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Inc. All rights reserved.

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Chapter
2
The External
Environment
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Learning Objectives
After studying Chapter 2, you will know:
how environmental forces influence organizations, as well as
how organizations can influence their environments
how to make a distinction between the macroenvironment and
the competitive environment
why organizations should attend to economic and social
developments in the environments
how to analyze the competitive environment
how organizations respond to environmental uncertainty
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The External Environment
Organizations are open systems
affected by, and in turn affect, their external environments
External environment
all relevant forces outside a firms boundaries
relevant - factors to which managers must pay attention
two elements comprise the external environment
competitive environment - immediate environment surrounding
a firm
macroenvironment - fundamental factors that generally affect all
organizations
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Laws and
politics
Economy
Technology
Demographics
Social
values
Macroenvironment
Competitive
Environment
Organization
Suppliers
New
Entrants
Substitutes
Rivals
Buyers
The External Environment
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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
creates 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
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The Macroenvironment (cont.)
Demographics
measures of various characteristics of the people comprising
groups or other social units
age, gender, family size, income, education, occupation
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
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The Macroenvironment (cont.)
Social issues and the natural environment
management must be aware of how people think and behave
the role of women in the workplace
providing benefits for domestic partners of employees
protection of the natural environment
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Competitive Environment
Competitive environment
comprises the specific organizations with which the
organization interacts
Michael Porter - defined the competitive environment
successful managers:
react to the competitive environment; and
act in ways that actually shape or change the competitive
environment
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Rival firms
New
entrants
Suppliers Customers
Substitutes
Competitive Environment
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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
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Competitive Environment (cont.)
Threat of new entrants
barriers to entry - influence the degree of threat
conditions that prevent new companies from entering an industry
include government policy, capital requirements, and brand
identification, cost disadvantages, and distribution channels
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
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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 costs - fixed costs buyers face if they change suppliers
close supplier relationship is the new model for organizations
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Competitive Environment (cont.)
Customers
purchase the products or services the organization offers
final consumers - purchase products in their final form
intermediate consumers - buy raw materials or wholesale
products before selling them to final consumers
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/or have other
suppliers
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Environmental
Scanning
Benchmarking
Scenario
Development
Forecasting
Environmental Analysis
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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
Environmental
Factor
Competitors


Threat of entry


Substitutes

Suppliers


Customers
Unattractive
Many; low industry growth;
equal size; commodity

High threat; few entry
barriers

Many

Few; high bargaining power


Few; high bargaining power

Few; high industry growth;
unequal size; differentiated

Low threat; many barriers


Few

Many; low bargaining
power

Many; low bargaining
power
Attractive
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Environmental Analysis (cont.)
Scenario development
scenario - 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 all 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
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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
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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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Complex
Simple
Stable Dynamic
Decentralized
Bureaucratic
(Standardized skills)
Centralized
Bureaucratic
(Standardized work
processes)
Decentralized
Organic
(Mutual adjustment)
Centralized
Organic
(Direct supervision)
Four Approaches for Managing Uncertainty
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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 at the core
flexible 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 your environment
proactive responses aimed at changing the environment
I ndependent 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
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Strategy

Competitive
aggression

Competitive
pacification

Public relations


Voluntary action


Legal action


Political action
Independent Action
Definition

Exploiting a distinctive competence or improving
internal efficiency for competitive advantage

Independent action to improve relations with
competitors

Establishing and maintaining favorable images in the
minds of those making up the environment

Voluntary commitment to various interest groups,
causes, and social problems

Company engages in private legal battle with
competition

Efforts to influence elected representatives to create a
more favorable business environment
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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
Responding To The Environment (cont.)
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Strategy

Domain
selection


Diversification



Merger and
acquisition

Divestiture



Strategic Maneuvering
Definition

Entering industries or markets with limited
competition or regulation and ample suppliers and
customers; entering high growth markets

Investing in different types of business, manufacturing
different types of products or geographic expansion
to reduce dependence on single market or technology

Combining two or more firms into a single enterprise;
gaining possession of an ongoing enterprise

Selling one or more businesses


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Change appropriate elements of the environment
focus 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
Choosing A Response Approach