Miles A. Zachary MGT 4380

Lecture The relationship between an organization and its environment Evaluating the general environment Evaluating the industry environment Strategic groups General environment exercise Short Exam Review / Q&A Group simulation time

The environment is composed of the external conditions and factors that affect an organization Two (2) sets of environments: General environment-includes overall trends and events in society Social Demographic Economic Industry environment-consists of multiple organizations that collectively compete by providing similar goods, services, or both

Any action a firm takes changes the world around them Most firms are limited to affecting their own industry Some firms have the ability to affect the more general environment (e.g. Apple, Intel, IBM) Why is understanding the environment important? Provides access to resources (open systems approach) Source of opportunities and threats Shape strategic decisions (e.g. goals set, creating a business)

Opportunities are events and trends that create chances to improve an organization’s performance level Threats are events and trends that may undermine an organization’s performance Note that both opportunities and threats are based on external conditions; strengths and weaknesses are based on internal conditions Most environmental events and trends create opportunities and threats for firms—the question is “which are important?”

Evaluating the general environment involves looking beyond a firm’s industry to the larger environmental landscape A simple way to compartmentalize a general environment analysis is using PESTEL PESTEL is an anagram that examines six different parts of the general environment PESTEL stands for (1) political, (2) economic, (3) social, (4) technological, (5) environmental, and (6) legal trends

Political Factors Tax policies Changes in trade restrictions and tariffs Government stability Economic Factors Interest rates Inflation Currency markets Unemployment rates Disposable income General growth or decline

Social Factors Demographics Cultural trends Obesity Consumer activism Technological Factors Revolutionary technological changes (e.g. internet, USB) Automation Delivery Software

Environment Factors Natural disasters Weather patterns Legal Factors Legislation Torts Discrimination Antitrust

The industry a firm operates influences a firm’s strategy Porter’s 5 Forces analysis is a tool from which a firm can analyze the factors that exert industry pressure Competitor Rivalry Threat of New Entrants Threat of Substitutes Buyer Power Supplier Power

Firms face competitive pressures and attempt to maneuver around competitors using a variety of actions Pricing Marketing New Product Development Scale/Capacity Operations Signaling Other

The competitive rivalry within a given industry is high given: Firms are roughly equal in size and power Industry growth rate is slow Competitors are not suitably differentiated Fixed costs are high Exit barriers are high Existence of excess capacity Capacity needs to expand to be efficient Perishable products These factors are often a function of market structure (e.g. monopoly, oligopoly, pure competition, etc…)

These are threats from possible firms entering a competitive industry Often a function of: Economies of scale Capital requirements Access to distribution channels Government policies Differentiation Switching costs Expected retaliation Cost advantages independent of size (e.g. patents, trademarks, brands, etc…)

Substitutes are offerings from other industries that fulfill the same need or a very similar need as an industry’s existing products or services Substitutes can be disastrous to industries In most industries, firms must continually innovate to avoid being substituted for another industry’s product or service

Suppliers provide inputs that competitors in an industry need to create goods and services Suppliers can gain power if: Suppliers are few in number and highly concentrated No viable substitutes exist Industry members rely heavily on suppliers High switching costs A suppliers products are differentiated Suppliers

While buyers in most markets are “price-takers”, buyers can still leverage power over industry competitors when: Few buyers exist relative to suppliers When goods/services are standardized or undifferentiated Little to no switching costs High percentage of buyer’s costs; buyers search for better Buyers are able to backward integrate into the market Competitor goods/services are of little importance (elastic demand)

Assumes a zero-sum competitive environment When firms make a profit, they do so at the cost of another firm Relationships are depicted as adversarial Ignores strategic alliances or joint-venture relationships Similarly, suppliers and buyers are depicted as adversarial Many firms must forge valuable relationships with their suppliers to increase profitability

Strategic groups are sets of firms within a given industry that follow similar strategies Differ in important ways from members of other groups Strategic groups are important because: Often identify a firm’s closest rivals Different strategies pursued by firms in a given group show alternatives to success (equifinality) Gaps in the map can reveal gaps in the industry; areas were entrepreneurs or entrepreneurial firms can capitalize on