External Environment

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Parameters of Managerial Discretion

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 Defining the External Environment
• External Environment
 The external environment of organizations comprises of all the entities
that exist outside its boundary, but have significant influence on its
growth and survival. An organization has little or no control over its
environment but needs to constantly monitor and adapt to these external
changes, a proactive or reactive response leads to significantly different
outcome. The external environment is made up of two components, the
specific environment and the general environment.

• Components of the External Environment

 Specific environment: external forces that have a direct and
immediate impact on the organization. The main ones are customers,
competitors, suppliers and pressure groups.
 General environment: broad economic, socio-cultural, political/legal,
demographic, technological, and global conditions that may affect the
organization.

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The External Environment

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The Specific Environment: The specific environment includes those constituencies that have
a direct and immediate impact on managers' decisions and actions and are directly relevant to
the achievement of the organization's goals.

The four factors in the specific environment are suppliers, who provide materials, equipment,
financial, and labor inputs; customers or clients, who absorb the organization’s output;
competitors, who compete on prices and on products and services offered, among other
dimensions; and pressure groups that attempt to influence the actions of organizations.

The General Environment :The general environment includes following factors - economic,
political/legal, sociocultural, demographic, technological, and legal/political conditions that may
affect the organization. Changes in any of these areas usually do not have as large an impact
as the specific environment has, but managers must consider these areas as they plan,
organize, lead, and control.

The six factors in the general environment are economic conditions such as interest and
inflation rates, changes in disposable income, stock market indexes, and the stage of the
general business cycle; political/legal conditions such as the general stability of the countries
in which an organization operates and government officials’ attitudes toward business;
sociocultural conditions including values, customs, and tastes; the demographic issues
encompass trends in the physical characteristics of a population such as gender, age, level of
education, geographic location, income, etc.; technological conditions that lead to automation,
electronic communication, robotic manufacturing, and so on.; and the global political, financial
and business situations.
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Stakeholder Relationships
• Stakeholders
 Any constituencies in the organization’s environment
that are affected by the organization’s decisions and
actions

• Why Manage Stakeholder Relationships?

 It can lead to improved organizational performance.
 It’s the “right” thing to do given the interdependence
of the organization and its external stakeholders.

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Organizational Stakeholders

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 Managing Stakeholder Relationships

1. Identify the organization’s external

stakeholders.
2. Determine the particular interests and
concerns of the external stakeholders.
3. Decide how critical each external stakeholder
is to the organization.
4. Determine how to manage each individual
external stakeholder relationship.

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• Environmental Uncertainty
 The extent to which managers have knowledge of and are able to
predict change their organization’s external environment is affected by:
 Complexity of the environment: the number of components in an
organization’s external environment.
 Degree of change in environmental components: how dynamic or stable
the external environment is.

How organizations can make direct influence on the environment:

• Influencing regulators through lobbying and bargaining

• Influencing customers through creating new uses for a product and also finding
new customers and taking customers away from competitors
• Influencing suppliers by signing long-term contracts with fixed price as a hedge
against inflation
• Influencing union through collective bargaining sessions
• Influencing stakeholders by with adequate information and persuasion
• Influencing strategic allies through negotiations and agreements
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 Company’s External Environment
 Question 1: What Are the Industry’s Dominant
Economic Features?
 Question 2: How Strong Are Competitive Forces?
 Question 3: What Forces Are Driving Industry Change
and What Impacts Will They Have?
 Question 4: What Market Positions Do Rivals
Occupy—Who Is Strongly Positioned and Who Is Not?
 Question 5: What Strategic Moves Are Rivals Likely to
Make Next?
 Question 6: What Are the Key Factors for Future
Competitive Success?
 Question 7: Does the Outlook for the Industry Offer
the Company a Good Opportunity to Earn Attractive
Profits?
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Question 1: What are the Industry’s
Dominant Economic Traits?
• Market size and growth rate
• Number of rivals
• Scope of competitive rivalry
• Buyer needs and requirements
• Degree of product differentiation
• Product innovation
• Supply/demand conditions
• Pace of technological change
• Vertical integration
• Economies of scale
• Learning and experience curve effects
 Economic Questions to Answer
Factors
Market size and  How big is the industry and how fast is it growing?
growth rate
 What does the industry's position in the product life cycle (early development, rapid growth and takeoff, early maturity
and slowing growth, saturation and stagnation, decline) reveal about the industry's growth prospects?
Number of  Is the industry fragmented into many small companies or concentrated and dominated by a few large companies?
rivals
 Is the industry consolidating to a smaller number of competitors?
Scope of  Is the geographic area over which most companies compote local, regional, national, multinational, or global?
competitive
 Is having a presence in foreign markets becoming more important to a company's long-term competitive success?
rivalry
Number of  Is market demand fragmented among many buyers?
buyers
 Do some buyers have bargaining power because they purchase in large volume?
Degree of  Are the products of rivals becoming more differentiated or less differentiated?
product  Are the products of rivals causing heightened price competition?
differentiation
Product  Is the industry characterized by rapid product innovation and short product life cycles?
innovation
 How important is R&D and product innovation?
 Are there opportunities to overtake key rivals by being first-to-market with next-generation products?
Demand-supply • Is a surplus of capacity pushing prices and profit margins down?
conditions
• Is the industry overcrowded with competitors?
Pace of  What role does advancing technology play in this industry?
technological
 Are ongoing upgrades of facilities/equipment essential because of rapidly advancing production process
change
technologies?
 Do most industry members have or need strong technological capabilities? Why?
Vertical  Do most competitors operate in only one stage of the industry (parts and components production, manufacturing and
integration assembly, distribution, retailing) or do some competitors operate in multiple stages?
 Is there any cost or competitive advantage or disadvantage associated with being fully or partially integrated?
Economies of  Is the industry characterized by economies of scale in purchasing, manufacturing, advertising, shipping or other
scale activities?
 Do companies large scale operations have an important cost advantage over small-scale firms?
Learning/experi  Are certain industry activities characterized by strong learning and experience effects ("learning by doing") such that
ence unit costs decline as a company's experience in performing the activity builds?
curve effects
 Do any companies have significant cost advantages because of their learning/experience in performing particular
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activities?
 How Strong Are Competitive Forces?

Forces in the Industry Analysis (Porter’s five forces model.

 Five Competitive Forces
• Threat of New Entrants
 The ease or difficulty with which new competitors can enter an industry.
• Threat of Substitutes
 The extent to which switching costs and brand loyalty affect the
likelihood of customers adopting substitutes products and services.
• Bargaining Power of Buyers
 The degree to which customers can put pressure on the business
organization to provide higher quality products, better customer service
and lower price.
• Bargaining Power of Suppliers
 The relative number of buyers to suppliers and threats from substitutes
and new entrants affect the buyer-supplier relationship.
• Current Rivalry
 Intensity among rivals increases when industry growth rates slow,
demand falls, and product prices descend.

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Common Barriers to Entry
 Sizable economies of scale
 Cost and resource disadvantages independent of
size
 Brand preferences and customer loyalty
 Capital requirements and/or other
specialized resource requirements
 Access to distribution channels
 Regulatory policies
 Tariffs and international trade restrictions
 Ability of industry incumbents to launch vigorous
initiatives to block a newcomer’s entry
 Does the Outlook for the
Industry Offer an Attractive Opportunity?

 Involves assessing whether the industry and

competitive environment presents a company with an
attractive or unattractive opportunity
for earning good profits
 Factors to consider:
 Industry growth potential
 Whether competitive forces are growing stronger/weaker
 Whether driving forces will favorable/unfavorably impact
industry profitability
 Degree of risk and uncertainty in industry’s future
 Whether the industry confronts severe problems
 Firm’s competitive position in industry vis-à-vis rivals
 Firm’s potential to capitalize on industry opportunities or the
vulnerabilities of weaker rivals
 Whether a firm has sufficient competitive strength to
defend against unattractive industry factors
 LEARNING OUTLINE

• Describe the components of the specific and general

environments.
• Discuss the two dimensions of environmental uncertainty.
• Identify the most common organizational stakeholders.
• Explain the steps in managing external stakeholder relationships.
• Describe what managers do during external and internal analyses.
• Describe the Industry’s Dominant Economic Traits
• Explain Porter’s five forces model.
• Understand Common Barriers to Entry
• Analyzing whether the Outlook for the Industry Offer an
Attractive Opportunity

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