1. McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. The External Environment Chapter 4

3. 4-3 Learning Objectives 1.Describe the three tiers of environmental factors that affect firm performance 2.List and explain the five factors in the remote environment 3.Give examples of the economic, social, political, technological, and ecological influences on a business 4.Explain the five forces model of industry analysis and give examples of each force 5.Give examples of the influences of entry barriers, supplier power, buyer power, substitute availability, and competitive rivalry on a business 6.List and explain the five factors in the operating environment 7.Give examples of the influences of competitors, creditors, customers, labor, and direct suppliers on a business

4. 4-4 External Environment  The factors beyond the control of the firm that influence its choice of direction and action, organizational structure, and internal processes

5. 4-5 The Firm’s External Environment Comprised of following Components:  Remote environment  Industry environment  Operating environment

6. 4-6 Remote Environment  Economic, social, political, technological, and ecological factors that originate beyond, and usually irrespective of, any single firm’s operating situation.

7. 4-7 Ex. 4.1 The Firm’s External Environment

8. 4-8 Remote Environment  Economic Factors  Social Factors  Political Factors  Technological Factors  Ecological Factors

9. 4-9 Economic Factors 1.Prime interest rates 2.Inflation rates 3.Trends in the growth of the gross national product 4.Unemployment rates 5.Globalization of the economy 6.Outsourcing

10. 4-10 Social Factors Present in the external environment: Beliefs & Values Attitudes & Opinions Lifestyles Developed from: Cultural conditioning Ecological conditioning Demographic makeup Religion Education Ethnic conditioning.

11. 4-11 Political Factors Political constraints on firms: Fair-trade Decisions Antitrust Laws Tax Programs Minimum Wage Legislation Pollution and Pricing Policies Administrative jawboning

12. 4-12 Impact of Political Activity  Political activity has a significant impact on two governmental functions that influence the remote environment of firms:  Supplier function  Customer function

13. 4-13 Technological 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 technological advancement lies in accurately predicting future technological capabilities and their probable impacts.

14. 4-14 Technological Forecasting  The quasi-science of anticipating environmental and competitive changes and estimating their importance to an organization’s operations.

15. 4-15 Ecological Factors  Ecology refers to the relationships among human beings and other living things and the 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 pollution  Loss of habitat and biodiversity  Environmental legislation  Eco-efficiency

16. 4-16 Eco-efficiency  Company actions that produce more useful goods and services while continuously reducing resource consumption and pollution.

17. 4-17 International Environment Monitoring the international environment involves assessing each non-domestic market on 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 are used to assess international environments. One complication to this process is that the interplay among international markets must be considered.

18. 4-18 Industry Environment  Harvard professor Michael E. Porter propelled the concept of industry environment into the foreground of strategic 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 industry.  Porter’s well-defined analytic framework helps strategic managers to link remote factors to their effects on a firm’s operating environment.

19. 4-19 Competitive 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 combatants 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.

20. 4-20 Ex. 4.8 Forces Driving Industry Competition

21. 4-21 Threats of Entry  Economies of Scale  Product Differentiation  Capital Requirements  Cost Disadvantages Independent of Size  Access to Distribution Channels  Government Policy

22. 4-22 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 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

23. 4-23 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 a component of its product and represent a significant fraction of its cost  It earns low profits  The 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

24. 4-24 Substitute 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 attention strategically are those that are  subject to trends improving their price-performance trade-off with the industry’s product or  produced by industries earning high profits

25. 4-25 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

26. 4-26 Industry Analysis & Competitive Analysis  An industry is a collection of firms that offer similar products or services.  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 few firms.  Barriers to entry are the obstacles that a firm must overcome to enter an industry.

27. 4-27 Competitive 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?

28. 4-28 Operating Environment Also called competitive or task environment  Includes competitor positions and customer profiling based on the following factors:  Geographic  Demographic  Psychographic  Buyer Behavior  Also includes suppliers & creditors and HRM

29. 4-29 HR: Nature of the Labor Market Access to personnel is affected by 4 factors:  Firm’s reputation as an employer  Local employment rates  Availability of people with the needed skills  Its relationship with labor unions.

30. 4-30 Emphasis on Environmental Factors Differing external elements affect different strategies at different times and with varying strengths Only 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 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 firm from assuming a leadership role in its environment

31. 4-31 Key Terms  Barriers to entry  Eco-efficiency  Ecology  Economies of scale  External environment  Industry  Industry environment  Operating environment  Pollution  Product differentiation  Remote environment  Technological forecasting