Business Environments: External and Internal

Business Environments: External and Internal1Business Environments are divided into two (2) primary CategoriesExternal & Internal2Business Environments3The external environment 1. Encompasses all issues, occurrences, trends, etc. that are peripheral to the corporation 2. It is beyond the direct control of the TMT.

The internal environment 1. Encompasses all issues, occurrences, trends, etc. that are within the confines of the organization 2. It generally is somewhat within the control of the TMT.

Both environments exert significant influence over the formation of a company's strategy and its degree of success.4Environments ChangeEnvironments can change rapidly changes in corporate strategies may be requiredThe external environment = GENERAL & COMPETITIVE The internal environment = RESOURCES & LEADERSHIP Predicting the extent, direction, and speed of environmental change with 100% of precision is difficult to impossible.

Abrupt environmental changes can quickly transform strategic plans from effective to obsolete.

A firm must be prepared to rapidly adapt to unexpected changes since this can mean the difference between success and failure.

Scenario Models facilitate rapid adaptation to changing environments5Scenario ModelsScenario Models:1. Are tools that can aid in the rapid adaptation to environmental changes.

2. They help TMTs prepare for a wide range of possible future conditions from the highly likely to possible but not expected.

3. They are the first step in the preparation of contingency strategies.

4. LESS LIKELY to occur but "could happen" scenarios are refined into alternate models which form the basis for Contingency Strategies.Scenario Models are sets of potential environmental conditions that range from very likely to possible but unlikely.

Contingency Strategies are alternative strategic plans to match the conditions highlighted in scenario models. 6The General Environment7The Five Factors of the General Environment(1) Sociocultural (2) Demographic (3) Economic(4) Technological (5) Political/Legal

8General EnvironmentChanges in one General environmental factor can influence changes in others.

For example a weak economy can influence Political/Legal positions.

9Sociocultural FactorsSociocultural factors relate to a country's:Dominant religionsThe population's general desire for leisure-timeAttitudes toward consumerismEnvironmentalismGender roles in society and business.

In general, sociocultural factors are characterized byThe lifestylesValuesBelief systems of populations

10Demographic FactorsDemographic factors pertain to changes:In the population size of a countryGeographic distribution of peopleEthnic mixIncome distributionAverage ageNumber of people in the family, etc.

For example, American families are getting smaller, the population is getting older, individuals are getting heavier, and the Hispanic population is the fastest growing part of the population.

11Economic FactorsEconomic factors relate to a country's:Inflation or deflation ratesInterest ratesTariffsBalance of trade issuesGrowth of national economiesExchange ratesUnemployment ratesLabor availabilityGross domestic productsSavings rates, etc. 12 Technological FactorsTechnological factors pertain to a countrys:Reception to innovationStrength of cultural discouragement for new things.Rate of innovation, inventions, patents Some cultures reject technological advances while others enthusiastically embrace new technology. 13Political/Legal FactorsPolitical/Legal Factors center on:The political stability of a countryIts legal systemNumber of Antitrust lawsSuccess of enforcementPhilosophies of regulations vs deregulationGeneral attitude toward business.

14The Competitive Environment15Competitive Environment: Nine Factors(1) Customers(2) Suppliers(3) Unions(4) Associations(5) New Entrants(6) Interest Groups(7) Substitutes(8) Competitors(9) Creditors

16Competitive Environment17

Factors that AMPLIFY COMPETITIVE INTENSITY1. High fixed costs (costs that cannot be eliminated easily as volume decreases)

2. High storage costs 3. Lack of differentiation between products or services

4. Low customer switching costs (customer can switch suppliers without significant cost or inconvenience)

5. High exit barriers for competitors (difficult for a firm to leave a particular industry)

18Competitive Environment & Porter's Five Forces(1) Rivalry among Competing Firms (2) Bargaining Power of Buyers (3) Bargaining Power of Suppliers (4) Threat of Substitutes (5) Threat of New Entrants

19Porter'sFive Forces20 Rivalry of Competing FirmsIntensity increases when:1. The size of markets shrinks or ceases to grow. 2. When there are numerous competitors seeking the same customers

Consequence of Intensity:1. Prices may fall lowering revenues2. More favorable shipping terms offered to customers3. Selling firms may offer more relaxed payment terms4. Increased expenses as services to customers added211. Rivalry between suppliers is intense2. Buyers for the products or services are few3. Buyer is the primary customer of the supplier4. Buyer is extremely large and purchases large quantities or major items 5. Switching costs are low for buyer(changing suppliers not difficult or costly)6. Buyer is capable of backward integration (may enter the sellers industry & supply own needs).Buyer Power is high when221. There are few suppliers 2. Demand exceeds availability3. There are few or no substitute4. Purchases are crucial to the buyers business 5. Buyers are small purchasers 6. Supplier has sufficient customers 7. High switching costs for the buyer (difficult and costly to find another supplier)8. Supplier could forward integrate (supplier may enter the industry of the buyer and become a direct competitor). Supplier Power is high when23Threats of Substitutes is high when1. The customers have low switching costs

2. Price of the substitute product or service is lower

3. Quality and suitability of the substitute is comparable24 Threats of new entrants (Newbies) is high when 1. Low entry barriers2. Lack of differentiation of current products or services3. Lack of brand loyalty by consumers4. Low switching costs by customers5. Low government intervention a) few or no licensingb) no permits requiredc) industry minimally regulated6. Easy access to distribution channels7. Favorable supplier welcome

25End of Part One: Business EnvironmentsRe-Read Chapter Two

Relax!

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