1. 1. Three Levels of the Environment 2. Industry
The External Environment (Part One)
Agenda
1. Three Levels of the Environment
2. Industry
a. Definition
b. Segmentation
c. Characteristics
Economic Traits,
Structure
Driving Forces
Key Success Factors

2. A Framework for the Strategy Making Processl e n t a i o
Vision
and
Mission
Corporate
Strategy P e r f o m a n c
Managers’
Mental
Models
(Beliefs &
Understanding
Market
Position
Set
Objectives
Business
Strategy
Functional
Strategy
Business
Definition
Decisions about
Feedback

3. External Environment Company Mission and Objectives Strategic Options
Macro
Industry
Operating
Company
Mission
and
Objectives
Strategic
Options
and
Choice
Desired?
Possible?
Internal
Environment
Resources
Current Strategy
Costs

4. Macro Environment
Industry Environment
Operating
Environment
Firm

5. Macro Environment Factors
Economic
Technological
Political/Legal
Social/Cultural

6. Economic Factors
The state of the macroeconomic environment determines the
general health and well being of the economy.
This in turn affects a company’s ability to earn an adequate
rate of return.
Examples: GDP trends, interest rates, money supply, inflation
unemployment levels, wage/price controls, energy availability
and costs, disposable and discretionary income.
Globally: Monetary and Fiscal policies, currency convertibility,
exchange rates, economic development, political economy

7. US Unemployment Rates 1996 5.4% 1997 4.7% 1998 4.4% 1999 4.0% 2000
3.9%
2001
5.7%
2002
6.0%
2003
2004
2005
5.1%
2006
4.5%
Source: Bureau of Labor Statistics (US Government)

8. Technological Factors
This factor deals with the general technological infrastructure, the
rate of change in technology, and those things impacting the
development and introduction of new technologies.
Examples: Total government spending for R&D, Total industry
spending for R&D, focus of technological efforts, patent protection,
new developments in technology transfer, productivity
improvements through automation.
Global: Regulations on technology transfer, information flow
infrastructure, patent and trademark protection.
1. Nanotechnology: sun block, stain-resistant clothing, power transmission, disease diagnosis and treatment Web-enabled telephone technology

10. Political/Legal Factors
These factors define the legal and regulatory parameters within
which a firm must operate.
Examples: Antitrust regulations, environmental protection, tax laws,
employment laws, stability of government, foreign trade protection
Global: Form of government, political ideology, protectionist
sentiment, terrorist activity, legal system, government’s attitude
toward foreign firms.

11. New Bankruptcy Filings (Through Sept, 2006)
Source: Administrative Office of the U.S. Courts
Year
Business
Non-Business
Total
2006
27,333
1,085,209
1,112,542
2005
34,222
1,748,421
1,782,643
2004
34,817
1,584,170
1,618,987
2003
36,183
1,625,813
1,661,996
2002
39,091
1,508,578
1,547,669
2001
38,490
1,398,864
1,437,354
2000
36,065
1,226,037
1,262,102

12. New Bankruptcy Filings
Source: Administrative Office of the U.S. Courts

13. Social/Cultural Factors
This category of factors describe the beliefs, values, attitudes,
opinions, and lifestyles of persons in the firm’s external
environment as developed from cultural, demographic, religious,
educational and ethnic conditioning.
Examples: Lifestyle changes, career expectations, age distribution,
regional shifts in population, birth rates, life expectancies,
growth rate in population, consumer activism, rate of family
formation.
Global: Human rights, literacy levels, language, social institutions,
skill level of the workforce

14. Obesity Trends* Among U.S. Adults BRFSS, 1991, 1996, 2003
(*BMI 30, or about 30 lbs overweight for 5’4” person)
1991
1996
2003
No Data <10% %–14% %–19% %–24% ≥25%
Source: Center for Disease Control

15. Obesity Trends (2004)
Source: Center for Disease Control

16. Obesity Trends (2005)

17. Industry Environment Dominant Economic Traits Industry Structure
Driving Forces
Key Success Factors
Industry Life Cycle
Competitive Forces (Porter’s Five Forces)

18. Operating Environment
Specific Competitors
Specific Customers
Specific Suppliers
Specific Pools of Labor
Specific Creditors

19. Where does one end and another begin?
What is an Industry?
How do we define it?
Where does one end and another begin?
Why are they important to define?

20. Why is it important to strategic management?
Segmentation
What is it?
Why is it important to strategic management?

21. Segmentation
1. Helps firms to determine the relative attractiveness of different
segments and different Key Success Factors.
2. Helps firms to appropriately classify competitors into groups
and determine direct and indirect competitors.
3. Helps firms to predict behavior of individual firms.

22. Industry
Segments
Markets

23. Segmentation can be based on:
Characteristics of the buyers: industrial, household, distribution
channel, geographic location.
Characteristics of the product: size, price, product features,
technology design, inputs used, performance characteristics,
pre/post sale service.
Segmentation impacts how companies view the competitive landscape!

24. Aerospace and Defense Industry: Broadly Defined
Key Segments
Military
Weapons
Commercial
Aircraft
Space
(Rockets and
Satellites)

25. Aerospace Industry Commercial Aircraft Further Segmentation Large
Jets
($48.4 Billion)
Maintenance
Repair
and Overhaul
($37.0 Billion)
Business and
Regional Aircraft
($16.1 Billion)
Jet Engines
($38.3 Billion)
Civil Avionics
($11.0 Billion)

26. Economic Traits
A set of dimensions that characterize the industry’s cost, revenue
and profit potentials.
Examples: market size, types of distribution channels used to
access customers, economies of scale, economies of learning,
pace of technological change, capital requirements, product
differentiation, presence of vertical integration.

27. Economic Traits: Defense and Aerospace
Market Size: $410 Billion (slow growth)
Types of Distribution Channels: Few (mostly direct)
Economies of Scale: Present
Capital Requirements: Extremely High
Product Differentiation: High (needs explanation)
Presence of Vertical Integration: Yes (Boeing and Airbus also
produce jet engines)
Key Competitors (Commercial Aircraft): Boeing and Airbus

28. Industry Structure
Industry Structure refers to those enduring characteristics that give
an industry its distinctive character.
Consolidation/Fragmentation
Concentration
Economies of Scale
Product Differentiation
Barriers to Entry/Exit
Information Availability

29. Industry Structure (Commercial Aircraft)
Oligopoly Competition (Boeing/45% and Airbus/55%)
Concentration (Yes)
Economies of Scale (Present)
Product Differentiation* (High)
Barriers to Entry/Exit (Extremely High)

30. Driving Forces
Driving Forces are conditions in the industry environment that
create significant and lasting change in the industry’s
structure and competitive environment.
Examples: long-term growth, technology and rate of technological
change, product innovation, globalization, diffusion of technical
know-how, changes in target market or how a product is used.

31. Driving Forces: Commercial Aircraft
Long-Term Airline Industry Profitability
Capacity Issues in Airline Industry
Fuel Prices
Air Traffic Forecasts
Price Pressure from Customers (Delta, Northwest, etc)
Globalization
Presence of Low Cost Air Carriers

32. Key Success Factors
Industry specific resources or processes that firms competing
in a particular industry must either possess or have some
competence in doing in order to be profitable and ultimately
survive.

33. Key Success Factors: Commercial Aircraft
Excellence in R&D
Effective Production Utilization
Free Cash Flow

34. Key Success Factors can differ between an industry segments.
US Bicycle Industry
Key Success Factors can differ between an industry segments.
Key Segments:
Low-Priced bikes sold primarily through department and
discount stores.
Medium-Priced bikes sold primarily under the manufacturer's
name and distributed main through specialty bicycle stores
High-priced bikes for enthusiasts
Children’s bikes and tricycles sold primarily through toy stores.