The External Environment Lecture 4

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External Environment

The factors beyond the control of the firm that influence its choice of direction and action, organizational structure, and internal processes

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Ex. 4.1 The Firms External Environment

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Remote Environment

Economic, social, political, technological, and ecological factors that originate beyond, and usually irrespective of, any single firms operating situation.

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Economic Factors

1. Prime interest rates

2. Inflation rates

3. Trends in the growth of the gross national product

4. Unemployment rates

5. Globalization of the economy

6. Outsourcing

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Social Factors

Present in the external environment: Beliefs & Values

Attitudes & Opinions

Lifestyles

Developed from: Cultural conditioning

Ecological conditioning

Demographic makeup

Religion

Education

Ethnic conditioning.

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Political Factors Political constraints on firms:

Fair-trade Decisions Antitrust Laws Tax Programs Minimum Wage Legislation Pollution and Pricing Policies Administrative jawboning

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Impact of Political Activity

Political activity has a significant impact on two governmental functions that influence the remote environment of firms: Supplier function

Customer function

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Technological 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.

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Technological Forecasting

The quasi-science of anticipating environmental and competitive changes and estimating their importance to an organizations operations.

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Ecological / Environmental Factors Ecology refers to the relationships among

human beings and other living things and the air, soil, and water that supports them.

Threats to our life-supporting ecology caused principally by human activities in an industrial society are commonly referred to as pollution

Loss of habitat and biodiversity

Environmental legislation

Eco-efficiency

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Eco-efficiency

Company actions that produce more useful goods and services while continuously reducing resource consumption and pollution.

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International Environment

Monitoring the international environment

involves assessing each non-domestic market on the same factors that are used in a domestic assessment.

While the importance of factors will differ, the same set of considerations can be used for each country.

Economic, political, legal, and social factors are used to assess international environments.

One complication to this process is that the interplay among international markets must be considered.

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Industry Environment

Harvard professor Michael E. Porter propelled the concept of industry environment into the foreground of strategic thought and business planning.

The cornerstone of Porters work first appeared in the Harvard Business Review, in which he explains the five forces that shape competition in an industry.

Porters well-defined analytic framework helps strategic managers to link remote factors to their effects on a firms operating environment.

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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.

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Ex. 4.8 Forces Driving Industry Competition

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Threats of Entry Economies of Scale

Product Differentiation

Capital Requirements

Cost Disadvantages Independent of Size

Access to Distribution Channels

Government Policy

Figure 3.5: Factors Affecting Threat of Entry

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Powerful Suppliers A supplier group is powerful if: It is dominated by a few companies and is more

concentrated than the industry it sells to Its product is unique or at least differentiated, or if

it has built-up switching costs It is not obliged to contend with other products for

sale to the industry It poses a credible threat of integrating forward

into the industrys business The industry is not an important customer of the

supplier group

Figure 3.7: Factors Affecting Bargaining Power of Suppliers

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Powerful Buyers A buyer group is powerful if: It is concentrated or purchases in large volumes The products it purchases from the industry are

standard The products it purchases from the industry form a

component of its product and represent a significant fraction of its cost

It earns low profits The industrys product is unimportant to the quality of

the buyers products or services The industrys product does not save the buyer money The buyers pose a credible threat of integrating

backward

Figure 3.8: Factors Affecting Bargaining Power of Buyers

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Substitute Products By placing a ceiling on the prices it can charge,

substitute products or services limit the potential of an industry

Substitutes not only limit profits in normal times but also reduce the bonanza an industry can reap in boom times

Substitute products that deserve the most attention strategically are those that are

subject to trends improving their price-performance trade-off with the industrys product or

produced by industries earning high profits

Figure 3.6: Factors Affecting Competition From Substitute Products

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Jockeying for Position Intense rivalry occurs when:

Competitors are numerous or are roughly equal

Industry growth is slow, precipitating fights for market share that involve expansion

The product or service lacks differentiation or switching costs

Fixed costs are high or the product is perishable, creating strong temptation to cut prices

Capacity normally is augmented in large increments

Exit barriers are high

Rivals are diverse in strategy, origin, and personality

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Industry Analysis & Competitive Analysis

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.

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Competitive Analysis 1. How do other firms define the scope of their

market?

2. How similar are the benefits the customers derive from the products and services that other firms offer? The more similar the benefits of products or services, the higher the level of substitutability between them.

3. How committed are other firms to the industry?

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Operating Environment

Also called competitive or task environment

Includes competitor positions and customer profiling based on the following factors:

Geographic

Demographic

Psychographic

Buyer Behavior

Also includes suppliers & creditors and HRM

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HR: Nature of the Labor Market

Access to personnel is affected by 4 factors:

Firms reputation as an employer

Local employment rates

Availability of people with the needed skills

Its relationship with labor unions.

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Emphasis on Environmental Factors

Differing external elements affect different strategies at different times and with varying strengths

Only certainty is that the effect of the remote and operating environments will be uncertain until a strategy is implemented

Many managers, particularly in less powerful firms, minimize long-term planning

Instead, they allow managers to adapt to new pressures from the environment

Absence of strong resources and psychological commitment to a proactive strategy effectively bars a firm from assuming a leadership role in its environment

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Porters Diamond of National Advantage

Figure 8.3 Porters Diamond the determinants of national advantages Source: Adapted with permission of The Free Press, a Division of Simon & Schuster, Inc., from The Competitive Advantage of Nations by Michael E. Porter. Copyright 1990, 1998 by

Michael E. Porter. All rights reserved

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Porters Diamond of National Advantage

Michael Porter has proposed a four-pointed diamond to explain why some locations tend to produce firms with sustained competitive advantages in some industries more than others.

Porters Diamond suggests that locational advantages may stem from:

local factor conditions;

local demand conditions;

local related and supporting conditions;

local firm strategy structure and rivalry.

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Yips Drivers of Internationalisation

Figure 8.2 Drivers of internationalisation Source: Adapted from G. Yip, Total Global Strategy II, Financial Times Prentice Hall, 2003, Chapter 2

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Yips Drivers of Internationalisation

Given internationalisations complexity, international strategy should be pinned by a careful assessment of trends in each particular market.

George Yips globalisation framework sees international strategy potential as determined by:

market drivers;

cost drivers;

government drivers;

competitive drivers.

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References

Pearce, JA & Robinson, RB 2013 Strategic Management: Formulation, Implementation & Control, 13th edn, McGraw-Hill International edition, Chapter 4.

Thompson & Strickland, 2010 Crafting and Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases, Chapter 3

Johnson G, Whittington R, Scholes, K, Angwin D & Regner, P 2014 10th edn, Pearson Education Limited, Italy.