Topic 2
The External
Environment
3 “Levels” to the External Environment
• Remote Environment
– Domestic & International Environment
• Industry Environment
– Industry Analysis and Competitive Analysis
• Operating Environment
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
THE FIRM
•Labor
•Suppliers
•Customers
Remote …
Economic Factors
• Concern the nature and direction of the economy
in which a firm operates
• Types of factors
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General availability of credit
Prime interest rates
Level of disposable income
Propensity of people to spend
Inflation rates
Trends in growth of gross national product
Remote …
Social Factors
• Include 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
Remote
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
Remote
Technological Factors
• … focus on technological changes affecting
industry
• Types of changes
• New products
• Improvements in existing products
• Manufacturing and marketing techniques
Remote
Ecological Factors
• … involve 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
Remote
Assessing the International Environment
• Assess each non-domestic market, on the
same factors … though the importance of
each may differ
• Notably …
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Economic Environment
Political System
Legal Environment
Cultural Environment
»
(we will talk more about these)
Forces Driving
(#2) Industry Competition
Potential
Entrants
Bargaining
power
of suppliers
Threat of new entrants
Industry Competitors
Bargaining
power
of buyers
Buyers
Suppliers
Rivalry Among
Existing Firms
Threat of substitute
products or services
Substitutes
Porter’s
5 forces Model
Industry Competition
Threat of Entry
• Seriousness of threat depends on
– Reaction from 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
Industry Competition
Suppliers
• A supplier group is powerful if:
• It is dominated by a few companies and is more
concentrated than industry to which it sells
• Its product is unique, or differentiated, or has built up
switching costs
• It poses a threat of integrating forward into industry’s
business
• Industry is not an important customer of supplier group
Industry Competition
Buyers
• A buyer group is powerful if:
• It is concentrated or purchases in large volume
• Products purchased from industry are standard or
undifferentiated
• Industry’s product is unimportant to quality of buyers’
products or services
• Buyer poses credible threat of integrating backward
Industry Competition
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 price-performance
trade-off with the industry’s product
• Produced by industries earning high profit
Industry Competition
Rivalry
• Tactics of competitive rivalry
• Price competition
• Product introduction
• Advertising slugfests
• What Causes Rivalry to be Intense?
– Size, slow growth, homogeneous products, high exit
barriers ….
Characteristics of Industry Structure
• Structural attributes –Characteristics that
give an industry its distinctive character
• Variations among industries involves
examining
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Concentration
Economies of Scale
Product Differentiation
Barriers to Entry
***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
the same way
Operating Environment (#3)
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
Factors in the
Operating
Environment
• Firm’s competitive position …
– Key success factors? ... market share, breadth of product
line, experience, financial position, product quality,
technological position, community reputation, etc.
• The composition of its customers
– Geographic, demographic, behavioral
• Reputation among suppliers and creditors
• Ability to attract capable employees