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

all relevant forces outside a firm’s 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

Laws and

politics

Economy

Technology

Demographics

Social

values

MacroenvironmentCompetitive

Environment

OrganizationSuppliers

New

Entrants

SubstitutesRivals

Buyers

The External Environment

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 firm’s more immediate task environment

have the power to investigate company practices and take legal action to ensure compliance with the laws

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

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

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

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

Rival firms

New

entrants

Suppliers Customers

Substitutes

Competitive Environment

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

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 industry’s revenue potential

companies need to think about potentially viable substitutes

Competitive Environment (cont.)

Suppliers

provide the resources needed for production

powerful suppliers can reduce an organization’s 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 supplier’s products

switching costs - fixed costs buyers face if they change suppliers

close supplier relationship is the new model for organizations

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

Economic Stability Inflation

Widespread Price Increases In An Economic System

Unemployment Level of Joblessness Among

Those Actively Seeking Work In An Economic System

Recession vs. Depression

Organizational Boundaries& Environments

External Environment

Organizational Boundary-Separates Organization From Environment

Dimensions ofExternal Environments

The Business

Organization

Economic

Technological

Political-Legal

Business

Sociocultural

Economic Environment

Business Cycle

Patterns of short term ups and down in an economy

Aggregate Output

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

Gross Domestic Product (GDP)

Real (GDP calculated to account for changes in

currency values and price changes)

Nominal (GDP measured in current dollars or with all

components valued at current prices)

Gross National Product (GNP)

Business CycleExpansion

Contraction

Managing the U.S. Economy

Fiscal Policy Determines How

Government Collects/Spends Revenues

Monetary Policy Determines Size of Nation’s

Money Supply

Monetary PolicyInterest Rates

Spending Tight

Interest Rates

Spending

Easy

Technological Environment

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

ERP System

Human

Resources

Data Analysis

Accounting & Finance

Customer

Services

Sales &

Marketing

Supply Chain

Management

Manufacturing

Moore’s Law Means More Performance. Processing power, measured in millions of

instructions per second (MIPS), has risen because of increased transistor counts.

Copyright © 2005 Intel Corporation 4

Intel Silicon Innovation: ”Fueling New Solutions for the Digital Planet”, Copyright © 2005 Intel

Corporation.5

Samsung40” TV Active Matrix 1280x800 pixel OLED

(July 2005)

Siemens 4 cm Active Matrix 128x48 pixel OLED

Suitable for MP3 Player

SonyThin Screen OLED for Mobile Devices

(September 2004)

Electronic Paper OLED

64

Prof. Dr. Andreas Tünnermann: “OPTICS AND PHOTONICS:

Enabling Technology and Driving Force for Regional Development and Competitiveness”,

IST 2004 66

Political-Legal Environment

Regulation-

Defines Relationship Between Government & Business

Government =

Pro vs. Anti-Business Sentiment

Sociocultural Environment

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

Environmental

Scanning

BenchmarkingScenario

Development

Forecasting

Environmental Analysis

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

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

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)

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

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

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

Responding To The Environment (cont.)

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

Choosing A Response Approach

U.S. Balance of Trade (2003)

U.S. Buys $1.5 Trillion of Goods/Services

U.S. Sells $1.0 Trillion of Goods/Services

U.S. Balance of Trade

-$500 Billion

Source: U.S. Census Bureau- Foreign Trade Statistics (2003 Annual Highlights), http://www.census.gov/foreign-trade/statistics/highlights/annual.html

Chapter

2

Understanding the Environments of Business

Chapter Outline

Organizational Boundaries & Environments

Economic Environment

Technological Environment

Political-Legal Environment

Sociocultural Environment

Business Environment

% GDP Change From Previous Period

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1975 1985 1995 2003

Source: U.S. Department of Commerce, Bureau of Economic Analysis

U.S. GDP & Real GDP

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1975

1980

1985

1990

1995

2000

2003

Gross DomesticProduct

Gross DomesticProduct (2000Dollars)

(In $ Billons)

Source: U.S. Department of Commerce, Bureau of Economic Analysis

GDP & GDP Per Capita

Purchasing Power Parity(Big Mac Index Based On At Market Exchange Rate 12/13/04)

$5.46

$3.75

$3.00

$2.56

$2.50

$2.12

$1.60

$1.49

$1.26

$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00

Switzerland

Euro Area

U.S.

Chile

Japan

Mexico

Argentina

Russia

China

US Big Mac = $3 Average

(Average of 4 Cities)

Source: The New York Times, “Big Mac Index”, Dec. 16th, 2004. http://www.economist.com/markets/bigmac/displayStory.cfm?story_id=3503641

U.S. Productivity

GDP % Change From Preceding Period

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2004

Source: U.S. Dept. of Commerce- Bureau of Economic Analysis

Expansion vs. Recession vs. Depression?

*

*3rd Quarter 2004

% GDP Change vs.% Labor Productivity Change

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1995

1996

1997

1998

1999

2000

2001

2002

2003

GDP

Productivity

Source: U.S. Department of Commerce, Bureau of Economic Analysis U.S. Department of Labor- Bureau of Labor Statistics

U.S. National Debt

$0

$1

$2

$3

$4

$5

$6

$7

$8

1950 1960 1970 1980 1990 2000*For Today’s Figure go to “U.S. National Debt Clock”, http://www.brillig.com/debt_clock/

Source: Bureau of the Public Debt: Historical Debt Outstanding- Annual, http://www.publicdebt.treas.gov/opd/opdhisto4.htm

In $ Trillions*

U.S. Consumer Price Index(Dec.- All Urban Consumers)

0

20

40

60

80

100

120

140

160

180

1965 1970 1975 1980 1985 1990 1995 2000

1982-1984- = 100

Source: U.S. Department of Labor- Bureau of Labor Statistics

U.S. Unemployment Rate(Seasonally Adjusted on 12/31)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

1965 1970 1975 1980 1985 1990 1995 2000 2004

** 11/30/04

Source: U.S. Department of Labor- Bureau of Labor Statistics, http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

U.S. Prime Interest Rate(Jan.1)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1950 1960 1970 1980 1990 2000 2004Source: Board of Governors of the Federal Reserve System

Earnings & Educational Attainment (1999 Dollars)

$0 $20,000 $40,000 $60,000 $80,000 $100,000$120,000

Ph.D.

Professional

Master's

Bachelor's

Associate's

Some College

H.S. Grad.

Not H.S. Grad.

Source: U.S. Census Bureau

Full-Time Year-Round Workers

Foreign Direct Investment Confidence Index (Oct. 2004)

0 0.5 1 1.5 2 2.5

China

U.S.

India

Germany

Japan

Russia

Brazil

Mexico

Taiwan

Source: A.T. Kearney Consulting, http://www.atkearney.com/main.taf?p=5,3,1,89

Corporate Investors’ Interest in Global Investment

Scale = 0-3

Low Confidence High Confidence