2Learning ObjectivesDescribe the three tiers of environmental factors that affect firm performanceList and explain the five factors in the remote environmentGive examples of the economic, social, political, technological, and ecological influences on a businessExplain the five forces model of industry analysis and give examples of each forceGive examples of the influences of entry barriers, supplier power, buyer power, substitute availability, and competitive rivalry on a businessList and explain the five factors in the operating environmentGive examples of the influences of competitors, creditors, customers, labor, and direct suppliers on a business
3External EnvironmentThe factors beyond the control of the firm that influence its choice of direction and action, organizational structure, and internal processes
4The Firm’s External Environment Comprised of following Components:Remote environmentIndustry environmentOperating environment
5Remote EnvironmentEconomic, social, political, technological, and ecological factors that originate beyond, and usually irrespective of, any single firm’s operating situation.
7Remote Environment Economic Factors Social Factors Political Factors Technological FactorsEcological Factors
8Economic Factors Prime interest rates Inflation rates Trends in the growth of the gross national productUnemployment ratesGlobalization of the economyOutsourcing
9Social Factors Present in the external environment: Developed from: Beliefs & ValuesAttitudes & OpinionsLifestylesDeveloped from:Cultural conditioningEcological conditioningDemographic makeupReligionEducationEthnic conditioning.
10Three Profound Social Changes Entry of large numbers of women into the labor marketAccelerating interest of consumers and employees in quality-of-life issuesShift in the age distribution of the populationCutting across the above three issues is concern for individual health
11Political Factors Political constraints on firms: Fair-trade Decisions Antitrust LawsTax ProgramsMinimum Wage LegislationPollution and Pricing PoliciesAdministrative jawboning
12Impact of Political Activity Political activity has a significant impact on two governmental functions that influence the remote environment of firms:Supplier functionCustomer function
13Technological 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.
14Technological Forecasting The quasi-science of anticipating environmental and competitive changes and estimating their importance to an organization’s operations.
15Ecological FactorsEcology refers to the relationships among human beings and other living things and the air, soil, and water that supports them.
16Ecological Factors (contd.) Threats to our life-supporting ecology caused principally by human activities in an industrial society are commonly referred to as pollutionLoss of habitat and biodiversityEnvironmental legislationEco-efficiency
17Eco-efficiencyCompany actions that produce more useful goods and services while continuously reducing resource consumption and pollution.
18Industry EnvironmentHarvard 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.
19Industry Environment Defined The general conditions for competition that influence all businesses that provide similar products and services.
20How 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.
22Threat of Entry Common Barriers to Entry Economies of ScaleProduct DifferentiationCapital RequirementsCost Disadvantages Independent of SizeAccess to Distribution ChannelsGovernment Policy
23Powerful Suppliers A supplier group is powerful if: It is dominated by a few companies and is more concentrated than the industry it sells toIts product is unique or at least differentiated, or if it has built-up switching costsIt is not obliged to contend with other products for sale to the industryIt poses a credible threat of integrating forward into the industry’s businessThe industry is not an important customer of the supplier group
24Powerful Buyers A buyer group is powerful if: It is concentrated or purchases in large volumesThe 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 of the buyers’ products or servicesThe industry’s product does not save the buyer moneyThe buyers pose a credible threat of integrating backward
25Substitute ProductsBy placing a ceiling on the prices it can charge, substitute products or services limit the potential of an industrySubstitutes not only limit profits in normal times but also reduce the bonanza an industry can reap in boom timesSubstitute products that deserve the most attention strategically are those that aresubject to trends improving their price-performance trade-off with the industry’s product orproduced by industries earning high profits
26Jockeying for Position Intense rivalry occurs when:Competitors are numerous or are roughly equalIndustry 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 pricesCapacity normally is augmented in large incrementsExit barriers are highRivals are diverse in strategy, origin, and personality
27Industry Analysis & Competitive Analysis Key questions to ask:What are the boundaries of the industry?What is the structure of the industry?Which firms are our competitors?What are the major determinants of competition?
28Industry Analysis & Competitive Analysis (contd.) 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.
29Problems in Defining Industry Boundaries The difficulty in defining industry boundaries stems from three sources:The evolution of industries over time creates new opportunities and threatsIndustry evolution creates industries within industriesIndustries are becoming global in scope
30Power CurvesPower curves depict the fundamental structural trends that underlie an industry.This is a new tool that helps strategic managers assess industry structure – the enduring characteristics that give an industry its distinctive character.
31Operating Environment Factors in the immediate competitive situation that affect a firm’s success in acquiring needed resources.
32Operating Environment (contd.) Also called competitive or task environmentIncludes competitor positions and customer profiling based on the following factors:GeographicDemographicPsychographicBuyer BehaviorAlso includes suppliers & creditors and HRM
33HR: Nature of the Labor Market Access to personnel is affected by 4 factors:Firm’s reputation as an employerLocal employment ratesAvailability of people with the needed skillsIts relationship with labor unions.
34Emphasis on Environmental Factors Differing external elements affect different strategies at different times and with varying strengthsOnly certainty is that the effect of the remote and operating environments will be uncertain until a strategy is implementedMany managers, particularly in less powerful firms, minimize long-term planningInstead, they allow managers to adapt to new pressures from the environmentAbsence of strong resources and psychological commitment to a proactive strategy effectively bars a firm from assuming a leadership role in its environment
35Key Terms Barriers to entry Eco-efficiency Ecology Economies of scale External environmentIndustryIndustry environmentOperating environmentPollutionProduct differentiationRemote environmentTechnological forecasting