Chapter 2: External Environment and Porter's Five Forces

Vocabulary flashcards covering external environment, PESTLE, five forces, and related concepts from the notes.

External environment

Everything outside the organization that can impact or be impacted by the firm; includes general, industry, and competitor levels with bidirectional influence.

General environment

Macro factors that affect all organizations (demographic, economic, political/legal, sociocultural, technological, global, and environmental).

Industry environment

Factors specific to a given industry that shape profitability and competitive dynamics.

Competitor environment

The subset of the external environment focused on a firm’s direct rivals and their actions.

PESTLE analysis

A framework for analyzing general environment factors: political, economic, sociocultural, technological, environmental, and legal (often with demographic/global as well).

Demographic factors

Population size, age structure, geographic distribution, ethnic mix, and income distribution that influence market opportunity.

Economic factors

Inflation, interest rates, debt costs, exchange rates, and other macroeconomic conditions affecting investment and growth.

Sociocultural factors

Societal attitudes, cultural values, health consciousness, and inclusivity affecting consumer behavior and brand reception.

Technological factors

Advances in technology (AI, cybersecurity, blockchain, etc.) that alter products, processes, and business models.

Global factors

How an organization is positioned globally—manufacturing, sourcing, and supply chain strategy across borders.

Sustainable/Environmental factors

Environmental concerns and sustainability practices shaping product design, operations, and stakeholder trust.

Political factors

Government policies and regulations, including tariffs and antitrust, that influence costs and market access.

Barriers to entry

Obstacles that make entry into an industry difficult, protecting incumbents (economies of scale, capital, switching costs, distribution access, etc.).

Economies of scale

Cost advantages from large-scale production, lowering average costs and creating entry barriers.

Capital requirements

The need for substantial capital to enter or compete in an industry; high capital needs deter entrants.

Switching costs

One-time costs customers incur to change suppliers; higher switching costs reduce threat from entrants and substitutes.

Distribution channels

Pathways through which products reach customers; control/access can raise barriers to entry.

Brand differentiation

Distinctive branding and perceived uniqueness that creates customer loyalty and deters entry.

Power of suppliers

Supplier bargaining power; strong when inputs are concentrated, essential, or few in number.

Power of buyers

Buyer bargaining power; strong when buyers purchase a large share, products are undifferentiated, or switching costs are low.

Substitutes

Alternate products or services that satisfy the same need; threat rises with similar value and low switching costs.

Rivalry among existing competitors

Competitive intensity within an industry; higher with many rivals, slow growth, high fixed costs, or low differentiation.

Strategic groups

Subsets of firms within an industry that follow similar strategies; intra-group rivalry tends to be stronger.

Competitive intelligence / Competitor analysis

Systematically analyzing rivals' objectives, strategies, capabilities, and assumptions to anticipate moves.

Environmental analysis process

Four-step approach to external analysis: scanning, monitoring, forecasting, and assessing.

Scanning

Casting a wide net to identify early signals of external changes and potential relevance.

Monitoring

Ongoing observation of the most relevant external factors identified during scanning.

Forecasting

Projecting future trends and scenarios to anticipate impacts on the business model.

Assessing

Evaluating outcomes and feedback to inform the next cycle of external analysis.

AI as an external trend

Artificial intelligence as a major external factor influencing many industries, with examples like OpenAI and Alphabet responses.