PESTEL analysis:1

Answer 160

helps to examine the macro-environment. It looks at factors in the wider environment, such as trends and developments that influence the company strategy.

Question 161

The PESTEL analysis:2

Answer 161

looks at political, economic, social, technological, ecological, and legal aspects that influence strategic decisions.

Question 162

The PESTEL analysis:3

Answer 162

is broad and can be used to make decisions on locations, product portfolios, technological concepts, and other projects.

Question 163

Michael Porter’s Five Forces model helps to?

Answer 163

analyze the strategy of an organization and make planning decisions.

Question 164

The basic assumption of the model is that the business structure influences?

Answer 164

the attractiveness and the strategic behavior of companies operating in the business.

Question 165

The attractiveness of the market is influenced by?

Answer 165

five factors: buyers, competitors, new market entrants, substitutes, and suppliers.

Question 166

A thorough analysis of the five forces and their scope of influence allows organizations to?

Answer 166

evaluate the attractiveness of the market.

Question 167

In combination with the PESTEL analysis, a company can also evaluate trends in the market. Thus, the company can define?

Answer 167

the strategic possibilities and try to influence one or several of the five forces.

Question 168

The goal is to weaken suppliers’ and customers’ power over the organization, to minimize the threat from?

Answer 168

new market entrants and substitutes, and to minimize the pressure from existing competitors on the organization.

Question 169

Porter’s model has been criticized, as it is based on static and stable market conditions. Therefore, it cannot be applied to?

Answer 169

today’s complex and dynamic markets.