2.

Business environment
2. Business environment
Chapter

2 The External
Environment
 The External Environment
 Organizations are open systems
 affected by, and in turn affect, their external environments
 External environment
 Everything outside an organization’s boundaries that might affect it
 all relevant forces outside a firm’s boundaries
 relevant - factors to which managers must pay attention
 organizational boundaries - that which separates the organization
from its environment
 two elements comprise the external environment
 competitive environment - immediate environment surrounding a
firm
 macroenvironment - fundamental factors that generally affect all
organizations
 The External Environment

Laws and
politics
New Economy
Entrants Buyers

Suppliers
Organization Competitive Technology
Macroenvironment
Environment

Rivals Substitutes Demographics

Social
values
 Economic Environment

 Business Cycle
 Patterns of short term ups and
down expansions and
contractions) in an economy
 Aggregate Output
 Total quantity of goods and
services produced by an economic
system during a given period
Business Cycle
Expansion

Contraction
 Economic Environment

 Aggregate Output
a. Standard of Living
b. Gross Domestic Product (GDP)
c. Gross National Product (GNP)
d. Purchasing Power Parity
e. Productivity
f. Balance of trade
g. National Debt
 Economic Environment
 Aggregate Output
a. Standard of Living
 Total quantity and quality of goods and services that a country’s
citizerns can purchase with the currency used in their country
b. Gross Domestic Product (GDP)
 Total value of all goods and services produced within a given period
by a national economy through domestic factors of production
 Real GDP  (GDP calculated to account for changes in currency
values and price changes)
 Nominal GDP  (GDP measured in current dollars or with all
components valued at current prices)
c. Gross National Product (GNP)
 Total value of all goods and services produced by a national
economy within a given period regardless where the factors of
production are located
 Economic Environment
 Aggregate Output
d. Purchasing Power Parity
 Principle that exchange rates are set so that the prices of similar products in different countries are
about the same
e. Productivity
 Measure of economic growth that compares how much a system produces with the resources
needed to produce it
f. Balance of trade
 Economic value of all products a country exports minus the economic value of all products it imports
g. National Debt
 Amount of money that a government owes its creditors


 Economic Stability
a. Stability
b. Inflation
c. Consumer Price Index (CPI)
d. Unemployment
e. Recession
f. Depression
g. Fiscal Policies
h. Monetary Policies
i. Stabilization Policies
Economic Stability
a. Stability
 Condition in an economic system in which the amount of
money available and the quantity of goods and services
produced are growing at about the same rate
b. Inflation
 Occurrence of widespread price increases throughout
an economic system
 Inflation rate = (change in price Index/Initial Price Index)
X 100
c. Consumer Price Index (CPI)
 Measure of prices of typical products purchased by
consumers living in urban areas
d. Unemployment
 Measure of prices of typical products purchased by
consumers living in urban areas
Monetary Policy
Interest Rates 
Tight
Spending 

Interest Rates 
Easy
Spending 
 Economic Stability
e. Recession
 Period during which aggregate output, as measured
by real GDP, declines
f. Depression
 Particularly severe and long lasting recession
g. Fiscal Policies
 Government economic policies that determine how
the government collects and spends its revenues
h. Monetary Policies
 Government economic policies that determine the
size of a nations monetary supply
i. Stabilization Policies
e. Government policy, embracing both fiscal and
monetary policies whose goal is to smooth out
fluctuations in output and unemployment and to
stabilize prices
Technological Environment
 Technology
 Product/Service
Technologies
 Business Process
Technologies
 Technological Environment
 Technology
 All the ways in which firms create value
for constituents
 Product/Service Technologies
 Technologies employed for creating
products (goods and services) for
customers
 Business Process Technologies-
 Enterprise Resource Planning
 Large scale information system for

organizing and managing a firm’s

processes across product lines,
departments and geographic locations
 Enterprise Resource Planning
Data Analysis Sales &
Human
Resources * Product costs Marketing

* Benefits * Job costs * Sales Orders

* Payroll * Pricing Systems

ERP System
Customer
Services
Manufacturing
* Material requirements * Field Services
Plannning * Quality
Accounting & Supply Chain
* Schedulling Finance Management
* Account Payable and
Receivable * Forecasting
* Asset Management * Purchasing
* Distribution
 Political-Legal Environment
 Political-Legal Environment
 Condition reflecting the relationship
between business and government,
usually in the form of government
regulation
 Regulation
 Defines Relationship Between
Government & Business
 Government
 Pro vs. Anti-Business Sentiment
 Sociocultural Environment
 Sociocultural Environment
 Conditions including the customs, mores, values
and demographic characteristics of the society in
which an organization functions
 Customer Preferences/Tastes- Vary
 International
 National
 Ethical Compliance & Responsible Behavior
 Enron
 Arthur Andersen
 Business Environment
 Redrawing Corporate
Boundaries- Core
Competencies
 Challenges/Opportunities
 Outsourcing
 Vertical Integration
 Viral Marketing
 Business Process Management
 Post-9/11
Business Environment
 Redrawing Corporate
Boundaries- Core
Competencies
 Core Competencies
 Skills and resources with
which an organization
competes best and creates
the most values for owners
 Business Environment
 Challenges/Opportunities (1/2)
 Outsourcing
 Strategy of paying suppliers and distributors
to perform certain business processes or to
provide needed materials or resources
 Vertical Integration
 Strategy of owning the means by which an
organization produces goods or services
 Viral Marketing
 Strategy of using the internet and word of
mouth marketing to spread product
information
 Business Environment
 Challenges/Opportunities (2/2)
 Process
 Any activity that adds value to some input by
transforming it into an output for a customer
(whether internal or external)
 Business Process Management
 Approach by which firms move away from
department-oriented organization and toward
process oriented team structures that cut
across old departmental boundaries
 Post-9/11
 The government should be security concern
Environmental Analysis

Environmental
Scanning

Scenario
Benchmarking
Development

Forecasting
 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
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
 Attractive and Unattractive
Environments
Environmental
Factor Unattractive Attractive

Competitors Many; low industry growth; Few; high industry growth;

equal size; commodity unequal size; differentiated

Threat of entry High threat; few entry Low threat; many barriers
barriers

Substitutes Many Few

Suppliers Few; high bargaining power Many; low bargaining

power

Customers Few; high bargaining power Many; low bargaining

power
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
Environmental Analysis (cont.)

 Benchmarking
 process of comparing the organization’s 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
company’s operations and those of benchmark companies
to identify gaps
 gaps investigated to learn the underlying causes of
performance differences
 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)
Four Approaches for Managing
Uncertainty

Stable Dynamic

Decentralized Decentralized
Complex Bureaucratic Organic
(Standardized skills) (Mutual adjustment)

Centralized Centralized
Simple Bureaucratic Organic
(Standardized work (Direct supervision)
processes)
 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

Responding To The Environment
(cont.)
 Influencing your environment
 proactive 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 influence the external
environment
 at an organizational level, establish strategic alliances,
partnerships, joint ventures, and mergers with competitors
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:
 diversifying and merging
 seeking new products and markets
 acquiring new enterprises
 defenders - companies that stay within a stable, more-
limited product domain as a strategic maneuver
 Choosing A Response Approach

 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 specific 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