Chapter 2 The External Environment 1

2 Learning Objectives To understand: the elements of the broad environment the five primary forces that determine the nature and level of competition in an industry how stakeholders in the task environment influence the firm, its performance, and its strategies cooperative strategies and alliance networks global business environments and evaluating a foreign country for investment To understand: the elements of the broad environment the five primary forces that determine the nature and level of competition in an industry how stakeholders in the task environment influence the firm, its performance, and its strategies cooperative strategies and alliance networks global business environments and evaluating a foreign country for investment

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

4 The Broad Environment Sociocultural Forces Economic Forces Technological Forces Political/Legal Forces Sociocultural Forces Economic Forces Technological Forces Political/Legal Forces

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

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

7 Technological Forces 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 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 “Technology is human knowledge about products and services and the way they are made and delivered” “Technology is human knowledge about products and services and the way they are made and delivered”

8 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, with a general trend towards more government intervention and regulation Alliances and treaties among governments provide another level of complexity in planning 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, with a general trend towards more government intervention and regulation Alliances and treaties among governments provide another level of complexity in planning

9 The Task Environment Customers – existing and potential Suppliers – of labor, materials, equipment, money Competitors – that battle for customers and attention Government agencies and administrators – that influence business practices, costs and opportunities Communities – that are dependent on businesses for jobs, economic activity Activist groups – that influence business practices Unions – that provide workers in some industries and influence costs Financial intermediaries – that provide capital and oversight Customers – existing and potential Suppliers – of labor, materials, equipment, money Competitors – that battle for customers and attention Government agencies and administrators – that influence business practices, costs and opportunities Communities – that are dependent on businesses for jobs, economic activity Activist groups – that influence business practices Unions – that provide workers in some industries and influence costs Financial intermediaries – that provide capital and oversight

10 Competitors 3. Direct competitors 4. Potential competitors (entry barriers) 5. Firms that sell substitute products/services 1. Economic Power of Customers 2. Economic Power of Suppliers Forces of That Drive Industry Competition and Profitability

11 When Customers Have Power Small number of customersSmall number of customers Many similar products existMany similar products exist Customers make high volume purchasesCustomers make high volume purchases Customers can get accurate information on the selling industryCustomers can get accurate information on the selling industry The products they are buying are undifferentiatedThe products they are buying are undifferentiated They can easily vertically integrate backwardsThey can easily vertically integrate backwards They can easily switch from one seller to anotherThey can easily switch from one seller to another

12 When Suppliers Have Power Small number of suppliersSmall number of suppliers Few substitutes exist and the buying industry must have the product/service to surviveFew substitutes exist and the buying industry must have the product/service to survive Suppliers are not dependent on the buyer for a lot of their salesSuppliers are not dependent on the buyer for a lot of their sales Suppliers can get accurate information on the buying industrySuppliers can get accurate information on the buying industry Suppliers have differentiated their productsSuppliers have differentiated their products Suppliers can easily vertically integrate forwardSuppliers can easily vertically integrate forward Suppliers have made it costly to switch suppliersSuppliers have made it costly to switch suppliers

13 When Rivalry Among Direct Competitors Is Intense Slow industry growthSlow industry growth High fixed costs (plants, machinery, outlets)High fixed costs (plants, machinery, outlets) Lack of product differentiationLack of product differentiation A large number of competitorsA large number of competitors High exit barriers (what you lose if you leave the business)High exit barriers (what you lose if you leave the business)

High Low High Low Price/ Service Price/ Service Few Many Number of Product Categories Specialty Stores Specialty Stores Specialty Warehouse Stores Specialty Warehouse Stores Elite Department Stores Elite Department Stores General Merchandisers General Merchandisers Discount Department Stores Discount Department Stores Warehouse Clubs Warehouse Clubs Strategic Group Map for U.S. Retailing

15 Entry Barriers Economies of scaleEconomies of scale High levels of product differentiationHigh levels of product differentiation High switching costsHigh switching costs Limited access to distribution channelsLimited access to distribution channels Government policies and regulations that make it hard to enter or competeGovernment policies and regulations that make it hard to enter or compete Existing firm possession of resources that are hard to duplicate such as patents, great locations, proprietary technology, subsidies, partnerships, etc.Existing firm possession of resources that are hard to duplicate such as patents, great locations, proprietary technology, subsidies, partnerships, etc. Past history of aggressive retaliation toward new entrantsPast history of aggressive retaliation toward new entrants

16 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 studiedSubstitutes 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 surgeryE.g., contacts lens versus glasses versus surgery Close substitutes place a ceiling on the price that can be charged for a product or serviceClose substitutes place a ceiling on the price that can be charged for a product or service Close substitutes also set indirect performance comparisonsClose substitutes also set indirect performance comparisons

17 Guiding principle: higher propensity to pursue cooperative strategies with stakeholders that can influence firm outcomes (increase or reduce environmental uncertainty) The ability to influence firms and firm outcomes results from: Economic power of particular stakeholders – ability to influence profit potential and operations Political power of particular stakeholders – ability to influence ground rules by which firms operate Network centrality of particular stakeholders – firms that are well positioned relative to other firms in the industry Guiding principle: higher propensity to pursue cooperative strategies with stakeholders that can influence firm outcomes (increase or reduce environmental uncertainty) The ability to influence firms and firm outcomes results from: Economic power of particular stakeholders – ability to influence profit potential and operations Political power of particular stakeholders – ability to influence ground rules by which firms operate Network centrality of particular stakeholders – firms that are well positioned relative to other firms in the industry When to Cooperate with External Stakeholders

18 Examples of Cooperative Strategies with Stakeholders Customers – Involvement in design teams/planning Suppliers – Integrated information systems Competitors – Joint ventures for R&D or market development Government – Joint or government-sponsored research Communities – Cooperative training programs Special Interests – Appointment of representatives to internal committees Unions – Inclusion of labor leaders in major decisions Financial Intermediaries – Appointment of representatives to board of directors Customers – Involvement in design teams/planning Suppliers – Integrated information systems Competitors – Joint ventures for R&D or market development Government – Joint or government-sponsored research Communities – Cooperative training programs Special Interests – Appointment of representatives to internal committees Unions – Inclusion of labor leaders in major decisions Financial Intermediaries – Appointment of representatives to board of directors

19 Forms of Alliances and Alliance Networks Strategic alliance – any kind of cooperative strategy in which firms combine resources to pursue common objectivesStrategic alliance – any kind of cooperative strategy in which firms combine resources to pursue common objectives Equity alliance (also called joint venture) – two or more firms form a legally independent companyEquity alliance (also called joint venture) – two or more firms form a legally independent company Nonequity strategic alliance – formed through contract (no equity)Nonequity strategic alliance – formed through contract (no equity) Collusion – formal price setting (illegal in U.S.)Collusion – formal price setting (illegal in U.S.) ›Informal price cooperation is also evident in some industries Alliance networks – autonomous firms that cooperative due to common interestsAlliance networks – autonomous firms that cooperative due to common interests ›These firms are often organized around hub firms that coordinate information sharing

20 Global Business Environments Major trends include: Technological advances – communication, transportation Dramatic increase in globalization of companies Opportunities in many developing nations Factors to consider when evaluating a country for entry: Social forces Economy Political/legal environment Technology Industry specific factors Major trends include: Technological advances – communication, transportation Dramatic increase in globalization of companies Opportunities in many developing nations Factors to consider when evaluating a country for entry: Social forces Economy Political/legal environment Technology Industry specific factors

21 Conditions that Create Advantages for Nations Factors of Production - uncommon raw materials, special workers, better schools or training Demand Conditions - discriminating buyers, trend setters Related and Supporting Industries - best suppliers in world, firms in related industries global leaders Firm Strategy, Structure and Rivalry - customary practices are conducive to success, the most talented managers, strong competitors Factors of Production - uncommon raw materials, special workers, better schools or training Demand Conditions - discriminating buyers, trend setters Related and Supporting Industries - best suppliers in world, firms in related industries global leaders Firm Strategy, Structure and Rivalry - customary practices are conducive to success, the most talented managers, strong competitors