Chapter 3

How is a task environment different from a general environment?

-External factors in the firm's general environment (PESTEL) are ones that managers have little direct influence over, such as macroeconomic factors (e.g. interest or currency exchange rates) -In contrast, external factors in the firm's task environment(Five Forces) are ones that managers do have some influence over, such as composition of their strategic groups (a set of close rivals) or the structure of the industry

What does PESTEL stand for?

-Political -Economic -Sociocultural -Technological -Ecological -Legal

what are the five forces?

1) Threat of Entry 2) Power of Suppliers 3) Power of Buyers 4) Threat of Substitutes 5) Rivalry among Existing Competitors

Power of Suppliers

captures pressures that industry suppliers can exert on an industry's profit potential

Power of Buyers

concerns the pressure an industry's customers can put on producers' margins in the industry by demanding a lower price or higher product

Technological

capture the application of knowledge to create new processes and products

What are the drawbacks of Porter's Five Forces model?

Although the five forces plus complements model is useful in understanding an industry's profit potential, it provides only a point-in-time snapshot of a moving target. With this model (as with other static models), one cannot determine the changing speed of an industry or the rate of innovation. This DRAWBACK implies that managers must repeat their analysis over time to create a more accurate picture of their industry. It is therefore important that managers consider industry dynamics."

Define PESTEL analysis

Provides a relatively straightforward way to scan, monitor, and evaluate the important external factors and trends that might impinge upon a firm. These factors can create both opportunities and threats for the firm.

Threat of Entry

The risk that potential competitors will enter an industry

What are strategic groups?

The set of companies that pursue a similar strategy within a specific industry

Cumulative learning and experience effects affects which of the five forces?

Threat of Entry: The risk that potential competitors will enter an industry Entry Barriers: Obstacles that determine how easily a firm can enter an industry and often significantly predict industry potential Ex: Tesla now has >10 yrs of experience in designing & building high-performance all-electric vehicles of superior quality & design. Attempting to obtain such deep knowledge within a shorter time frame is often costly, if not impossible, which in turn constitutes a formidable barrier to entry.

define the five forces model

a framework that identifies forces that determine the profit potential of an industry and shape a firm's competitive strategy

Sociocultural

capture a society's cultures, norms, and values Demographic trends are also important sociocultural factors

What is an economy of scale?

cost advantages that accrue to firms with larger output because they can spread fixed costs over more units, employ technology more efficiently, benefit from a more specialized division of labor, and demand better terms for their suppliers -These factors in turn drive down the cost per unit, allowing large incumbent firms to enjoy a cost advantage over new entrants that cannot muster such scale

Rivalry among Existing Competitors

describes the intensity with which companies within the same industry jockey (struggle by every available means to gain or achieve something) for market share and profitability

Economic

factors in a firm's external environment are largely macroeconomic, affecting economy-wide phenomena Growth Rates Levels of Employment Interest Rates Price Stability (Inflation and Deflation) Currency Exchange Rates

Ecological

factors involve broad environmental issues such as the natural environment, global warming, and sustainable economic growth

Legal

official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions - all of which can have a direct bearing on a firm's profit potential

Political

result from the processes and actions of government bodies that can influence the decisions and behavior of firms

Threat of Substitutes

the idea that products/services available from outside the given industry will come close to meeting the needs of current customers