Miles A. Zachary
MGT 4380
 Lecture
 The relationship between an organization and its
environment
 Evaluating the general environment
 Evaluating the industry environment
 Strategic groups
 General environment exercise
 Short Exam Review / Q&A
 Group simulation time
 The environment is composed of the external
conditions and factors that affect an organization
 Two (2) sets of environments:
 General environment-includes overall trends and events
in society
 Social
 Demographic
 Economic
 Industry environment-consists of multiple
organizations that collectively compete by providing
similar goods, services, or both
 Any action a firm takes changes the world around
them
 Most firms are limited to affecting their own industry
 Some firms have the ability to affect the more general
environment (e.g. Apple, Intel, IBM)
 Why is understanding the environment important?
 Provides access to resources (open systems approach)
 Source of opportunities and threats
 Shape strategic decisions (e.g. goals set, creating a
business)
 Opportunities are events and trends that create
chances to improve an organization’s performance
level
 Threats are events and trends that may undermine an
organization’s performance
 Note that both opportunities and threats are based on
external conditions; strengths and weaknesses are
based on internal conditions
 Most environmental events and trends create
opportunities and threats for firms—the question is
“which are important?”
 Evaluating the general environment involves looking
beyond a firm’s industry to the larger environmental
landscape
 A simple way to compartmentalize a general
environment analysis is using PESTEL
 PESTEL is an anagram that examines six different parts
of the general environment
 PESTEL stands for (1) political, (2) economic, (3)
social, (4) technological, (5) environmental, and (6)
legal trends
 Political Factors
 Tax policies
 Changes in trade restrictions and tariffs
 Government stability
 Economic Factors
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Interest rates
Inflation
Currency markets
Unemployment rates
Disposable income
General growth or decline
 Social Factors
 Demographics
 Cultural trends
 Obesity
 Consumer activism
 Technological Factors
 Revolutionary technological changes (e.g. internet,
USB)
 Automation
 Delivery
 Software
 Environment Factors
 Natural disasters
 Weather patterns
 Legal Factors
 Legislation
 Torts
 Discrimination
 Antitrust
 The industry a firm operates influences a firm’s
strategy
 Porter’s 5 Forces analysis is a tool from which a firm
can analyze the factors that exert industry pressure
 Competitor Rivalry
 Threat of New Entrants
 Threat of Substitutes
 Buyer Power
 Supplier Power
 Firms face competitive pressures and attempt to
maneuver around competitors using a variety of
actions
 Pricing
 Marketing
 New Product Development
 Scale/Capacity
 Operations
 Signaling
 Other
 The competitive rivalry within a given industry is high
given:
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Firms are roughly equal in size and power
Industry growth rate is slow
Competitors are not suitably differentiated
Fixed costs are high
Exit barriers are high
Existence of excess capacity
Capacity needs to expand to be efficient
Perishable products
 These factors are often a function of market structure
(e.g. monopoly, oligopoly, pure competition, etc…)
 These are threats from possible firms entering a
competitive industry
 Often a function of:
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Economies of scale
Capital requirements
Access to distribution channels
Government policies
Differentiation
Switching costs
Expected retaliation
Cost advantages independent of size (e.g. patents,
trademarks, brands, etc…)
 Substitutes are offerings from other industries that
fulfill the same need or a very similar need as an
industry’s existing products or services
 Substitutes can be disastrous to industries
 In most industries, firms must continually innovate to
avoid being substituted for another industry’s product
or service
 Suppliers provide inputs that competitors in an
industry need to create goods and services
 Suppliers can gain power if:
 Suppliers are few in number and highly concentrated
 No viable substitutes exist
 Industry members rely heavily on suppliers
 High switching costs
 A suppliers products are differentiated
 Suppliers
 While buyers in most markets are “price-takers”,
buyers can still leverage power over industry
competitors when:
 Few buyers exist relative to suppliers
 When goods/services are standardized or
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undifferentiated
Little to no switching costs
High percentage of buyer’s costs; buyers search for
better
Buyers are able to backward integrate into the market
Competitor goods/services are of little importance
(elastic demand)
 Assumes a zero-sum competitive environment
 When firms make a profit, they do so at the cost of
another firm
 Relationships are depicted as adversarial
 Ignores strategic alliances or joint-venture relationships
 Similarly, suppliers and buyers are depicted as
adversarial
 Many firms must forge valuable relationships with their
suppliers to increase profitability
 Strategic groups are sets of firms within a given
industry that follow similar strategies
 Differ in important ways from members of other
groups
 Strategic groups are important because:
 Often identify a firm’s closest rivals
 Different strategies pursued by firms in a given group
show alternatives to success (equifinality)
 Gaps in the map can reveal gaps in the industry; areas
were entrepreneurs or entrepreneurial firms can
capitalize on