Session 2THE EXTERNAL ENVIRONMENT

Mata kuliah : A0012 – Manajemen Umum Tahun : 2010

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Learning Objectives• After studying The External Environment, you will

know:– how environmental forces influence organizations, as well

as how organizations can influence their environments– how to make a distinction between the

macroenvironment and the competitive environment– why organizations should attend to economic and social

developments in the environments– how to analyze the competitive environment– how organizations respond to environmental uncertainty

Outline Materi

• The Macroenvironment• The Competitive Environment• Environmental Analysis• Responding to the Environment• Choosing a Response Approach•

Bina Nusantara

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The External Environment• Organizations are open systems

– affected by, and in turn affect, their external environments

• External environment– all relevant forces outside a firm’s boundaries

• relevant - factors to which managers must pay attention

– two elements comprise the external environment

•competitive environment - immediate environment surrounding a firm

•macroenvironment - fundamental factors that generally affect all organizations

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Laws andpolitics

Economy

Technology

DemographicsSocialvalues

MacroenvironmentCompetitiveEnvironment

OrganizationSuppliers

NewEntrants

SubstitutesRivals

Buyers

The External Environment

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The Macroenvironment• The macroenvironment

– most general elements in the external environment that can potentially influence strategic decisions

– all organizations are affected by the general components of the macroenvironment

• Laws and regulations– impose strategic constraints and provide opportunities– regulators - specific government organizations in a firm’s more

immediate task environment

• have the power to investigate company practices and take legal action to ensure compliance with the laws

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The Macroenvironment (cont.)• The economy

– created by complex interconnections among economies of different countries

– important elements include interest rates, inflation rates, unemployment rates, and the stock market

– economic conditions change and are difficult to predict

• Technology– technological advances create innovations in business

• new products, advanced production techniques, and improved methods of managing and communicating

– strategies that ignore or lag behind competitors in considering technology lead to obsolescence and extinction

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The Macroenvironment (cont.)• Demographics

– measures of various characteristics of the people comprising groups or other social units

– workforce demographics must be considered in formulating human resources strategies

• population growth influences the size and composition of the labor force

– immigration also is a significant factor

• increasing diversity of the labor force has both advantages and disadvantages

– must assure equal employment opportunity

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The Macroenvironment (cont.)• Social issues and the natural environment

– management must be aware of how people think and behave

• the role of women in the workplace• social costs of smoking• protection of the natural environment

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Competitive Environment• Competitive environment

– comprises the specific organizations with which the organization interacts

• Michael Porter - defined the competitive environment

– successful managers:

• react to the competitive environment• act in ways that actually shape or change

the competitive environment

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Newentrants

Newentrants

Newentrants

Newentrants

Rival firms

Competitive Environment

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Competitive Environment (cont.)• Competitors

– competitors within an industry must deal with one another– organizations must:

• identify their competitors• analyze how competitors compete• react to and anticipate competitors’ actions

– competition is most intense:

• where there are many competitors• when industry growth is slow• when the product or service cannot be differentiated

– intense competition causes an industry shakeout

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Competitive Environment (cont.)• Threat of new entrants

– barriers to entry - influence the degree of threat

• include government policy, capital requirements, and brand identification

• Threat of substitutes– technological advances and economic efficiencies may

result in substitutes for existing products– substitutes can limit another industry’s revenue potential– companies need to think about potentially viable

substitutes

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Competitive Environment (cont.)• Suppliers

– provide the resources needed for production– powerful suppliers can reduce an organization’s profits

• international labor unions are noteworthy suppliers– dependence on powerful suppliers is a competitive disadvantage

• power of supplier determined by:– availability of other suppliers from whom to buy– the number of customers for the supplier’s products

•switching costs - fixed costs buyers face if they change suppliers

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Competitive Environment (cont.)• Customers

– purchase the products or services the organization offers

•final consumers - purchase end product• intermediate consumers - buy raw

materials or wholesale products– sell them to final consumers– make more purchases than individual final consumers do

– customer service - giving customers what they want, the way they want it, the first time

– disadvantageous to depend too heavily on powerful customers

• powerful customers make large purchases and have other suppliers

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EnvironmentalScanning

BenchmarkingScenario

Development

Forecasting

Environmental Analysis

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Environmental Analysis• Environmental uncertainty

– lack of information needed to understand or predict the future– uncertainty arises from two related factors

•complexity - the number of issues to which a manager must attend as well as their interconnectedness

•dynamism - the degree of discontinuous change that occurs within the industry

– as uncertainty increases, techniques must be developed to collect, sort, and interpret information about the environment

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Environmental Analysis (cont.)• Environmental scanning

– searching for and sorting through information about the environment

– competitive intelligence - information that helps managers determine how to compete better

– competitive potential of environments differs

•attractive environments - give firm a competitive advantage

•unattractive environments - put firm at a competitive disadvantage

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AttractiveAttractive and Unattractive Environments

Few; high industry growth;unequal size; differentiated

Low threat; many barriers

Few

Many; low bargainingpower

Many; low bargainingpower

AttractiveEnvironmental

FactorCompetitors

Threat of entry

Substitutes

Suppliers

Customers

UnattractiveMany; low industry growth;equal size; commodity

High threat; few entry barriers

Many

Few; high bargaining power

Few; high bargaining power

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Environmental Analysis (cont.)• Scenario development

– scenarios - a narrative that describes a particular set of future conditions

•best-case scenario - events occur that are favorable to the firm

•worst-case scenario - events occur that are unfavorable – help managers develop contingency plans

• Forecasting– method for predicting how variables will change in the future– accuracy varies from application to application– forecasts are most useful when they accurately predict a changed future

environment

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Environmental Analysis (cont.)• Benchmarking

– process of comparing the organization’s practices and technologies with those of other companies

• determine the best-in-class performance by a company in a given area

• benchmarking team collects information on its own company’s operations and those of benchmark companies to identify gaps

• gaps investigated to learn the underlying causes of performance differences

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Responding To The Environment• Adapting to the environment

– company adjusts its structures and work processes– in uncertain environment caused by complexity, companies tend to

decentralize decision making

• empowerment - process of sharing power with employees– enhances their confidence in their ability to perform their jobs – engenders beliefs that they are influential contributors to the firm

– in uncertain environments caused by dynamism, companies tend to establish more flexible structures

• bureaucracy - suited for stable environments (low dynamism)• organic - provides flexibility required for changing

environments (high dynamism)

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Responding To The Environment (cont.)• Adapting to the environment (cont.)

– Adapting at the boundaries

•buffering - creating supplies of excess resources in case of unpredictable needs

– buffers created on both the input and output side of the business

•smoothing - leveling normal fluctuations at the boundaries of the organization

– Adapting at the core

•flexible processes - permit adaptation of the technical core

– mass customization -use of a network of independent operating units that each performs a specific process

» different modules join forces to deliver the product or service as specified by the customer

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Responding To The Environment (cont.)

• Influencing your environment– proactive responses aimed at changing the environment

• Independent action - strategies that an organization acting on its own uses to change some aspect of its current environment

•Cooperative action - strategies used by two or more organizations working together to mange the external environment

– at an organizational level, establish strategic alliances, partnerships, joint ventures, and mergers with competitors

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• Changing the environment you are in– strategic maneuvering - conscious effort to change the

boundaries of the competitive environment

•prospectors - companies that continuously change the boundaries of their task environments by:

– seeking new products and markets– diversifying and merging– acquiring new enterprises

•defenders - companies that stay within a stable, more- limited product domain as a strategic maneuver

Responding To The Environment (cont.)