The External Environment (Part One)

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• The External Environment (Part One)
• Agenda
• 1. Three Levels of the Environment
• 2. Industry
• a. Definition
• b. Segmentation
• c. Characteristics
• Economic Traits,
• Structure
• Driving Forces
• Key Success Factors

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A Framework for the Strategy Making Process
I m p l e m e n t a t i o n
Vision and Mission
Corporate Strategy
P e r f o r m a n c e
Managers Mental Models (Beliefs Understanding
Market Position
Business Strategy
Set Objectives
Functional Strategy
Business Definition
Decisions about
Feedback
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External Environment Macro Industry Operating
Company Mission and Objectives
Strategic Options and Choice
Desired?
Possible?
Internal Environment Resources Current
Strategy Costs
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Macro Environment
Industry Environment
Operating Environment
Firm
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Macro Environment Factors
Economic Technological Political/Legal Socia
l/Cultural
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Economic Factors
The state of the macroeconomic environment
determines the general health and well being of
the economy. This in turn affects a companys
ability to earn an adequate rate of
return. Examples GDP trends, interest rates,
money supply, inflation unemployment levels,
wage/price controls, energy availability and
costs, disposable and discretionary
income. Globally Monetary and Fiscal policies,
currency convertibility, exchange rates, economic
development, political economy
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US Unemployment Rates
1996 5.4
1997 4.7
1998 4.4
1999 4.0
2000 3.9
2001 5.7
2002 6.0
2003 5.7
2004 5.4
2005 5.1
2006 4.6
Source Bureau of Labor Statistics (US Government)
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Unemployment Rates (2006)

• Lowest
• Hawaii (2.4)
• Utah (2.9)
• Nebraska (3.0)
• Virginia (3.0)

• Highest
• Michigan (6.9)
• Alaska (6.7)
• South Carolina (6.5)
• District of Columbia (6.0)

Source Bureau of Labor Statistics (US Government)
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Technological Factors
This factor deals with the general technological
infrastructure, the rate of change in
technology, and those things impacting the
development and introduction of new
technologies. Examples Total government
spending for RD, Total industry spending for
RD, focus of technological efforts, patent
protection, new developments in technology
transfer, productivity improvements through
automation. Global Regulations on technology
transfer, information flow infrastructure, patent
and trademark protection.
1. Nanotechnology sun block, stain-resistant
clothing, power transmission, disease diagnosis
and treatment. 2. Web-enabled telephone
technology
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Barbados Technological FactorsSource World
Bank (2003)
Number of Phones per 100 people 86 Personal
Computers per 1000 people 104 Internet Users
per 1000 people 371 (up from 112)
Haiti Technological FactorsSource World Bank
(2003)
of Telephones per 100 people 3 of Internet
users per 1000 people 18 (up from 10)
Definition Internet users are people with access
to the worldwide network.
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Political/Legal Factors
These factors define the legal and regulatory
parameters within which a firm must
operate. Examples Antitrust regulations,
environmental protection, tax laws, employment
laws, stability of government, foreign trade
protection Global Form of government, political
ideology, protectionist sentiment, terrorist
activity, legal system, governments
attitude toward foreign firms.
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New Bankruptcy Filings (Through Sept, 2006)
Source Administrative Office of the U.S. Courts
Year Business Non-Business Total
2006 27,333 1,085,209 1,112,542
2005 34,222 1,748,421 1,782,643
2004 34,817 1,584,170 1,618,987
2003 36,183 1,625,813 1,661,996
2002 39,091 1,508,578 1,547,669
2001 38,490 1,398,864 1,437,354
2000 36,065 1,226,037 1,262,102
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Social/Cultural Factors
This category of factors describe the beliefs,
values, attitudes, opinions, and lifestyles of
persons in the firms external environment as
developed from cultural, demographic,
religious, educational and ethnic
conditioning. Examples Lifestyle changes,
career expectations, age distribution, regional
shifts in population, birth rates, life
expectancies, growth rate in population, consumer
activism, rate of family formation. Global
Human rights, literacy levels, language, social
institutions, skill level of the workforce
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Obesity Trends Among U.S. AdultsBRFSS, 1991,
1996, 2003
(BMI ?30, or about 30 lbs overweight for 54
person)
1996
2003
No Data lt10 1014
1519 2024 25
Source Center for Disease Control
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Obesity Trends (2004)
Source Center for Disease Control
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Obesity Trends (2005)
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2006 UB Obesity Report Card
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Industry Environment
Dominant Economic Traits Industry
Structure Driving Forces Key Success
Factors Industry Life Cycle Competitive Forces
(Porters Five Forces)
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Operating Environment
Specific Competitors Specific Customers Specific
Suppliers Specific Pools of Labor Specific
Creditors
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What is an Industry? How do we define it? Where
does one end and another begin? Why are they
important to define?
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Segmentation
What is it? What does it mean in a marketing
context? Why is it important to strategic
management?
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Segmentation
1. Helps firms to determine the relative
attractiveness of different segments and
different Key Success Factors. 2. Helps firms to
appropriately classify competitors into
groups and determine direct and indirect
competitors. 3. Helps firms to predict behavior
of individual firms.
Impending Competitors
Invisible Competitors
Immediate Competitors
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Industry
Segments
Markets
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Segmentation can be based on
Characteristics of the buyers industrial,
household, distribution channel, geographic
location. Characteristics of the product size,
price, product features, technology design,
inputs used, performance characteristics, pre/post
sale service. Segmentation impacts how
companies view the competitive landscape!
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Aerospace and Defense Industry Broadly Defined
Key Segments
Military Weapons
Commercial Aircraft
Space (Rockets and Satellites)
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Aerospace Industry
Commercial Aircraft
Further Segmentation
Large Commercial Jets (49 Billion)
Maintenance Repair and Overhaul (36.4 Billion)
Business and Regional Aircraft (21.1 Billion)
Jet Engines (33.1 Billion)
Civil Avionics (11.2 Billion)
(Source Standard and Poors Nov. 2006)
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Economic Traits
A set of dimensions that characterize the
industrys cost, revenue and profit
potentials. Examples market size, types of
distribution channels used to access customers,
economies of scale, economies of learning, pace
of technological change, capital requirements,
product differentiation, presence of vertical
integration.
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Economic Traits (2006) Commercial Aircraft
Market Size (Defense and Aerospace) 468
billion Market Size (Commercial aircraft) 151
billion (slow growth) Types of Distribution
Channels Few (mostly direct) Economies of
Scale Present Capital Requirements Extremely
High Product Differentiation High (needs
explanation) Presence of Vertical Integration
Yes (Boeing and Airbus also produce jet
engines)
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Industry Structure
Industry Structure refers to those enduring
characteristics that give an industry its
distinctive character. Consolidation/Fragmentatio
n Concentration Economies of Scale Product
Differentiation Barriers to Entry/Exit Informati
on Availability
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Industry Structure (Commercial Aircraft)
Oligopoly Competition (Boeing/45 and
Airbus/55) Concentration (Yes) Economies of
Scale (Present) Product Differentiation (High)
Barriers to Entry/Exit (Extremely High)
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Driving Forces
Driving Forces are conditions in the industry
environment that create significant and lasting
change in the industrys structure and
competitive environment. Examples long-term
growth, technology and rate of technological chang
e, product innovation, globalization, diffusion
of technical know-how, changes in target market
or how a product is used.
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Driving Forces Commercial Aircraft
Driving Forces Long-Term Airline Industry
Profitability Capacity Issues in Airline
Industry Fuel Prices Air Traffic Forecasts Price
Pressure from Customers (Delta, Northwest,
etc) Globalization Presence of Low Cost Air
Carriers
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Key Success Factors
Industry specific resources or processes that
firms competing in a particular industry must
either possess or have some competence in doing
in order to be profitable and ultimately survive.
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Key Success Factors Commercial Aircraft
Key Success Factors Excellence in RD Effective
Production Utilization Free Cash Flow
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US Bicycle Industry
Key Success Factors can differ between an
industry segments.
Key Segments Low-Priced bikes sold primarily
through department and discount
stores. Medium-Priced bikes sold primarily under
the manufacturer's name and distributed main
through specialty bicycle stores High-priced
bikes for enthusiasts Childrens bikes and
tricycles sold primarily through toy stores.