chp 3 key notes

MGT4394 Strategic Management Chapter 3 Preparation Document Evaluating the External Environment Read: Chapter 3 and view the videos mentioned in the chapter. In-Class: Analytical discussion and M/C Quiz regarding the chapter. NOTE: Chapters 3 & 4 are sprawling and absolutely critical. Your performance in the class overall will depend heavily upon the extent to which you are able to master the material in CH 3 and 4. KEY TAKE-AWAYS IN THE CHAPTER An organization’s environment is a major consideration in strategic assessment. The environment is the source of resources that the organization needs. It provides opportunities and threats, and it influences the various strategic decisions that executives must make. PESTEL is a framework that reflects general environmental factors—political, economic, sociocultural, technological, environmental, and legal—that can impact an organization either positively or negatively. In many cases, executives can prevent negative outcomes and leverage positive forces by performing a PESTEL analysis to diagnose where in the general environment important opportunities and threats arise. “How much profit potential exists in our industry?” is a key question for executives. Five Forces Analysis provides an answer to this question. It does this by considering the interactions among the competitors in an industry, potential new entrants to the industry, substitutes for the industry’s offerings, suppliers to the industry, and the industry’s buyers. Examination of the strategic groups in an industry provides a firm’s executives with a better understanding of their closest rivals, reveals alternative paths to success, and highlights untapped opportunities. KEY QUESTIONS FROM THE CHAPTER

1. What is the macro environment and why is it important to organizations? - External forces within an economy - Affect business operations in good or bad way - Make decisions based on how macro environment is doing 2. To what does the “macro-environment” refer? Why does it impact firms? - Macro environment factors like inflation, fiscal policy, monetary policy, consumer spending, GDP, and employment rates considerably affect business operations. Governments and institutions strategize policies based on these factors. 3. What are the three reasons that the environment matters? 1. An organization’s environment is a major consideration in strategic assessment. 2. The environment is the source of resources that the organization needs. 3. It provides opportunities and threats, and it influences the various strategic decisions that executives must make. 4. What are the PESTEL factors? Know examples of each. - Political - Political factors include elements such as tax policies, changes in trade restrictions and tariffs, and the stability of governments - Economic - Economic factors include elements such as interest rates, inflation rates, gross domestic product, unemployment rates, levels of disposable income, and the general growth or decline of the economy. - Socio-Cultural - Socio-cultural factors include trends in demographics such as population size, age, and ethnic mix, as well as cultural trends such as attitudes toward obesity and consumer activism. - Technological - Technological factors include, for example, changes in the rate of new product development, increases in automation, and advancements in service industry delivery. - Environmental - Environmental factors, also called ecological factors, include, for example, natural disasters, global warming, pollution, and weather patterns. - Legal - Legal factors include laws involving issues such as employment, health and safety, discrimination, and antitrust. 5. How is the PESTEL framework used to evaluate the external environment? - PESTEL analysis is a framework or tool used by marketers to analyze and monitor the macro-environmental (external marketing environment) factors that have an impact on an organization, company, or industry. It examines the Political, Economic, Social, Technological, Environmental, and Legal factors in

8. What are the Five Forces developed by Michael Porter? How is the Porter’s Five-Forces tool used to perform a competitive analysis of an industry? - Porter’s Five Forces: purpose of Five Forces Analysis is to identify how much profit potential exists in an industry 1. Threat of Potential Entrants: a. are firms that are not currently considered viable competitors in the industry but that may become viable competitors in the future b. Ex. Tesla Motors’ production of electric vehicles poses a threat to displace the traditional powers in the auto industry, and Chinese automakers are rumored to be eyeing the US market 2. Bargaining power of suppliers a. to the auto industry include firms such as Lear Corporation who produce auto interior systems. 3. Rivalry of industry competitors a. in the auto industry include firms such as Ford, Fiat Chrysler, and GM. 4. Bargaining power of buyers a. are those firms that buy directly from the industry such as automobile dealerships. Automakers also have to pay careful attention to end users, of course, such as individual drivers and rental car agencies. 5. Threat of substitutes a. for the auto industry’s products include bicycles and mass transit. Luckily for automakers competing in the US market, Americans are notoriously reluctant to embrace these substitutes. - If none of these five forces works to undermine profits in the industry, then the profit potential is very strong. - If all the forces work to undermine profits, then the profit potential is very weak 9. Imagine you are the president of your college or university. Which of the five forces would be most important to you? Why? - Rivalry - Everyone is about the same, you aren't scared of a new college coming to market, buyers, etc - You are nervous about pre existing other colleges and universities that offer what you offer as well 10. What are strategic groups and how are they useful to evaluate the competitive environment? - Strategic groups: sets of firms that follow similar strategies to one another - consists of a set of industry competitors that have similar characteristics to one another but differ in important ways from the members of other groups

- Useful in 3 ways 1. When assessing their firm’s performance and considering strategic moves, the other members of a group are often the best references for executives to consider. 2. strategies pursued by firms within other strategic groups highlight alternative paths to success. 3. the analysis of strategic groups can reveal gaps in the industry that represent untapped opportunities. - Examination of the strategic groups in an industry provides a firm’s executives with a better understanding of their closest rivals, reveals alternative paths to success, and highlights untapped opportunities.