Business Policy Chapter 2 - The External Environment

Prof. Noel M. Teves

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.

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

Why Consider Society? Stakeholders are members of society--assessment of their values and beliefs Good (ethical) reputation Avoid restrictive legislation Change = opportunities

Analysis of global socio-cultural trends is important from at least four perspectives. 1.Most stakeholder groups are also members of society and some of their values and beliefs are derived from broader societal influences, which can create opportunities and threats for organizations. 2.Firms may reduce the risk of gaining a bad "ethical" reputation by anticipating and adjusting for socio-cultural trends. 3.Correct assessment of socio-cultural trends can help businesses avoid restrictive legislation. 4.Demographic and cultural changes in society can create opportunities for and threats to the revenue growth and profit prospects of an organization. 5.An organizations must manage its relationship and reputation with society at large.

The Global Economy Economic Growth Interest Rates Availability of Credit Inflation Rates Foreign Exchange Rates Foreign Trade Balances

Business Policy Chapter 2 - The External Environment

Prof. Noel M. Teves

Global economic forces include economic growth, interest rates, the availability of credit, inflation rates, foreign exchange rates, and foreign trade balances are among the most critical economic factors. 1.These forces determine the inherent attractiveness of industries demand, costs, and profitability. 2.Economics forces and socio-cultural forces can interact to create powerful threats and opportunities. (e.g., buying power of baby boomers, availability of low-cost immigrant labor) 3.To assess the effect of the interdependent socio-cultural and economic forces, organizations often model their business environments using different scenarios. The scenarios are composed of optimistic, pessimistic, and most likely assumptions and interpretations of various economic and socio-cultural trend data collected for the process.

Technological Change Technology is human knowledge about products and services and the way they are made and delivered 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

Global technological forces create new products, services, and, in some cases, entire new industries. Technological forces can change the way society behaves and what society expects. The Internet, handheld computers, direct satellite systems, and cellular telephones are technological innovations that have experienced extraordinary growth in recent years, leaving formerly well-established industries stunned, creating whole new industries, and influencing the way many people approach work and leisure. To help identify trends and anticipate their timing, organizations may participate in several kinds of technological forecasting efforts, such as trend monitoring, gathering the opinions of experts, scenario development, collaborative research initiatives with leading technological institutions. 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

Global political/legal forces, both at home and abroad, are significant determinants of organizational success. 1. Even in the United States, which is considered a "free" market economy, no organization is allowed the privilege of total autonomy from government regulations. Governments can encourage new business formation through tax incentives and subsidies; they can restructure organizations.

Business Policy Chapter 2 - The External Environment

Prof. Noel M. Teves

2. Although all organizations face some form of regulation, the trend is toward deregulation and privatization of industries worldwide. 3. The amount of time and effort organizations should devote to learning about regulations, complying with them, and fostering good relationships with regulatory agencies and their representatives depends, in part, on the industry.

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

The stakeholders in the task environment have a very direct effect on the growth and profitability of industries. The amount of power and influence exercised by the groups tends to vary by industry. In some industries, rivalry among competitors has virtually dissipated all profits. In other industries, industry profits are primarily influenced by suppliers or by regulators.

Porters 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 The competitive forces in an industry may be analyzed using Michael Porters 5-forces model. 1.Industries are often difficult to define, but in general they refer to a group of organizations who compete directly with each other to win orders or sales in the marketplace. 2.Porter's model includes suppliers, customers, and industry competitors. Competitors are further divided into three types: existing competitors, potential competitors, and indirect competitors. 3.An entire industry (as opposed to a single organization) is placed in the center of the model. One of the most common errors made by new students of strategic management is placing an organization in the middle of the model instead of an industry group.

Business Policy Chapter 2 - The External Environment

Prof. Noel M. Teves

When Customers Have Power Small number of customers They make high volume purchases Large purchases compared to purchases from other industries Products they are buying are undifferentiated They have low profits They can get accurate information on the selling industry They can easily vertically integrate backwards They can easily switch from one seller to another

Customers create demand for products and services, and influence industries by bargaining on quality, prices, new features, delivery, etc.

When Suppliers Have Power Small number of suppliers Few substitutes exist Suppliers are not dependent on the buyer for a lot of their sales The buying industry must have the product or service to survive Suppliers have differentiated their products It is costly to switch suppliers They can easily vertically integrate forward

Suppliers to industries provide equipment, supplies, component parts, and raw materials, as well as labor and investment funds. Powerful suppliers influence the industry through prices, quality of goods or services provided, or delivery performance.

Business Policy Chapter 2 - The External Environment

Prof. Noel M. Teves

When Rivalry Among Existing Competitors Is Intense Slow industry growth High fixed costs (plants, machinery, outlets) Undifferentiated products A large number of competitors High exit barriers (what you lose if you leave the business) Existing competitors. jockey with each other for the attention of customers, market share, and the favorable comments of investment analysts. In many industries, every new product introduction, marketing promotion, and capacity expansion has implications for the revenues, costs, and profits of other competitors. Entry Barriers Economies of scale Large capital requirements Product differentiation High switching cost Limited access to distribution channels Government 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. Past history of aggressive retaliation toward new entrants

Economies of Scale as a company produces larger numbers of a particular product, the cost for each of these products goes down Existing competitors. jockey with each other for the attention of customers, market share, and the favorable comments of investment analysts. In many industries, every new product introduction, marketing promotion, and capacity expansion has implications for the revenues, costs, and profits of other competitors.

Business Policy Chapter 2 - The External Environment

Prof. Noel M. Teves

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 studied E.g., contacts lens versus glasses versus surgery Close substitutes place a ceiling on the price that can be charged for a product or service Close substitutes also set indirect performance comparisons

When to Partner with External Stakeholders 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: o Economic power ability to influence profit potential o and operations o Political power ability to influence ground rules by o which firms operate o Possession of valuable resources needed by o organization

Common Partnering Techniques o 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)

Partnering is being used with increasing frequency and with a broader base of stakeholders. 1. Between supplies and their customers e.g., GM and Michelin for run-flat tires. 2.Among competitors to stimulate industry demand e.g, Got Milk? 3.Among competitors to influence common stakeholders such as government agencies, activist groups, unions, or local communities. These alliances then become a part of the

Business Policy Chapter 2 - The External Environment

Prof. Noel M. Teves

organization's political strategy, which includes all organizational activities that have as one of their objectives the creation of a friendlier political climate for the organization.

Global Business Environments Major trends include: Technological advances communication, transportation Dramatic increase in globalization of companies Opportunities in Latin America, Asia, Eastern Europe Factors to consider when evaluating a country for entry: Social forces Economy Political/legal environment Technology Industry specific factors 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

Michael Porter explains that four characteristics of countries actually create an environment that is conducive to creating globally competitive firms in certain business areas. The four characteristics are: 1. Factor Conditions. These are endowment (GIFT) enjoyed by specific nations such as such as uncommon raw materials, laborers with specific skills, and superior factor-producing mechanisms such as excellent schools or universities. 2. Demand Conditions. If buyers of a product or service in a particular country are among the most discriminating and demanding in the world, competitors in that industry have to work harder to please them. 3. Related and Supporting Industries. If suppliers to an industry are the very best in the world, their excellence is passed on to the buyers who use their products. 4. Firm Strategy, Structure and Rivalry. Sometimes the management techniques that are customary in a nation's businesses are conducive to success in particular industries.

The End Chapter 2