1. Chapter 3 Environmental Forces
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2. Learning Objectives
Describe how economic and cultural factors influence organizations.
Identify the five competitive forces that affect organizations in an industry.
Describe the principle political and legal strategies used by managers to cope with changes in the environment.
Explain how technological forces influence changes in industries.
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3. The Environment
General Environment - sometimes called the macroenvironment, includes the external factors that usually affect all or most organizations.
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4. Forces Impacting Organizations (adapted from Figure 3.1)
Macroenvironment
Politics
Competitors
Organization
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5. The Economy
Economics is the discipline that focuses on understanding how people or people or nations produce, distribute, and consume various goods and services.
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6. Trends in the New Versus the Old Economy (adapted from Table 3.1)
Value matters – information is key
New markets – distance vanished
Customers buy activities not products – a click away
Human capital – rise of knowledge worker
Old
Size of organization matters – manufacturing is key
Defined market segments – demographics
Customers for a lifetime – loyalty, repeat business
Physical and capital assets – tangible assets
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7. Demographics
Demographics are the characteristics of a work group, an organization, a specific market, or various populations.
Some current demographic changes include:
Increasing Diversity
Education and Skills
Managerial Challenges
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8. Cultural Forces
Culture refers to the unique pattern of shared characteristics, such as values, that distinguish the members of one group of people from those of another.
A value is a basic belief about a condition that has considerable importance and meaning to individuals and is relatively stable over time.
A value system comprises multiple beliefs that are compatible and supportive of on another.
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9. Cultural Forces Values can effect how a manager
Views other people and groups
Perceives situations and problems
Goes about solving problems
Determines what is and is not ethical behavior
Leads and controls employees
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10. Hofstede’s Framework
Power Distance – the degree to which less powerful members of society accept that influence is unequally divided.
Uncertainty Avoidance – the extent to which members of a culture feel threatened by risky or unknown situations.
Individualism – is a combination of the degree to which society expects to take care of themselves and their immediate family and the degree to which people believe they are masters of their own destinies.
Masculinity – the degree to which assertiveness and the acquisition of money and material things are valued.
Long-Term/Short-Term Orientation – reflects the extent to which a culture stresses that its members accept delayed gratification of material, social, and emotional needs.
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11. Hofstede’s Ranking (adapted from Figure 3.2)
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12. Competitive Forces in the Task Environment (adapted from Figure 3.3)
Supplier
bargaining
power
Threat of
substitute goods
or services
Threat
of new
competitors
Customer
bargaining
power
Rivalry among
existing firms in
industry
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13.  Risk of Entry by Potential Competitors
Potential Competitors are companies that are not currently competing in an industry but have the capability to do so if they choose. Barriers to new entrants include:
Economies of Scale – as firms expand output unit costs fall via:
Cost reductions – through mass production
Discounts on bulk purchases – of raw material and standard parts
Cost advantages – of spreading fixed and marketing costs over large volume
Brand Loyalty
Achieved by creating well-established customer preferences
Difficult for new entrants to take market share from established brands
Absolute Cost Advantages – relative to new entrants
Accumulated experience – in production and key business processes
Control of particular inputs required for production
Lower financial risks – access to cheaper funds
Customer Switching Costs for Buyers – where significant
Government Regulation
May be a barrier to enter certain industries
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14.  Rivalry Among Established Companies
Competitive Rivalry refers to the competitive struggle between companies in the same industry to gain market share from each other. Intensity of rivalry is a function of:
Industry Competitive Structure
Number and size distribution of companies
Consolidated versus fragmented industries
Demand Conditions
Growing demand – tends to moderate competition and reduce rivalry
Declining demand – encourages rivalry for market share and revenue
Cost Conditions
High fixed costs – profitability leveraged by sales volume
Slow demand and growth – can result in intense rivalry and lower profits
Height of Exit Barriers – prevents companies from leaving industry
Write-off of investment in assets
Economic dependence on industry
Maintain assets - to participate
effectively in an industry
 High fixed costs of exit
 Emotional attachment to industry
 Bankruptcy regulations – allowing unprofitable assets to remain
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15.  Bargaining Power of Buyers
Industry Buyers may be the consumers or end-users who ultimately use the product or intermediaries that distribute or retail the products. These buyers are most powerful when:
Buyers are dominant.
Buyers are large and few in number.
The industry supplying the product is composed of many small companies.
Buyers purchase in large quantities.
Buyers have purchasing power as leverage for price reductions.
The industry is dependant on the buyers.
Buyers purchase a large percentage of a company’s total orders.
Switching costs for buyers are low.
Buyers can play off the supplying companies against each other.
Buyers can purchase from several supplying companies at once.
Buyers can threaten to enter the industry themselves.
Buyers produce themselves and supply their own product.
Buyers can use threat of entry as a tactic to drive prices down.
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16.  Bargaining Power of Suppliers
Suppliers are organizations that provide inputs such as material and labor into the industry. These suppliers are most powerful when:
The product supplied is vital to the industry and has few substitutes.
The industry is not an important customer to suppliers.
Suppliers are not significantly affected by the industry.
Switching costs for companies in the industry are significant.
Companies in the industry cannot play suppliers against each other.
Suppliers can threaten to enter their customers’ industry.
Suppliers can use their inputs to produce and compete with companies already in the industry.
Companies in the industry cannot threaten to enter suppliers’ industry.
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17.  Substitute Products
Substitute Products are the products from different businesses or industries that can satisfy similar customer needs.
The existence of close substitutes is a strong competitive threat.
Substitutes limit the price that companies can charge for their product.
Substitutes are a weak competitive force if an industry’s products have few close substitutes.
Other things being equal, companies in the industry have the opportunity to raise prices and earn additional profits.
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18. Managerial Political Strategies (adapted from Figure 3.4)
Political-Legal Forces
Negotiation
Lobbying
Alliance
Representation
Socialization
Political action
committees (PACs)
Laws
Government
Labor unions
Others
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