External Environment
Running header: EXTERNAL ENVIRONMENT
Understanding the External Environment: Able Corporation
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Understanding the External Environment
Companies realize to look only at internal activities of the firm can cause said companies
to miss opportunities to increase their presence in the markets and also cause a loss of
competitive advantage; as such, the company must also respond to immediate and remote
external environments. “The immediate external environment includes competitors, suppliers,
increasingly scarce resources, government agencies and their ever more numerous regulations,
and customers whose preferences often shift inexplicably,” according to Pearce and Robinson
(2005, p. 3). Technology, economic and social conditions, and politics are the variables
encountered in the remote external environment which management must deal with in order to
provide corporate value for its shareholders while understanding the benefits and threats in the
external business environment.
Able Corporation understands the factors that affect its internal decision-making
processes yet must also understand the external environment in which it operates, this being the
Portable Electric Power Tools Industry. Different factors, such as housing starts, expenditures for
residential construction, expenditures for commercial construction, and expenditures for home
repairs and improvement, affect the industry in which Able Corporation operates but are driven
by deeper factors such as interest rates, inflation rates, and foreign exchange rates. Able
Corporation must understand the problems with the housing market, interest rates,
unemployment rates, and exchange rates and how these affect the power tool industry.
External Environments
For a company to understand how to address strategic issues, the company must look at
the external environment in which it operates. All businesses “exist in an open system” in which
the companies “affect and are affected by external conditions that are largely beyond their
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control” (p. 7). This reasoning is why strategic management should not focus exclusively on
operations and should look outside of the organizational walls to find answers to market
fluctuations, decreased market share, and increased or decreased competitive advantage. Able
Corporation did not understand why its market share was at 40 percent and the company could
not achieve higher sales and increased market share in the power tool industry. Examining each
of the general economic indices that affect the power tool industry will provide insight for Able
to make strategic decisions placing the company in a more competitive position for continued
upward mobility in the power tool industry, whether such a position is in the personal consumer
power tools industry or the commercial power tools industry.
A Balancing Act
As with financial information, companies must learn how to properly research data to
ensure the proper use of information in making key strategic decisions. In the PEPT industry,
different economic indices affect the outcome of the purchase of power tools and other goods
required in the construction and maintenance of buildings, primarily residential buildings. The
current housing market is saturated with new homes that were built but not sold because of the
current economic downturn. In viewing the number of housing starts, the value of residential
construction put in place, the value of commercial construction put in place, and the expenditures
for residential improvements and repairs, Able Corporation can make decisions about what
component of the power tool industry it will focus on. We will examine the current trend of these
indices, historic data, and forecasts concerning the construction industry, including the impact on
the power tool industry.
The first step is viewing the number of housing starts for the United States. In 2003, the
number of housing starts was at 1,847,000; this figure increased in 2004 and 2005, with
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1,955,800 and 2,068,300 units, respectively. In 2006 and 2007, the number of housing starts
decreased to pre-2003 levels at 1,800,900 starts and 1,355,200 starts, respectively. This means
the applications for new construction fell in 2006, directly aligning with the downturn of the
housing market. The following defines the housing starts for 2003 to 2007:
Table 1-1: Housing Starts: 2003 to 2007. Retrieved January 18, 2009 from:
http://www.nahb.org/
However, a look at the housing starts is not a total picture of the home construction industry
because other factors provide more insight into what markets companies in the PEPT industry
should focus. The next step involves looking at expenditures in residential construction. In 2003,
expenditures were at a seasonally-adjusted average rate (SAAR) of $5,340,253 million for
residential construction, $2,751,632 million for commercial construction, and $707,000 million
for home repairs and improvements (U.S. Census Bureau).
Table 1-2: Expenditures for Residential Construction. Retrieved January 18, 2009, from http://www.census.gov
In 2004, residential expenditures increased to $6,378,884 million, commercial expenditures
increased to $2,857,470, and expenditures for home repairs and improvement increased to
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794,100 million. Expenditures for residential construction continued the upward trend in 2005
and 2006, at $7,326,331 million and $7,399,983 million, respectively; however, the downward
trend in the housing market made the put in place value of residential construction shrink to
$5,936,795 million in 2007.
Table 1-3: Expenditures for Commercial Construction. Retrieved January 18, 2009, from http://www.census.gov
Expenditures for commercial construction have continued to increase through 2005 to 2007, with
totals of $3,080,825 million, $3,579,691 million, and $4,282,100 million. Expenditures for home
repairs and improvement for 2005, 2006, and 2007 were $860,800 million, $914,200 million,
and $908,400 million, as displayed in the following table:
Table 1-4: Expenditures for Home Repairs and Improvements.
Retrieved January 18, 2009, from http://www.census.gov
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In examining the results, it appears that home repairs and improvements increased in 2007, even
with the reduction of expenditures for residential construction. Other market forces, such as
increasing mortgage rates, adjusted-rated mortgages (ARMs), and interest rates caused
consumers to be hesitant about continued building of new homes. This indicates that Able
Corporation should focus on consumer market, as the people making repairs to their existing
structures will continue to increase because of interest rate increases, foreclosure rates, and
lending institution unwillingness to provide loans for consumers.
Effects of Indices on the PEPT Industry
Examining data to ensure effective strategic implementation is one method of ensuring
competitive advantage. In combining the housing starts with the expenditure data, any company
in the PEPT industry would see a decrease in new home construction (indicated by the decrease
in housing starts) and an increase in expenditures for home repairs and improvements as an
indication that the housing market is saturated with new homes. Fewer customers spending on
the construction of new residential buildings means home construction is stalled and Able
Corporation and other members of the industry should focus on the home improvement market,
largely run by the “do-it-yourselfers” who make repairs to their existing home structures. The
increase in commercial construction is based on the different needs of companies in other
industries requiring buildings for their operations; as a result, the number of commercial
structures will continue to increase but the increase does not directly impact the PEPT industry
because commercial contractors go through industrial channels to purchase their equipment.
The Economy and Forecasting
The next step in the strategic management process, after the examination of historical
data, is the examination of current conditions and forecasts affecting an industry. A “firm’s
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strategic posture may have to be reevaluated in response to changes in any of the principal
factors that determine or affect its performance” (Pearce and Robinson, 2005, p. 18). Able
Corporation has examined the historical data but must view current data and forecasting of the
housing industry to gain insight as to what movement the company will make to gain more
market share in a segment of the industry that will continue an upward trend; in this case, the
industry is the consumer products industry. Able Corporation enjoys consumer success with its
circular saw and, through proper examination, Able Corporation could gain more market share in
this segment of the industry and other segments of the portable power tool industry.
In examining the economic conditions, a downward trend began in mid-2006 and has
continued to the present, as indicated in the following chart:
Table 1-5: U.S. Outlook: January 2009
In examining the data, the current state of the economy has slowed, as indicated by the growth
rates of the real gross domestic product, a decrease in disposable income, and an increase in the
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unemployment rate (currently at 7.2 percent). Mortgage rates have also increased and this
increase causes fewer consumers to purchase or build homes. As the forecasts indicate, the real
GDP will continue to contract throughout 2009, meaning productivity levels will continue to
decline as rising unemployment rates indicate a loss of production at U.S. companies. The 30year fixed mortgage rate decline will only be one-tenth of a percentage point, also causing
consumers to move away from the housing market. However, this is only one forecast on the
U.S. economy. Able Corporation would need to research different data delivery services to
receive different forecasts and adjust their plans according to a median of the economic
forecasts. This will ensure that Able Corporation examines the lowest and highest prediction
rates and can manage their operations while planning for long-term growth.
Moving Forward: Recommendations
The data provided throughout this paper has indicated the economy is still moving
downward. Able Corporation, as a small company, should focus on importing its materials for
the power tools from other countries and export its tools to other countries. The current U.S.
market is not healthy, as indicated by the current downward trend in productivity indices such as
the GDP. The U.S. market does not provide the opportunities for Able Corporation to increase
brand loyalty with U.S. consumers, as disposable income has decreased while unemployment has
increased across the nation. In positioning itself in the international marketplace, Able
Corporation can retain its market share in circular saws domestically while increasing demand
for its power tools globally.
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References
National Association of Home Builders. (2009). Annual Housing Starts (1978 – 2007). Retrieved
January 18, 2009, from the Web site:
http://www.nahb.org/generic.aspx?sectionid=819&genericcontentid=554&channelID=31
1&print=false
National Association of Realtors. (2009). U.S. Economic Outlook: January 2009. Retrieved
January 18, 2009, from the Web site:
http://www.realtor.org/wps/wcm/connect/fdc708004c910d10a21aa778e322d571/research
__forecast0109.pdf?MOD=AJPERES&CACHEID=fdc708004c910d10a21aa778e322d57
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Pearce, J.A., & Robinson, R.B. (2005). Strategic Management: Formulation, Implementation,
and Control (9th Ed.). New York: McGraw-Hill/Irwin.
U.S. Census Bureau. (2008). Construction Spending: November 2008. Retrieved January 18,
2009, from the Web site: http://www.census.gov/const/www/c30index.html
U.S. Census Bureau. (2008). Residential Improvements and Repairs Statistics. Retrieved January
18, 2009, from the Web site: http://www.census.gov/const/www/c50index.html