Business Environments:

External and Internal

Welcome to Class 4Part One

Chapter 2

Business Environments are divided into two

(2) primary Categories

External & Internal

Business Environments

Environments

External

General

Competitive

Internal

Resources

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

Environments can change rapidly changes in corporate strategies may be required

The external environment = GENERAL & COMPETITIVE

The internal environment = RESOURCES & LEADERSHIP

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 ModelsScenario 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

ExternalEnvironment

General Environme

nt

Competitive

Environment

The Five Factors of the General Environment

(1) Sociocultural (2) Demographic (3) Economic(4) Technological (5) Political/Legal

Sociocultural

Demographic

EconomicTechnologic

al

Political/Legal

General Environment

Changes in one General environmental factor can influence

changes in others.

For example a weak economy can influence Political/Legal positions.

Sociocultural FactorsSociocultural factors relate to a country's:1. Dominant religions2. The population's general desire for leisure-time3. Attitudes toward consumerism4. Environmentalism5. Gender roles in society and business.

In general, sociocultural factors are characterized byThe lifestylesValuesBelief systems of populations

Demographic FactorsDemographic factors pertain to changes:1. In the population size of a country2. Geographic distribution of people3. Ethnic mix4. Income distribution5. Average age6. 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 FactorsEconomic factors relate to a country's:1. Inflation or deflation rates2. Interest rates3. Tariffs4. Balance of trade issues5. Growth of national economies6. Exchange rates7. Unemployment rates8. Labor availability9. Gross domestic products10.Savings rates, etc.

Technological FactorsTechnological factors pertain to a country’s:1. Reception to innovation2. 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 FactorsPolitical/Legal Factors center on:1. The political stability of a country2. Its legal system3. Number of Antitrust laws4. Success of enforcement5. Philosophies of regulations vs deregulation6. General attitude toward business.

ExternalEnvironment

General Environme

nt

Competitive

Environment

The 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

Unions

Associations

New Entrants

InterestGroups

Substitutes

Competitors

Creditors

Competitive Environment

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 ofBuyers

Bargaining power ofSuppliers

Threats of Substitutes

Threat ofNew

EntrantsPorter'

sFive

Forces

Rivalry of Competing FirmsIntensity 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 revenues2. More favorable shipping terms offered to customers3. Selling firms may offer more relaxed payment terms4. Increased expenses as services to customers added

1. Rivalry between suppliers is intense2. Buyers for the products or services are few3. Buyer is the primary customer of the supplier4. 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).

Buyer Power is high when…

1. There are few suppliers 2. Demand exceeds availability3. There are few or no substitute4. 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).

Supplier Power is high when

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 barriers2. Lack of differentiation of current products or

services3. Lack of brand loyalty by consumers4. Low switching costs by customers5. Low government intervention

a) few or no licensingb) no permits requiredc) industry minimally regulated

6. Easy access to distribution channels7. Favorable supplier welcome

End of Part One: Business Environments

Re-Read Chapter Two

Relax!