Strategic Management
MODULE 2: The Environment and External
Stakeholders
• Staffing challenges faced by the hospitality
industry in Dubai, United Stated and United
Kingdom illustrates the complex connection
between political, religious, and cultural factors.
• Identification of external opportunities and
threats helps successful organizations to stay
abreast of changes in their external
environment.
o They can anticipate concerns, predict
trends, and generate ideas.
• The lack of qualified local service staff in an area
may create an opportunity for an entrepreneur
to consider the development of a hospitality
training program to fulfill the needs of a local
businesses.
EXTERNAL ENVIRONMENT
1. Broad Environment
a. Is not firm specific or industry specific.
b. The major trends and influences that
occurs impact many firms and
industries.
2. Operating Environment
a. Is different for each firm, although
similarities may exist among firms in the
same industries.
FIGURE 2.1 The Organization, Its Primary Stakeholders,
and the Broad Environment
THE BROAD ENVIRONMENT
✓ The emphasis here will be on Scanning,
Monitoring, Forecasting, and Adapting to
broad environmental influences.
✓ Key Elements in the Broad Environment are:
1. Sociocultural Influences
2. Global Economic Influences
3. Political Influences
4. Technological Influences
THE SOCIOCULTURAL CONTEXT
• Society is composed of the individuals who
make up a particular geographic region.
• Example of Major social issues:
3rd Year-2nd Semester
o Role of government in health care and
elder care
o Terrorism and levels of violent crimes
o Security of travel and public places
o Global warming
o War and role of the military
o Declining quality of education
o Financial market failures
o Quality and health levels of various
imported and manufactured food
products
o Pollution and disposal of toxic and
nontoxic waste.
ANALYSIS OF SOCIETAL TRENDS
• Watching social trends helps firms to
understand preferences, strengthen ties with
existing customers, and create innovative
products.
o Recognize opportunities.
o Identify unique and cultural differences.
o Enhance corporate reputation.
o Avoid unwanted legislation.
OPPORTUNITY CREATION
• Broader societal influences can create
opportunities for organization.
• Example, societal interest in wellness has lead
to the development of state-of-the-art spa for
upscale hotels and resorts.
• Example:
o Many baby boomer couple had babies
later in life than did past generations,
causing a demographic trend towards
older couples with children.
o The higher income levels of these more
established parents means that they
are more likely to travel with their
children.
o It led to the development of programs
that cater to their special interests.
• Demographic trends, such as the average age
of a population, ethnic mix, migration patterns,
income levels, and literacy rates, can help in the
development of strategy.
GENERATIONAL AND CULTURAL AWARENESS
• ‘Culture’
o An evolving set of shared beliefs,
values, and attitudes that help shape
how a social group thinks, sees, acts,
and reacts to various events and
situations.
• Generation may shape its identity or distinctive
beliefs and views.
CORPORATE REPUTATION
• Positive organizational reputation among
stakeholders such as customers and suppliers
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may increase demand for products or lead to
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 Strategic Management
• The distrust of corporations goes hand in hand • Government can encourage new business
with greater confidence in the views and formation through tax incentives and subsidies,
opinions of consumers, particularly the views of or through direct intervention.
other travelers. • Government can also restructure companies or
totally close firms that do not comply with laws,
SOCIAL RESPONSIBILITY
ordinances, or regulations.
• It is when a firm takes a proactive stance in its THE TECHNOLOGICAL CONTEXT
social role, going beyond what is called for by
law. • Technology refers to human knowledge about
• A socially responsible firms not only refrains products and services and the way they are
from acting unethically, but also voluntarily made and delivered.
seeks to improve society. • Typically, technology is defined in terms of such
• A complex social issue facing the restaurant things as machinery, computers, and
industry is its role in influencing a healthy information systems.
lifestyle for diners. • Technological changes create new products,
processes, and services, and, in some cases,
THE ECONOMIC CONTEXT
entire new industries.
• Economic forces can have a profound o Computers and telecommunications
influence on organizational behavior and technologies have played an essential
performance. role in creating the increasing global
o It creates growth and profit marketplace.
opportunities allow organizations to o The Internet added a new
take actions that satisfy many communications and marketing tool
stakeholders. that has led to many new global
o Organizations should constantly scan business threats and opportunities.
economic environment to monitor • Technological change is difficult but is not
critical but uncertain assumptions. impossible to predict.
• Most Critical Economic Factors: • Three Characteristics of Innovation:
o Economic growth o Innovations often merge from existing
o Interest rates technologies.
o Availability of credit o A dominant design will eventually be
o Inflation rates widely adopted.
o Foreign exchange rates o Radical innovations often come from
o Foreign-trade balances outside of the industry group.
DEALING WITH TECHNOLOGICAL CHANGE
FORCE PoTENTIAL InflUENCES

Economic Growth Consumer demand, cost of factors of production, availability of

• Monitor trends by surfing the Web, studying
factors of production (especially labor and scarce resources) journals, and staying current with the latest
reports.
Interest Rates Cost of capital for new projects, cost of refinancing existing
debt, consumer demand (due to customer ability to finance • Solicit the opinion of experts outside the
purchases) organization.
Inflation Interest rates, cost of factors of production, optimism or
• Develop scenarios of alternative technological
pessimism of stakeholders futures, which capture different rates of
innovation and different emerging
Exchange Rates Ability to profitably remove profits from foreign ventures,
government policies toward business technologies.

Trade Deficits Government policies, incentives, trade barriers

TABLE 2.2 A Few of Many Global Economic Forces to

Monitor and Predict

THE POLITICAL CONTEXT

• Government provide and enforce the rules by

which organizations operate.
o Laws
o Regulations
o Policies
• Alliance among governments provides an
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additional level of complexity for business with

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 Strategic Management
• Not all stakeholders are equally important to
firm success, nor do any of them play the same
roles.
• Three Stakeholder Groups That Influences Firm
Behavior and Success about Economic Power
in an Industry:
o Customers
o Suppliers
o Competitors
PORTER’S FIVE FORCES, ECONOMIC POWER, AND
INDUSTRY CHARACTERISTICS

• Analysis of the Five Forces is useful from several

perspectives:
o By understanding how the five forces
influence competition and profitability
in an industry, a firm can better
understand how to position itself
relative to the forces, determine any
TABLE 2.3 Assessment Board of the Broad Environment sources of competitive advantage now
and in the future, and estimate the
profits that can be expected.
GATHERING INFORMATION ON INTERNATIONAL o For small and start-up businesses, a five
ENVIRONMENTS forces analysis can reveal opportunities
for market entry that will not attract the
• WTO attention of the larger competitors.
o World Tourism Organization o An organization can also conduct a
o Provides statistics and market reports five forces analysis of an industry before
for a wide variety of countries and entry to determine the sector’s
regions of the world. attractiveness.
• Provides a comprehensive database of hotel o If the firm is already involved in the
performance information. industry, a five forces analysis can serve
o Smith Travel Research as a basis for declining to leave it.
o The Bench o Finally, company managers ma decides
• Makes available a wide array of articles about to alter the five forces through specific
all aspects of hospitality. actions.
o HVS
▪ Hospitality Valuation Services
• Key Environmental Factors to any Hospitality
Firm:
1. The openness of a country’s borders
2. The tourism infrastructure
3. The availability of tourism support
systems
4. Frequency of airline routes
ANALYSIS OF EXTERNAL STAKEHOLDERS AND THE
OPERATING ENVIRONMENT

• Operating environment consists of stakeholders

with whom organizations interact on a regular
basis including:
o Customers
o Suppliers
o Competitors
o Government agencies
o Administrators FIGURE 2.3 Porter’s Five Forces Model of Industry
o Local communities Competition
o Activist groups
o Unions
o The media
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o Financial intermediaries
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ECONOMIC POWER OF CUSTOMERS
• Customers provide demand for product and
services, without which an organization would
cease to exist.
o Because they can withhold demand,
they have bargaining power, a form of
economic power.
ACCORDING TO PORTER, CUSTOMERS TEND TO
EXHIBIT GREATER BARGAINING POWER UNDER THE
FOLLOWING CONDITIONS:
• They are few in number.
• They make high-volume (regular) purchase.
• They are highly motivated to get good deals.
• They can easily integrate backward and thus
become their own suppliers.
o ‘Vertical integration’
▪ Means that a firm moves
forward to become its own
customer or, in this case.
Backward to become its own
supplier.
• They are not concerned about the quality of
what they are buying.
• They have an information advantage when
compared to the firms from which they buy
products and services.
o Information creates bargaining power.
• They are well organized.
o Powerful customers must be given
high priority in strategic management
activities.
ECONOMIC POWER OF SUPPLIERS
• Powerful suppliers can raise their prices and
therefor reduce profitability levels in the buying
industry.
• They can also exert influence and increase
environmental uncertainty by threatening to
raise prices, reducing quality of goods provided
or not delivering supplies when needed.
SUPPLIER POWER IS GREATER UNDER THE
FOLLOWING CONDITIONS:
• Suppliers are few in numbers, or in the extreme
case, there is only one supplier for a good or
service.
• They sell products and services that cannot be
substituted with other products and services.
• They do sell a large percentage of their
product or services to the buying industry.
• They have a dependent customer.
• They have differentiated their products or in
other ways made it costly to switch suppliers.
• They can easily integrate forward and thus
compete directly with their former buyers.
• They have an information advantage relative to
the firms they are supplying.
• They are well organized.
3rd Year-2nd Semester
COMPETITION, CONCENTRATION, AND MONOPOLY
POWER
• Competing firms have an economic stake in
one another.
• Examples of competitive moves and
countermoves:
o Advertising programs
o Sales force programs
o New-service introductions
o Capacity expansions
o Long-term contracts with customers
MAJOR FORCES THAT LEAD TO HIGH LEVELS OF
COMPETITION
1. There are many competitors in the industry,
and none of them possess a dominant position.
a. ‘Pure Competition’
i. Organizations must work hard
to maintain their positions.
2. The industry is growing slowly.
3. Products in the industry are not easily
differentiated. (They are standard or generic)
4. High fixed costs exist.
5. High exit barriers exist.
ENTRY BARRIERS AND SUBTITUTES
• It is easy to enter an industry, and therefore
many new entrants can be expected.
• New entrants increase competitions in a sector,
which may drive down prices and profits.
• ‘Entry Barriers’
o Forces that keep new competitors out,
providing a level of protection for
existing competitors
• Example of entry barriers:
o Economies of scale.
▪ Occurs when it is more efficient
to provide a service at higher
volume.
o Capital requirements.
▪ Also known as ‘start-up cost’
▪ High capital requirements can
prevent a small competitor
from entering an industry.
o Product differentiation
▪ Established firms enjoy a loyal
customer base which makes it
very difficult for a new entrant
to compete.
o High switching cost
▪ Switching industry will cost too
much that will make firm to
lose everything they invested.
o Inimitable resources
▪ Resources that are possessed
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by industry participants but are
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 Strategic Management
o Government policy
▪ Sometimes government limit
COMPETITIVE TACTICS
entry into an industry.
EXTERNAL STAKEHOLDERS, FORMAL POWER, AND • Competitive tactics includes:
POLITICAL INFLUENCE o Advertising
o New-product launches
• Economic power is not the only type of power o Cost-reduction efforts
available to stakeholders, nor do economic o New service methods
factors completely determine the o Quality improvements
competitiveness of organizations. • Competitive Benchmarking
• Formal Power o It is a popular technique for keeping up
o Means stakeholder have a legal or with competitors.
contractual right to make decisions for o Benchmarking is a tool for assessing
some part of the company. the best practices of direct competitors
o Regulatory agencies have formal and firms in similar industries.
power.
POLITICAL STRATEGIES
• Economic Power
o Derived from the ability to withhold • Political strategies include all organizational
services, products, capital, revenues, or activities that have as one of their objectives the
business transactions that the firm creation of a friendlier political climate for the
values. organization.
• Political Power • Companies may donate to political causes or
o Comes from the ability to persuade parties, special-interest groups, or charities.
lawmakers, society, or regulatory
agencies to influence the behavior or PARTNERING WITH EXTERNAL STAKEHOLDERS
organizations.
• Firms partner to obtain complementary
technologies or knowledge.
• Types of organizational cooperation:
o Joint ventures
o Networks
o Consortia
o Trade associations
o Alliances
o Interlocking directorates
INTERORGANIZATIONAL
FORM DESCRIPTION

Joint Venture An entity that is created when two or more firms pool a
portion of their resources to create a separate, jointly owned
entity.

Network A hub-and-wheel configuration with a local firm at the hub

organizing the interdependencies of a complex array of firms.

FIGURE 2.5 Typical Role of Various Stakeholders Consortia (Cooperative

Partnerships)
Specialized joint ventures encompassing many different
arrangements. Consortia are often a group of firms oriented
toward problem solving and technology development, such as
R&D consortia.

Alliance An arrangement between two or more firms that establishes

an exchange relationship but has no joint ownership involved.

MANAGING THE OPERATING ENVIRONMENT Trade Association Organizations (typically nonprofit) that are formed by
firms in the same industry to collect and disseminate trade

•
information, offer legal and technical advice, furnish industry-
Powerful customers or suppliers can make it related training, and provide a platform for collective lobbying.

difficult to remain competitive. Interlocking Directorate Occurs when a director or executive of one firm sits on the
board of a second firm or when two firms have directors

• Substitute products put pressure on prices and who also serve on the board of a third firm. Interlocking
directorates serve as a mechanism for interfirm information

other product features.

sharing and cooperation.

• When entry barriers are low, new competitors TABLE 2.5 Common Forms of Interorganizational
enter the industry on a regular basis. Relationships
ECONOMIC ACTIONS

• If entry barriers are low, companies may work

to erect new entry barriers that prevent other
firms from entering, thus preserving or
stabilizing industry profitability.
• Erection of entry barriers can be done by
increasing advertising to create product
differentiation or by constructing larger facilities
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to achieve economies of scales.

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