The External Environment

Chapter 2

The External Environment

TRUE/FALSE QUESTIONS

1. Individual organizations typically have only a marginal impact on the broad environment.

Answer: T

2. The broad environment consists of sociocultural forces, competitive forces, technological trends, and political/legal forces.

Answer: F

3. Awareness of and compliance with the attitudes of society can help an organization avoid problems associated with a bad ethical reputation.

Answer: T

4. Exchange rates can influence the ability of a firm profitably to remove profits from foreign countries.

Answer: T

5. Technology is human knowledge about products and services and the ways they are made and delivered.

Answer: T

6. Industry regulation is increasing worldwide.

Answer: F

7. The task environment consists of stakeholders with whom organizations interact on a fairly regular basis.

Answer: T

8. Industries may be defined as a group of organizations that compete directly with one another to win orders or sales in the marketplace.

Answer: T

9. There are three major types of competitors discussed in Porter’s Five-Forces model: existing, potential, and indirect.

Answer: T

10. The power of a single customer is greater when there are many customers than when there are few.

Answer: F

11. Organizations that are in a weak position relative to their suppliers can attempt to balance power through vertical integration.

Answer: T

12. Low levels of competition may be caused by high fixed costs.

Answer: F

13. A strategic group map involves plotting industry rivals based on two or more strategic dimensions that are important to the industry.

Answer: T

14. The higher the entry barriers, the more intense is competition in an industry.

Answer: F

15. Discriminating and demanding buyers in the home country of a firm can help the firm to succeed as it competes in foreign markets.

Answer: T

MULTIPLE CHOICE QUESTIONS

16. What is a primary reason that an organization should monitor the broad environment?
17. To anticipate concerns and trends
18. To determine the firm’s internal strengths
19. To determine the firm’s internal weaknesses
20. To identify key employees within the firm
21. To determine the firm’s focus on manufacturing and materials management

Answer: A

17. An organization can typically have:
18. Little influence over events in its task environment
19. Little influence over major occurrences and patterns in the broad environment
20. Significant influence over major occurrences and patterns in the remote environment
21. Significant influence over major social trends
22. Significant influence on government policy in a nation as a whole

Answer: B

18. The broad environment consists of all of the following except:
19. Technological trends
20. Political and legal forces
21. Competitors
22. Economic forces
23. Sociocultural forces

Answer: C

19. Which of the following is part of the broad environment?
20. Competitors
21. Suppliers
22. Technological forces
23. Government agencies
24. Unions

Answer: C

20. Analysis of society is important for all of the following reasons except:
21. Awareness of what is happening in society virtually guarantees that an organization will be able to successfully compete in its own industry
22. Most of the other stakeholder groups are also members of society
23. Awareness of and compliance with the attitudes of society can help an organization avoid problems associated with being a bad corporate citizen
24. Changes in society can provide opportunities for organizations
25. Correct assessment of social trends can help businesses avoid restrictive legislation

Answer: A

21. Analysis of social trends is important because:
22. The values and beliefs of key stakeholders are derived from societal influences
23. Correct assessment of social trends can help businesses avoid restrictive legislation
24. Changes in society can create either opportunities or threats for organizations
25. All of these are correct
26. Only A and C are correct

Answer: D

22. Among the most critical economic factors to monitor are:
23. Interest rates
24. Economic growth
25. Foreign trade balances
26. Inflation rates
27. All of these factors are important

Answer: E

23. Among the following, the best definition of technology is:
24. Human knowledge about products and services and the ways they are made and delivered
25. Technical equipment such as computers and electronics
26. Knowledge about computers, electronics, and information systems
27. Knowledge about computers, electronics, and information systems as well as the equipment and systems themselves
28. All equipment that is used to create products and services

Answer: A

24. Which of the following is not included as a major force in Michael Porter’s Five-Forces Model of industry competition?
25. Existing competitors
26. Suppliers
27. Potential competitors
28. Unions
29. Indirect competitors

Answer: D

25. Suppliers tend to exhibit greater power if:
26. There are few suppliers of the raw material, product, or service
27. There are many substitutes for the product or service that suppliers sell
28. Suppliers are small businesses with regards to total sales volume
29. The suppliers’ products are undifferentiated and plentiful
30. Suppliers cannot integrate forward

Answer: A

26. The influence of potential competitors on industry competition is determined primarily by:
27. Buyer power
28. Supplier power
29. Strength of entry barriers
30. Strength of exit barriers
31. Threat of substitutes

Answer: C

27. Customers tend to exhibit a powerful force on competition in the industry if:
28. There are a large number of customers that buy the product
29. The customers make low volume purchases
30. Purchases customers make from the industry are large relative to the amount spent for items from other industries
31. The sellers’ products are highly differentiated
32. The customers are earning high profits

Answer: C

28. High levels of competition may be caused by:
29. Rapid industry growth
30. Low fixed costs
31. A small number of competitors
32. A lack of product differentiation
33. Low exit barriers

Answer: D

29. Which of the following may lead a firm to conclude that an industry is attractive to enter?
30. Strong supplier power
31. Strong customer power
32. No close substitutes
33. Many strong competitors
34. Low sales growth

Answer: C

30. All of the following are true about environmental uncertainty except:
31. It makes managerial decision making more difficult
32. Organizations feel most of its influence directly from the broad environment
33. Political power influences it
34. Economic power influences it
35. It often originates in the broad environment

Answer: B

31. What should organizations do with stakeholders that have a large influence on environmental uncertainty?
32. Fight against them with competitive weapons
33. Ignore them
34. Just monitor their activities
35. Partner with them
36. None of the above

Answer: D

32. Loosely coupled groups of autonomous firms that cooperate due to mutual interests are called:
33. Semiautonomous partnerships
34. Structural holes
35. Social networks
36. Business networks
37. None of these

Answer: C

33. According to Michael Porter, all of the following are conditions that create advantages for firms in certain countries and industries except:
34. Suppliers to a particular industry are the very best in the world
35. Strong industry competition
36. Buyers are among the most demanding in the world
37. Shortages of critical raw materials or other supplies
38. Ability to attract the most talented managers

Answer: D

34. According to Michael Porter, conditions that create advantages for firms in certain countries and industries include:
35. Suppliers to a particular industry are the very best in the world
36. Strong industry competition
37. Buyers are among the most demanding in the world
38. Ability to attract the most talented managers
39. All of the above

Answer: E

ESSAY QUESTIONS

35. What is a firm’s broad environment? To what extent can the broad environment influence a firm? To what extent can one firm influence the broad environment?

Answer: The broad environment is made up of sociocultural forces, economic forces, technological trends, and political/legal forces. In general, although the broad environment can have a large influence on a firm and its outcomes, any one firm can have only a marginal influence on its broad environment.

36. Why is analysis of social trends important? Give examples.

Answer: First, the values and beliefs of key stakeholders are derived from broader societal influences. Second, awareness of and compliance with the attitudes of society can help an organization avoid problems associated with being a “bad corporate citizen.” Third, correct assessment of social trends can help businesses avoid restrictive legislation. Industries and organizations that police themselves are less likely to be the target of legislative activity. Legislative activity is often in response to a public outcry against the actions of firms or industries, as has been the case with some intrusive and unethical telemarketing activity. The fourth reason that analysis of social values is important is that changes in society can create either opportunities for or threats to an organization’s revenue growth and profit prospects.

37. What are some of the most critical economic factors for a firm to track? Why are they important?

Answer: Economic growth, interest rates, the availability of credit, inflation rates, foreign exchange rates, and foreign trade balances are among the most critical economic factors.

Economic growth can have a large impact on consumer demand for products and services. Inflation and the availability of credit, among other factors, influence interest rates that organizations have to pay. High interest payments can constrain the strategic flexibility of firms by making new ventures and capacity expansions prohibitively expensive. On the other hand, low interest rates can increase strategic flexibility for organizations and also influence demand by encouraging customers to purchase goods and services on credit. Foreign exchange rates are another major source of uncertainty for global organizations. Organizations sometimes earn a profit in a foreign country, only to see the profit turn into a loss due to unfavorable currency translations. Finally, foreign trade balances are highly relevant to both domestic and global organizations because they are an indication of the nature of trade legislation that might be expected in the future.

38. According to Porter, when do customers exhibit a powerful force on competition in an industry?

Answer: According to Porter, customers tend to exhibit a powerful force on competition in an industry if: (1) There are a small number of customers. In this case, losing one customer makes a big difference. (2) The customers make high-volume purchases. (3) The purchases customers make from the industry are large relative to the amount expended for items from other industries. Here customers will expend considerable effort to shop for the best price. (4) The products customers are buying are undifferentiated (also known as standard or generic). This means that customers are not concerned about which company they buy from. (5) The customers earn low profits. Customers who earn low profits are under constant pressure to keep the costs of their purchases down. (6) The customers can easily get accurate information on the selling industry’s costs and demand. This gives them a real edge during negotiations. (7) The customers can easily integrate backward and become their own suppliers. Both Sears and General Motors have been known to buy supplier companies when they are unhappy with pricing. (8) Customers can easily switch from one seller to another.

39. What are strategic groups? Why are strategic group maps useful?

Answer: Strategic groups consist of firms that end up in the same general location of a strategic group map. This map is constructed by plotting industry rivals based on two or more strategic dimensions that are important to strategy in the industry. The axes of the map describe strategy, not performance. The companies in each strategic group respond to external forces in a way that is similar to each other and different from companies in other strategic groups. Strategic group maps are useful in tracking the evolution of an industry over time. Companies may move from one group to another, and groups may change their position based on the strategic dimensions. However, organizations can belong to several different strategic groups, depending on the dimensions that are used to form the groups. This subjectivity of strategic group maps may be a weakness, but the use of the maps can help a firm address competitive rivalry issues.

40. According to Michael Porter, what are the conditions that create advantages for firms in certain countries and industries? Please explain each of them.

Answer: (1) Factor conditions. These are endowments enjoyed by specific nations such as uncommon raw materials or laborers with specific skills that can lead to advantages in particular industries. Other factor conditions that can lead to advantage are superior factor-producing mechanisms such as excellent schools or universities. (2) Demand conditions. If buyers of a product or service in a particular country are among the most discriminating and demanding in the world, competitors in that industry have to work harder to please them. (3) Related and supporting industries. If suppliers to an industry are the very best in the world, their excellence is passed on to the buyers who use their products. Advantages can also be obtained if firms in related industries are also global leaders. (4) Firm strategy, structure, and rivalry. Sometimes the management techniques that are customary in a nation’s businesses are conducive to success in particular industries. Also, particular industries may attract the most talented managers in the nation. In addition, strong competition can force competitors to excel, thus making them stronger in world markets.