The External

Environment
Lecture 4

External Environment
The factors beyond the control of the
firm that influence its choice of
direction and action, organizational
structure, and internal processes

4-2

The Firms External

Environment
Ex. 4.1

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Remote Environment
Economic,
social,
political,
technological, and ecological factors
that originate beyond, and usually
irrespective of, any single firms
operating situation.

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Economic Factors
1. Prime interest rates
2. Inflation rates
3. Trends in the growth of the gross national
product
4. Unemployment rates
5. Globalization of the economy
6. Outsourcing

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Social Factors
Present in the external environment:

Beliefs & Values

Attitudes & Opinions
Lifestyles

Developed from:

Cultural conditioning
Ecological conditioning
Demographic makeup
Religion
Education
Ethnic conditioning.

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Political Factors
Political constraints on firms:

Fair-trade Decisions
Antitrust Laws
Tax Programs
Minimum Wage Legislation
Pollution and Pricing Policies
Administrative jawboning

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Impact of Political Activity

Political activity has a significant
impact on two governmental
functions that influence the remote
environment of firms:
Supplier function
Customer function

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Technological Factors

Technological forecasting helps protect and

improve the profitability of firms in growing
industries.
It alerts strategic managers to impending
challenges and promising opportunities.
The key to beneficial forecasting of technological
advancement lies in accurately predicting future
technological capabilities and their probable
impacts.

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Technological Forecasting
The quasi-science of anticipating
environmental and competitive
changes and estimating their
importance to an organizations
operations.

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Ecological / Environmental
Factors

Ecology refers to the relationships among

human beings and other living things and the air,
soil, and water that supports them.
Threats to our life-supporting ecology caused
principally by human activities in an industrial
society are commonly referred to as pollution
Loss of habitat and biodiversity
Environmental legislation
Eco-efficiency

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Eco-efficiency
Company actions that produce more
useful goods and services while
continuously reducing resource
consumption and pollution.

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International Environment

Monitoring the international environment

involves assessing each non-domestic market on the
same factors that are used in a domestic assessment.
While the importance of factors will differ, the same set
of considerations can be used for each country.
Economic, political, legal, and social factors are used to
assess international environments.
One complication to this process is that the interplay
among international markets must be considered.

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Industry Environment

Harvard professor Michael E. Porter propelled the

concept of industry environment into the
foreground of strategic thought and business
planning.
The cornerstone of Porters work first appeared in
the Harvard Business Review, in which he explains
the five forces that shape competition in an
industry.
Porters well-defined analytic framework helps
strategic managers to link remote factors to their
effects on a firms operating environment.
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Competitive Forces Shape Strategy

The essence of strategy formulation is coping with

competition.
Intense competition in an industry is neither
coincidence nor bad luck.
Competition in an industry is rooted in its
underlying economics, and competitive forces
exist that go well beyond the established
combatants in a particular industry.
The corporate strategists goal is to find a position
in the industry where his or her company can best
defend itself against these forces or can influence
them in its favor.
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Ex. 4.8 Forces Driving Industry Competition

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Threats of Entry

Economies of Scale
Product Differentiation
Capital Requirements
Cost Disadvantages Independent of Size
Access to Distribution Channels
Government Policy

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Figure 3.5: Factors Affecting Threat of Entry

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Powerful Suppliers
A supplier group is powerful if:
It is dominated by a few companies and is more
concentrated than the industry it sells to
Its product is unique or at least differentiated, or if
it has built-up switching costs
It is not obliged to contend with other products for
sale to the industry
It poses a credible threat of integrating forward
into the industrys business
The industry is not an important customer of the
supplier group

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Figure 3.7: Factors Affecting Bargaining Power of Suppliers

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Powerful Buyers
A buyer group is powerful if:

It is concentrated or purchases in large volumes

The products it purchases from the industry are

standard

The products it purchases from the industry form a

component of its product and represent a significant
fraction of its cost

It earns low profits

The industrys product is unimportant to the quality of

the buyers products or services

The industrys product does not save the buyer money

The buyers pose a credible threat of integrating

backward

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Figure 3.8: Factors Affecting Bargaining Power of Buyers

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Substitute Products

By placing a ceiling on the prices it can charge,

substitute products or services limit the
potential of an industry
Substitutes not only limit profits in normal times
but also reduce the bonanza an industry can
reap in boom times
Substitute products that deserve the most
attention strategically are those that are

subject to trends improving their price-performance trade-off

with the industrys product or
produced by industries earning high profits

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Figure 3.6: Factors Affecting Competition From Substitute Products

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Jockeying for Position

Intense rivalry occurs when:
Competitors are numerous or are roughly equal
Industry growth is slow, precipitating fights for
market share that involve expansion
The product or service lacks differentiation or
switching costs
Fixed costs are high or the product is perishable,
creating strong temptation to cut prices
Capacity normally is augmented in large increments
Exit barriers are high
Rivals are diverse in strategy, origin, and personality

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Industry Analysis & Competitive Analysis

An industry is a collection of firms that offer

similar products or services.
Structural attributes are the enduring
characteristics that give an industry its distinctive
character.
Concentration refers to the extent to which
industry sales are dominated by only a few firms.
Barriers to entry are the obstacles that a firm
must overcome to enter an industry.

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Competitive Analysis
1. How do other firms define the scope of their
market?
2. How similar are the benefits the customers
derive from the products and services that other
firms offer? The more similar the benefits of
products or services, the higher the level of
substitutability between them.
3. How committed are other firms to the industry?

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Operating Environment
Also called competitive or task environment
Includes competitor positions and customer
profiling based on the following factors:
Geographic
Demographic
Psychographic
Buyer Behavior
Also includes suppliers & creditors and HRM

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HR: Nature of the Labor Market

Access to personnel is affected by 4 factors:
Firms reputation as an employer
Local employment rates
Availability of people with the needed skills
Its relationship with labor unions.

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Emphasis on Environmental Factors

Differing external elements affect different strategies at

different times and with varying strengths
Only certainty is that the effect of the remote and
operating environments will be uncertain until a
strategy is implemented
Many managers, particularly in less powerful firms,
minimize long-term planning
Instead, they allow managers to adapt to new pressures
from the environment
Absence of strong resources and psychological
commitment to a proactive strategy effectively bars a
firm from assuming a leadership role in its environment

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Porters Diamond of National Advantage

Figure 8.3

Porters Diamond the determinants of national advantages

Source: Adapted with permission of The Free Press, a Division of Simon & Schuster, Inc., from The Competitive Advantage of Nations by Michael E. Porter. Copyright 1990, 1998 by
Michael E. Porter. All rights reserved

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Porters Diamond of National Advantage

Michael Porter has proposed a four-pointed diamond
to explain why some locations tend to produce firms with
sustained competitive advantages in some industries
more than others.
Porters Diamond suggests that locational advantages
may stem from:
local factor conditions;
local demand conditions;
local related and supporting conditions;
local firm strategy structure and rivalry.
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Yips Drivers of Internationalisation

Figure 8.2 Drivers of internationalisation

Source: Adapted from G. Yip, Total Global Strategy II, Financial Times Prentice Hall, 2003, Chapter 2

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Yips Drivers of Internationalisation

Given internationalisations complexity, international
strategy should be pinned by a careful assessment of
trends in each particular market.
George Yips globalisation framework sees international
strategy potential as determined by:
market drivers;
cost drivers;
government drivers;
competitive drivers.

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References
Pearce, JA & Robinson, RB 2013 Strategic Management:
Formulation, Implementation & Control, 13th edn,
McGraw-Hill International edition, Chapter 4.
Thompson & Strickland, 2010 Crafting and Executing
Strategy: The Quest for Competitive Advantage: Concepts
and Cases, Chapter 3
Johnson G, Whittington R, Scholes, K, Angwin D &
Regner, P 2014 10th edn, Pearson Education Limited, Italy.

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