Chapter 4Chapter 4

The External The External EnvironmentEnvironment

Learning ObjectivesLearning Objectives

1. Three tiers of environmental factors that affect firm performance

2 Five factors in the remote environment2. Five factors in the remote environment3. Examples of the economic, social, political,

technological, and ecological influences on a business4. The five forces model of industry analysis and give

examples5. The influences of entry barriers, supplier power, buyer

power substitute availability and competitive rivalry onpower, substitute availability, and competitive rivalry on a business

6. The five factors in the operating environment7. The influences of competitors, creditors, customers,

labor, and direct suppliers on a business

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The Firm’s External EnvironmentThe Firm’s External Environment

The factors beyond the control of the firm that influence its choice of direction and action, organizational structure, and internal processesComprised of following Components:

– Remote environment– Industry environment– Operating environment

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Firm’s External EnvironmentFirm’s External Environment

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Remote EnvironmentRemote Environment

Economic, social, , ,political, technological, and ecological factors that originate beyond, and usually irrespective of, any single firm’s operating

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any single firm s operating situation.

Remote EnvironmentRemote Environment

• Economic Factors• Social Factors• Political Factors• Technological Factors• Ecological Factors

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Economic FactorsEconomic Factors

1. Prime interest rates2 Inflation rates2. Inflation rates3. Trends in the growth of the

gross national product 4. Unemployment rates5. Globalization of the economy6. Outsourcing

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Social FactorsSocial Factors

Present in the external environment:• Beliefs & Values

Attit d & O i i• Attitudes & Opinions• Lifestyles

Developed from:• Cultural conditioning• Ecological conditioning• Demographic makeup• Religion• Education• Ethnic conditioning

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Political FactorsPolitical Factors

Political constraints on firms:• Fair-trade DecisionsFair trade Decisions• Antitrust Laws• Tax Programs• Minimum Wage Legislation• Pollution and Pricing Policies• Administrative jawboning

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Impact of Political ActivityImpact of Political Activity

Political activity has a significant impact on two governmentalimpact on two governmental functions that influence the remote environment of firms:• Supplier function• Customer function

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Technological FactorsTechnological Factors

Technological forecasting helps protect and improve the profitability of firms in growing industries. It alerts strategic managers to impending challenges and promising opportunities. The key to beneficial forecasting of t h l i l d t li i t ltechnological advancement lies in accurately predicting future technological capabilities and their probable impacts.

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Technological ForecastingTechnological Forecasting

The quasi-science of anticipating environmental and competitiveenvironmental and competitive changes and estimating their importance to an organization’s operations.

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Ecological FactorsEcological Factors

Ecology refers to the relationships among human beings and other living things and g g gthe air, soil, and water that supports them. Threats to our life-supporting ecology caused principally by human activities in an industrial society are commonly referred to as pollutionpLoss of habitat and biodiversityEnvironmental legislationEco-efficiency

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International EnvironmentInternational Environment

Monitoring the international environment involves assessing each non-domestic market on the same factors that are used in a domesticon the same factors that are used in a domestic assessment. While the importance of factors will differ, the same set of considerations can be used for each country.Economic, political, legal, and social factors areEconomic, political, legal, and social factors are used to assess international environments. One complication to this process is that the interplay among international markets must be considered.

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Industry EnvironmentIndustry Environment

Harvard Prof. Michael E. Porterpropelled the concept of industry environment into the foreground of gstrategic thought and business planning. The cornerstone of Porter’s work first appeared in the Harvard Business Review, in which he explains the five forces that shape competition in an industryindustry. Porter’s well-defined analytic framework helps strategic managers to link remote factors to their effects on a firm’s operating environment.

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Competitive Forces Shape StrategyCompetitive Forces Shape Strategy

The essence of strategy formulation is coping with competition. Intense competition in an industry is neither coincidence nor bad luck. Competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established

b t t i ti l i d tcombatants in a particular industry. The corporate strategists’ goal is to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favor. 4-16

Forces Driving Industry CompetitionForces Driving Industry Competition

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• Economies of Scale• Product Differentiation

Threat of Threat of EntryEntry

• Capital Requirements• Cost Disadvantages Independent of Size• Access to Distribution Channels• Government Policy

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Powerful SuppliersPowerful Suppliers

A supplier group is powerful if:It is dominated by a few companies and is more concentrated than the industry it sells to Its product is unique or at least differentiated, or if it has built-up switching costs It is not obliged to contend with other products for sale to the industry It poses a credible threat of integrating forward into the industry’s business The industry is not an important customer of the supplier group

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Powerful BuyersPowerful Buyers

A buyer group is powerful if: It is concentrated or purchases in large volumes The products it purchases from the industry areThe products it purchases from the industry are standardThe products it purchases from the industry form a component of its product and represent a significant fraction of its costIt earns low profitsThe industry’s product is unimportant to the quality ofThe industry s product is unimportant to the quality of the buyers’ products or services The industry’s product does not save the buyer money The buyers pose a credible threat of integrating backward 4-20

Substitute ProductsSubstitute Products

By placing a ceiling on the prices it can charge, substitute products or services limit the potential of an industry Substitutes not only limit profits in normal times but also reduce the bonanza an industry can reap in boom times Substitute products that deserve the most pattention strategically are those that are

subject to trends improving their price-performance trade-off with the industry’s product orproduced by industries earning high profits

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Jockeying for PositionJockeying for Position

Intense rivalry occurs when: Competitors are numerous or are roughly equalIndustry growth is slow precipitating fights forIndustry growth is slow, precipitating fights for market share that involve expansionThe product or service lacks differentiation or switching costsFixed costs are high or the product is perishable, creating strong temptation to cut prices Capacity normally is augmented in largeCapacity normally is augmented in large incrementsExit barriers are highRivals are diverse in strategy, origin, and personality

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Industry Analysis Industry Analysis & Competitive Analysis& Competitive Analysis

An industry is a collection of firms that offer similar products or services. p

Structural attributes are the enduring characteristics that give an industry its distinctive character.

Concentration refers to the extent to which industry sales are dominated by only a fewindustry sales are dominated by only a few firms.

Barriers to entry are the obstacles that a firm must overcome to enter an industry.

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Competitive AnalysisCompetitive Analysis

1. How do other firms define the scope of their market?

2. How similar are the benefits the customers derive from the products and services that other firms offer? The more similar the benefits of products or services, the higher the level of substitutability between them.

3. How committed are other firms to the industry?

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Operating EnvironmentOperating Environment

Also called competitive or task environmentIncludes competitor positions and customerIncludes competitor positions and customer profiling based on the following factors:

GeographicDemographicPsychographicBuyer Behavior

Also includes suppliers & creditors and HRM

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Competitor’s profileCompetitor’s profile

1. Market share

2. Breadth of product line

11. Financial position

12. Relative product quality

3. Effectiveness of sales distribution

4. Proprietary & key account advantages

5. Price competitiveness

6. Advertising & promotion

13. R&D advantages position

14. Caliber of personnel

15. General images

16. Customer profile

17 Patents & copyrightseffectiveness

7. Location & age of facility

8. Capacity & productivity

9. Experience

10. Raw material

17. Patents & copyrights

18. Union relations

19. Technological position

20. Community reputation

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HR: Nature of the Labor MarketHR: Nature of the Labor Market

Access to personnel is affected by 4 factors: • Firm’s reputation as an employerFirm s reputation as an employer• Local employment rates• Availability of people with the needed skills• Its relationship with Labor Unions.

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Emphasis on Environmental FactorsEmphasis on Environmental Factors

Differing external elements affect different strategies at different times and with varying strengths O l t i t i th t th ff t f th t dOnly certainty is that the effect of the remote and operating environments will be uncertain until a strategy is implemented Many managers, particularly in less powerful firms, minimize long-term planningInstead they allow managers to adapt to newInstead, they allow managers to adapt to new pressures from the environment Absence of strong resources and psychological commitment to a proactive strategy effectively bars a firm from assuming a leadership role in its environment

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Emphasis on Environmental FactorsEmphasis on Environmental Factors

Assessing the potential of changes in the external environment offers a real advantageIt enables decision makers:

Narrow the range of available optionsEliminate options inconsistent with the forecast opportunities

E i t t ld id tifi● Environment assessment seldom identifies the best strategy but it leads to the elimination of all but the most promising options.

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Industry AnalysisIndustry Analysis

• The External Factor Evaluation (EFE) Matrix: summarizing and evaluating external factors: g geconomic, social, political, technology,cultural, demographic, environmental, competitors…

Opportunities and Threats• The Competitive Profile Matrix (CPM):

identifying major competitors and strengthsidentifying major competitors and strengths and weaknesses Critical success factors

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Key TermsKey Terms

• Barriers to entry • Industry environment• Eco-efficiency• Ecology• Economies of scale• External environment

I d t

• Operating environment

• Pollution• Product

differentiation• Industry differentiation• Remote environment• Technological

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