11

22

Learning Objectives

To understand:• the elements of the external environment • the role of external environmental forces on

industry demand, cost structure, and profitability

• the role of external environmental forces in creating opportunities and threats

• methods that organizations can use to influence stakeholders in the task environment.

33

StrategicStrategicDirectionDirection

Strategy FormulationStrategy Formulation(corporate and (corporate and business level)business level)

Strategy ImplementationStrategy Implementationand Controland Control

Strategic RestructuringStrategic Restructuring

Internal and External Internal and External AnalysisAnalysis

44

The Broad Environment

The Broad Environment

• Sociocultural Forces

• Economic Forces

• Technological Forces

• Political/Legal Forces

• Sociocultural Forces

• Economic Forces

• Technological Forces

• Political/Legal Forces

55

Why Consider Society?Why Consider Society?

• Stakeholders are members of society--

assessment of their values and beliefs

• Good (ethical) reputation

• Avoid restrictive legislation

• Change = opportunities

• Stakeholders are members of society--

assessment of their values and beliefs

• Good (ethical) reputation

• Avoid restrictive legislation

• Change = opportunities

66

The Global EconomyThe Global Economy

• Economic Growth

• Interest Rates

• Availability of Credit

• Inflation Rates

• Foreign Exchange Rates

• Foreign Trade Balances

• Economic Growth

• Interest Rates

• Availability of Credit

• Inflation Rates

• Foreign Exchange Rates

• Foreign Trade Balances

Key Forces That Affect Virtually All Organizations Key Forces That Affect Virtually All Organizations

77

Technological ChangeTechnological Change

• 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

• 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

“Technology is human knowledge about products and services and the way they are made

and delivered”

“Technology is human knowledge about products and services and the way they are made

and delivered”

88

Global Political and Legal Forces

Global 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

• The worldwide trend is towards deregulation and privatization

• In the U.S., significant political/legal influence comes from: lawmakers, regulatory agencies, revenue collection agencies, courts

• 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

• The worldwide trend is towards deregulation and privatization

• In the U.S., significant political/legal influence comes from: lawmakers, regulatory agencies, revenue collection agencies, courts

99

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

1010

Porter’s Five Forces of Competition

• The Power of Customers

• The Power of Suppliers

• The Threat of Potential Entrants

• The Availability and Comparability of Substitutes

• Competition Among Existing Competitors

1111

When Customers Have Power

• Small number of customersSmall number of customers

• They make high volume purchasesThey make high volume purchases

• Large purchases compared to purchases from other Large purchases compared to purchases from other industriesindustries

• Products they are buying are undifferentiatedProducts they are buying are undifferentiated

• They have low profitsThey have low profits

• They can get accurate information on the selling industryThey can get accurate information on the selling industry

• They can easily vertically integrate backwardsThey can easily vertically integrate backwards

• They can easily switch from one seller to anotherThey can easily switch from one seller to another

1212

When Suppliers Have Power

• Small number of suppliersSmall number of suppliers• Few substitutes existFew substitutes exist• Suppliers are not dependent on the buyer for a lot of Suppliers are not dependent on the buyer for a lot of

their salestheir sales• The buying industry must have the product or service The buying industry must have the product or service

to surviveto survive• Suppliers have differentiated their productsSuppliers have differentiated their products• It is costly to switch suppliersIt is costly to switch suppliers• They can easily vertically integrate forwardThey can easily vertically integrate forward

1313

When Rivalry Among Existing Competitors Is Intense

• Slow industry growthSlow industry growth

• High fixed costs (plants, machinery, outlets)High fixed costs (plants, machinery, outlets)

• Undifferentiated productsUndifferentiated products

• A large number of competitorsA large number of competitors

• High exit barriers (what you lose if you leave the High exit barriers (what you lose if you leave the business)business)

1414

Entry BarriersEntry Barriers

• Economies of scaleEconomies of scale

• Large capital requirementsLarge capital requirements

• Product differentiationProduct differentiation

• High switching costHigh switching cost

• Limited access to distribution channelsLimited access to distribution channels

• Government policies and regulations that make it Government policies and regulations that make it hard to enter or competehard to enter or compete

• Existing firm possession of resources that are hard Existing firm possession of resources that are hard to duplicate such as patents, great locations, to duplicate such as patents, great locations, proprietary technology, subsidies, partnerships, proprietary technology, subsidies, partnerships, etc.etc.

• Past history of aggressive retaliation toward new Past history of aggressive retaliation toward new entrantsentrants

1515

Indirect Competitors/Substitutes

• Substitutes are not the same as competing products and Substitutes are not the same as competing products and services--they are products and services from another services--they are products and services from another industry that can substitute for the products and industry that can substitute for the products and services of the industry being studiedservices of the industry being studied

• E.g., contacts lens versus glasses versus surgeryE.g., contacts lens versus glasses versus surgery

• Close substitutes place a ceiling on the price that can be Close substitutes place a ceiling on the price that can be charged for a product or servicecharged for a product or service

• Close substitutes also set indirect performance Close substitutes also set indirect performance comparisonscomparisons

1616

Guiding principle: higher propensity to partner with stakeholders

that can influence firm outcomes (increase or reduce environmental

uncertainty)

The ability to influence firms and firm outcomes results from:• Economic power – ability to influence profit potential and operations• Political power – ability to influence ground rules by which firms

operate• Possession of valuable resources – needed by organization

Guiding principle: higher propensity to partner with stakeholders

that can influence firm outcomes (increase or reduce environmental

uncertainty)

The ability to influence firms and firm outcomes results from:• Economic power – ability to influence profit potential and operations• Political power – ability to influence ground rules by which firms

operate• Possession of valuable resources – needed by organization

When to Partner with External Stakeholders

When to Partner with External Stakeholders

1717

Common Partnering TechniquesCommon Partnering Techniques

• Direct Stakeholder Involvement

• Design Teams/Planning (Customers, Suppliers)

• Linked Communications (Customers, Suppliers)

• Appointments to Board (Customers, Suppliers, Unions, Financial Intermediaries, Government Contacts, Activists)

• Joint Research (Competitors, Government)

• Joint Ownership

• Joint Ventures (all stakeholders)

• Keiretsu (Customers, Suppliers, Financial Intermediaries, Competitors)

• Consortia/Alliances

• Trade Groups (Competitors)

• Foreign Development (Competitors, Governments)

• Education (Competitors, Governments, Communities)

• Direct Stakeholder Involvement

• Design Teams/Planning (Customers, Suppliers)

• Linked Communications (Customers, Suppliers)

• Appointments to Board (Customers, Suppliers, Unions, Financial Intermediaries, Government Contacts, Activists)

• Joint Research (Competitors, Government)

• Joint Ownership

• Joint Ventures (all stakeholders)

• Keiretsu (Customers, Suppliers, Financial Intermediaries, Competitors)

• Consortia/Alliances

• Trade Groups (Competitors)

• Foreign Development (Competitors, Governments)

• Education (Competitors, Governments, Communities)

1818

Global Business Environments

Major trends include:Major trends include:• Technological advances – communication, Technological advances – communication,

transportationtransportation• Dramatic increase in globalization of companiesDramatic increase in globalization of companies• Opportunities in Latin America, Asia, Eastern EuropeOpportunities in Latin America, Asia, Eastern EuropeFactors to consider when evaluating a country for entry:Factors to consider when evaluating a country for entry:• Social forcesSocial forces• EconomyEconomy• Political/legal environmentPolitical/legal environment• TechnologyTechnology• Industry specific factorsIndustry specific factors

1919

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