Topic: The Firm’s External Environment

Learning Outcomes: At the end of this module, you are expected to:

1. Point out the major external forces that affect the organization
2. Relate the importance of monitoring external trends and events to the actual operation of the business
3. To determine the segments of the general environment (Societal Environment) such as:
Economic Forces
Socio-cultural
Demographic
Environmental Forces
Political, Governmental and Legal Forces
Technological Forces

LEARNING CONTENT

Introduction:

The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis

The external environment includes the areas of General, Industry and Competitor environment. The general
environment is the broader society dimensions that influence an industry and the firms within it. It is grouped
into seven dimensions or ‘environmental segments’ which cannot be controlled or manipulated. However,
segment intelligence of each of these can help reorient strategy to mitigate influence in the long term.

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Lesson Proper:

The General, Industry and Competitor Environments

A. The External Environment

1. General Environment— composed of dimensions in the broader society that influence the industry
and the firms within it.

Environmental Segments
a) Demographic c) Political/legal e) Socio cultural
b) Economic d) Technological f) Global

2. Industry Environment— refers to the set of factors that directly influences a firm and its competitive
actions and competitive responses.
3. Competitor Analysis— how companies gather and interpret information about their competitors.

EXTERNAL ENVIRONMENT ANALYSIS

Objective: “To identify opportunities and threats”

Opportunity- a condition in the general environment that if exploited, helps a company achieve
strategic competitiveness

Threat – a condition in the general environment that may hinder a company’s effort to achieve strategic
competitiveness

COMPONENTS OF ENVIRONMENTAL ANALYSIS

Scanning - entails the study of all the segments in the general environment
- identify early signals of potential changes in the general environment
- detect changes that are under way
Monitoring - detecting meaning through on going observations of environmental changes and trends
Forecasting - developing projections of anticipated outcomes based on monitored changes and trends
Assessing - determining the timing and importance of environmental changes and trends for firm’s
strategies and their management
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External forces

 affect the types of products developed, the nature of positioning and market segmentation strategies
the types of services offered, and the choice of business to acquire or sell.
 directly affect both suppliers and distributors.

The SEGMENTS of the GENERAL ENVIRONMENT

1. Demographic Segment
 concerned with a population size, age, structure, geographic distribution, ethnic mix and
income distribution

2. Economic segment
 refers to the nature and direction of the economy in which a firm compete or may compete

3. Political/legal
 the arena in which organizations and interest groups compete for attention, resources, and a
voice of overseeing the body of laws and regulations guiding the interactions among nations.

4. . Socio cultural Environment

 concerned with the society’s attitudes culture and values

5. Technological Segment
 includes the institutions and activities involved with creating new knowledge into new
outputs, products, process, and materials.

6. Global Segment
 includes new global markets, existing market that are changing, important international
political events and critical culture and institutional characteristics of global market.

The General Environment: Segments and Elements

Segments Elements
Demographics Population size, age structure, geographic distribution, ethnic mix, income
distribution
Economic Inflation rates, interest rates, trade deficits or surpluses, budget deficits or
surpluses, personal saving rate, business saving rates, GDP
Political/legal Taxation laws, deregulation, labor training law, educational philosophies and
policies
Socio cultural Women in the workplace, workforce diversity, attitudes about quality of work
life, concerns about environment shifts in work and career preferences, shifts
preferences regarding product and service characteristics
Technological Product innovation, applications of knowledge, new communication
technologies, Research and Dev’t. expenditures
Global Important political events, critical global markets, different cultural and
institutional attributes

The Task Environment

Stakeholder Criteria
1.Stockholder Price appreciation of securities
Dividends (How much and how often?)

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2. Labor unions Comparable wages
Stability of employment
Opportunity for advancement
Working conditions
3.Government Support of government programs
Adherence to laws and regulations
4. Suppliers Rapidity of payment
Consistency of purchases
5. Creditor Adherence to contract terms
Dependability
6. Customers/distributors Value given for the price paid
Availability of product or service
7. Trade associations Participation in association programs (time)
Participation in association programs(money)
8. Competitors Rate of growth
Product/Service innovations
9. Communities Contribution to community development through taxes, Participation in
charitable activities, etc.
Employment of local people
Minimum of negative side-effects
10. Special interest groups Employment of minority group
Contributions to urban improvement programs

INDUSTRY ENVIRONMENT ANALYSIS

Industry Environment- has more direct effect on firm’s strategies, competitiveness and above average returns
Industry – a group of firms producing products that are close substitute

FORCES DRIVING INDUSTRY COMPETITION

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THREAT OF NEW ENTRANTS
NEW ENTRANTS BRING:
*new capacity
*desire to gain market share
*substantial resources

SERIOUSNESS OF THE THREAT OF ENTRY DEPENDS ON:

A. presence of entry barriers
B. reaction from existing competitors

A. ENTRY BARRIERS
a.1. Economies of scale- the marginal improvements in efficiency that a firms experiences as
it incrementally increases its size
a.2. Product differentiation-forces entrants to spend heavily to overcome customer loyalty.
a.3. Capital requirements- need to invest large capital resources in order to compete.
a.4. Cost disadvantages independent of size- entrenched companies may have cost
advantages not available to potential rivals no matter what their size and attainable economies
of scale.
Stem from:
Learning curve - refers to the efficiency achieved over a period of time by workers through much
repetition

a.5. Access to distribution channels- new entrant must be able to displace others from the
distributor’s shelf
a.6. Government policy-the government can limit or even foreclose entry to industries with
such controls as license requirements and limits on access to raw materials.
a. 7. Switching costs – one- time costs customers incur when they buy from a different
suppliers

B. THE POTENTIAL RIVAL’S EXPECTATIONS ABOUT THE REACTION OF EXISTING COMPETITORS

ALSO WILL INFLUENCE ITS DECISION HETHER TO ENTER.
b.1. The incumbents have substantial resources to fight back. Ex. Productive capacity
b.2. The incumbents seem likely to cut prices to keep market share
b.3. Industry growth is slow, affecting its ability to absorb the new entrant.
b.4. The incumbents have a major stake in the industry (ex. It has assets with few, if any
alternative uses.

RIVALRY AMONG EXISTING FIRMS

- a competitive move by one firm can be expected to have a noticeable effect on its competitors and thus may
cause retaliation or counter-efforts.
a. Numerous equally balances competitors
b. Slow industry growth
c. High Fixed cost or High storage costs
d. Lack of Differentiation or Low switching costs
e. High strategic stakes
f. High exit barriers

THREAT OF SUBSTITUTE PRODUCTS OR SERVICES

-in effect, all corporations within one industry are competing with other industries that produce substitute
products.

PORTER: “Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the
industry can profitably charge”

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BARGAINING POWER OF BUYERS
-buyers affect industry through their ability to force down prices, bargain for high quality or more services and
play competitors against each other.

A BUYER group is powerful if:

 it is concentrated or purchases in large volumes

 the product it purchases from the industry are standard or undifferentiated
 the product it purchases from the industry form a component of its product and represent a significant
fraction of its cost
 it earns a low profits, which create great incentive to lower its purchasing costs
 the industry’s product is unimportant to the quality of the buyer’s products or services
 the industry’s product does not save the buyer money
 the buyers pose credible threat of integrating backward to make the industry’s product

BARGAINING POWER OF SUPPLIERS

-they can affect an industry through their ability to raise prices or reduce the quality of purchased goods or
services

A SUPPLIER group is powerful if:

 it is dominated by few companies and more concentrated than the industry it sells to
 its product is unique or at least differentiated
 it builds up switching costs–are fixed cost buyers face in changing suppliers
 it is not obliged to contend with other products for sale to the industry
 it poses a credible threat of integrating forward into the industry’s business.
 the industry is not an important customer of the supplier group.

INTERPRETING INDUSTRY ANALYSES

The stronger competitive forces are, the lower the profit potential for an industry’s firm

An unattractive industry has low entry barriers, suppliers and buyers with strong bargaining positions, strong
competitive threats from product substitutes and intense rivalry among competitors. (Make it difficult for firms to
achieve strategic competitiveness and earn above average returns)

An attractive industry has high entry barriers, suppliers and buyers with little bargaining power, few competitive
threats from product substitute and relatively moderate rivalry.

STRATEGIC GROUP
- a set of firms emphasizing similar strategic dimensions to use a similar strategy

NOTE: Competition between firms within strategic groups in greater than the competition between a member
of a strategic group and companies outside strategic group. INTRA-STRATEGIC GROUP COMPETITION IS
MORE INTENSE THAN IN INTER-STRATEGIC GROUP.

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Strategic Dimensions of Which Firms within strategic group treat

*extent of technical leadership

*product quality

*pricing policies

similarly

PATTERN OF COMPETITION
“Organizations in a strategic group occupy similar positions in the market, offer similar groups to similar
customers and may also make similar choices about production technology and other organizational features”

IMPLICATIONS:
1. First, firms within which a group offers similar products to the same customers, the competitive rivalry
among them can be intense. The more intense the rivalry, the greater is the threat to each firm’s
profitability.
2. Secondly, strengths of the five industry forces differ across strategic groups.
3. Third, the closer the strategic groups are in terms of their structure, the greater is the likelihood of
rivalry between the groups.

COMPETITOR ANALYSIS
 Final part of the external environment requiring study
 Focuses on each company against whom a firm directly competes
 Example: Fuji and Kodak; Smart and Globe, Jollibee and McDo. Ecah should be keenly interested in
understanding each other’s objectives, strategies, assumptions and capabilities
 Intense rivalry creates a strong need to understand competitors
 In here, the firm seeks to understand the following?
o What drives the competitors, as shown by its future objectives
o What the competitor is doing and can do, as revealed by its current strategy
o What the competitor believes about the industry, as shown by its assumptions
o What the competitor’s capabilities are, as shown by its capabilities (its strength and weaknesses)
 Includes gathering intelligence about public policies as this will “provide an early warning of threats and
opportunities emerging from the global public policy environment, and analyzes how they will affect the
achievement of company’s strategy”

Note:
Information about these four dimensions helps the firm prepare an anticipated response profile for each
competitor. Thus, the results of an effective competitor analysis help a firm understand, interpret, and predict
its competitors’ actions and responses.

Critical to an effective competitor analysis is gathering data and information that can help the firm understand
its competitors’ intentions and strategic implications resulting from them.

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Competitor Intelligence
-the set of data and information the firm gathers to better understand and better anticipate competitors’
objectives, strategies, assumptions and capabilities.

*** END of LESSON 4***

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