Slide strategic management 6e by harrison chapter 2 the external environment

Learning ObjectivesLearning Objectives To understand: • the elements of the broad environment • the five primary forces that determine the nature and level of competition in an indust

Chapter 2 The External Environment

Chapter 2 The External Environment

Learning Objectives

Learning Objectives

To understand:

• the elements of the broad environment

• the five primary forces that determine the

nature and level of competition in an

industry

• how stakeholders in the task environment

influence the firm, its performance, and its strategies

To understand:

• the elements of the broad environment

• the five primary forces that determine the nature and level of competition in an

industry

• how stakeholders in the task environment influence the firm, its performance, and its strategies

Direction

Strategy Formulation (corporate and business level)

The Broad Environment

Why Consider Society?

• Stakeholders are members of

society assessment of their values and beliefs

• Good (ethical) reputation

• Change = opportunities

• Avoid restrictive legislation

• Stakeholders are members of

society assessment of their values and beliefs

• Good (ethical) reputation

• Change = opportunities

• Avoid restrictive legislation

The Global Economy

• Economic Growth

• Inflation Rates

• Interest Rates

• Foreign Exchange Rates

• Foreign Trade Balances

• Economic Growth

• Inflation Rates

• Interest Rates

• Foreign Exchange Rates

• Foreign Trade Balances

Key Forces That Affect Virtually All Organizations

Technological Forces

• 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”

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, with a general trend towards more government intervention and regulation

• Alliances and treaties among governments provide another level of complexity in planning

• 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, with a general trend towards more government intervention and regulation

• Alliances and treaties among governments provide another

level of complexity in planning

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

• 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

When Customers Have Power

• Small number of customers

• Many similar products exist

• Customers make high volume purchases

• Customers can get accurate information on the selling

industry

• The products they are buying are undifferentiated

• They can easily vertically integrate backwards

• They can easily switch from one seller to another

When Suppliers Have Power

• Small number of suppliers

• Few substitutes exist and the buying industry must have

the product/service to survive

• Suppliers are not dependent on the buyer for a lot of their

When Rivalry Among Direct

Competitors Is Intense

When Rivalry Among Direct

Competitors Is Intense

• Slow industry growth

• High fixed costs (plants, machinery, outlets)

• Lack of product differentiation

• A large number of competitors

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

business)

Warehouse Stores

•Elite

Department Stores

•Elite

Department Stores

•Discount

Department Stores

Strategic Group Map for U.S Retailing

Entry Barriers

• Economies of scale

• High levels of product differentiation

• High switching costs

• Limited access to distribution channels

• Government policies and regulations that make it

hard to enter or compete

• Existing firm possession of resources that are hard

to duplicate such as patents, great locations,

proprietary technology, subsidies, partnerships,

etc.

• Past history of aggressive retaliation toward new

Indirect Competitors/Substitutes

• Substitutes are not the same as competing products and

services – they are products and services from another industry that can substitute for the products and

services of the industry being studied

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

• Close substitutes place a ceiling on the price that can be

charged for a product or service

• Close substitutes also set indirect performance

Guiding principle: higher propensity to pursue cooperative strategies with stakeholders that can influence firm outcomes (increase or reduce environmental uncertainty)

The ability to influence firms and firm outcomes results from:

• Economic power of particular stakeholders – ability to influence profit potential and operations

• Political power of particular stakeholders – ability to influence ground rules by which firms operate

• Network centrality of particular stakeholders – firms that are well

positioned relative to other firms in the industry

Guiding principle: higher propensity to pursue cooperative strategies with stakeholders that can influence firm outcomes (increase or

reduce environmental uncertainty)

The ability to influence firms and firm outcomes results from:

• Economic power of particular stakeholders – ability to influence profit potential and operations

• Political power of particular stakeholders – ability to influence ground rules by which firms operate

• Network centrality of particular stakeholders – firms that are well

positioned relative to other firms in the industry

When to Cooperate with External

Stakeholders

When to Cooperate with External

Stakeholders

Examples of Cooperative Strategies with

Stakeholders

Examples of Cooperative Strategies with

Stakeholders

Customers – Involvement in design teams/planning

Suppliers – Integrated information systems

Competitors – Joint ventures for R&D or market development

Government – Joint or government-sponsored research

Communities – Cooperative training programs

Special Interests – Appointment of representatives to internal committees Unions – Inclusion of labor leaders in major decisions

Customers – Involvement in design teams/planning

Government – Joint or government-sponsored research

Forms of Alliances and Alliance Networks

• Strategic alliance – any kind of cooperative strategy in

which firms combine resources to pursue common

objectives

• Equity alliance (also called joint venture) – two or more

firms form a legally independent company

• Nonequity strategic alliance – formed through contract

(no equity)

• Collusion – formal price setting (illegal in U.S.)

› Informal price cooperation is also evident in some industries

• Alliance networks – autonomous firms that cooperative

due to common interests

› These firms are often organized around hub firms that coordinate

Global Business Environments

Major trends include:

• Technological advances – communication,

transportation

• Dramatic increase in globalization of companies

• Opportunities in many developing nations

Factors to consider when evaluating a country for entry:

• Social forces

• Economy

• Political/legal environment

Major trends include:

• Technological advances – communication,

transportation

• Dramatic increase in globalization of companies

• Opportunities in many developing nations

Factors to consider when evaluating a country for entry:

• Social forces

• Economy

• Political/legal environment

Conditions that Create Advantages

for Nations

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

special workers, better schools or training

setters

in world, firms in related industries global leaders

practices are conducive to success, the most

talented managers, strong competitors