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The Firms External Environment
Remote Environment (Global and Domestic)
Industry Environment (Global and Domestic)
Operating Environment (Global and Domestic)
Economic Social Political Technological
Ecological
Entry barriers
Supplier power
Buyer power
Substitute availability Competitive rivalry
Competitors
Creditors
Customers
Labor Suppliers
THE FIRM
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2Economic Factors
Concern nature and direction of economy inwhich a firm operates
Types of factors
General availability of credit
Level of disposable income
Propensity of people to spend
Prime interest rates
Inflation rates
Trends in growth of gross national product
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3Social Factors
Include beliefs, values, opinions, and lifestyles
of people
Recent social trendsEntry of large numbers of women into labor market
Accelerating interest of consumers and employees
in quality-of-life issues
Shift in age distribution of population
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4Political Factors
Define legal and regulatory parameters withinwhich firms must operate
Types of factors
Fair-trade decisions
Antitrust laws
Tax programs
Minimum wage legislation
Pollution and pricing policies
Administrative jawboning
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5Technological Factors
Focus on technological changes affecting industry
Types of changes
New products
Improvements in existing products
Manufacturing and marketing techniques
Role of technological forecasting
Foresees advancements and estimating their impact
Alerts managers to impending challenges and
promising opportunities
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6Ecological Factors
Involve relationships among human beingsand other living things and air, soil, and water
Current concerns
Global warmingLoss of habitat and biodiversity
Air, water, and land pollution
Responsibilities of firmsEliminating toxic by-products of current
manufacturing processes
Cleaning up prior environmental damage
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7Factors Used to Assess the International Environment
Economic Env. Level of economic development Population GNP Per capita income
Literacy level Social infrastructureNatural resources Climate
Membership in economic blocs Monetary and fiscal policies Wage and salary levels Currency convertibility
Inflation and interest rates Taxation system
Political System Form of government Political ideology
Stability of government
Strength of opposition parties Social unrest
Political strife and insurgency
Governmental attitude towards
foreign firms Foreign policy
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8Factors Used to Assess the International Environment
Legal Environment
Legal tradition
Effectiveness of legal system
Treaties with foreign nations
Patent trademark laws
Laws affecting business firms
Cultural Env.
Customs, norms, values,
beliefs
Language
Attitudes
Motivations
Social institutions
Status symbols
Religious beliefs
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Firms External Environment
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Industry/Competitive Environment
Harvard professorMichael E. Porter propelledthe concept of industry environment into theforeground of strategic thought and businessplanning.
The cornerstone of Porters work first appeared intheHarvard Business Review, in which heexplains the five forces that shape competition in
an industry. Porters well-defined analytic framework helps
strategic managers to link remote factors to theireffects on a firms operating environment.
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Competitive Forces Shape Strategy
The essence of strategy formulation is coping withcompetition.
Intense competition in an industry is neithercoincidence nor bad luck.
Competition in an industry is rooted in itsunderlying economics, and competitive forcesexist that go well beyond the established
combatants in a particular industry. The corporate strategists goal is to find a positionin the industry where his or her company can bestdefend itself against these forces or can influence
them in its favor.
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The Goal of Competitive Strategy
To Achieve a Defensible Position Against the
Competitive (Five) Forces that Are Constantly
Working to Erode Industrywide Profitability
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Competitive Forces
Any Entity (Group or Class of
Firms) that has the Potential to
Erode Profitability Among Firms
within an Industry
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Government Influence on the Model
We Consider the Influence of
Government as Felt through its
Role(s) as one of the Five Forces:
Government can be a Potential
Entrant, Supplier, Buyer, Substitute,
or Rival Firm
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Five Forces Driving Industry Competition
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Breakout Groups by Case
1. Define your Industry
2. Most Significant General Environmental Factor
3. Top Two More Significant of the Five Forces
You have 15 minutes!
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The Five Forces
Threat of Entry
Bargaining Power of Suppliers
Bargaining Power of Buyers
Pressure from Substitute Products
Rivalry Among Existing Firms
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Forces Affecting Entry Decision
Economies of Scale
Product Differentiation
Capital Requirements
Cost Disadvantages
Independent of Size
Access to Distribution
Channels
Government Policy
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Powerful 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 leastdifferentiated, 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 theindustrys business
The industry is not an important customer of the supplier
group
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Powerful Buyers
A buyer group is powerful if: It is concentrated or purchases in
large volumes
The products it purchases from the industry are standard
The products it purchases from the industry form acomponent of its product and represent a significantfraction of its cost
It earns low profits The industrys product is unimportant to the quality of the
buyers products or services
The industrys product does not save the buyer money
The buyers pose a credible threat of integrating backward
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Substitute Products
By placing a ceiling on the prices it can charge,substitute products or services limit the potential ofan industry
Substitutes not only limit profits in normal timesbut also reduce the bonanza an industry can reap inboom times
Substitute products that deserve the most attention
strategically are those that are subject to trends improving their price-performance
trade-off with the industrys product or
produced by industries earning high profits
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Jockeying for Position
Intense rivalry occurs when: Competitors are numerous or are roughly equal
Industry growth is slow, precipitating fights for market
share that involve expansion The product or service lacks differentiation or switching
costs
Fixed costs are high or the product is perishable, creating
strong temptation to cut prices
Capacity normally is augmented in large increments
Exit barriers are high
Rivals are diverse in strategy, origin, and personality
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Industry Analysis
& Competitive Analysis
An industry is a collection of firms that offersimilar products or services.
Structural attributes are the enduring
characteristics that give an industry its distinctivecharacter.
Concentration refers to the extent to which
industry 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 Analysis
1. How do other firms define the scope of theirmarket?
2. How similar are the benefits the customers derive
from the products and services that other firmsoffer? 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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Direct/Operating Environment
Also called taskenvironment
Includes competitor positions and customer
profiling based on the following factors: Geographic
Demographic
Psychographic
Buyer Behavior
Also includes suppliers & creditors and HRM
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HR: Nature of the Labor Market
Access to personnel is affected by 4 factors: Firms 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 Factors
Differing external elements affect different strategies atdifferent times and with varying strengths
Only certainty is that the effect of the remote andoperating environments will be uncertain until a strategy
is implemented Many managers, particularly in less powerful firms,
minimize long-term planning
Instead, 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 firmfrom assuming a leadership role in its environment