Chapter 2 The External Environment

1. Chapter 2 The External Environment

2. Learning Objectives Understanding of: • the elements of the external environment • the role of external environmental forces on industry demand, cost structure, and profitability • the role of external environmental forces in creating opportunities and threats • methods that organizations can use to influence stakeholders in the task environment.

3. The Strategic Management Process Internal and External Analysis Strategy Formulation (corporate and business level) Strategic Direction Strategy Implementation and Control Strategic Restructuring

4. The Broad Environment • Global Socio-cultural Forces • Global Economic Forces • Global Technological Forces • Global Political/Legal Forces

5. Why Consider Society? • Stakeholders are members of society--assessment of their values and beliefs • Good (ethical) reputation • Avoid restrictive legislation • Change = opportunities

6. The Global Economy • Economic Growth • Interest Rates • Availability of Credit • Inflation Rates • Foreign Exchange Rates • Foreign Trade Balances Key Forces That Affect Virtually All Organizations

7. Technological Change “Technology is knowledge about products and services and the way they are produced and delivered” • Inventions--new ideas or technologies discovered in the laboratory • Innovations--inventions that can be replicated reliably on a meaningful scale (new products or processes) • Basic innovation--impacts much more than one product category or industry

8. Global Political and Legal Forces • Among the most significant determinants of organizational success • Governments provide and enforce the rules by which organizations operate • Level of interference from government varies from country to country and industry to industry • The worldwide trend is towards deregulation and privatization • In the U.S., significant political/legal influence comes from: lawmakers, regulatory agencies, revenue collection agencies, courts

9. The Task Environment • Customers - existing and potential • Suppliers - of labor, materials, equipment, money • Existing competitors - that battle for customers and attention • New competitors - that might enter the industry • Indirect competitors- from other industries that offer substitute products or services • Communities - that are dependent on businesses for jobs, economic activity • Local regulators - that influence business practices and costs

10. Porter’s Five Forces of Competition • The Power of Customers • The Power of Suppliers • The Threat of Potential Entrants • The Availability and Comparability of Substitutes • Competition Among Existing Competitors

11. When Customers Have Power • Small number of customers • They make high volume purchases • Large purchases compared to purchases from other industries • Products they are buying are undifferentiated • They have low profits • They can get accurate information on the selling industry • They can easily vertically integrate backwards • They can easily switch from one seller to another

12. When Suppliers Have Power • Small number of suppliers • Few substitutes exist • Suppliers are not dependent on the buyer for a lot of their sales • The buying industry must have the product or service to survive • Suppliers have differentiated their products • It is costly to switch suppliers • They can easily vertically integrate forward

13. When Rivalry Among Existing Competitors Is Intense • Slow industry growth • High fixed costs (plants, machinery, outlets) • Undifferentiated products • A large number of competitors • High exit barriers (what you lose if you leave the business) • Small changes in market share have a big pay-off

14. Barriers That Block New Entrants • Economies of scale • Large capital requirements • Product differentiation • High switching cost • Limited access to distribution channels • Some government policies and regulations • Other advantages that are hard to duplicate such as patents, great locations, subsidies, partnerships, etc. • History of aggressive retaliation toward new entrants

15. Indirect Competitors/Substitutes • Substitutes are not the same as competing products and services--they are products and services from another industry that can substitute for the products and services of the industry being studied • E.g., contacts lens versus glasses versus surgery • Close substitutes place a ceiling on the price that can be charged for a product or service • Close substitutes also set indirect performance comparisons

16. Strategic Importance and Management Approach HIGH Contribution of the stakeholder to the environmental uncertainty facing the firm Increased Use of Strategic Partnering Tactics STRATEGIC IMPORTANCE OF STAKEHOLDER (PRIORITY) Firm strategic choice LOW Ability of the stakeholder to reduce environmental uncertainty for the firm Primary Dependence On Traditional Stakeholder Management Techniques

17. Common Partnering Techniques • Direct Stakeholder Involvement • Design Teams/Planning (Customers, Suppliers) • Linked Communications (Customers, Suppliers) • Appointments to Board (Customers, Suppliers, Unions, Financial Intermediaries, Government Contacts, Activists) • Joint Research (Competitors, Government) • Joint Ownership • Joint Ventures (all stakeholders) • Keiretsu (Customers, Suppliers, Financial Intermediaries, Competitors) • Consortia/Alliances • Trade Groups (Competitors) • Foreign Development (Competitors, Governments) • Education (Competitors, Governments, Communities)