Business Environments:

External and Internal

Welcome to Class 4Part One

Chapter 2

Business Environments are divided into two

primary Categories

External & Internal

Business Environments

Environments

External

General

Competitive

Internal

Resources

Leadership

The external environment encompasses all issues, occurrences, trends, etc. that are peripheral to the corporation and beyond the control of the TMT.

The internal environment relates to all aspects within the confines of the organization and generally are within the control of the TMT.

Both environments exert significant influence over the formation of a company's strategy and its degree of success.

Environments ChangeChanges in the external environment (general & competitive) may require a company to adjust its strategic plans. Likewise, changes within the internal environment of a firm may force a company to change its tactics and strategies.

For example, new personnel with unique knowledge and skills may join the company OR valuable employees with unique knowledge and skills may leave the firm.

Predicting the extent, direction, and speed of environmental change with any degree of precision is difficult and often – impossible.

Abrupt environmental changes can quickly transform strategic plans from “effective to obsolete"

A firm must be prepared to rapidly adapt to unexpected changes since this can mean the difference between success and failure.

Environments Change (Cont)

Scenario ModelsScenario Models are tools that can aid in the

rapid adaptation to environmental changes.

Scenario Models help TMTs prepare for a wide range of possible future conditions from the highly likely to possible but not expected.

Scenario Models facilitate the preparation of contingency strategies.

Scenario Models (Cont)

Scenario models evolve during STRATEGY FORMULATION (data synthesis stage). They focus on predicting the future of the business environment.

When predicting the future business environment, TMTs structure their strategies on "likely-to-happen" conditions but they also imagine/brainstorm/consider other conditions that “could-happen.”

The less likely to occur but "could happen" scenarios are refined into alternate models which form the basis for Contingency Strategies.

Scenario Models are sets of potential environmental conditions that range from very likely to possible but unlikely.

Contingency Strategies are alternative strategic plans to match the conditions highlighted in scenario models.

The General Environment

ExternalEnvironment

General Environme

nt

Competitive

Environment

The Five Factors of the General Environment

(1) Sociocultural (2) Demographic (3) Economic(4) Technological (5) Political/Legal

Sociocultural

Demographic

EconomicTechnologic

al

Political/Legal

General Environment

Although the general environmental factors are divided into specific and unique categories they are vigorously interactive, interrelated, and interdependent.

Sociocultural FactorsSociocultural factors relate to a country's

dominant religions, the population's general desire for leisure-time, attitudes toward consumerism, environmentalism, and the role of gender in society and business.

In general, sociocultural factors are characterized by the lifestyles, values, and belief systems of populations.

Demographic FactorsDemographic factors pertain to changes in

the population size of a country, geographic distribution of people, ethnic mix, income distribution, average age, number of people in the family, etc.

For example, American families are getting smaller, the population is getting older, individuals are getting heavier, and the Hispanic population is the fastest growing part of the population.

Economic FactorsEconomic factors relate to a country's inflation

or deflation rates, interest rates, tariffs, balance of trade issues, growth of national economies, exchange rates, unemployment rates, labor availability, gross domestic products, savings rates, etc.

Technological FactorsTechnological factors pertain to a country’s

reception to innovation. Some national cultures discourage change while others embrace and support it.

Political/Legal FactorsPolitical/Legal Factors center on the political

stability of a country, its legal system, and its general attitude toward business.

E.G., Antitrust laws are examined and current philosophies of regulation and deregulation are assessed.

ExternalEnvironment

General Environme

nt

Competitive

Environment

The Competitive Environment

Competitive Environment: Nine Factors

(1) Customers(2) Suppliers(3) Unions(4) Associations(5) New Entrants(6) Interest

Groups(7) Substitutes(8) Competitors(9) Creditors

Customers

Suppliers

Unions

Associations

New Entrants

InterestGroups

Substitutes

Competitors

Creditors

Competitive Environment

See the HOMEWORK slides at the end of these

lecture notes. VERY IMPORTANT!!

Factors that can amplify the intensity with which firms compete:

High fixed costs (costs that cannot be eliminated easily as volume decreases)

High storage costs

Lack of differentiation between products or services

Low switching costs (customer can switch suppliers without significant cost or inconvenience)

High exit barriers for competitors (difficult for a firm to leave a particular industry)

Competitive Environment & Porter's Five Forces

(1) Rivalry among Competing Firms

(2) Bargaining Power of Buyers (3) Bargaining Power of

Suppliers (4) Threat of Substitutes (5) Threat of New Entrants

Rivalry among

Competing Firms

Bargaining power ofBuyers

Bargaining power ofSuppliers

Threats of Substitutes

Threat ofNew

Entrants Porter's

Five Forces

Rivalry of Competing FirmsRivalry of Competing Firms increases in

intensity when the size of markets shrinks or ceases to grow.

It also increases when there are numerous competitors or equally balanced competitors seeking the same set of customers.

Prices may fall, more favorable shipping terms may be offered to customers, or selling firms may offer more relaxed payment terms.

The consequence of increased rivalry for most firms is lower net revenues from reduces prices and increased expenses associated with the additional services and incentives offered.

There is intense rivalry between suppliers There are few buyers for the products or

services The buyer is the primary customer of the

supplier The buyer is extremely large and purchases in

large quantities or major parts of an industry's output

The switching costs are low (can change suppliers without significant consequences)

The buyer is capable of backward integration (may enter the sellers industry and supply its own needs).

Buyer Power is high when…

There are few suppliers There is greater demand than availability There are few or no substitute The products or services are crucial to the

buyer’s business The buyers are small purchasers The supplier has an ample supply of

customers There are high switching costs for the buyer When there is a risk of forward integration by

the supplier (supplier may enter the industry of the buyer and become a direct competitor).

Supplier Power is high when

Threats of Substitutes is high when

The customers of the focal industry have low switching costs

The price of the substitute product or service is lower

The quality and suitability of the substitute is comparable (or better) than the current product or service.

Threats of new entrants (Newbies) is high when Low entry barriers Lack of differentiation of current products or

services Lack of brand loyalty by consumers Low switching costs by customers Low government intervention (few or no

licensing and/or permits required, industry minimally regulated)

Easy access to distribution channels Favorable supplier welcome

End of Part One: Business EnvironmentsRe-Read Chapter TwoReview the following slides carefully

as part of your homework assignment

Relax!

Homework slides

Please review the following slides carefully as part of your homework assignment.

Competitive Environment: Nine Factors

(1) Customers(2) Suppliers(3) Unions(4) Associations(5) New Entrants(6) Interest

Groups(7) Substitutes(8) Competitors(9) Creditors

CustomersCustomers are the ultimate determining factor

in whether or not a particular business succeeds or fails.

Although hard to fathom, customers are frequently not a primary consideration in the formulation of corporate strategies.

Each factor in the competitive environment is crucial to the success of an organization but there is probably no quicker path to corporate self-destruction than to routinely neglect customer interests.

Customers should be central to any operating strategy.

SuppliersSuppliers are fundamentally important to a

firm's ability to achieve competitive advantages.

If suppliers are non-cooperative they can make it financially and/or physically impossible to satisfy customer needs.

Maintaining a strong working relationship with suppliers requires effort, patience, and

commitment.

UnionsUnions are not the enemy of businesses or

TMTs. Contrary to conventional wisdom, organized labor can actually enhance a well-managed corporation is fulfilling customer needs.

Unions represent resource of crucial intellectual capital.

All employees unionized or otherwise, should be included in every dimension of the strategic management process.

AssociationsAssociations, and organizations such as the

Chamber of Commerce, SHRM, (Human Resource Management), IMA (Institute of Management Accountants), and other professional and trade association, albeit it frequently subtle, have an impact on how business is conducted.

Through meetings, proclamations, and publications these association can stimulate new ideas, new behaviors, promote emerging technologies, and even create friendships from what may have been previously hostile competitors.

The influence of associations over how businesses act and react with their competitors as well as their stakeholders is frequently underestimated.

New EntrantsNew Entrants, also referred to as "Newbies" are

always a threat to existing businesses. They can consume market share, introduce new

marketing ideas, and innovate in unexpected ways. They can also adversely affect the current pricing

structure thereby threatening profitability of existing firms.

New entrants to an industry often have an inadequate understanding of market realities.

They may have difficulty gaining a sufficient market share and react by simply lower prices, frequently below the point at which they or anyone else can make a profit.

Newbies should always be monitored carefully.

Interest GroupsInterest Groups, particularly public interest groups such as

environmentalists, humanists, or other types of activists can force businesses to alter or eliminate practices that are frequently deemed essential to their strategies by the TMT.

The power of interest groups can debilitate a firm that is unprepared.

This is not suggested that "interest groups" are out of sync with reality or out to destroy corporations.

Neither is it to suggest that their concerns and distresses are irrelevant or unwarranted.

If fact, the ideas of interest groups may actually strengthen a corporation and enhance not only its qualitative performance but also, over the long term give it a competitive advantage over rivals and improve its financial performance.

Concerns and issues of interest groups must be anticipated and always be addressed in a firm's tactical and strategic plans.

Employee rights groups frequently refer to themselves as humanists in contrast to capitalists.

SubstitutesSubstitutes for products or services that are

suitable replacements for current products and services can be an enormous challenge to the TMT.

The financial industry is continuously caught off guard by the creation of new investment products.

Substitutes can occasionally lurk in the shadows by taking a shape or form not envisioned as a substitute. For example, the U.S. Postal Service has petitioned Congress for a rate increase because email and significantly reduced the traditional method of sending letters, cards, invoices, late notices, and even advertisements.

Further, some studies to suggest that "texting" is slowly diminishing the market for "cell phone calling.“

CompetitorsCompetitors are an integral part of nature, of sports,

and of business. Competing is not an undesirable activity although

losing can have undesirable consequences. Whenever two or more participants strive for an

identical goal, disappointment is a certainty. Winning the competitive battle is a strategic mandate. Knowing the opponent is the first step, monitoring is

the second, and gathering competitive intelligence is the third.

A compounding factor in the competitive battle is the fact that all competitors are easily visible.

Some, such as new entrants are off the radar screen until too late.

CreditorsCreditors are differentiated from suppliers of goods

and services although these companies extend credit. Creditors this context refers to providers of financial

capital for operations, acquisitions, or facilities expansion.

Creditors are a crucial lifeline most corporations and when their leverage is too great they are capable of demanding behavior concessions from businesses that may be counterproductive to corporate strategies.

They are a force with which most businesses must reckon.

Unless the TMT develops an appropriate working relationship with creditors, growth and expansion may be seriously hampered.