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Chapter
2
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The External
Environment
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Learning Objectives
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After studying Chapter 2, you will know:
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how environmental forces influence organizations, as well as
how organizations can influence their environments
how to make a distinction between the macroenvironment and
the competitive environment
why organizations should attend to economic and social
developments in the environments
how to analyze the competitive environment
how organizations respond to environmental uncertainty
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The External Environment
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Organizations are open systems
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affected by, and in turn affect, their external environments
External environment
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all relevant forces outside a firm’s boundaries
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relevant - factors to which managers must pay attention
two elements comprise the external environment
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competitive environment - immediate environment surrounding
a firm
macroenvironment - fundamental factors that generally affect all
organizations
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The External Environment
Laws and
politics
New
Entrants
Suppliers
Organization
Rivals
Economy
Buyers
Competitive
Environment
Macroenvironment
Technology
Demographics
Substitutes
Social
values
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The Macroenvironment
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The macroenvironment
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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
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impose strategic constraints and provide opportunities
regulators - specific government organizations in a firm’s
more immediate task environment
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have the power to investigate company practices and take legal
action to ensure compliance with the laws
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The Macroenvironment (cont.)
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The economy
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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
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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
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The Macroenvironment (cont.)
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Demographics
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measures of various characteristics of the people comprising
groups or other social units
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workforce demographics must be considered in formulating
human resources strategies
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age, gender, family size, income, education, occupation
population growth influences the size and composition of the
labor force
immigration also is a significant factor
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increasing diversity of the labor force has both advantages and
disadvantages
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must assure equal employment opportunity
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The Macroenvironment (cont.)
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Social issues and the natural environment
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management must be aware of how people think and behave
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the role of women in the workplace
providing benefits for domestic partners of employees
protection of the natural environment
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Competitive Environment
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Competitive environment
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comprises the specific organizations with which the
organization interacts
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Michael Porter - defined the competitive environment
successful managers:
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react to the competitive environment; and
act in ways that actually shape or change the competitive
environment
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Competitive Environment
New
entrants
Suppliers
Rival firms
Customers
Substitutes
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Competitive Environment (cont.)
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Competitors
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competitors within an industry must deal with one another
organizations must:
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identify their competitors
analyze how competitors compete
react to and anticipate competitors’ actions
competition is most intense:
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where there are many competitors
when industry growth is slow
when the product or service cannot be differentiated
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Competitive Environment (cont.)
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Threat of new entrants
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barriers to entry - influence the degree of threat
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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
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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
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Competitive Environment (cont.)
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Suppliers
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provide the resources needed for production
powerful suppliers can reduce an organization’s profits
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international labor unions are noteworthy suppliers
dependence on powerful suppliers is a competitive
disadvantage
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power of supplier determined by:
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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
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Competitive Environment (cont.)
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Customers
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purchase the products or services the organization offers
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customer service - giving customers what they want, the way
they want it, the first time
disadvantageous to depend too heavily on powerful
customers
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final consumers - purchase products in their final form
intermediate consumers - buy raw materials or wholesale
products before selling them to final consumers
powerful customers make large purchases and/or have other
suppliers
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Environmental Analysis
Environmental
Scanning
Scenario
Development
Benchmarking
Forecasting
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Environmental Analysis
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Environmental uncertainty
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lack of information needed to understand or predict the future
uncertainty arises from two related factors
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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
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Environmental Analysis (cont.)
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Environmental scanning
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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
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attractive environments - give firm a competitive advantage
unattractive environments - put firm at a competitive
disadvantage
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Attractive and Unattractive Environments
Environmental
Factor
Attractive
Unattractive
Competitors
Many; low industry growth;
equal size; commodity
Few; high industry growth;
unequal size; differentiated
Threat of entry
High threat; few entry
barriers
Low threat; many barriers
Substitutes
Many
Few
Suppliers
Few; high bargaining power
Many; low bargaining
power
Customers
Few; high bargaining power
Many; low bargaining
power
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Environmental Analysis (cont.)
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Scenario development
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scenario - a narrative that describes a particular set of future
conditions
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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
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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
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Environmental Analysis (cont.)
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Benchmarking
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process of comparing the organization’s practices and
technologies with those of other companies
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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
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Responding To The Environment
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Adapting to the environment
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company adjusts its structures and work processes
in uncertain environment caused by complexity, companies
tend to decentralize decision making
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empowerment - process of sharing power with employees
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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
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bureaucracy - suited for stable environments (low dynamism)
organic - provides flexibility required for changing environments
(high dynamism)
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Four Approaches for Managing Uncertainty
Stable
Complex
Simple
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Dynamic
Decentralized
Bureaucratic
(Standardized skills)
Decentralized
Organic
(Mutual adjustment)
Centralized
Bureaucratic
(Standardized work
processes)
Centralized
Organic
(Direct supervision)
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Responding To The Environment (cont.)
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Adapting to the environment (cont.)
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Adapting at the boundaries
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buffering - creating supplies of excess resources in case of
unpredictable needs
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smoothing - leveling normal fluctuations at the boundaries of
the organization
Adapting at the core
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flexible processes - permit adaptation of the technical core
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buffers created on both the input and output side of the business
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
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Responding To The Environment (cont.)
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Influencing your environment
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proactive responses aimed at changing the environment
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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 mange the external
environment
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at an organizational level, establish strategic alliances, partnerships,
joint ventures, and mergers with competitors
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Independent Action
Strategy
Definition
Competitive
aggression
Exploiting a distinctive competence or improving
internal efficiency for competitive advantage
Competitive
pacification
Independent action to improve relations with
competitors
Public relations
Establishing and maintaining favorable images in the
minds of those making up the environment
Voluntary action
Voluntary commitment to various interest groups,
causes, and social problems
Legal action
Company engages in private legal battle with
competition
Political action
Efforts to influence elected representatives to create a
more favorable business environment
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Responding To The Environment (cont.)
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Changing the environment you are in
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strategic maneuvering - conscious effort to change the
boundaries of the competitive environment
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prospectors - companies that continuously change the boundaries
of their task environments by:
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seeking new products and markets
diversifying and merging
acquiring new enterprises
defenders - companies that stay within a stable, more- limited
product domain as a strategic maneuver
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Strategic Maneuvering
Strategy
Definition
Domain
selection
Entering industries or markets with limited
competition or regulation and ample suppliers and
customers; entering high growth markets
Diversification
Investing in different types of business, manufacturing
different types of products or geographic expansion
to reduce dependence on single market or technology
Merger and
acquisition
Combining two or more firms into a single enterprise;
gaining possession of an ongoing enterprise
Divestiture
Selling one or more businesses
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Choosing A Response Approach
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Change appropriate elements of the environment
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focus on elements that:
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Choose responses that focus on pertinent elements of the
environment
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cause the company problems
provide the company with opportunities
allow the company to change successfully
focus on competitive aggression and pacification
Choose responses that offer the most benefit at the lowest
cost
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focus on both short- and long-term financial considerations
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