Chapter 2 The External Environment

1. Chapter 2The External Environment

2. Learning Objectives To understand: • the elements of the broad environment • the five primary forces that determine the nature and level of competition in an industry • how stakeholders in the task environment influence the firm, its performance, and its strategies • cooperative strategies and alliance networks • global business environments and evaluating a foreign country for investment

3. Strategic Management Process External and Internal Analysis Strategy Formulation (corporate and business level) Strategic Direction Strategy Implementation and Control Strategic Restructuring

4. The Broad Environment • Sociocultural Forces • Economic Forces • Technological Forces • Political/Legal Forces

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

6. The Global Economy Key Forces That Affect Virtually All Organizations • Economic Growth • Inflation Rates • Interest Rates • Foreign Exchange Rates • Foreign Trade Balances

7. Technological Forces “Technology is human knowledge about products and services and the way they are made and delivered” • Inventions--new ideas or technologies discovered in the laboratory • Innovations--inventions that can be replicated reliably on a meaningful scale (new products or processes) • Basic innovation--impacts much more than one product category or industry

8. Political and Legal Forces • Among the most significant determinants of organizational success • Governments provide and enforce the rules by which organizations operate • Level of interference from government varies from country to country and industry to industry, with a general trend towards more government intervention and regulation • Alliances and treaties among governments provide another level of complexity in planning

9. The Task Environment • Customers – existing and potential • Suppliers – of labor, materials, equipment, money • Competitors – that battle for customers and attention • Government agencies and administrators – that influence business practices, costs and opportunities • Communities – that are dependent on businesses for jobs, economic activity • Activist groups – that influence business practices • Unions – that provide workers in some industries and influence costs • Financial intermediaries – that provide capital and oversight

10. Forces of That Drive Industry Competition and Profitability Competitors 3. Direct competitors 4. Potential competitors (entry barriers) 5. Firms that sell substitute products/services 2. Economic Power of Suppliers 1. Economic Power of Customers

11. When Customers Have Power • Small number of customers • Many similar products exist • Customers make high volume purchases • Customers can get accurate information on the selling industry • The products they are buying are undifferentiated • They can easily vertically integrate backwards • They can easily switch from one seller to another

12. When Suppliers Have Power • Small number of suppliers • Few substitutes exist and the buying industry must have the product/service to survive • Suppliers are not dependent on the buyer for a lot of their sales • Suppliers can get accurate information on the buying industry • Suppliers have differentiated their products • Suppliers can easily vertically integrate forward • Suppliers have made it costly to switch suppliers

13. When Rivalry Among Direct Competitors Is Intense • Slow industry growth • High fixed costs (plants, machinery, outlets) • Lack of product differentiation • A large number of competitors • High exit barriers (what you lose if you leave the business)

14. Strategic Group Map for U.S. Retailing High Low • Specialty Stores • Elite Department Stores • General Merchandisers Price/ Service • Specialty Warehouse Stores • Discount Department Stores • Warehouse Clubs Few Many Number of Product Categories

15. Entry Barriers • Economies of scale • High levels of product differentiation • High switching costs • Limited access to distribution channels • Government policies and regulations that make it hard to enter or compete • Existing firm possession of resources that are hard to duplicate such as patents, great locations, proprietary technology, subsidies, partnerships, etc. • Past history of aggressive retaliation toward new entrants

16. Indirect Competitors/Substitutes • Substitutes are not the same as competing products and services – they are products and services from another industry that can substitute for the products and services of the industry being studied • E.g., contacts lens versus glasses versus surgery • Close substitutes place a ceiling on the price that can be charged for a product or service • Close substitutes also set indirect performance comparisons

17. When to Cooperate with External Stakeholders Guiding principle: higher propensity to pursue cooperative strategies with stakeholders that can influence firm outcomes (increase or reduce environmental uncertainty) The ability to influence firms and firm outcomes results from: • Economic power of particular stakeholders – ability to influence profit potential and operations • Political power of particular stakeholders – ability to influence ground rules by which firms operate • Network centrality of particular stakeholders – firms that are well positioned relative to other firms in the industry

18. Examples of Cooperative Strategies with Stakeholders Customers – Involvement in design teams/planning Suppliers – Integrated information systems Competitors – Joint ventures for R&D or market development Government – Joint or government-sponsored research Communities – Cooperative training programs Special Interests – Appointment of representatives to internal committees Unions – Inclusion of labor leaders in major decisions Financial Intermediaries – Appointment of representatives to board of directors

19. Forms of Alliances and Alliance Networks • Strategic alliance – any kind of cooperative strategy in which firms combine resources to pursue common objectives • Equity alliance (also called joint venture) – two or more firms form a legally independent company • Nonequity strategic alliance – formed through contract (no equity) • Collusion – formal price setting (illegal in U.S.) • Informal price cooperation is also evident in some industries • Alliance networks – autonomous firms that cooperative due to common interests • These firms are often organized around hub firms that coordinate information sharing

20. Global Business Environments Major trends include: • Technological advances – communication, transportation • Dramatic increase in globalization of companies • Opportunities in many developing nations Factors to consider when evaluating a country for entry: • Social forces • Economy • Political/legal environment • Technology • Industry specific factors

21. Conditions that Create Advantages for Nations • Factors of Production - uncommon raw materials, special workers, better schools or training • Demand Conditions - discriminating buyers, trend setters • Related and Supporting Industries - best suppliers in world, firms in related industries global leaders • Firm Strategy, Structure and Rivalry - customary practices are conducive to success, the most talented managers, strong competitors