Chapters 1 and 2

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CHAPTER 2 The Environment and External
Stakeholders
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Learning Objectives

• Differentiate between the broad and operating
  environments
• Analyze the various components of the broad and
  operating environments
• Explain how managers can use information from
  environmental analysis to help devise strategies
  for their firms
• Describe each of the five major forces that drive
  competition in an industry
• Evaluate important stakeholders on the basis of
  their interest in and power over a firm
• Understand the forms of inter-organizational
  relationships and how they can be used to
  increase competitiveness

3
The Organization, Its Primary Stakeholders the
Broad Environment
The Broad Environment
Technological Influences
Socio-cultural Influences
The Operating Environment
Competitors
Local Communities
Activist Groups
The Organization
Suppliers
Customers
Owners/Board of Directors Managers Employees
The Media
Unions
Financial Intermediaries
Government Agencies and Administrators
Economic Influences
Political/Legal Influences
4
External Environment

• Stakeholders and forces outside the traditional
  boundaries of the firm they can be divided into
  the board and operating environments

5
Major Socio-cultural Issues in the U.S.

• Role of Government in Health Care and Child Care
• Declining Quality of Education
• Legality of Abortion and Stem-Cell Research
• Terrorism and Levels of Crime in General
• Security of Travel and Public Places
• Importance and Role of the Military
• Levels of Foreign Investment/Ownership in the
  U.S.
• Social Costs of Restructuring, Especially Layoffs

6
Major Socio-cultural Issues in the U.S.

• Pollution and Disposal of Toxic and Non-Toxic
  Wastes
• General Increase in Environmental Awareness
• Drug Addiction and Drug Traffic
• Continued Migration Toward the Sun Belt States
• Graying of America
• AIDS and Other Health Problems
• Major Global Issues
• Immigration Restrictions and Programs

7
Why Monitor Society?

• Change opportunities
• Avoid being called a bad corporate citizen
• A good reputation can lead to increased demand or
  business opportunities
• Accurate assessment can sometimes help firms
  avoid restrictive legislation

8
Global Economic Forces to Monitor and Predict

• Economic Growth
• Influences consumer demand, cost of factors of
  production, availability of factors of production
  (especially labor and scarce resources)
• Interest Rates
• Influences cost of capital for new projects, cost
  of refinancing existing debt, consumer demand
  (due to customer ability to finance purchases)
• Inflation
• Influences interest rates, cost of factors of
  production, optimism or pessimism of stakeholders

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Global Economic Forces to Monitor and Predict

• Exchange Rates
• Influences ability to profitably remove profits
  from foreign ventures, government policies
  towards business
• Trade Deficits
• Influences government policies, incentives, trade
  barriers

10
Political/legal Forces

• New Laws
• New Regulations
• Current Administrative Policies
• Government Stability
• Wars
• International Pacts and Treaties

11
Government Influences on Organizations in the U.S.
Federal, State and Local Regulators (enforce
regulations)
Federal, State and Local Revenue Collectors (colle
ct taxes and fees, grant licenses)
Federal, State and Local Law Makers (create laws,
regulations, taxes, agencies, incentives)
The Organization
Federal, State and Local Courts (enforce laws and
regulations, impose fines and penalties, settle
disputes, restructure, protect
12
Technological Forces

• Technology is knowledge about products and
  services and the way they are made and delivered
• Organizations should monitor
• New Production Processes
• New Products/Product Ideas
• Current Process Research Efforts
• Current Product Research Efforts
• Scientific Discoveries that May Have an Impact
• Characteristics of innovation
• New innovations often emerge from existing
  technologies
• A dominant design will eventually be widely
  adopted
• Radical innovations often come from outside the
  industry

13
From Analysis of the Broad Environment to
Development of Alternative Strategies

• For each key influence found during analysis of
  the broad environment, determine whether it is
• An opportunity
• A threat
• Neutral
• Then determine which strategies the firm might
  pursue in response to each influence, if action
  should be taken at all
• This is one way to generate ideas regarding
  future strategies the firm might pursue

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The Organization and Its Operating Environment
The Operating Environment
Local Communities
Activist Groups
Competitors
Customers
Suppliers
The Organization
The Media
Unions
Financial Intermediaries
Government Agencies and Administrators
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Five Forces of Industry Competition
Threat of new entrants
Bargaining power of customers
Bargaining power of suppliers
Threat of substitute products or services
Source Adapted with the permission of the Free
Press, an imprint of Simon Schuster Adult
Publishing Group (see text for complete reference)
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Economic Power of Customers

• Customers are more powerful if
• They are few in number
• They make high-volume purchases
• They are buying undifferentiated products
• They are highly motivated to get good deals
  (i.e., earn low profits or buy a lot from the
  industry)
• They can easily vertically integrate backward and
  become their own suppliers
• They are not very concerned about quality
• They have an information advantage over the
  suppliers
• They are well organized

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Economic Power of Suppliers

• Suppliers are more powerful if
• They are few in number
• They sell products/services that are not easily
  substituted
• They do not sell a large percentage of their
  products/services to the buying industry
• They have a dependent customer
• They sell products/services that are
  differentiated
• They can easily vertically integrate forward and
  become their own customers
• They have an information advantage relative to
  their buyers
• They are well organized

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Industry Competition

• A high level of competition is expected when
• There are many competitors and none of them is
  dominant
• Slow industry growth
• Hard to differentiate products
• High fixed costs exist
• High exit barriers exist (what is lost if you
  leave the industry)
• Terms to describe industry competition
• A monopoly is a situation in which one firm is
  the only significant provider of a good or
  service
• An oligopoly exists when an industry contains a
  few very large firms (very common in established
  industries)
• Hyper-competition is a condition of rapidly
  escalating competition

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Entry Barriers

• Some common entry barriers include
• Economies of scale
• High capital requirements
• High levels of product/service differentiation
• Limited access to distribution channels
• Inimitable resources
• Government policies or regulations that
  discourage new entry

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Substitute Products

• Substitutes are products or services provided by
  another industry that can be readily substituted
  for an industrys own products or services
• Substitutes place a ceiling on the price that can
  be charged
• They can also set new performance standards

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Typical Roles of Various Stakeholders
Managers w/stock Directors w/stock Stockholders M
anagers/directors Venture partners Creditors Regu
lators Unpaid trustees
Other companies that own stock Employees Custome
rs Competitors Financial community
Owner- ship Econo- mic Depen- dence Social
S T A K E
Competitors For. govern. Local communities Activi
sts The media
Formal Economic
Political
INFLUENCE ON BEHAVIOR (POWER)
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Managing the Operating Environment

• Economic Actions
• Erect new entry barriers
• Competitive tactics such as advertising,
  new-product launches, cost-reduction efforts, new
  distribution methods or quality improvements (to
  name a few)
• Competitive benchmarking
• Political Strategies include all firm activities
  that have as one of their objectives the creation
  of a friendlier political climate
• Direct contact with legislators and government
  leaders
• Political contributions
• Lobbying
• Creation of collective institutions such as trade
  associations

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Common Forms of Inter-organizational Relationships

• Joint Venture
• An entity that is created when two or more firms
  pool a portion of their resources to create a
  separate jointly owned entity
• Network
• A hub and wheel configuration with a local firm
  at the hub organizing the interdependencies of a
  complex array of firms
• Consortia
• Specialized joint ventures encompassing many
  different arrangements. Consortia are often a
  group of firms oriented towards problem solving
  and technology development, such as RD consortia

Source Adapted from B.B. Barringer and J.S.
Harrison, Walking a Tightrope Creating Value
Through Interorganizational Relationships,
Journal of Management 26 (2000), p. 383, used
with permission.
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Common Forms of Inter-organizational Relationships

• Alliance
• An arrangement between two or more firms that
  establishes an exchange relationship but has no
  joint ownership involved
• Trade Association
• Organizations (typically nonprofit) that are
  formed by firms in the same industry to collect
  and disseminate trade information, offer legal
  and technical advice, furnish industry-related
  training, and provide a platform for collective
  lobbying
• Interlocking Directorate
• Occurs when a director or executive of one firm
  sits on the board of a second firm or when two
  firms have directors who also serve on the board
  of a third firm. Interlocking directorates serve
  as a mechanism for inter-firm information sharing
  and cooperation

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Major Concepts in Chapter 2

• The most significant elements in the broad
  environment include socio-cultural influences,
  economic influences, technological influences and
  political influences
• The broad environment can have a significant
  impact on a firm however, most firms typically
  have only a marginal impact on the broad
  environment. Consequently, the emphasis in this
  part of external analysis is more on
  understanding and adapting rather than trying to
  influence.

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Major Concepts in Chapter 2

• Innovations usually arise from existing
  technologies, most products and processes evolve
  towards a dominant design and radical innovations
  typically come from outside the boundaries of the
  industry
• The operating environment includes stakeholders
  with whom a firm interacts regularly. Elements
  of this environment are subject to a much higher
  level of influence than the broad environment

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Major Concepts in Chapter 2

• Five major forces that influence industry
  competition include customers, suppliers,
  existing competitors, entry barriers and
  substitutes
• Organizations can take economic, political, or
  partnering actions in an effort to influence
  their operating environments
• Partnering tactics often involve
  inter-organizational relationships such as joint
  ventures, networks, consortia, alliances, trade
  associations, and interlocking directorates