1. Topic 2 The External Environment

2. 3 “Levels” to the External Environment
Remote Environment
Domestic & International Environment
Industry Environment
Industry Analysis and Competitive Analysis
Operating Environment

3. The Firm’s External Environment THE FIRM
Economic
Social
Political
Remote Environment (Global and Domestic)
Technological
Ecological
Industry Environment (Global and Domestic)
Entry barriers
Supplier power
Buyer power
Substitute availability
Competitive
rivalry
Operating Environment (Global and Domestic)
Labor
Suppliers
Customers
Competitors
Creditors
THE FIRM

4. Remote … Economic Factors
Concern the nature and direction of the economy in which a firm operates
Types of factors
General availability of credit
Prime interest rates
Level of disposable income
Propensity of people to spend
Inflation rates
Trends in growth of gross national product

5. Remote … Social Factors
Include beliefs, values, opinions, and lifestyles of people
“Recent” social trends
Entry of large numbers of women into labor market
Accelerating interest of consumers and employees in quality-of-life issues
Shift in age distribution of population

6. Remote Political Factors
… define legal and regulatory parameters within which firms must operate
Types of factors
Fair-trade decisions
Antitrust laws
Tax programs
Minimum wage legislation
Pollution and pricing policies

7. Remote Technological Factors
… focus on technological changes affecting industry
Types of changes
New products
Improvements in existing products
Manufacturing and marketing techniques

8. Remote Ecological Factors
… involve relationships among human beings and other living things and air, soil, and water
Current concerns
Global warming
Loss of habitat and biodiversity
Air, water, and land pollution

9. Remote Assessing the International Environment
Assess each non-domestic market, on the same factors … though the importance of each may differ
Notably …
Economic Environment
Political System
Legal Environment
Cultural Environment
(we will talk more about these)

10. Forces Driving (#2) Industry Competition
Potential
Entrants
Threat of new entrants
Bargaining power
of suppliers
Bargaining power
of buyers
Industry Competitors
Suppliers
Buyers
Rivalry Among
Existing Firms
Threat of substitute
products or services
Substitutes
Porter’s
5 forces Model

11. Industry Competition Threat of Entry
Seriousness of threat depends on
Reaction from existing firms
Barriers to entry
Economies of scale
Product differentiation
Capital requirements
Cost advantages independent of size
Access to distribution channels
Government policy

12. Industry Competition Suppliers
A supplier group is powerful if:
It is dominated by a few companies and is more concentrated than industry to which it sells
Its product is unique, or differentiated, or has built up switching costs
It poses a threat of integrating forward into industry’s business
Industry is not an important customer of supplier group

13. Industry Competition Buyers
A buyer group is powerful if:
It is concentrated or purchases in large volume
Products purchased from industry are standard or undifferentiated
Industry’s product is unimportant to quality of buyers’ products or services
Buyer poses credible threat of integrating backward

14. Industry Competition Substitute Products
Relevance of substitutes
By placing a ceiling on prices charged, they limit profit potential of an industry
Substitutes deserving the most attention are those
Subject to trends improving their price-performance trade-off with the industry’s product
Produced by industries earning high profit

15. Industry Competition Rivalry
Tactics of competitive rivalry
Price competition
Product introduction
Advertising slugfests
What Causes Rivalry to be Intense?
Size, slow growth, homogeneous products, high exit barriers ….

16. Characteristics of Industry Structure
Structural attributes –Characteristics that give an industry its distinctive character
Variations among industries involves examining
Concentration
Economies of Scale
Product Differentiation
Barriers to Entry

17. ***Common Mistakes in Identifying Competitors
Overemphasizing current and known competitors while ignoring potential entrants
Overemphasizing large competitors while ignoring small ones
Overlooking potential international competitors
Assuming competitors will continue to behave in the same way

18. Operating Environment (#3)
The operating environment, also called the competitive or task environment, comprises factors in the competitive situation that affect a firm’s success in acquiring needed resources or in profitably marketing its goods and services

19. Factors in the Operating Environment
Firm’s competitive position …
Key success factors? ... market share, breadth of product line, experience, financial position, product quality, technological position, community reputation, etc.
The composition of its customers
Geographic, demographic, behavioral
Reputation among suppliers and creditors
Ability to attract capable employees