1

2 Learning Objectives Understanding of: the elements of the external environment the role of external environmental forces on industry demand, cost structure, and profitability the role of external environmental forces in creating opportunities and threats methods that organizations can use to influence stakeholders in the task environment.

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

4 The Broad Environment Global Socio-cultural Forces Global Economic Forces Global Technological Forces Global Political/Legal Forces Global Socio-cultural Forces Global Economic Forces Global Technological Forces Global Political/Legal Forces

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

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

7 Technological Change 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 knowledge about products and services and the way they are produced and delivered” “Technology is knowledge about products and services and the way they are produced and delivered”

8 Global 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 The worldwide trend is towards deregulation and privatization In the U.S., significant political/legal influence comes from: lawmakers, regulatory agencies, revenue collection agencies, courts 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 The worldwide trend is towards deregulation and privatization In the U.S., significant political/legal influence comes from: lawmakers, regulatory agencies, revenue collection agencies, courts

9 The Task Environment Customers - existing and potential Suppliers - of labor, materials, equipment, money Existing competitors - that battle for customers and attention New competitors - that might enter the industry Indirect competitors- from other industries that offer substitute products or services Communities - that are dependent on businesses for jobs, economic activity Local regulators - that influence business practices and costs

10 Porter’s Five Forces of Competition The Power of Customers The Power of Suppliers The Threat of Potential Entrants The Availability and Comparability of Substitutes Competition Among Existing Competitors

11 When Customers Have Power Small number of customersSmall number of customers They make high volume purchasesThey make high volume purchases Large purchases compared to purchases from other industriesLarge purchases compared to purchases from other industries Products they are buying are undifferentiatedProducts they are buying are undifferentiated They have low profitsThey have low profits They can get accurate information on the selling industryThey can get accurate information on the selling industry 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 existFew substitutes exist 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 The buying industry must have the product or service to surviveThe buying industry must have the product or service to survive Suppliers have differentiated their productsSuppliers have differentiated their products It is costly to switch suppliersIt is costly to switch suppliers They can easily vertically integrate forwardThey can easily vertically integrate forward

13 When Rivalry Among Existing Competitors Is Intense Slow industry growthSlow industry growth High fixed costs (plants, machinery, outlets)High fixed costs (plants, machinery, outlets) Undifferentiated productsUndifferentiated products 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) Small changes in market share have a big pay- offSmall changes in market share have a big pay- off

14 Barriers That Block New Entrants Economies of scaleEconomies of scale Large capital requirementsLarge capital requirements Product differentiationProduct differentiation High switching costHigh switching cost Limited access to distribution channelsLimited access to distribution channels Some government policies and regulationsSome government policies and regulations Other advantages that are hard to duplicate such as patents, great locations, subsidies, partnerships, etc.Other advantages that are hard to duplicate such as patents, great locations, subsidies, partnerships, etc. History of aggressive retaliation toward new entrantsHistory of aggressive retaliation toward new entrants

15 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

16 Strategic Importance and Management Approach STRATEGIC STRATEGIC IMPORTANCE IMPORTANCE OF STAKEHOLDER (PRIORITY) (PRIORITY) Contribution of the Contribution of the stakeholder to the stakeholder to the environmental uncertainty environmental uncertainty facing the firm facing the firm HIGH Increased Use of Strategic Partnering Tactics Primary Dependence On Traditional Stakeholder Management Techniques LOW Firm strategic choice Ability of the Ability of the stakeholder to reduce stakeholder to reduce environmental uncertainty for the firm environmental uncertainty for the firm

17 Common Partnering Techniques Direct Stakeholder Involvement Design Teams/Planning (Customers, Suppliers) Linked Communications (Customers, Suppliers) Appointments to Board (Customers, Suppliers, Unions, Financial Intermediaries, Government Contacts, Activists) Joint Research (Competitors, Government) Joint Ownership Joint Ventures (all stakeholders) Keiretsu (Customers, Suppliers, Financial Intermediaries, Competitors) Consortia/Alliances Trade Groups (Competitors) Foreign Development (Competitors, Governments) Education (Competitors, Governments, Communities) Direct Stakeholder Involvement Design Teams/Planning (Customers, Suppliers) Linked Communications (Customers, Suppliers) Appointments to Board (Customers, Suppliers, Unions, Financial Intermediaries, Government Contacts, Activists) Joint Research (Competitors, Government) Joint Ownership Joint Ventures (all stakeholders) Keiretsu (Customers, Suppliers, Financial Intermediaries, Competitors) Consortia/Alliances Trade Groups (Competitors) Foreign Development (Competitors, Governments) Education (Competitors, Governments, Communities)