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Chapter

2 The ExternalEnvironment

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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 andthe 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

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The External Environment

Organizations are open systems

affected by, and in turn affect, their external environments

External environment

all relevant forces outside a firms 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

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Laws and

politics

Economy

Technology

Demographics

Social

values

MacroenvironmentCompetitive

Environment

OrganizationSuppliers

New

Entrants

SubstitutesRivals

Buyers

The External Environment

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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 firms

more immediate task environment have the power to investigate company practices and take legal

action to ensure compliance with the laws

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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, andimproved methods of managing and communicating

strategies that ignore or lag behind competitors in

considering technology lead to obsolescence and extinction

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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

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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

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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

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Rival firms

New

entrants

Suppliers Customers

Substitutes

Competitive Environment

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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

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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 industrys revenue potential

companies need to think about potentially viable substitutes

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Competitive Environment (cont.)

Suppliers

provide the resources needed for production

powerful suppliers can reduce an organizations 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 suppliers products

switching costs - fixed costs buyers face if they change suppliers

close supplier relationship is the new model for organizations

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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

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Environmental

Scanning

BenchmarkingScenario

Development

Forecasting

Environmental Analysis

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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 mustattend 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

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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 competitivedisadvantage

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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 bargaining power

Few; high industry growth;

unequal size; differentiated

Low threat; many barriers

Few

Many; low bargainingpower

Many; low bargaining

power

Attractive

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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

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Environmental Analysis (cont.)

Benchmarking

process of comparing the organizations 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 companys

operations and those of benchmark companies to identify gaps

gaps investigated to learn the underlying causes of performance

differences

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Responding To The Environment

Adapting to the environment

company adjusts its structures and work processes

in uncertain environment caused bycomplexity, 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 bydynamism, companies

tend to establish more flexible structures

bureaucracy - suited for stable environments (low dynamism)

organic - provides flexibility required for changing environments

(high dynamism)

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Complex

Simple

Stable Dynamic

Decentralized

Bureaucratic

(Standardized skills)

Centralized

Bureaucratic

(Standardized workprocesses)

Decentralized

Organic(Mutual adjustment)

Centralized

Organic

(Direct supervision)

Four Approaches for Managing Uncertainty

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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

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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

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Strategy

Competitive

aggression

Competitive

pacificationPublic 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

competitorsEstablishing 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

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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- limitedproduct domain as a strategic maneuver

Responding To The Environment (cont.)

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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, manufacturingdifferent 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

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Ch i A A h

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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