1. 2. Business environment

3. Chapter 2 The External Environment

4. 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

5. Laws and politics Economy Technology Demographics Social values Macroenvironment Competitive Environment Organization Suppliers New Entrants Substitutes Rivals Buyers The External Environment

6. 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

7. 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 creates 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

8. The Macroenvironment (cont.) Demographics measures of various characteristics of the people comprising groups or other social units age, gender, family size, income, education, occupation 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

9. 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 providing benefits for domestic partners of employees protection of the natural environment

10. 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; and act in ways that actually shape or change the competitive environment

11. Rival firms New entrants SuppliersCustomers Substitutes Competitive Environment

12. 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

13. Competitive Environment (cont.) Threat of new entrants barriers to entry - influence the degree of threat conditions that prevent new companies from entering an industry include government policy, capital requirements, and brand identification, cost disadvantages, and distribution channels 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

14. 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 close supplier relationship is the new model for organizations

15. Competitive Environment (cont.) Customers purchase the products or services the organization offers final consumers - purchase products in their final form intermediate consumers - buy raw materials or wholesale products before selling them to final consumers 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/or have other suppliers

16. Economic Stability Inflation Widespread Price Increases In An Economic System Unemployment Level of Joblessness Among Those Actively Seeking Work In An Economic System Recession vs. Depression

17. Organizational Boundaries & Environments External Environment Organizational Boundary- Separates Organization From Environment

18. Dimensions of External Environments The Business Organization Economic Technological Political- Legal Business Sociocultural

19. Economic Environment Business Cycle Patterns of short term ups and down in an economy Aggregate Output Standard of Living Total quantity and quality of goods and services that a country’s citizerns can purchase with the currency used in their country Gross Domestic Product (GDP) Real (GDP calculated to account for changes in currency values and price changes) Nominal (GDP measured in current dollars or with all components valued at current prices) Gross National Product (GNP)

20. Business Cycle Expansion Contraction

21. Managing the U.S. Economy Fiscal Policy Determines How Government Collects/Spends Revenues Monetary Policy Determines Size of Nation’s Money Supply

22. Monetary Policy Interest Rates  Spending  Tight Interest Rates  Spending  Easy

23. Technological Environment  Product/Service Technologies  Technologies employed for creating products (goods and services) for customers  Business Process Technologies- Enterprise Resource Planning  Large scale information system for organizing and managing a firm’s processes across product lines, departments and geographic locations

24. Enterprise Resource Planning ERP System Human Resources Data Analysis Accounting & Finance Customer Services Sales & Marketing Supply Chain Management Manufacturing

25. Moore’s Law Means More Performance. Processing power, measured in millions of instructions per second (MIPS), has risen because of increased transistor counts. Copyright © 2005 Intel Corporation 4

26. Intel Silicon Innovation: ”Fueling New Solutions for the Digital Planet”, Copyright © 2005 Intel Corporation. 5

27. Samsung 40” TV Active Matrix 1280x800 pixel OLED (July 2005) Siemens 4 cm Active Matrix 128x48 pixel OLED Suitable for MP3 Player Sony Thin Screen OLED for Mobile Devices (September 2004) Electronic Paper OLED 64

28. Prof. Dr. Andreas Tünnermann: “OPTICS AND PHOTONICS: Enabling Technology and Driving Force for Regional Development and Competitiveness”, IST 2004 66

29. Political-Legal Environment Regulation- Defines Relationship Between Government & Business Government = Pro vs. Anti-Business Sentiment

30. Sociocultural Environment Customer Preferences/Tastes- Vary International National Ethical Compliance & Responsible Behavior Enron Arthur Andersen

31. Business Environment Redrawing Corporate Boundaries- Core Competencies Challenges/Opportunities Outsourcing Vertical Integration Viral Marketing Business Process Management Post-9/11

32. Environmental Scanning Benchmarking Scenario Development Forecasting Environmental Analysis

33. 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

34. 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

35. Attractive and Unattractive Environments Environmental Factor Competitors Threat of entry Substitutes Suppliers Customers Unattractive Many; low industry growth; equal size; commodity High threat; few entry barriers Many Few; high bargaining power Few; high industry growth; unequal size; differentiated Low threat; many barriers Few Many; low bargaining power Many; low bargaining power Attractive

36. Environmental Analysis (cont.) Scenario development scenario - 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 all 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

37. 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

38. 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)

39. Complex Simple StableDynamic Decentralized Bureaucratic (Standardized skills) Centralized Bureaucratic (Standardized work processes) Decentralized Organic (Mutual adjustment) Centralized Organic (Direct supervision) Four Approaches for Managing Uncertainty

40. 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

41. 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 influence the external environment at an organizational level, establish strategic alliances, partnerships, joint ventures, and mergers with competitors

42. 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: diversifying and merging seeking new products and markets acquiring new enterprises defenders - companies that stay within a stable, more- limited product domain as a strategic maneuver Responding To The Environment (cont.)

43. Change appropriate elements of the environment focus on elements that: cause the company problems provide the company with opportunities allow the company to change successfully Choose responses that focus on specific elements of the environment focus on competitive aggression and pacification Choose responses that offer the most benefit at the lowest cost focus on both short- and long-term financial considerations Choosing A Response Approach

44. U.S. Balance of Trade (2003) U.S. Buys $1.5 Trillion of Goods/Services U.S. Sells $1.0 Trillion of Goods/Services U.S. Balance of Trade -$500 Billion Source: U.S. Census Bureau- Foreign Trade Statistics (2003 Annual Highlights), http://www.census.gov/foreign-trade/statistics/highlights/annual.html

46. Chapter 2 Understanding the Environments of Business

47. Chapter Outline Organizational Boundaries & Environments Economic Environment Technological Environment Political-Legal Environment Sociocultural Environment Business Environment

48. % GDP Change From Previous Period Source: U.S. Department of Commerce, Bureau of Economic Analysis

49. U.S. GDP & Real GDP (In $ Billons) Source: U.S. Department of Commerce, Bureau of Economic Analysis

50. GDP & GDP Per Capita

51. Purchasing Power Parity (Big Mac Index Based On At Market Exchange Rate 12/13/04) US Big Mac = $3 Average (Average of 4 Cities) Source: The New York Times, “Big Mac Index”, Dec. 16 th, 2004. http://www.economist.com/markets/bigmac/displayStory.cfm?story_id=3503641

52. U.S. Productivity

53. GDP % Change From Preceding Period Source: U.S. Dept. of Commerce- Bureau of Economic Analysis Expansion vs. Recession vs. Depression? * *3 rd Quarter 2004

54. % GDP Change vs. % Labor Productivity Change Source: U.S. Department of Commerce, Bureau of Economic Analysis U.S. Department of Labor- Bureau of Labor Statistics

55. U.S. National Debt *For Today’s Figure go to “U.S. National Debt Clock”, http://www.brillig.com/debt_clock/ Source: Bureau of the Public Debt: Historical Debt Outstanding- Annual, http://www.publicdebt.treas.gov/opd/opdhisto4.htm In $ Trillions*

56. U.S. Consumer Price Index (Dec.- All Urban Consumers) 1982-1984- = 100 Source: U.S. Department of Labor- Bureau of Labor Statistics

57. U.S. Unemployment Rate (Seasonally Adjusted on 12/31) * * 11/30/04 Source: U.S. Department of Labor- Bureau of Labor Statistics, http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

58. U.S. Prime Interest Rate (Jan.1) Source: Board of Governors of the Federal Reserve System

59. Earnings & Educational Attainment (1999 Dollars) Source: U.S. Census Bureau Full-Time Year-Round Workers

60. Foreign Direct Investment Confidence Index (Oct. 2004) Source: A.T. Kearney Consulting, http://www.atkearney.com/main.taf?p=5,3,1,89 Corporate Investors’ Interest in Global Investment Scale = 0-3 Low Confidence High Confidence