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Chapter 3
The External Environment
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Chapter Topics
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Remote Environment
International Environment
Industry Environment
Industry Analysis and Competitive
Analysis
• Operating Environment
• Emphasis on Environmental Factors
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Ex. 3-1: The Firm’s External
Environment
•Economic
•Social
•Political
•Technological
•Ecological
Remote Environment (Global and Domestic)
Industry Environment (Global and Domestic)
•Entry barriers
•Supplier power
•Buyer power
•Substitute availability
•Competitive
rivalry
Operating Environment (Global and Domestic)
•Competitors
•Creditors
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THE FIRM
•Labor
•Suppliers
•Customers
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Economic Factors
• Concern the nature and direction of
economy in which a firm operates
• Types of factors
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General availability of credit
Level of disposable income
Propensity of people to spend
Prime interest rates
Inflation rates
Trends in growth of gross national
product
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Social Factors
• Beliefs, values, opinions, and lifestyles
of people
• Recent social trends
• Entry of large numbers of women into
labor market
• Accelerating interest of consumers and
employees in quality-of-life issues
• Shift in age distribution of population
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Political Factors
• Define legal and regulatory
parameters within which firms must
operate
• Types of factors
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Fair-trade decisions
Antitrust laws
Tax programs
Minimum wage legislation
Pollution and pricing policies
Administrative jawboning
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Technological Factors
• Focus on technological changes
affecting industry
• Types of changes
• New products
• Improvements in existing products
• Manufacturing and marketing techniques
• Role of technological forecasting
• Foresees advancements and estimating
their impact on organization’s operations
• Alerts managers to impending challenges
and promising opportunities
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Ecological Factors
• Ecology refers to the relationships
among human beings and other living
things and air, soil, and water
• Current concerns
• Global warming
• Loss of habitat and biodiversity
• Air, water, and land pollution
• Responsibilities of firms
• Eliminating toxic by-products of current
manufacturing processes
• Cleaning up prior environmental damage
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Ex. 3-7: Federal Ecological Legislation
Centerpiece Legislation
National Environmental Policy Act, 1969
Established Environmental Protection Agency; consolidated
federal environmental activities under it. Established Council
on Environmental Quality to advise president on
environmental policy and to review environmental impact
statements
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Ex. 3-7: Federal Ecological Legislation
(contd.)
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Air Pollution
Clean Air Act,
1963
Clean Air Act,
Amendments,
1965
Air Quality
Act, 1967
Clean Air Act,
Amendments,
1970 and 1977
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Solid Waste
Pollution
Solid Waste Disposal
Act, 1965
Resource Recovery
Act, 1970
Resource
Conservation and
Recovery Act, 1976
Surface Mining and
Reclamation Act,
1976
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Ex. 3-7: Federal Ecological Legislation
(contd.)
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Water Pollution
Refuse Act, 1899
Federal Water Pollution Control Act, 1956
Water Quality Act, 1965
Water Quality Improvement Act, 1970
Federal Water Pollution Control Act
Amendments, 1972
Safe Drinking Water Act, 1974
Clean Water Act, 1977
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Concept of Eco-Efficiency
• Definition
• Firms producing more useful products while
continuously reducing resource consumption and
pollution
• Benefits – why should firms implement an
environmental policy?
• Increasing demand for cleaner products by
customers
• More stringent environmental regulations
• Attracting employees who prefer to work for
environmentally conscious firms
• Availability of financing
• Governmental incentives
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Characteristics of Eco-Efficient
Companies
Proactive, not reactive
Encompassing, not
insular
Design in, not add on
Flexibility
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Ex. 3-8: Factors Used to Assess
the International Environment
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Economic Environment
Level of economic
development
Population
GNP
Per capita income
Literacy level
Social infrastructure
Natural resources
Climate
Membership in economic
blocs
Monetary and fiscal policies
Wage and salary levels
Nature of competition
Currency convertibility
Inflation and interest rates
Taxation systems
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Political System
Form of government
Political ideology
Stability of government
Strength of opposition parties
Social unrest
Political strife and insurgency
Governmental attitude toward
foreign firms
Foreign policy
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Ex. 3-8: Factors Used to Assess the
International Environment (contd.)
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Legal
Environment
Legal tradition
Effectiveness of
legal system
Treaties with
foreign nations
Patent trademark
laws
Laws affecting
business firms
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Cultural
Environment
Customs, norms,
values, beliefs
Language
Attitudes
Motivations
Social institutions
Status symbols
Religious beliefs
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Ex. 3-9: Forces Driving Industry
Competition
New
Entrants
Threat of new entrants
Bargaining power
of suppliers
Industry Competitors
Bargaining power
of buyers
Buyers
Suppliers
Rivalry Among
Existing Firms
Threat of substitute
products or services
Substitutes
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Competitive Force: Threat of Entry
• Seriousness of threat depends on
• Barriers to entry
• Reaction of existing firms
• Barriers to entry
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Economies of scale
Product differentiation
Capital requirements
Cost advantages independent of size
Access to distribution channels
Government policy
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Competitive Force: Suppliers
• A supplier group is powerful if:
• It is dominated by a few companies and
is more concentrated than industry it sells
to
• Its product is unique, or differentiated, or
has built up switching costs
• It is not obliged to contend with other
products for sale to industry
• It poses a threat of integrating forward
into industry’s business
• Industry is not an important customer of
supplier group
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Competitive Force: Buyers
• A buyer group is powerful if:
• It is concentrated or purchases in large volume
• Products purchased from industry are standard or
undifferentiated
• Products purchased from industry form a
component of its product, representing a
significant fraction of its cost
• It earns low profits, creating incentives to lower its
costs
• Industry’s product is unimportant to quality of
buyers’ products or services
• Industry’s product does not save buyer money
• Buyer poses credible threat of integrating
backward
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Competitive Force: Substitute Products
• Relevance of substitutes
• By placing a ceiling on prices charged,
they limit profit potential of an industry
• Substitutes deserving the most
attention are those
• Subject to trends improving their priceperformance trade-off with the industry’s
product
• Produced by industries earning high profit
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Competitive Force: Jockeying For
Position
• Tactics of competitive rivalry
• Price competition
• Product introduction
• Advertising slugfests
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What Causes Rivalry to be Intense?
• Numerous competitors or they are roughly
equal in size and power
• Slow growth in industry
• Product lacks differentiation or switching
costs
• High fixed costs or perishable product
• Capacity normally augmented in large
increments
• High exit barriers
• Rivals are diverse in strategies, origins, and
“personalities”
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Industry and Competitive Analysis
1. What are the boundaries of the
industry?
Questions
involved
in
designing
viable
strategies
2. What is the structure of the industry?
3. Which firms are our competitors?
4. What are the major determinants of
competition?
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Why a Definition of Industry
Boundaries is Important
• Helps executives determine arena in
which their firm competes
• Focuses attention on firm’s
competitors
• Helps executives determine key
factors for success
• Gives executives another basis on
which to evaluate their firm’s goals
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Sources of Difficulty in Defining
Industry Boundaries
Evolution of industries
over time creates new
opportunities and threats
Industry evolution creates
industries within
industries
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Industries are becoming
global in scope
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Issues in Defining an Industry
• What part of the industry corresponds to our
firm’s goals?
• What are the key ingredients of success in
that part of the industry?
• Does our firm have the skills needed to
compete in that part of the industry?
• Will the skills enable us to seize emerging
opportunities and deal with future threats?
• Is our definition of the industry flexible
enough to allow necessary adjustments to
our business concept as the industry grows?
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Characteristics of Industry Structure
• Structural attributes – Enduring
characteristics giving an industry its
distinctive character
• Variations among industries involves
examining
• Concentration – Extent to which industry sales
are dominated by only a few firms
• Economies of Scale – Savings firms within an
industry achieve due to increased volume
• Product Differentiation – Extent to which
customers perceive products of firms in industry
as different
• Barriers to Entry – Obstacles a firm must
overcome to enter an industry
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Variables in Identifying Competitors
• How do other firms define the scope of
their market?
• The more similar the definitions of firms, the
more likely the firms will view each other as
competitors
• How similar are the benefits the customers
derive from the products and services other
firms offer?
• The more similar the benefits, the higher the level
of substitutability between them
• How committed are other firms to the
industry?
• To size up commitment of potential competitors
to industry, reliable intelligence data are needed
concerning potential resource commitments
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Common Mistakes in Identifying
Competitors
• Overemphasizing current and known
competitors while ignoring potential
entrants
• Overemphasizing large competitors
while ignoring small ones
• Overlooking potential international
competitors
• Assuming competitors will continue
to behave in same way
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Common Mistakes in Identifying
Competitors (contd.)
• Misreading signals indicating a shift in
focus of competitors
• Overemphasizing competitors’
financial resources, market position,
and strategies while ignoring their
intangible assets
• Assuming all firms in industry are
subject to same constraints or are open
to same opportunities
• Believing purpose of strategy is to
outsmart competition, rather than
satisfy customer needs
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Operating Environment
The operating environment, also called the
competitive or task environment, comprises factors
in the competitive situation that affect a firm’s
success in acquiring needed resources or in
profitably marketing its goods and services
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Factors in the Operating
Environment
• Firm’s competitive position
• The composition of its customers
• Its reputation among suppliers and
creditors
• Its ability to attract capable employees
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Criteria Used in Constructing
Competitor Profiles
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Market share
Breadth of product line
Effectiveness of sales distribution
Proprietary and key-account
advantages
Price competitiveness
Advertising and promotion
effectiveness
Location and age of facility
Capacity and productivity
Experience
Raw material costs
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Financial position
Relative product quality
R&D advantages position
Caliber of personnel
General images
Customer profile
Patents and copyrights
Union relations
Technological position
Community reputation
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Customer Profiles
• Improves ability of managers to
• Plan strategic operations
• Anticipate changes in size of markets
• Reallocate resources to support forecasted
shifts in demand patterns
• Segmenting customers
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Geographic
Demographic
Psychographic
Buyer behavior
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Ex. 3-12: Major Segmentation
Variables for Industrial Markets
Demographic
• Industry
• Company size
• Location
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Operating
• Technology
• User-nonuser status
• Customer
capabilities
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Ex. 3-12: Major Segmentation
Variables for Industrial Markets (contd.)
Purchasing Approaches
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Purchasing-function organization
Power structure
Nature of existing relationships
General purchase policies
Purchasing criteria
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Ex. 3-12: Major Segmentation
Variables for Industrial Markets (contd.)
Situational Factors
• Urgency
• Specific application
• Size of order
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Perfect Characteristics
• Buyer-seller
similarity
• Attitudes toward risk
• Loyalty
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Factors Related to Assessing
Relationship With Suppliers
How costly are shipping charges?
Are suppliers competitive in terms of
production standards?
Are suppliers’ prices
competitive? Do they offer
quantity discounts?
Are suppliers reciprocally
dependent on the firm?
In terms of deficiency rates, are
suppliers’ abilities, reputations, and
services competitive?
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Factors Related to Assessing
Relationship with Creditors
• Do creditors fairly value and willingly
accept firm’s stock as collateral?
• Do creditors perceive firm as having an
acceptable record of past payment?
• A strong working capital position?
Little or no leverage?
• Are creditors’ loan terms compatible
with firm’s profitability objectives?
• Are creditors able to extend necessary
lines of credit?
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Factors Related to Acquiring Needed
Human Resources
Reputation as an
employer
Local employment
rates
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A firm’s access to needed
personnel is affected by
Availability of people
with needed skills
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