Business Policy & Strategy: The External Environment

Vocabulary terms and definitions covering the external environment analysis, Porter's Five Forces, the I/O and RBV models, and competitor intelligence based on the Business Policy & Strategy lecture notes.

I/O model

A logic suggesting that the profitability potential of an industry and the actions firms should take are determined by industry characteristics such as economies of scale, barriers to entry, and the degree of concentration.

Resource-Based View (RBV)

A model of above-average returns that assumes each organization is a collection of unique resources and capabilities which form the basis of a firm's strategy.

Resources

Inputs into a firm’s production process, including capital equipment, employee skills, patents, finances, and talented managers.

Capability

The capacity for a set of resources to perform a task or an activity in an integrative manner.

Core competencies

Capabilities that serve as a source of competitive advantage for a firm over its rivals.

Valuable

A resource or capability that allows a firm to take advantage of opportunities or neutralize threats in its external environment.

Rare

Resources or capabilities possessed by few, if any, current and potential competitors.

Costly to imitate

Resources or capabilities that are difficult for other firms to obtain.

Non-substitutable

Resources or capabilities that have no structural equivalents.

General environment

Dimensions in broader society that influence an industry and the firms within it, consisting of $7$ segments.

Industry environment

Factors that have a direct influence on firms and their competitive actions, specifically the structure and composition of the industry as analyzed via Porter’s $5$ forces.

Demographic segment

General environment segment concerned with customer/stakeholder base attributes like population size, age structure, geographic distribution, ethnic mix, and income distribution.

Economic segment

The nature and direction of the economy, including inflation rates, interest rates, trade deficits, budget deficits, and Gross Domestic Product.

Political/Legal segment

The influence of governments on competitive actions, involving antitrust laws, taxation laws, deregulation philosophies, and labor training laws.

Sociocultural segment

A society’s attitudes and cultural values, including workforce diversity, shifts in career preferences, and changes in product characteristic preferences.

Technological segment

Institutions and activities involved in creating new knowledge and translating it into new outputs, processes, and materials, including R&D expenditures.

Global segment

Factors encompassing new global markets, international political events, and different cultural and institutional characteristics.

Sustainable physical environment segment

Potential and actual changes in the physical environment and the business practices like energy consumption and renewable energy efforts intended to respond to them.

Scanning

Identifying early signals of environmental changes and trends.

Monitoring

Detecting meaning through ongoing observations of environmental changes and trends.

Forecasting

Developing projections of anticipated outcomes based on monitored changes and trends.

Assessing

Determining the timing and importance of environmental changes and trends for firms’ strategies and management.

Threat of Entry

The risk that potential competitors will enter an industry, which lowers profit potential and is influenced by entry barriers like economies of scale and capital requirements.

Bargaining Power of Suppliers

The pressure exerted by suppliers, which is high when the supplier industry is more concentrated than the buyer industry or when suppliers pose a threat of forward integration.

Bargaining Power of Buyers

The pressure exerted by customers, which is high when buyers purchase a large portion of output or when products are undifferentiated.

Threat of Substitutes

Goods or services from outside the industry that meet the same basic customer need, which is high when there is an attractive price-performance trade-off.

Rivalry Among Competitors

The intensity with which companies in the same industry compete for market share, influenced by the number of competitors, industry growth rate, and exit barriers.

Exit barriers

Economic and social factors that determine how easily a firm can leave an industry, such as specialized assets, strategic interrelationships, and fixed costs like employee benefits.

Complements

A product, service, or competency that adds value when used with the original product, increasing demand for the primary product.

Co-opetition

Cooperation among competitors to achieve a strategic objective.

Strategic groups

A set of companies that pursue a similar strategy in the same industry, typically clustered by dimensions like price policies or distribution channels.

Competitor intelligence

The set of data and information a firm gathers to better understand and anticipate competitors' objectives, strategies, assumptions, and capabilities.

Complementors

Companies or networks that sell goods or services compatible with the focal firm's offerings, often forming part of a business ecosystem.