Welcome to Class 4
Part One
Chapter 2
Business Environments are
divided into two
(2) primary Categories
External & Internal
Business Environments
General
External
Competitive
Environments
Resources
Internal
Leadership
The external environment
1. Encompasses all issues, occurrences, trends, etc. that are
peripheral to the corporation
2. It is beyond the direct control of the TMT.
The internal environment
1. Encompasses all issues, occurrences, trends, etc. that are
within the confines of the organization
2. It generally is “somewhat” within the control of the TMT.
Both environments exert significant influence over the
formation of a company's strategy and its degree of success.
Environments Change
The external environment = GENERAL & COMPETITIVE
The internal environment = RESOURCES & LEADERSHIP
Environments can change rapidly
changes in corporate strategies may be required
 Predicting the extent, direction, and speed of environmental change
with 100% of precision is difficult to – impossible.
 Abrupt environmental changes can quickly transform strategic plans
from effective to obsolete.
 A firm must be prepared to rapidly adapt to unexpected changes since
this can mean the difference between success and failure.
 Scenario Models facilitate rapid adaptation to changing
environments
Scenario Models
Scenario Models:
1. Are tools that can aid in the rapid adaptation to environmental changes.
2. They help TMTs prepare for a wide range of possible future
conditions from the highly likely to possible but not expected.
3. They are the first step in the preparation of contingency strategies.
4. LESS LIKELY to occur but "could happen" scenarios are refined into
alternate models which form the basis for Contingency Strategies.
 Scenario Models are sets of potential environmental conditions that
range from very likely to possible but unlikely.
 Contingency Strategies are alternative strategic plans to match the
conditions highlighted in scenario models.
The General Environment
External
Environment
General
Environment
Competitive
Environment
The Five Factors of the
General Environment
 (1) Sociocultural
 (2) Demographic
 (3) Economic
 (4) Technological
 (5) Political/Legal
Sociocultural
General
Environment
Political/Legal
Technological
Demographic
Economic
Changes in one General environmental factor
can influence
changes in others.
For example a weak economy can influence Political/Legal positions.
Sociocultural Factors
 Sociocultural factors relate to a country's:
1.
2.
3.
4.
5.
Dominant religions
The population's general desire for leisure-time
Attitudes toward consumerism
Environmentalism
Gender roles in society and business.
 In general, sociocultural factors are characterized by
 The lifestyles
 Values
 Belief systems of populations
Demographic Factors
 Demographic factors pertain to changes:
1. In the population size of a country
2. Geographic distribution of people
3. Ethnic mix
4. Income distribution
5. Average age
6. Number of people in the family, etc.
 For example, American families are getting smaller, the
population is getting older, individuals are getting heavier, and
the Hispanic population is the fastest growing part of the
population.
Economic Factors
 Economic factors relate to a country's:
1. Inflation or deflation rates
2. Interest rates
3. Tariffs
4. Balance of trade issues
5. Growth of national economies
6. Exchange rates
7. Unemployment rates
8. Labor availability
9. Gross domestic products
10. Savings rates, etc.
Technological Factors
 Technological factors pertain to a country’s:
1. Reception to innovation
2. Strength of cultural discouragement for “new” things.
3. Rate of innovation, inventions, patents
Some cultures reject technological advances while
others enthusiastically embrace new technology.
Political/Legal Factors
 Political/Legal Factors center on:
1.
2.
3.
4.
5.
6.
The political stability of a country
Its legal system
Number of Antitrust laws
Success of enforcement
Philosophies of regulations vs deregulation
General attitude toward business.
The Competitive Environment
External
Environment
General
Environment
Competitive
Environment
Competitive Environment:
Nine Factors
 (1) Customers
 (2) Suppliers
 (3) Unions
 (4) Associations
 (5) New Entrants
 (6) Interest Groups
 (7) Substitutes
 (8) Competitors
 (9) Creditors
Customers
Suppliers
Creditors
Competitors
Competitive
Environment
Substitutes
Unions
Associations
Interest
Groups
New
Entrants
Factors that AMPLIFY COMPETITIVE
INTENSITY
1. High fixed costs
(costs that cannot be eliminated easily as volume decreases)
2. High storage costs
3. Lack of differentiation between products or services
4. Low customer switching costs
(customer can switch suppliers without significant cost or
inconvenience)
5. High exit barriers for competitors
(difficult for a firm to leave a particular industry)
Competitive Environment &
Porter's Five Forces
 (1) Rivalry among Competing Firms
 (2) Bargaining Power of Buyers
 (3) Bargaining Power of Suppliers
 (4) Threat of Substitutes
 (5) Threat of New Entrants
Rivalry among
Competing
Firms
Bargaining
power of
Threat of
New Entrants
Buyers
Porter's
Five
Forces
Threats of
Substitutes
Bargaining
power of
Suppliers
Rivalry of Competing Firms
Intensity increases when:
1. The size of markets shrinks or ceases to grow.
2. When there are numerous competitors seeking the
same customers
Consequence of Intensity:
1. Prices may fall lowering revenues
2. More favorable shipping terms offered to customers
3. Selling firms may offer more relaxed payment terms
4. Increased expenses as services to customers added
Buyer Power is high when…
1. Rivalry between suppliers is intense
2. Buyers for the products or services are few
3. Buyer is the primary customer of the supplier
4. Buyer is extremely large and purchases large quantities or
major items
5. Switching costs are low for buyer
(changing suppliers not difficult or costly)
6. Buyer is capable of backward integration
(may enter the sellers industry & supply own needs).
Supplier Power is high when
1. There are few suppliers
2. Demand exceeds availability
3. There are few or no substitute
4. Purchases are crucial to the buyer’s business
5. Buyers are small purchasers
6. Supplier has sufficient customers
7. High switching costs for the buyer
(difficult and costly to find another supplier)
8. Supplier could forward integrate
(supplier may enter the industry of the buyer and become a direct
competitor).
Threats of Substitutes is high when
1. The customers have low switching costs
2. Price of the substitute product or service is lower
3. Quality and suitability of the substitute is comparable
Threats of new entrants (Newbies)
is high when
1. Low entry barriers
2. Lack of differentiation of current products or services
3. Lack of brand loyalty by consumers
4. Low switching costs by customers
5. Low government intervention
a) few or no licensing
b) no permits required
c) industry minimally regulated
6. Easy access to distribution channels
7. Favorable supplier welcome
End of Part One: Business Environments
 Re-Read Chapter Two
Relax! 