McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Chapter 2 The External Environment

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Learning Objectives After studying Chapter 2, you will know: how environmental forces influence organizations, as well as how organizations can influence their environments how to make a distinction between the macroenvironment and the competitive environment why organizations should attend to economic and social developments in the environments how to analyze the competitive environment how organizations respond to environmental uncertainty

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved The External Environment Organizations are open systems affected by, and in turn affect, their external environments External environment all relevant forces outside a firm’s boundaries relevant - factors to which managers must pay attention two elements comprise the external environment competitive environment - immediate environment surrounding a firm macroenvironment - fundamental factors that generally affect all organizations

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Laws and politics Economy Technology Demographics Social values Macroenvironment Competitive Environment Organization Suppliers New Entrants Substitutes Rivals Buyers The External Environment

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved The Macroenvironment The macroenvironment most general elements in the external environment that can potentially influence strategic decisions all organizations are affected by the general components of the macroenvironment Laws and regulations impose strategic constraints and provide opportunities regulators - specific government organizations in a firm’s more immediate task environment have the power to investigate company practices and take legal action to ensure compliance with the laws

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved The Macroenvironment (cont.) The economy created by complex interconnections among economies of different countries important elements include interest rates, inflation rates, unemployment rates, and the stock market economic conditions change and are difficult to predict Technology creates new products, advanced production techniques, and improved methods of managing and communicating strategies that ignore or lag behind competitors in considering technology lead to obsolescence and extinction

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved The Macroenvironment (cont.) Demographics measures of various characteristics of the people comprising groups or other social units age, gender, family size, income, education, occupation workforce demographics must be considered in formulating human resources strategies population growth influences the size and composition of the labor force immigration also is a significant factor increasing diversity of the labor force has both advantages and disadvantages must assure equal employment opportunity

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved The Macroenvironment (cont.) Social issues and the natural environment management must be aware of how people think and behave the role of women in the workplace providing benefits for domestic partners of employees protection of the natural environment

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Competitive Environment Competitive environment comprises the specific organizations with which the organization interacts Michael Porter - defined the competitive environment successful managers: react to the competitive environment; and act in ways that actually shape or change the competitive environment

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Rival firms New entrants SuppliersCustomers Substitutes Competitive Environment

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Competitive Environment (cont.) Competitors competitors within an industry must deal with one another organizations must: identify their competitors analyze how competitors compete react to and anticipate competitors’ actions competition is most intense: where there are many competitors when industry growth is slow when the product or service cannot be differentiated

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Competitive Environment (cont.) Threat of new entrants barriers to entry - influence the degree of threat conditions that prevent new companies from entering an industry include government policy, capital requirements, and brand identification, cost disadvantages, and distribution channels Threat of substitutes technological advances and economic efficiencies may result in substitutes for existing products substitutes can limit another industry’s revenue potential companies need to think about potentially viable substitutes

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Competitive Environment (cont.) Suppliers provide the resources needed for production powerful suppliers can reduce an organization’s profits international labor unions are noteworthy suppliers dependence on powerful suppliers is a competitive disadvantage power of supplier determined by: availability of other suppliers from whom to buy the number of customers for the supplier’s products switching costs - fixed costs buyers face if they change suppliers close supplier relationship is the new model for organizations

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Competitive Environment (cont.) Customers purchase the products or services the organization offers final consumers - purchase products in their final form intermediate consumers - buy raw materials or wholesale products before selling them to final consumers customer service - giving customers what they want, the way they want it, the first time disadvantageous to depend too heavily on powerful customers powerful customers make large purchases and/or have other suppliers

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Environmental Scanning Benchmarking Scenario Development Forecasting Environmental Analysis

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Environmental Analysis Environmental uncertainty lack of information needed to understand or predict the future uncertainty arises from two related factors complexity - the number of issues to which a manager must attend as well as their interconnectedness dynamism - the degree of discontinuous change that occurs within the industry as uncertainty increases, techniques must be developed to collect, sort, and interpret information about the environment

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Environmental Analysis (cont.) Environmental scanning searching for and sorting through information about the environment competitive intelligence - information that helps managers determine how to compete better competitive potential of environments differs attractive environments - give firm a competitive advantage unattractive environments - put firm at a competitive disadvantage

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Attractive and Unattractive Environments Environmental Factor Competitors Threat of entry Substitutes Suppliers Customers Unattractive Many; low industry growth; equal size; commodity High threat; few entry barriers Many Few; high bargaining power Few; high industry growth; unequal size; differentiated Low threat; many barriers Few Many; low bargaining power Many; low bargaining power Attractive

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Environmental Analysis (cont.) Scenario development scenario - a narrative that describes a particular set of future conditions best-case scenario - events occur that are favorable to the firm worst-case scenario - events occur that are all unfavorable help managers develop contingency plans Forecasting method for predicting how variables will change in the future accuracy varies from application to application forecasts are most useful when they accurately predict a changed future environment

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Environmental Analysis (cont.) Benchmarking process of comparing the organization’s practices and technologies with those of other companies determine the best-in-class performance by a company in a given area benchmarking team collects information on its own company’s operations and those of benchmark companies to identify gaps gaps investigated to learn the underlying causes of performance differences

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Responding To The Environment Adapting to the environment company adjusts its structures and work processes in uncertain environment caused by complexity, companies tend to decentralize decision making empowerment - process of sharing power with employees enhances their confidence in their ability to perform their jobs engenders beliefs that they are influential contributors to the firm in uncertain environments caused by dynamism, companies tend to establish more flexible structures bureaucracy - suited for stable environments (low dynamism) organic - provides flexibility required for changing environments (high dynamism)

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Complex Simple StableDynamic Decentralized Bureaucratic (Standardized skills) Centralized Bureaucratic (Standardized work processes) Decentralized Organic (Mutual adjustment) Centralized Organic (Direct supervision) Four Approaches for Managing Uncertainty

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Responding To The Environment (cont.) Adapting to the environment (cont.) Adapting at the boundaries buffering - creating supplies of excess resources in case of unpredictable needs buffers created on both the input and output side of the business smoothing - leveling normal fluctuations at the boundaries of the organization Adapting at the core flexible processes - permit adaptation of the technical core mass customization -use of a network of independent operating units that each performs a specific process different modules join forces to deliver the product or service as specified by the customer

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Responding To The Environment (cont.) Influencing your environment proactive responses aimed at changing the environment Independent action - strategies that an organization acting on its own uses to change some aspect of its current environment Cooperative action - strategies used by two or more organizations working together to mange the external environment at an organizational level, establish strategic alliances, partnerships, joint ventures, and mergers with competitors

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Strategy Competitive aggression Competitive pacification Public relations Voluntary action Legal action Political action Independent Action Definition Exploiting a distinctive competence or improving internal efficiency for competitive advantage Independent action to improve relations with competitors Establishing and maintaining favorable images in the minds of those making up the environment Voluntary commitment to various interest groups, causes, and social problems Company engages in private legal battle with competition Efforts to influence elected representatives to create a more favorable business environment

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Changing the environment you are in strategic maneuvering - conscious effort to change the boundaries of the competitive environment prospectors - companies that continuously change the boundaries of their task environments by: seeking new products and markets diversifying and merging acquiring new enterprises defenders - companies that stay within a stable, more- limited product domain as a strategic maneuver Responding To The Environment (cont.)

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Strategy Domain selection Diversification Merger and acquisition Divestiture Strategic Maneuvering Definition Entering industries or markets with limited competition or regulation and ample suppliers and customers; entering high growth markets Investing in different types of business, manufacturing different types of products or geographic expansion to reduce dependence on single market or technology Combining two or more firms into a single enterprise; gaining possession of an ongoing enterprise Selling one or more businesses

McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved Change appropriate elements of the environment focus on elements that: cause the company problems provide the company with opportunities allow the company to change successfully Choose responses that focus on pertinent elements of the environment focus on competitive aggression and pacification Choose responses that offer the most benefit at the lowest cost focus on both short- and long-term financial considerations Choosing A Response Approach