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2. 2 Learning Objectives To understand: 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. 3 StrategicDirection Strategy Formulation (corporate and business level) Strategy Implementation and Control Strategic Restructuring Internal and External Analysis

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

5. 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. 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. 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 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. 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. 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

10. 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. 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. 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. 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)

14. 14 Entry Barriers 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 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

15. 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. 16 Guiding principle: higher propensity to partner with stakeholders that can influence firm outcomes (increase or reduce environmental uncertainty) The ability to influence firms and firm outcomes results from: Economic power – ability to influence profit potential and operations Political power – ability to influence ground rules by which firms operate Possession of valuable resources – needed by organization Guiding principle: higher propensity to partner with stakeholders that can influence firm outcomes (increase or reduce environmental uncertainty) The ability to influence firms and firm outcomes results from: Economic power – ability to influence profit potential and operations Political power – ability to influence ground rules by which firms operate Possession of valuable resources – needed by organization When to Partner with External Stakeholders

17. 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)

18. 18 Global Business Environments Major trends include: Technological advances – communication, transportationTechnological advances – communication, transportation Dramatic increase in globalization of companiesDramatic increase in globalization of companies Opportunities in Latin America, Asia, Eastern EuropeOpportunities in Latin America, Asia, Eastern Europe Factors to consider when evaluating a country for entry: Social forcesSocial forces EconomyEconomy Political/legal environmentPolitical/legal environment TechnologyTechnology Industry specific factorsIndustry specific factors

19. 19 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