2-1

Management

The External Environment

2-2

The External Environment

Chapter Outline
The Macroenvironment
The Competitive Environment
Environmental Analysis
Responding to the Environment
Choosing a Response Approach

2-3

The External Environment

Organizations
affected

External
all

are open systems

by, and in turn affect, their external environments

environment

relevant forces outside a firms boundaries

relevant

two

- factors to which managers must pay attention

elements comprise the external environment

competitive

environment - immediate environment surrounding

a firm
macroenvironment - fundamental factors that generally affect
all organizations

2-4

The External Environment

Laws and
politics
New
Entrants

Suppliers

Organization

Rivals

Economy

Buyers

Competitive
Environment

Macroenvironment

Demographics

Substitutes
Social
values

Technology

2-5

The Macroenvironment
The

macroenvironment

most

general elements in the external environment that can

potentially influence strategic decisions
all organizations are affected by the general components of
the macroenvironment
Laws

and regulations

impose

strategic constraints and provide opportunities

regulators - specific government organizations in a firms
more immediate task environment
have

the power to investigate company practices and take legal

action to ensure compliance with the laws

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The Macroenvironment (cont.)

The

economy

created

by complex interconnections among economies of

different countries
important elements include interest rates, inflation rates,
unemployment rates, and the stock market
economic conditions change and are difficult to predict
Technology
technological

advances create innovations in business

new

products, advanced production techniques, and improved

methods of managing and communicating

strategies

that ignore or lag behind competitors in considering

technology lead to obsolescence and extinction

2-7

The Macroenvironment (cont.)

Demographics
measures

of various characteristics of the people comprising

groups or other social units
workforce demographics must be considered in formulating
human resources strategies
population

growth influences the size and composition of the

labor force
immigration

also is a significant factor

increasing

diversity of the labor force has both advantages and

disadvantages

must assure equal employment opportunity

2-8

The Macroenvironment (cont.)

Social

issues and the natural environment

management
the

must be aware of how people think and behave

role of women in the workplace

social costs of smoking
protection of the natural environment

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Competitive Environment
Competitive

environment

comprises

the specific organizations with which the

organization interacts
Michael

successful
react

Porter - defined the competitive environment

managers:

to the competitive environment

act in ways that actually shape or change the competitive
environment

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Competitive Environment
New
entrants

New
entrants

Rival firms

New
entrants

New
entrants

2-11

Competitive Environment (cont.)

Competitors
competitors

within an industry must deal with one another

organizations must:
identify

their competitors
analyze how competitors compete
react to and anticipate competitors actions
competition

is most intense:

where there are many competitors

when industry growth is slow
when the product or service cannot be differentiated

intense

competition causes an industry shakeout

2-12

Competitive Environment (cont.)

Threat

of new entrants

barriers

to entry - influence the degree of threat

include

government policy, capital requirements, and brand

identification

Threat

of substitutes

technological

advances and economic efficiencies may result

in substitutes for existing products
substitutes can limit another industrys revenue potential
companies need to think about potentially viable substitutes

2-13

Competitive Environment (cont.)

Suppliers
provide

the resources needed for production

powerful suppliers can reduce an organizations profits
international

labor unions are noteworthy suppliers

dependence

on powerful suppliers is a competitive

disadvantage
power

of supplier determined by:

availability of other suppliers from whom to buy

the number of customers for the suppliers products

switching

suppliers

costs - fixed costs buyers face if they change

2-14

Competitive Environment (cont.)

Customers
purchase

the products or services the organization offers

final

consumers - purchase end product

intermediate consumers - buy raw materials or wholesale products
sell them to final consumers
make more purchases than individual final consumers do

customer

service - giving customers what they want, the way

they want it, the first time
disadvantageous to depend too heavily on powerful customers
powerful

customers make large purchases and have other suppliers

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Environmental Analysis
Environmental
Scanning

Scenario
Development

Benchmarking

Forecasting

2-16

Environmental Analysis
Environmental

uncertainty

lack

of information needed to understand or predict the

future
uncertainty arises from two related factors
complexity

- the number of issues to which a manager must

attend as well as their interconnectedness
dynamism - the degree of discontinuous change that occurs
within the industry
as

uncertainty increases, techniques must be developed to

collect, sort, and interpret information about the environment

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Environmental Analysis (cont.)

Environmental

scanning

searching

for and sorting through information about the

environment
competitive intelligence - information that helps managers
determine how to compete better
competitive potential of environments differs
attractive

environments - give firm a competitive advantage

unattractive environments - put firm at a competitive
disadvantage

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Attractive and Unattractive

Environments Attractive
Environmental
Factor

Unattractive

Attractive

Competitors

Many; low industry growth;

equal size; commodity

Few; high industry growth;

unequal size; differentiated

Threat of entry

High threat; few entry

barriers

Low threat; many barriers

Substitutes

Many

Few

Suppliers

Few; high bargaining power

Many; low bargaining

power

Customers

Few; high bargaining power

Many; low bargaining

power

2-19

Environmental Analysis (cont.)

Scenario

development

scenarios

- a narrative that describes a particular set of future

conditions
best-case

scenario - events occur that are favorable to the firm

worst-case scenario - events occur that are unfavorable
help

managers develop contingency plans

Forecasting
method

for predicting how variables will change in the future

accuracy varies from application to application
forecasts are most useful when they accurately predict a
changed future environment

2-20

Environmental Analysis (cont.)

Benchmarking
process

of comparing the organizations practices and

technologies with those of other companies
determine

the best-in-class performance by a company in a

given area
benchmarking team collects information on its own companys
operations and those of benchmark companies to identify gaps
gaps investigated to learn the underlying causes of performance
differences

2-21

Responding To The Environment

Adapting

to the environment

company

adjusts its structures and work processes

in uncertain environment caused by complexity, companies
tend to decentralize decision making
empowerment

- process of sharing power with employees

enhances their confidence in their ability to perform their jobs

engenders beliefs that they are influential contributors to the firm

in

uncertain environments caused by dynamism, companies

tend to establish more flexible structures
bureaucracy

- suited for stable environments (low dynamism)

organic - provides flexibility required for changing environments
(high dynamism)

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Stable

Complex

Simple

Dynamic

Decentralized
Bureaucratic
(Standardized skills)

Decentralized
Organic
(Mutual adjustment)

Centralized
Bureaucratic
(Standardized work
processes)

Centralized
Organic
(Direct supervision)

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Responding To The Environment

(cont.)
Adapting

to the environment (cont.)

Adapting

at the boundaries

buffering

- creating supplies of excess resources in case of

unpredictable needs

buffers created on both the input and output side of the business

smoothing

- leveling normal fluctuations at the boundaries of the

organization

Adapting
flexible

at the core
processes - permit adaptation of the technical core

mass customization -use of a network of independent operating units

that each performs a specific process
different modules join forces to deliver the product or service as
specified by the customer

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Responding To The Environment

(cont.)
Influencing
proactive

your environment

responses aimed at changing the environment

Independent

action - strategies that an organization acting on

its own uses to change some aspect of its current environment
Cooperative action - strategies used by two or more
organizations working together to mange the external
environment

at an organizational level, establish strategic alliances,

partnerships, joint ventures, and mergers with competitors

2-25

Responding To The Environment

(cont.)
Changing

the environment you are in

strategic

maneuvering - conscious effort to change the

boundaries of the competitive environment
prospectors

- companies that continuously change the

boundaries of their task environments by:
seeking new products and markets
diversifying and merging
acquiring new enterprises

defenders

- companies that stay within a stable, more- limited

product domain as a strategic maneuver

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Choosing A Response Approach

Change
focus

appropriate elements of the environment

on elements that:

cause

the company problems

provide the company with opportunities
allow the company to change successfully
Choose

responses that focus on pertinent elements of the

environment
focus

on competitive aggression and pacification

Choose

responses that offer the most benefit at the

lowest cost
focus

on both short- and long-term financial considerations