Analyzing the External Environment of the Firm

Vocabulary terms and definitions from the lecture on analyzing a firm's external environment, covering SWOT, environmental segments, Porter's Five Forces, and scanning techniques.

SWOT Analysis

A framework for analyzing a firm's strategy by building on strengths, remedying weaknesses, taking advantage of opportunities, and protecting against threats.

Strengths and Weaknesses

Internal conditions of the firm that it must respectively build on or remedy.

Opportunities and Threats

Environmental conditions external to the firm that it must respectively take advantage of or protect itself from.

General Environment

Factors external to an industry, usually beyond a firm’s control, including demographic, sociocultural, legal/political, technological, economic, and global segments.

Demographic Segment

Factors such as an aging population, rising or declining affluence, and changes in ethnic composition or geographic distribution.

Sociocultural Segment

Factors including more women in the workforce, greater concern for healthy diets and physical fitness, and interest in the environment.

Political/Legal Segment

The area of the general environment containing laws and regulations such as the Americans with Disabilities Act (ADA), Sarbanes-Oxley Act, and deregulation.

Technological Segment

Innovation factors such as genetic engineering, CAD/CAM systems, wireless communication, and nanotechnology.

Economic Segment

Factors including interest rates, unemployment, Consumer Price index, and trends in GDP.

Global Segment

Factors involving international trade, currency exchange rates, foreign economies like India and China, and trade agreements like NAFTA, EU, or ASEAN.

Competitive Environment

Factors pertaining to an industry that affect a firm’s strategies, specifically competitors, customers, and suppliers.

Porter’s Five Forces Model

A framework for industry competition analysis including the threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, and intensity of rivalry.

Sources of Entry Barriers

Factors like economies of scale, product differentiation, capital requirements, switching costs, and access to distribution channels that protect established firms.

Bargaining Power of Buyers

The ability of customers to threaten an industry by forcing down prices, bargaining for higher quality, or playing competitors against each other.

Backward Integration

A credible threat posed by a buyer group where they might produce the industry's product themselves.

Bargaining Power of Suppliers

The ability of suppliers to exert power by threatening to raise prices or reduce the quality of purchased goods and services.

Forward Integration

A credible threat posed by a supplier group where they might enter the buyer's industry.

Threat of Substitute Products and Services

The limit on potential returns of an industry created by products from other industries that place a ceiling on prices.

Intensity of Rivalry

The degree of competition among existing competitors, manifested through price competition, advertising battles, and product introductions.

Strategic Groups

Clusters of firms within an industry that share similar strategies, such as breadths of product lines or geographic scope.

Environmental Scanning

Surveillance of a firm’s external environment to predict environmental changes to come and detect changes already under way in a proactive mode.

Environmental Monitoring

The tracking of the evolution of environmental trends, sequences of events, or streams of activities.

Competitive Intelligence

The process of defining and understanding a firm’s industry and identifying rivals’ strengths and weaknesses to help a firm avoid surprises.

Environmental Forecasting

The development of plausible projections about the direction, scope, speed, and intensity of environmental change.

Scenario Analysis

A tool for environmental forecasting that involves experts’ detailed assessments of societal, economic, political, or technological dimensions of the environment.