—- After studying this chapter, the students should be able to: Understand the Industrial Organizational (I/O) view; Identify external forces in the general environment of an organization; Analyze the industry environment using Porter’s Five Forces Model; Name the components of the task environment of an organization; and Analyze a business using External Factor Evaluation (EFE) and its process. “The opportunities and threats existing in any situation always exceed the resources needed to exploit the opportunities or avoid the threats. Thus, strategy is essentially a problem of allocating resources. If strategy is to be successful, it must allocate superior resources against a decisive opportunity.” —William Cohen Environmental analysis is a strategic tool that helps identify all the external and internal elements, which can affect the organization's performance. The analysis helps align strategies with the company’s environment. The analysis entails assessing the level of threat or opportunity the factors might present. These evaluations are later translated into the decision-making process. An external environment analysis reveals key opportunities and threats facing an organization so that managers can devise strategies to gain advantage of the opportunities and prevent or trim down the impact of threats. Opportunities provide an organization with a means to improve its performance and competitive advantage in a market environment. Threats are anything from the organizations’ outside environment that can adversely affect its performance or achievement of its goals. The market is facing changes every day. Many new things develop over time and the whole scenario can alter in only a few seconds. There are some factors that are beyond control. Any changes in external factors would also mean changes in demands for industrial and consumer offerings. Naming and assessing opportunities and threats outside organizations help develop a clear mission, to devise strategies in realizing long-term objectives, and to formulate policies to accomplish yearly objectives.zr as a leading paragj sation (10) Model w romotes that externa} . fron, i : nization V pproach P ee r The Industrial oe e 1980s. This ae rs in an organization, t ernal facto 1960s and throughout int ‘ than int factors are more significan 8CCompy, Usp, tage. This m odel rantage. Jains it is the external ¢ Viton ti, deny Bar before it formulates Ne, its competitive adv. should be concerne hich a company 1 hich a firm pre ions managers Basically, the industry ee than do the options es make on the organization's perform icone jousattention to the structured, characte. ae i cautiousattent ri Selec ge chm to participate. tas must look for one . of the industry in whit the firm, given the company’s ac vantageously Pert; is the most eee should profitably put into action Strategies Needed e” resources. Then, cteristics in order to increase their level of competi, ivene The ‘Tie Fae = Model of Michael Porter which will be discusseq later in th oe an analytical means accustomed to tackle and illustrate these industy characteristics, a Str, fers to participate has a stron, er Dra The V/O model is founded on the following four assumptions; 1. Theexternal environment composed of the general, indus} view (1/0) ry ORGANIZATIONAL THE INDU: an ting in an industry orinan industry sector ae thus practice ge a ae Sets of Strategically applicable resources and same availability Of re: oe state ment supposes that, having the _ SOU ie: industry (or indus ae est comps i anies Participatin, ina particular Ei eRe thal ae Sav? Parallel capabilities and ‘anche : Smong companies in an ie » there are hardly any major i * Te extremel, bile across i S in g : ely mobile s Mobility, indus ike cally Pertinent resources amid ction me extinct due to sail Ns sg] . are COVEre, Ortly disappear as they to performs pee izations by other companies, i the industy Of thi. Tely for y Te und, id this Statement j tite 400d 50 be logical and ae aS 7 ompany. The connota : £ co, 4 : tantly Maxi, . OMY anies cons' ™imizing. Pi will 60 withing | ong run successful, 'Based from the supporters of I/O model, competitive advantage is decided mainly by means of competitive positioning inside an industry. Strategically managing an organization from the I/O viewpoint necessitates companies to participate in attractive industries. These companies need to prevent entering weak or faltering industries and thus required to obtain complete information of major external factors affecting said attractive industry. I/O research offers vital contributions to ones understanding on the manner of achieving competitive advantage. Strategy experts who are followers of the I/O model assert that organization performance is basically founded more on properties of an industry like economies of scale, barriers to entry in a particular market, product differentiation, the economic situation and the level of competitiveness and less on internal resources, capabilities, organizational structure and company operations. For instance, the Great Recession during the late 2000s and early 2010s characterized by an era of general economic decline in world markets was experienced by both strong and weak companies. This global economic recession has further the acceptance of the belief that external forces are more essential than internal ones. Thousands of internally strong companies in that period disappeared shortly right after. Y/O view has improved the appreciation of strategic management by business organizations. Yet, it is not the issue of significance between external or internal factors in winning and sustaining competitive advantage. Successful combination and understanding of external and internal factors together is the input to protecting and maintaining a competitive advantage. In fact, the proper matching of important external opportunities/threats with important internal strengths/ weaknesses offers the foundation in formulating successful strategy. Figure 6. Five Step Process of the I/O Model Industrial Organisation Model ‘External Attractive” “Strategy” Environment Industry Formulation General Environment An industry whose Selection of a strategy Industry Environsnen. structural characteristics. linked with above =a: Competitive suggest above-average. average returns in a. e ss J \,patticuiar indust « Implementation Selection of stratagic actions linkedwith effective impternentation, Source:http://www.opentearningworld.com/bookslintroduction%20t0%20strategic%20 management/alternative%20models%200/%20developing % 20strategic%20competitiveness/ the%20i-0%20model.html ; aaAchigy, ive-step : : : ends a five-s ‘see Figure 6): apter, the /O = bates in the figure above (see Figu above-average return ronment composed of the general, industry ang | envil 1, Analyze the external competitive in order to find o the descriptions of the external environ, : cae dou f the t Ba both establish and limit the company’s strategic choices. that will bot d limit th y’s strate; hy A i ith a high likelihoog fo , (or industries) with a hii qt 2 Choose hal eaieer ea ate fe poh features of the industry, returns in are ived from the features of the industry, in which the company selects to * eee that are related with above-average returns must be ii 4 chosen. A model or framework must be used to measure the Tequirements } and dangers of these strategies. ‘i tioned earlier in, ang assumptions ment ; th. ; derlying @ ss for companies to ith the un proce: In accordance wi k i i + Obtain or improve the crucial resources, skills and assets indispensable | to implement the strategy that has been particularly chosen to become | Successful. 5. The 1/0 model shows that above-average returns will accumulate to Organizations that Profitably apply appropriate strategic actions that allow | ¢ company to control its strengths (skills and Tesources) to match the | demands or pressures and restriction of the industry in which they have | selected to participate, | THE GENERAL ENVIRONMENT An organization's environment includes factors that as factors that largely lay beyond its influence, The |. exist within the general enviro; Can teadily affect as well mment. Be a substantial influ en t it atter set of factors are said to ae e general Wironm, ence on an Organization's level Sa = ces trends and events as they evolve and try trends and events, itp ” SXCCUtives must track to anticipate the implications of these The general environment is oo, oe : ™MPosed of i organization's surroundings that might influence “eta del a su ne th me ' ments of the mensions w! are political, Honomic, sociocul nals onSists of five and global or international, \ effects of these dime techno} gical and legal, broad and gradual, "SIONS on the "ganization are Businesses are Breatly influenceg by their envi factors which determine day-to-day circ tances ;MENt, Ay Th must constantly analyze the busines, ervronment Pact firms, the puaiona i ‘ 'e mar] , ae acd ae tools that firm ket, the PESTLE analysis, This is a bits on was of extern Out some are and strategy builders use thi analysis to §, Wie Business con, duet oh™ent is Positioned. It also helps foresee where the organi ae Tt Market ig cus Bers Anization wit) be in the ently future, 62PESTLE analysis, which is sometimes referred as PEST analysis, is a concept in marketing principles. Moreover, this concept is used as a tool by companies to track the environment they are operating in or are planning to launch a new project/product/service. : PESTLE is a mnemonic which in its expanded form denotes P for Political, E for Economic, $ for Social, T for Technological, L for Legal and E for Environmental. It gives a bird’s eye view of the whole environment from many different angles that one wants to check and keep a track of while contemplating on a certain idea or plan. The framework has included the Global or International environment also. There are certain questions that one needs to ask while conducting this analysis, which give them an idea of what things to keep in mind. They are: 1. What is the political situation of the country and how can it affect the industry? 2. What are the prevalent economic factors? : 3. How much importance does the culture have in the market and what are its determinants? 4. What technological innovations are likely to pop up and affect the market structure? 5. Are there any’current legislations that regulate the industry or can there be any change in the legislations for the industry? : What are the environmental concerns for the industry? . What are the trending changes happening around the world that may affect the industry? no All the aspects of this technique are crucial for any industry a business might be in. More than just understanding the market, this framework represents one of the vertebras of the backbone of strategic management that not only defines what a company should do, but also accounts for an organization's goals and the strategies stringed to them. It may be so, that the importance of each of the factors. might be different to different kinds of industries, but it is imperative to any strategy a company wants to develop that they conduct the PESTLE analysis as it forms a much more comprehensive version of the SWOT analysis. Itis very critical for one to understand the complete depth of each of the letters of the PESTLE. It is explained as below: Political Factors Political factors determine the extent to which a government may influence the economy or a certain industry. The political factors affecting business are often given a lot of importance. Several aspects of government policy can affect business, All firms must follow the law. Managers must find how upcoming legislations can affect their activities. 63a Fn The Political environment can influence business organizations in numerous pining Tt might put in a risk factor and direct to a major loss. Management of ee ought to recognize that the political factors have the pressure to ter Tesults. Tt may as well influence government policies at local to national level Organization need to be prepared to cope with the local and international effects of politics, Corruption is an obstacle to economic development for many countries, Some companies endure and develop by presenting bribes to local and national government officials. The success and growth of these companies are not founded on the worth they bid to consumers. Below is a list of political factors that affect the’ - business environment to a great extent: Table 4. Political Factors Affecting Business «&, Tax Policy (tax rates and incentives) Government stability and related changes Government involvement in trade unions and agreements Import restrictions on quality and quantity of praduct Intellectual property law (copyright, patents) ‘Consumer protection and e-commerce laws that regulate environment pollution Employment Law Discrimination law Corruption level Freedom ofthe press _| Data protection law Trade control Health and safety law Competition regulation Regulation and deregulation Source: http://pestleanalysis.comlpolitical-factors-affecting-business/ Education law Business organization must at all times observe and analyze their political environment. Alteration in any of the political factors can impact business strategy because of the following reasons: 1. The steadiness of a political system may shape the attractiveness of # specific local market. 2, Government observes business organizations as a vital medium for social transformation. 3. Government approves legislation, which places pressure on the relationshiP among the business organization and its customers, suppliers, and othe’ companies as well. 4. The government is legally responsible for defending the interest of the public. : 5. Government actions control the economic environment.: 6. Government is a key user of goods and services, : ee See So Te afThe Philippine business environment is affected by the following defects in its political system, namely: Nonstop graft and corruption in major government agencies both local and national. Absence of transparency and accountability in governance. Most regulatory agencies are confined by their own vested interests. The weak point of the clectoral processes has been prone to massive cheating and manipulation of voting outcome. 5. Dynasties and traditional politics are rampant and unchecked. ‘Armed conflict especially in Muslim dominated areas. 7. Deterioration of human rights situation, predominantly on extra-judicial Killings (EJK) of journalists, suspected drug personalities and activists of the left. 8. Lack of concern or withdrawal from political commitment especially at the national level. Economic Factors Economic factors are determinants of how a country’s economy performs that have direct and resonating long term impacts on an industry and those businesses within, These economic factors are basically associated with goods, services, and money. Even though openly influencing businesses, these variables refer to financial condition of the economy on a bigger level whether that is local or global. The explanation for this is that the condition of the economy can decide on countless of the vital details that surface in an operating company. An economic factor like the inflation rate may affect companies’ technique of pricing their products and services. In addition, the purchasing power of a consumer and demand and supply variations can be based from economic changes. Economic factors include may include but not limited to inflation rate, interest rates, foreign exchange rates, economic growth patterns and others. It also accounts for the FDI (foreign direct investment) depending on certain specific industries who are undergoing this analysis. Table 5. Key Economic Variables to Be Monitored Shift to a service economy in the Philippines | Import/export factors Availability of credit Demand shifts for different categories of goods and services Level of disposable income Income differences by region and consumer groups Propensity of people to spend Price fluctuations Interest rates Export of labor and capital from the Philippines[infationretes | Monetarypolees [Money markettes | sal poles [Navona government budget decks [Taxrates J Unemployment wends Value of the dollar in world markets Foreign countries’ economic conditions : Source: https:/ houno.adb.org/sitestdefault/files/publication/182221/ado2016.pdf Philippines is the fourth biggest economy in South East Asia and the 36th largest economy in the world by means of purchasing power according to the International Monetary Fund in 2009. Jollibee Foods Corporation (JFC) makes certain that their product line-up has a reasonably priced pattern for their target market. The company ought to be Price responsive since they are providing budget friendly meals to their Filipino customers. In this strategy they are able to penetrate their market not merely because of the product's distinctive taste but tmoreover by their pricing model. The uncertainties of rivalry from foreign players and recessions in particular market niches are all-pervading in the country’s present economic environment. Other uncertainties also enter in the structure of financial crisis in the region and in the country it is operating in. : at 4 Social Factors — Social factors scrutinize the social environment of the market, and gauge determinants like cultural trends, demographics, population analytics and the like. An example for this can be the buying trends for Southeast Asian-countries like the Philippines where there is high demand during the Holiday season. The social aspect centers on the influencers inside the society. Family, peers, contemporaries, neighbors and the media are examples of social factors. These’ factors can shape the attitudes, opinions and interests that would influence the sales of product and revenues produced. Basically, social factors affect the behavior and buying preferences of consumers. A good example is how Filipinos’ attitude towards diet and health is changing in the Philippines. For this reason, Philippine businesses are considering some changes. Today, more and more Filipinos are joining fitness clubs such as Fitness First, Slimmer’s World and neighborhood gyms. There is also a huge increase in demand for natural food amongst Filipinos. Population changes are also openly affecting business organizations. With the structure of the population, the supply and demand of goods and services in an economy can alter. Decline in birth rates denote demand of goods and services ‘will decrease. It also shows greater competition as the total number of consumers drop.There is no doubt that the society is continually changing. The tastes and fashions are a great example of this change. One of the most significant differences is the growing popularity of social media. Social networking sites like Facebook have become very popular among the younger people. The young consumers have grown used to mobile phones and computers. The millennial generation likes better to exploit digital technology to shop online. Older consumers will possibly stick to their traditional ways. The consequence of changing society must be understood.as these changing factors have a toll on business organizations. Changes in the social factors may place stress on a company in so many diverse ways. Therefore, companies must seriously focus and see on the changing trends and patterns of the society. In order to recognize fully the impacts, the company must learn the factors comprehensively. Nearly all companies examine the population growth and age structure. They also demonstrate curiosity in consumer attitudes and lifestyle changes. The analysis can facilitate discover novel ideas. Below is a list of social factors that most likely shall impact customer needs and size of markets: Table 6. Social Factors that Affect Business ‘Average disposable income level_| Population growth rate Social classes Immigration and emigration rates Family size and structure ‘Age distribution and life expectancy rates Attitudes toward - imported products and services Attitudes toward saving and| Attitudes toward work, career, investing leisure and retirement Atittudes toward green or ecological | Attitudes toward customer products service and product quality Attitudes toward for renewable energy Buying habits Education level Emphasis on safety | Minorities Religion and beliefs Health consciousness Sex distribution Source: http:/ipestleanalysis.com/social-factors-affecting-business/ Organizations must be able to present products and services which intend to promote people's lifestyle. The offerings ought to harmonize customers’ behavior. Without reacting to changes in the society might become a pricey error. Businesses may lose market share and the demand for their products and services will go down. Every nation has its individual food preferences. Jollibee may not match the flavor of each country’s local. However as a Filipino-owned company, it penetrates the taste of the locals and also of the other nationalities. Certainly, there is no reservation that Jollibee is an ingredient of the cultural pride of Filipinos. In order to prevent culture and religion inconsistency, one of the strategies prepared by Jollibee is through its components for its vast recipe line-up. The company is “67flict with Islam religion. Because the supposed to stay away Laat iB epraced eae cere is the reason YS eens ea P el conser ingredients a f 2009, Jollibee Foog, should make use 0! lation of 92million as ©! : ey Hos Bases Is Ompon, With a eae ss having @ market ae is a fact that fi vathe Com, tion took on with the lanes t market of Jollibee. It a ee ie any ami, Ppany’s website. Kids are the nist it is expected that one lults shay con with one child as a target mar! ty, there is a domino effect ee the Yielg - with the child to Jollibes. SPY) Cg and happy people. Filipinos find it fing oe en their much loved restaurants ee bbe OCeasion, This aspect must be regarded as a plus for Jollibee. % a Technological Factors — Technological factors pertain to innovations in Seer ore affect the operations of the industry and the market favorably or seat y: h S Tefers tp automation, research and development and the amount o} te : ological awareness that a market possesses. In crafting strategies, technological forces that Tepresent major opportunities and threats have to be reflected on. Technological advancements have changed the very character of opportunities and threats. It has altered products life cycle, increased distribution rate, created new markets due to the creation and improvement of new products as well as services, eliminated restrictions of traditional geographic markets and altered the past manner of trade-off involving product standardization and flexibility. Also, the improvement in technology has changed economies of scale, altered entry barriers and redefined the connection among industries and their suppliers, creditors, customers as well as rivals. In addition technology advancements has made existing products and services outdated, produced scarcities in technical skills and has resulted in shifting values of Managers, employees and customers too. These improvement in technol titi dvant: in logy generated new and more power competitive advantages. In most industries toda 1» di ent o! vital technological opportunities and thr Y, discovery and assessm ‘eats can be the Ati ymponent of the external strategic management audit, the most essential co ee Legal Factors Legal factors are exte: approach businesses margins, and feasibilit prejudiced by legal fa mal factors whi function and ity of certain ictors, ‘ 7 © ache g ROW the law influences " rkets are al] ,. Cduct transportation, PM. be asbects of things which may Customer, ma 68Legal factors have both external and internal sides. There are certain laws that affect the business environment in a certain country while there are certain policies that companies maintain for themselves. Legal analysis takes into account both of these angles and then charts out the strategies in light of these legislations. For example, consumer laws, safety standards, labor laws and the like. The general legal factors affecting businesses are not limited to things listed as follows: . 1. Consumer laws - Otherwise known as consumer protection it is planned to guard consumers from deceptive companies or practices, and protect their rights in the marketplace. For instance, with consumer law large companies are obligated to contribute a reasonable amount of their resources into putting out comprehensive information regarding their products and policies. Alternatively, consumer law in itself creates a business for some secret watchdog companies. 2. Employment laws — Also recognized as labor laws, orders how employees of companies are supposed to be treated. Minimum wage laws can place boundary on the different employment potentials a company can propose, child labor laws may affect the approach backyard home businesses in third world countries function, and dismissal laws can make employee firing that bit more difficult. 3. Regulatory laws - Regulatory laws are standards that influence how businesses function in definite circumstances. Even as a good number business laws are regulatory in several means, there are quite a few types of legislation that are appropriate more for definite industries than others. These consist of environmental laws and building code laws lay down by both the national government and local governments. Moreover, there are regulatory laws for global trade and most kinds of business licensing. 4.” Labor laws - Labor laws are regulations that are relevant openly to how businesses take care of employees. These laws comprise on regulations about minimum wage, wage garnishment rules and worker defense rules. Labor laws also include other laws, like the Law on the Elimination of the Worst Forms of Child Labor (RA 9231) and Occupational Safety and Health Act. The Philippine government also has laws for employee insurance and benefits programs such as PhilHealth Insurance and Social Security System (SSS). 5. Tax laws - Tax laws organize how a business must account its financial status to the government. There a number of tax laws that are mandatorily practiced here in the Philippines like the Income Tax, Value Added Tax, Excise Tax and Withholding Tax on Compensation to name a few. 6. Reporting laws - Reporting laws control how businesses must testify their finances to investors and the government. These laws place standards that incorporated businesses participation and are.necessary for transparency intentions. Reporting laws are related to tax laws but are more focused since they put a stop to fraud and misbehavior. > 69> id regulations like the Corporatio, i is governed by the laws an Iso known coaerens Pulses also the Republic Act No. 8976, a aS th, Philippine Food Fortification Act of 2000. EEA that the State shai; i icle Il of the Constitution offers : - ee the right of health of the eae ne he consciousness among them. State distinguishes that ne epi sruintneeed ma in the Philippines, based on nutrition surveys, consis| septa eee By, vitamin A, iodine, thiamin and riboflavin. To a negligible 7 Bree, i pin is also scarce in ascorbic acid, calcium and folate. The ao ie ngu 7 - hl at foo. fortification is very important where there is a Sn a 7 ai oO the eating of a necessary nutrient by one or more Pop 7 Bx ; PS, as» in nutritional, biochemical or clinical proofs of deficiency. Food forti¢: Fegarded as significant in the encouragement of optimal health and to , for the loss of nutrients because of processing and/or storage of food. Thus, food fortification s| iron, 10 diet les in Filipino diet, are The Right to Adequate Food (Article 11of the Covenant, Economic, Social and Cultural Rights, CESCR); human tights instruments rE to the right to food also shape part of Philippine law through the Proced; incorporation, a constitutional declareti Le b- ce all those that influence or are determined by the ing environment. This aspect of the PESTLE is vital for definite industries for instance tourism, farming, agriculture and other industries that depend on the natural environment Factors of a natural business environmental analysis include but are not limited to climate, Weather, ‘geographical location, global changes in climate, environmental Offsets and so on. On the other hand, in the framework of PESTLE analysi sometimes called ecological factors refer to Variables about the This can include things like consume i 'S, environmental | factors Physical environment. 2 er health, climate cha: energy, or any direct consequences o From the sound of it, it ma nge, the availability of f these things, . ‘ : 'Y Seem that enviro Sct mary ia es Or ea Sate or have ve affect many different important aspects of business. Examples incl de customer willingness to buy a product say who will be need; 'P us employee efficiency, and crop/re any aters j climate, Source accessibility. © ers in a hotter Industrial waste, sustainable dey, ‘elopment of ra, i ; emissions are vital environmental Matters affecting ban rials and water and = business since laws necessitate businesses to adjust e, ‘ness. These matters. pape meet imposed standards, which Costs business, ‘qWipment and Procedures ie money. In their effort to protect 70 —————ws and regulations like the Corpo ic Act No. 8976, also known i k The food industry is governed by the la ns Code of the Philippines and a Repub Philippine Food Fortification A «the Constitution offers that the State « ‘The Section 15 of Article © OF health of the people and inculcate heate look after and encourage the right of nea hes that nutritional deficiency trouby consciousness among them. State distinguis ist of deficiency in enerer in the Philippines, based on nutrition surveys consist of deticency in. Fi vitamin A, iodine, thiamin and riboflavin. To a negligt ao finulahre pi dit is also scarce in ascorbic acid, calcium and folate. The State distinguishes that foo, fortification is very important where there is a confirmed requirement to boos the eating of a necessary nutrient by one or more population BFOUPS, as visible in nutritional, biochemical or clinical proofs of deficiency. Food fortification is regarded as significant in the encouragement of optimal health and to balance for the loss of nutrients because of processing and/or storage of food. Thus, food fortification shall complete to compensate for the insufficiencies in Filipino diet, derived from present-day needs as measured by the most current Recommended Dietary Allowances (RDA). Other pertinent laws that oversee the food, industry are The Right to Adequate Food (Article 11of the Covenant, UN Committee on Economic, Social and Cultural Rights, CESCR); human rights instruments pertinen to the right to food also shape part of Philippine law through the procedure of incorporation, a constitutional declaration governed by Section 2, Article II of the 1987 Constitution; Presidential Decree No. 856, known as the Code on Sanitation of the Philippines. ( Environmental Factors Environmental factors embrace all those that influence or are determined by the surrounding environment. This aspect of the PESTLE is vital for definite industis principally for instance tourism, farming, agriculture and other industries thet depend on the natural environment Factors of a natural business environmental analysis include but are not limited to climate, weather, ; aphical location, global changes in climate, envizonmental offsets and oe oor On the other hand, in the framewo rk of PE ‘= envi . sometimes called ecological fectors refer to vatiahyee YS, environmental fal 2 ‘i ological '0 Variables about the physi ironment. This can include things like consumer health, climate chat et oo energy, or any direct consequences of these things, ge, the availal From the sound of it, it May seem th; a 7 modest to do with business. On the contrary, Mage factors eo affect many rent important aspects of business. aay ee willingness to buy a product say who Will be nee ding hy ples include cust on employee efficiency, and ctop/resource accessibility, '8 heaters in a hotter clim ee Malesia {evelopment of aw Material ter and aif is ad ‘onmental matters affecting busi rials and wa affect business in e puis businesses toadjust eee These ee est a eir effol 70 SS i.the environment and do what is proper, many business organizations take on more stringent changes. These environmentally-concerned businesses pay for the caring and proactive environmental procedures and try to get back the expenses using consumer goodwill or the additional consumer support achieved from a green policy. : 1. Industrial waste — At some point in the manufacturing process industrial waste is created by businesses that produce products. There are ecological laws and good environmental citizenship that ban the indiscriminate throwing away of manufacturing byproduct. Therefore, businesses need to settle on the manner of dispensing this waste. A lot of companies employ recycling programs; some others vend their waste to other manufacturers who utilize it in their own production processes as raw material. Whichever approach, the result is extra expenditure to the business in terms of labor, procedures, equipment and managing all details of moving the waste materials from the businesses production process and facilities. 2. Sustainable developments of raw materials - All manufacturers make use of raw materials to create their finished goods. Natural raw materials like wood necessitate the business to follow environmental laws and practice “good environmental citizenship through replanting trees in order to put back what it uses. A good example is the pine tree farm wherein growers must replant right after harvesting Christmas trees for resellers to retail. In this way, the whole forests of naturally occurring pine trees would not get depleted. Once more, the affect on the company is expenditure as to higher costs of raw materials, which typically consist of the suppliers’ charge to replant or restock the natural raw supplies. 3, Emissions - Most manufacturing companies in their production processes frequently produce air and/or water emissions. These emissions consist of chemical-filled smoke, ash and particles and chemicals that leak into ground water via overspill. In order to shield the environment from contact to these emissions businesses are required to follow environmental protection laws. Corrective process comprise placing screens of particular gauges over smoke stacks, filtration of waste water and lining using clay and poly liners of retention ponds. Latest regulations are applied often that call for retrofitting of manufacturing facilities with better protections, such as screens of even finer gauges and pond liners of latest and safer materials. ‘All of these measures are expensive to business and influence businesses initially by diminishing profit margins. Jollibee Foods Corporation is one of the companies in the Philippines which support the legislations of the government regarding environmental issues. One shift done by the company was by reducing the usage of harmful materials such as Styrofoam and plastics and started to use environment friendly materials. Such supplies are quite expensive but the company should still cooperate to support the legislation.Global Factors , much affected by global forces ang The business environment is very 5 how organizations interrelate wig, developments that are likely oS culture has been dictated by global Customers and react to competition, Bie tion but to just adapt to changes fron, forces that leave companies with so li ‘ondamentalisra. Uniformity: and vee technology advancements to religious ‘i ogy ization. Thus, businesses need to formulate competition has been brought by; globalization. a oa new strategies that would meet trends of existing mar ; - ee Governments, manufacturing companies and small business enterprises alj over the world are focusing more thei efforts on sustainability through Promoting environmentally friendly practices in an attempt to moderate global warming. Although costly especially for small businesses, going green is now a very powerful global force against global warming. Every company should commit themselves that their product and service offerings have undergone production and disposal Processes that are green. The service industry too is obliged to execute rigorous environmental laws: that mostly likely would be an addition to administrative overheads. Certainly, the net effect being green is an increase in production costs acquired by both the manufacturing segment and the business community. Information is another strong force that continually drives the current global framework. Advances in technology have improved communications in all areas. Smart companies have taken advantage of the Internet with their various marketing re platforms. Interactive organizational websites, social networks, Smartphone apps and & email are some of these platforms. Using reasonably priced advertising provided by these media both small and big businesses area able to make use of the power of technology to expand their market base and get in touch with extensive number of prospective customers. wae ; 5 i ints of competition when it comes to ideologies. Indi» are seemingly the points 0! whether political, cultural or religions, Most ous embrace strong convictions force or coercion they are committed to Preserve and © whatever it takes, be Ideologies frequently order how, when and where co) Protect these convictions- Philippine small businesses which have internatio, ™Panies carry out businesses out strategies for working in this world backgr nal transactions have to work or services may be banned in some countrne uw”: Sadly in fact some products . 5 int iT though there is obvious potential for the aa, Owing to Teligious causes, 72 aThe continually changing global setting is one of the serious facto: has to consider. It is a fact that the Philippines have witnessed key global] penetrating the fast-food market having a part in the market share. Ever Jollibee has always been the leading player in this industry, competing int markets appears to be in a different story. Besides having to break in the f@ market with their established and winning local recipe, Jollibee would a to try to win against previously well-known players like McDonald, Wend: KFC. INDUSTRY ENVIRONMENT Industry environment consis directly alters strategic In 1980 Michael P According to him the external forces consist of and suppliers, the thre existing competite d ™ puers his options is to remove switching costs while to buyers his alternative is to increase switching costs. Competitive forces and the structure of the industry in general for Porter have to be considered as they are both very critical in producing strategic decisions that are really effective. Source: www. strategic managementinsight. com / tools/ porters-five-forces.htmlThe continually changing global setting is one of the serious factors Jollibee has to consider. It is a fact that the Philippines have witnessed key global players penetrating the fast-food market having a part in the market share. Even though Jollibee has always been the leading player in this industry, competing in foreign markets appears to be in a different story. Besides having to break in the foreign market with their established and winning local recipe, Jollibee would also have to try to win against previously well-known players like McDonald, Wendy's and KFC. INDUSTRY ENVIRONMENT Industry environment’ consists of the factors that openly control a business organization and its competitive decisions and actions. The industry environment directly alters strategic competitiveness and firm profitability. In 1980 Michael Porter identified five forces in the external environment. According to him these forces are vital in crafting strategic decisions. These external forces consist of the threat of new entrants, bargaining power of buyers and suppliers, the threat of substitute products, and the degree of rivalry among, existing competitors. These forces establish an industry composition and: the intensity of competition in that industry. The figure below shows the attractiveriess . of an industry using the five forces mentioned. . Figure 7. Five Forces Model Analysis Porter made - suggestions in managing these external environment forces. He recommended the use of product differentiation and supporting constructive .government policy among others in developing barriers to entry. With respect to suppliers his options is to remove switching costs while to buyers his alternative is to increase switching costs. Competitive forces and the structure of the industry in general for Porter have to be considered as they are both very critical in producing strategic decisions that are really effective. : Attractive Industry - High profits High barriers to enter Weak suppliers bargaining power ‘Weak buyers bargaining power Few substitute products or services Low competition ' Unattractive Industry - Low profits Low barriers ta enter ‘Strong suppliers bargaining power Strong buyers bargaining power Many substitute products or services Intense competition Source: www. strategic managementinsight. com! tools/ porters-five-forces.htmli titi i In Porter's model, the five forces that form industry competition are disc, Sse below: Competitive Rivalry Rivalry among competing firms generally the most influential OF the iti 2 A can OI . iad ei cea ap ene means to be competitively advantageous compared {, strategies implemented by its rivals. In changes made by one company sha) result into retaliatory countermoves of its competitors like price reduction, quality enhancement, adding more features, giving additional services, Warranty extensions, and more advertising. : When rivalry competition is high, advertising and price wars can arise, which can harm pores Tine of ares Rivalry is quantitatively measured by the Concentration Ratio (CR), which is the percentage of market share owned by the four largest firms in an industry. : | As rivalry among competing firms intensifies, industry profits decline, insome | cases to the point where an industry becomes inherently unattractive. When tival | firms sense weakness, typically they will intensify both marketing and production efforts to capitalize on the opportunity. The table below summarizes situations that cause high rivalry among competing firms (see Table 6). Table 7. Conditions that Cause High Rivalry among Competing Firms SS High number of When consumers can switch When rivals have excess competing firms brand easily capacity ‘Similar size of firms When barriers to leaving the When consumer demand is competing market is high falling Similar capability of firms | When barriers to entering the | When rivals have excess cometing market is low inventory Falling demand of the | When fixed costs are high among | When a imi n rivals sell similar industry's products firms competing Droducr/services Falling product/service | When products perishable procs ibn commen ne nay t: Concepts and Cases (2011) 13th edition by David 74 ee qdBargaining Power of Suppliers The bargaining power of suppliers examines how greatly suppliers control a business and how greatly are their influences over the possibility to price increase - which may lower a business's profitability. Additionally, this force watches the number of suppliers existing in an industry. Business organizations are in a better situation when there are a huge number of suppliers. On the contrary, the fewer their number the more power they boast. This force influences the strength of competition in an industry, particularly when there are a great number of suppliers, when there are barely a small number of good substitutes or alternate raw ‘tnaterials, or when the price of switching raw materials is principally expensive. Most of the times the best interest suppliers and producers alike is long term profitability thus they work together towards affordable prices, enhanced quality, improvement of new services, just-in-time (JIT) deliveries and inventory cost reduction. In order to obtain control or ownership of suppliers some companies may practice a strategy of backward integration. Backward integration refers to company buying or internally producing parts of its supply chain. Backward integration as a strategy is mainly effective once suppliers are undependable, excessively expensive, or not competent of satisfying a firm’s needs on a reliable manner. Generally speaking, companies can bargain more good terms with suppliers when backward integration is a normally used strategy by competing players in an industry. Though, in numerous industries it is more cost-effective to utilize outside suppliers of component parts rather than to manufacture the items themselves. In increasingly number of industries, sellers are building strategic partnerships with chosen suppliers in efforts to trim down inventory and logistics costs (using just-in-time deliveries); make fast the accessibility of next-generation components; improve the quality of the supplied parts and components and diminish rates of defects; and squeeze out vital cost savings for themselves as well as their suppliers. In the case of Jollibee, its bargaining powers of suppliers are low. The accessibility of raw materials for the fast-food industry is readily obtainable not just locally, but accessible from nearby countries also. For instance, owing to the elevated rice prices in the Philippines, Jollibee can shrink its costs and get supply for rice in Thailand, Vietnam or Cambodia. Bargaining Power of Consumers The bargaining power of consumers observes the power of the consumer to influence both pricing and quality. Consumers have control when there are only few of them, but great number of sellers, and when it is trouble-free to switch from one company’s products or services to another. Buying power is low ‘once consumers buy products in small quantities and the seller's product are exceptionally unusual compared to any of its rivals., trated or big or purchase in volume, their “| ee ae hag tre concentration of rivalry in an industry Leste ae set ies may propose extensive warranties or exceptional service Competing ee loyalty every time the bargaining power of consumers i ate Bargainin wer of consumers also is higher also once the pro acts nie Sey or undifferentiated. As soon as this is the situati oa salen can bargain selling price, warranty period of coverage, anq consumers accessory packages to a larger scope. : - iis fe can be the most vital force influencing competitive advantage Consumers win in increasing bargaining power under the following circumstances, 1. If they can cheaply switch to rival brands or substitutes If they are predominantly essential to the seller If sellers are under pressure in the situation of declining consumer demand! . If they are well-versed regarding sellers’ products, prices, and costs | ._ If they have judgment in whether and when they procure the product | | Wrens The bargaining power of buyers of Jollibee is medium-high. With the several available choices of fast-food in the Philippines, buyers are able to select which restaurants they would feel like to go to. Switching from eating at Jollibee to McDonalds has modest force on the buyers’ pocket and this creates one of the major barricades in deciding if the company is capable to gross above-average returns. Threat of New Entrants Threat of new entrants checks how trouble-free or complex itis for competitors to be players of the market in the industry being studied. The easier it is for an entrant to be part of the market, the bigger the threat of a business’s market share being taken. Barriers to entry consist of complete cost advanta inputs, economies of scale and well-known brands ads exceedingly strong customer loyalty, incredibi - 5 . “i I, tr capital requirements, deficiency of sufficient distrbuton an vam huge regulatory Policies, tariffs, deficiency Of contact to Taw ae , cides patents, unattractive locations, retaliation by well-establi: ee saturation of the market, ished firms, and possible Notwithstanding abundant barriers t ; twithstand d ‘0 entry, new firms at 4 pen industries with higher-quality products, lower prices and consider 7 Stn . a 'e market, entering the market, to check the peti ie rip Asti compa s '¢ New companies, to retali. 7 iate as 76required and to take advantage of accessible strengths and opportunities. If the: threat of new companies coming in the market is strong, incumbent companies usually make stronger their positions and make actions to discourage new entrants, like price reduction, warranty extensions, more added features, or presenting financing specials. Jollibee for instance is considered low to medium when it comes to the threat of new entrants to the industry. New entrants to the fast-food industry would require confronting high entry barriers. In addition to having economies of scales, big capital requirements when opening a fast-food chain and products differentiation from the rest of the rival players, the new entrants would also have to fight alongside the hi igh standards and the previously current loyal customer base that Jollibee has place in the industry. Threat of Substitute Products or Services Threat of substitute products or services studies how simple it is for consumers to switch from a particular business's Product or service to that of a rival. It tries to find out the number of competitors there are, compares their prices and quality to the business being observed and profit earnings of those competitors which would resolve if they have the capability to lower down their costs all the more. The threat of substitutes is clued-up by switching costs, together with immediate and long-term, on top of a buyer's tendency to change. In many industries, companies are in cl substitute products in other industries. For instance, producers of plastic containers aren rivalry with glass, paperboard, and aluminum can producers. In another case, manufacturers of acetaminophen are in competition with other manufacturers of pain and headache medicines. The presence of substitute products in the market places a ceiling on the price that can be charged so that consumers will change to the substitute product. lose competition with producers of Price ceilings can be associated with profit ceilings and more strong competition amongst competitors. Laser eye surgery is creating rising competitive Pressures to eyeglasses and contact lenses producers. Sugar producers are also facing comparable pressures coming from artificial sweeteners, Competitive Pressures from the use of Internet and 24-hour cable television are being faced by newspapers and magazines as their substitute products. Generally, the intensity of competitive pressures resulting from growth of substitute products is evidenced through the plans of competitors for increasing production capacity, through their sales growth and profit increase. Once the relative price of substitute products decreases and the consumer's switching costs also declines, the competitive pressures arising from substitute Products shall increase. Substitute products’ competitive strength isbest calculated by the percentage into the market share those products gain, in addition to those companies’ plans for capacity increment and market penetration,i i be i ‘oducts is considered to Ee arded a main- igh Pec fom nh 00d ca be reg - ii Si substitute oben ne its direct rivals in the substitute, on % Strategic Group Mapping ci rr 4 Se i i lanagement that groups Broup i aan dels or similar ies wt in an ind sty that es ere yeerany can be divided combinations of sate : For Saag! ini based on variables io sere Oe eeu including fast-food and fine-dining i strat ue sieves es time, pricing, and presentation. Strategic group tapping is a technique for looking at your position in your ‘a ic a ; \ sector, field or market. Hunt coined the term 1. It can help you identify who your direct and indirect competitors (or Possible Partners) are 2 Itcan illustrate you take your Customers’ or benefi when developing Of assessing yor iciaries’ views into account ur strategy Strategic group Mapping is an important area with the help of which fi S easily analyze where they actually need betterments and with the hel an an do well and 8ain well. Constructing Strategic gtou, is which firms Tequires a clear and vivi i P Of this firms 7 Bice P map is a challenging task in 41S in or, i i Below mentioned are some major Steps Tequired pipe ca oe een ae tegic group 1. Try to analyze ¢valuate the riy, "sm, 2 Sting aor aaa te or areas ete Sand 8eographic Coverage 3. Same firms sh ited Propert, 4. the end, foll tep Strategical} Strategic Sroup mappin, font industry. This ic the by a ith Ip of . tS Positi trong en, h for a long time aN enjoy n; merous benef rhich a §, can sta a rms easily identity t their rivals d they the help f this sir, pack Potential advantages ant tobe the ongrd gre 8Ccordin, in orden teBy, high Fes order to gainTASK ENVIRONMENT The task environment consists of particular elements of the organization’s environment that are very possible to influence the organization's ability to acquire inputs and dispose of its outputs. It also composed of five components namely competitors, customers, suppliers, regulators, and strategic partners. Since these elements are connected with certain organizations in the environment, their consequences are expected to be more direct and instantaneous. A manager can identify environmental factors of specific interest rather than having to deal with more abstract dimension of the general environment. The different elements of task environment may be discussed as under and will use Jollibee Foods Corporation (JEC) as an example of analysis: Competitors Policies of the organization are often influenced by the competitors. Competitive companies are always trying to continue and move ahead of the competitors. In the present world economy, the competition and competitors in all respects has increased immensely. The positive consequence of this is that the customers at all times have choices and the quality of products as a whole goes high. Jollibeeis the top operator of quick-service restaurants in the Philippines. Except that McDonald’s is undeniably the unquestionable market leader worldwide when it comes to market share in similar industry. Although in the Philippine setting, a local food chain known as Jollibee has taken over the supremacy of McDonald’s. The explanation is the taste experience of Jollibee’s product lines which played a crucial role in its winning battle for market dominance above McDonald's which has a Westernized flavor. Experts acknowledged that Jollibee was triumphant in creating its products to go well with the meticulous taste of the Filipino consumer. Customers The primary goal of every organization is satisfying its customers. Customer is the one who pays money for product or services of organizations. They are the individuals or organizations who give them the profit that the companies are targeting. Managers should pay close attention to the customers’ dimension of the task environment because its customers purchase that keeps a company alive and sound. At the start and even at present the key target market of Jollibee is the children. Jollibee attracts kids with in-store play activities and a cast of appealing characters. In wider area JFC has penetrated above 65% share of the hamburger market within the Philippines. This is over half of the fast-food market as a whole. Their secret is smart niching which concentrates on serving the unique tastes of Filipino market.FEE mien errr tree oe ci - Suppliers are the providers of production or service materials, Dealing with suppliers is an ecoorpal tack of management. A good Telationship between the organization and the suppliers is vital for organization to keep a stable flow of input materials that are of good quality. Economies of scale allow Jollibee to avail of low purchase Price from local and foreign suppliers, leveraged on continued volume increase and dependable credit handling. The following are the five major suppliers of Jollibee to whom the company has very good relationship are: i 1. Chicken-San Miguel Foods, Inc. 2. Carbonated Beverages-Coca Gola Bottlers Philippines, Inc. 3. Sauces and Beverages-Del Monte Philippines, Inc. 4. Beverages-Nestle Professionals 5. Dressings-Unilever Philippines . Suppliers Regulators Regulators are units in the task environment that have the authority to direct, adjust or manipulate an organization’s policies and practices. Government agencies are the key player of the environment and interest groups is created by its members to attempt to influence organizations as well as government. Trade unions and chamber of commerce are the common example of interest group. For instance, Jollibee as a business corporation needs to deal with the national and the local government entities for its permit and clearances like the Securities and Exchange Commission (SEC), Bureau of Internal Revenue (BIR) and local government units (LGUs) where its branches are located. Strategic Partners Strategic partners are the organization and individuals with whom the organization is in an agreement or understanding for the benefit of the organization. ‘These strategic partners in some ways influence the organizations activities in various manners. The media industry is an important strategic partner of Jollibee. It has an exceptional connection with the media industry in the Philippines. For this reason the company already guarantees reasonable coverage when it comes to any controversy that may take place concerning their organization. Media relations for Jollibee improved their integrity and let a message to reach the target much quicker than advertising only. A proof of the benefits of media was the help extended by them to Jollibee during 1980 to launch its 1st TV commercial. Besides, in 1983 until the present times, the media sustains the Langhap-Sarap TV ad promotion for its target market.Jollibee group has grown phenomenally due to good business partners through its franchising system. Today, 50 percent of Jollibee stores are owned by franchisees. Each franchise now costs about P25 million. STRATEGIC FORECASTING TOOLS AND TECHNIQUES Forecasts are educated assumptions about future trends and events. Forecast- ing is a complex activity because of factors such as technological innovation, cul- tural changes, new products, improved services, stronger competitors, shifts in government priorities, changing social values, unstable economic conditions, and unforeseen events. Managers often must rely on published forecasts to effectively identify key external opportunities and threats. Forecasting tools can be broadly categorized into two groups: quantitative techniques and qualitative techniques. Quantitative forecasts are most appropriate when historical data are available and when the relationships among key variables are expected to remain the same in the future. Linear regression, for example, is based on the assumption that the future will be just like the past—which, of course, it never is. As historical relationships become less stable, quantitative forecasts become less accurate. No forecast is perfect, and some forecasts are even wildly inaccurate. This fact accents the need for strategists to devote sufficient time and effort to study the underlying bases for published forecasts and to develop internal forecasts of their own. Key external opportunities and threats can be effectively identified only through good forecasts. Accurate forecasts can provide major competitive advantages for organizations. Forecasts are vital to the strategic-management process and to the success of organizations. In order to develop strategies for the management of a business, management has to evaluate the present position and forecast how it will change during the planning period. Such forecasts guide the company in specifying strategic objectives, and the validity of the strategy depends on the accuracy of forecasting. Depending on the type of strategy a company is developing, it has to choose the forecasting techniques that will best allow it to predict how the business will evolve. An effective way of developing accurate forecasts for strategic management is to use several methods and verify that they give similar results. A qualitative approach is excellent for initial guidance and is based on the judgment of those closest to the markets. Management may ask sales and marketing employees for their opinions on how the markets it is interested in shall change is a good start. Information coming from suppliers and customers are also beneficial. Consistent information from variety of sources could result to a reliable qualitative forecast. Management may need to look for additional sources of information when there are major inconsistencies to make the forecast more trustworthy.1. Historical — Objective information is ate forecast. required for 2 aerof quantitative Extrapolating historical data is a precise and ane 5% per year for the forecasting. For example if sales have been SFOWGIE for next year past three years, a company can forecast ano ‘valuable in steady situations with assurance. This method is particularly valN@™" = 'r¢ the business and most especially if it confirms the qualitative an’ Yor nt anymore, situation has changed, the historical data may no! vialitative figures, extra Additionally, if the forecast does not equal the q forecasting methods are required. Patterns ~ Sometimes the strategy of a company calls for monthly forecasts, although the historical data differserratically ona monthly term. pond can still utilize such historical data if management can identify a pattern. Numerous business variables are based on yearly or seasonal influences that are expected and create variable historical data applicable. In the case of a 20% rise in sales every December or a bulk of sales every summer months of April or May, regular patterns could be noticed. Such variations could be part of the forecasts and obtain precise monthly outcomes. }. Cause and Effect — A key change in the business situation, may require a company to craft adjustments to its historical data. For instance, if a new competitor enters the business market, most likely reduced profits can be forecasted. An introduction of a new product may bring product launch expenses that will at the start lower profits but ultimately raise sales. If @ company can discover the cause for a disparity in its historical data, it may have to incorporate the effect in its forecasts to make them mirror the altered condition of the company in the market.from the prior round and the reasons the experts presented as support for their forécasts. In this manner the participants are offered a chance to modify their former inputs about the opinions of the other panelists. The purpose is that the difference among the expert opinions will diminish, and a stronger compromise will come out around the most possible results of supposed trends. The procedure is completed at some decided point, like the number of rounds, or firmness of consequences and the ultimate ‘outcome are created via the mean or median results of the final round: The Delphi method utilized in forecasting presumed that forecasts from a set of individuals, with pertinent proficiency and know-how, working in an organized approach, will be more practical compared to free discussion groups. In free discussion, individuals will have modest chance to scientifically contemplate the contributions of each participant. 6. Time-Series Forecasting - Time-series forecasting is a quantitative forecasting technique. It measures data gathered over time to identify trends. The data may be taken over any interval: however, for corporate strategic planning we are usually talking of forecasting processes that use data spanning a few years. I suggest using data for at least three years. Trend, cyclical, seasonal and irregular components make up the time series. The trend component refers to the data’s gradual shifting over time. It is often shown as an upward- or downward-sloping line, to represent increasing or decreasing trends, respectively. Cyclical elements sit above or below the trend line, and may recur for a year or longer. Business cycles in national economic activity illustrate such a cyclical trend. Seasonal components are similar to this in their periodicity, and they occur within a one-year period. The annual changes in sales of items like air conditioners would be one illustration of this. Some changes, like terrorist attacks seem to happen almost randomly. With hindsight some early warning indicators may be discerned. However this data is usually insufficient for forecasting to be used to predict future events. In corporate strategic planning, profit forecasts can be built up as time series from analysis of past experience, estimates of the impacts of recent decisions, effects of seasonal sales and so on. LEARNING FROM MISTAKES Why did General Motors fail? By Catey Hill, May 31, 2010 Source: http://www.nydailynews,com/news/money/general-motors-fail-article-1.374800 thas produced some of the most beloved automobiles i in the nation. Ithas inspired Countless articles and books. it has become an integral part i ‘d nt . ofth families around the globe. a And now? Bankrupt. Straddled with debt. Fighting with unions, 83How did it happen? How did General Motors go from a company that Sa American success to one of the largest corporate failures 7 eae history? The Dally News talked to automotive experts to find out. Here's what they said: Less-than-stellar product General Motors has produced some stellar cars. The Corvette, Pontiac GTO, Camaro and Trans Am, to name a few. But it has also manufactured some less-than-stellar automobiles. Quite a few of them actually. Remember the Chevy Vega? The Citation? The Chevette? Should | go on? “Many cars had a design and interiors that were not stellar and performance that wasn’t the best, said Dave Thomas, Senior Editor of Cars.com. Thomas added that in recent years, GM has stepped it up in terms of the quality of their product. But it may have been too little too late. “You remember the bad car your brother or dad had Thomas added. He could be onto something: General Motors’ marketshare fell from more than 50 percent in 1962 to about 23 percent in 2007. Staggering legacy costs General Motors is straddled with the ‘legacy costs’ of providing healthcare and pensions to a host of retired workers, which cost GM millions of dollars every single year. “When GM agreed to them, the company was lauded as an example of good corporate governance. Now, everyone says, ‘How did they agree to this?’ Back then, it was considered enlightened. But now, it’s a different story,’ said Jeremy Anwyl, CEO of Edmunds.com. These legacy costs shake out to be about $2,000 per car, David Cole, Chairman of the Center for Automotive Research, said. And that $2,000 has to be passed along tothe consumer if GM wants to tum a significant profit. An “elite group of accountant princes” General Motors managers became ver i 5 Ty numbers obsessed and bottom-line driven - to the detriment of innovation, creativity and ultimately the Product itself, Thomas called the GM management ofa few years backa A piece in The Examiner dubbed it “a culture born of an elite cli princes developed a stranglehold on the corporation." ane This ‘elite group of accountant princes’ apparently liked th ¢ le statu: -alot. John Delorean’s 1973 book about GM (he worked at the automaker), he chronicles how his attempts to create better-quality GM cars were hindered by management's focus on the bottom line and preoccupation with not changing GM's management system “They didn’t want to hear much of. anythin, i 7 od management of 2 few years back 'g Negative”"Thomas said, referring toGM “bunch of bean counters”| | | | | | The bean-counting, keep-the-status-quo system came back to hurt GM in the end. As The Examiner put it: “This approach can only work for a limited amount of time, for it contains the seeds of its own destruction." Thomas agrees, saying that the auto industry is very product-driven. While GM was obsessing over the bottom-line, it missed the boat on creating automobiles that more people would buy - and love. Fuel economy standards Federal fuel economy standards, especially the Corporate Average Fuel Economy (CAFE) regulations, played a role in GM's demise. In 1975, Congress passed the Energy Policy Conservation Act, which established fuel efficiency standards for cars, setting standards for the average fuel economy of an automaker's entire fleet of cars. GM made money on its larger - and less fuel efficient - cars and trucks. But with the new fuel efficiency standards, GM had to make a certain number of fuel-efficient cars in” order to balance out the larger, less-fuel-efficient ones. So GM cranked out these smaller cars at a loss so that they could continue to produce the larger more profitable ones. “GM had no incentive to invest in smaller cars because they lost money on them anyway,” Anwyl said. You can see the impact that CAFE has on GM from these 2007 comments by GM. Vice Chairman Bob Lutz in response to proposed CAFE changes: “The minute we have confirmation of the 35-mpg rule, that is the point where we go through all of our forward product plans and probably introduce, frankly, massive restructuring of the product plan.” And so GM was slow to develop fuel-efficient vehicles. When consumers began demanding such vehicles and stopped wanting larger cars like SUVs so much, GM was ina bit of a bind. Economic downturn And of course, the massive recession just helped put the nail in the coffin for GM. Allof the above problems were already affecting GM, and then the economy slowed and General Motors got hit - hard. And what was once a ‘Great American Company’ is now a bankrupt ghost of its former self.