Business Environments:
External and Internal
Welcome to Class 4Part One
Chapter 2
Business Environments are divided into two
(2) primary Categories
External & Internal
Business Environments
Environments
External
General
Competitive
Internal
Resources
Leadership
The external environment 1. Encompasses all issues, occurrences, trends, etc. that are peripheral to the corporation
2. It is beyond the direct control of the TMT.
The internal environment 1. Encompasses all issues, occurrences, trends, etc. that are within the confines of the organization
2. It generally is “somewhat” 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 Change
Environments can change rapidly changes in corporate strategies may be required
The external environment = GENERAL & COMPETITIVE
The internal environment = RESOURCES & LEADERSHIP
Predicting the extent, direction, and speed of environmental change with 100% of precision is difficult to – 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.
Scenario Models facilitate rapid adaptation to changing environments
Scenario ModelsScenario Models:1. Are tools that can aid in the rapid adaptation to environmental changes.
2. They help TMTs prepare for a wide range of possible future conditions from the highly likely to possible but not expected.
3. They are the first step in the preparation of contingency strategies.
4. 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
Changes in one General environmental factor can influence
changes in others.
For example a weak economy can influence Political/Legal positions.
Sociocultural FactorsSociocultural factors relate to a country's:1. Dominant religions2. The population's general desire for leisure-time3. Attitudes toward consumerism4. Environmentalism5. Gender roles in society and business.
In general, sociocultural factors are characterized byThe lifestylesValuesBelief systems of populations
Demographic FactorsDemographic factors pertain to changes:1. In the population size of a country2. Geographic distribution of people3. Ethnic mix4. Income distribution5. Average age6. 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:1. Inflation or deflation rates2. Interest rates3. Tariffs4. Balance of trade issues5. Growth of national economies6. Exchange rates7. Unemployment rates8. Labor availability9. Gross domestic products10.Savings rates, etc.
Technological FactorsTechnological factors pertain to a country’s:1. Reception to innovation2. Strength of cultural discouragement for “new”
things.3. Rate of innovation, inventions, patents
Some cultures reject technological advances while others enthusiastically embrace new technology.
Political/Legal FactorsPolitical/Legal Factors center on:1. The political stability of a country2. Its legal system3. Number of Antitrust laws4. Success of enforcement5. Philosophies of regulations vs deregulation6. General attitude toward business.
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
Factors that AMPLIFY COMPETITIVE INTENSITY
1. High fixed costs (costs that cannot be eliminated easily as volume decreases)
2. High storage costs
3. Lack of differentiation between products or services
4. Low customer switching costs (customer can switch suppliers without significant cost or inconvenience)
5. 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
EntrantsPorter'
sFive
Forces
Rivalry of Competing FirmsIntensity increases when:1. The size of markets shrinks or ceases to grow. 2. When there are numerous competitors seeking the same customers
Consequence of Intensity:1. Prices may fall lowering revenues2. More favorable shipping terms offered to customers3. Selling firms may offer more relaxed payment terms4. Increased expenses as services to customers added
1. Rivalry between suppliers is intense2. Buyers for the products or services are few3. Buyer is the primary customer of the supplier4. Buyer is extremely large and purchases large
quantities or major items 5. Switching costs are low for buyer
(changing suppliers not difficult or costly)6. Buyer is capable of backward integration
(may enter the sellers industry & supply own needs).
Buyer Power is high when…
1. There are few suppliers 2. Demand exceeds availability3. There are few or no substitute4. Purchases are crucial to the buyer’s
business 5. Buyers are small purchasers 6. Supplier has sufficient customers 7. High switching costs for the buyer
(difficult and costly to find another supplier)8. Supplier could forward integrate
(supplier may enter the industry of the buyer and become a direct competitor).
Supplier Power is high when
Threats of Substitutes is high when
1. The customers have low switching costs
2. Price of the substitute product or service is lower
3. Quality and suitability of the substitute is comparable
Threats of new entrants (Newbies)
is high when 1. Low entry barriers2. Lack of differentiation of current products or
services3. Lack of brand loyalty by consumers4. Low switching costs by customers5. Low government intervention
a) few or no licensingb) no permits requiredc) industry minimally regulated
6. Easy access to distribution channels7. Favorable supplier welcome
End of Part One: Business Environments
Re-Read Chapter Two
Relax!