Strategic Management Process

Strategic Management Process External Environment Tutorial 03

External Environment • Successful organizations stay abreast of changes in their external environments to predict trends, anticipate concerns, and generate ideas. • These activities lead to the identification of external opportunities and threats, which are then considered by managers as they develop strategic direction and formulate and implement organizational strategies. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

The external environment can be divided into the • Broad and • Operating environments. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Major Components of the broad & operating environments Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

In Brief ……… • The operating environment is different for each firm, although similarities may exist among firms in the same industries. • Broad environment is not firm specific or industry specific. In other words, the major trends and influences that occur in the broad environment impact many firms and industries, although the type and level of influence may be different from one industry to the next. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Operating Environment Vs Broad Environment • An organization can have a much more significant influence on events that transpire in its operating environment than it can in its broad environment. In fact, this is one way to distinguish between the two environments. • Example: it would be difficult for a firm, working independently, to dramatically influence societal views on abortion, drug abuse, free trade with another country, or migration to the another place However, an organization can have a profound impact on the attitude of its customers or suppliers, competitive rivalry, or even government regulations (assuming proactive political activities). Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Broad Environment • The broad environment forms the context in which the firm and its operating environment exist. • The most important elements in the broad environment, as it relates to a business organization and its operating environment are • Political influences • Global economic influences • Socio cultural influences • Technological influences • Environmental influences • Legal influences Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

The Socio cultural Context • Society is composed of the individuals who make up particular geographic regions • People, Attitudes, beliefs are part of socio cultural context • These socio cultural environments have meaning to most well-educated people, because of the widely held beliefs and values that are a part of the culture in these areas. • Some socio cultural trends are applicable to the citizens of an entire country. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Some of the major social issuesfacing by most countries • 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 • Levels of foreign investment/ownership • Social costs of restructuring, especially layoffs • General increase in environmental awareness • Drug addiction and drug traffic • AIDS and other health problems • Immigration restrictions and programs Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Why it is important to analyze the Social Environment? • Broader societal influences can create opportunities for organizations Example Many baby-boomer couples had babies later in life than did past generations, causing a demographic trend toward older couples with children. • The higher levels of income of these more established parents have led to the development of higher quality baby accessories, clothing, and supplies, and to new business opportunities in child care and specialized education. • Seemingly unrelated industries, such as the motion-picture and television industries, have taken advantage of these trends by producing many movies and television shows that center on birth, babies, and children. • Although the baby-boomer parents and their children have provided growth and profit opportunities for child-related businesses, the counter cycle of the baby-boomer trend, the baby-bust generation, will likely threaten the growth and profits of those child-related businesses. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Awareness of and compliance with the attitudes of society can help an organization avoid problems associated with being perceived as a bad corporate citizen Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

A positive organizational reputation among stakeholders such as customers and suppliers may increase demand for products or lead to increased business opportunities Example • Coca Cola A corporate reputation can be a very important organizational resource, since it cannot be imitated completely. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

The Economic Context • Economic forces can have a profound influence on organizational behavior and performance. Example • Economic forces that create growth and profit opportunities allow organizations to take actions that satisfy many stakeholders simultaneously, particularly owners, employees, and suppliers. • On the other hand, when economic trends are negative, managers face tremendous pressures as they balance potentially conflicting stakeholder interests, often between employees and owners. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

A Few of many Global Economic Forces to Monitor & Predict Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Economic Growth • Economic growth can have a large impact on consumer demand for products and services. • Consequently, organizations should consider forecasts of economic growth in determining when to make critical resource-allocation decisions such as plant expansions. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Interest Rates • Inflation and the availability of credit, among other factors, influences interest rates that organizations have to pay. • High interest payments can constrain the strategic flexibility of firms by making new ventures and capacity expansions prohibitively expensive. • On the other hand, low interest rates can increase strategic flexibility for organizations and also influence demand by encouraging customers to purchase goods and services on credit. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Foreign Exchange Rates • Foreign exchange rates are another major source of uncertainty for global organizations. • Companies sometimes earn a profit in a foreign country, only to see the profit turn into a loss due to unfavorable currency translations. • Furthermore, the organization may have billings in one currency and payables in another. Chamara Bandara FCA,ACMA,MBA(USQ - AUS )

Foreign Exchange Rates (Contd.) • Foreign trade balances are highly relevant to both domestic and global organizations because they are an indication of the nature of trade legislation that might be expected in the future. Example: • The United States tends to run a trade surplus with the European Union. As a result, American manufacturers who export to the EU are concerned about new protectionist legislation such as high tariffs that may be enacted to reduce the trade imbalance. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

The Political & Legal Context • Political forces, both at home and abroad, are among the most significant determinants of organizational success, and make up the political environment. The stakes are often high. Example • Israel once asked the White House to limit the ability of U.S. satellite companies to survey Israel from space. However, an Israeli company that is about to enter the same business would not face similar restrictions. In the United States, a Supreme Court ruling allows liability lawsuits against manufacturers of medical devices even though the devices are regulated by law. Also, court rulings have made banks liable when their customers pollute. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

The Political & Legal Context (Contd.) • Governments provide and enforce the rules by which organizations operate. • These rules include laws, regulations and policies. • Governments can • encourage new-business formation through tax incentives and subsidies; • restructure companies, • totally close firms that do not comply with laws, ordinances, or regulations. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

The Political & Legal Context (Contd.) • Furthermore, alliances among governments provide an additional level of complexity for businesses with significant foreign operations. • Also, some countries have established independent entities to counsel them on government policy. • Financial service is another arena that has been subject to tight government regulations that have severely affected business strategies. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

The Political & Legal Context (Contd.) • Some laws and regulations pertain to only one industry, such as nuclear energy. • On the other hand, many regulations are cross cutting, in that they apply to organizations in general. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

The Political & Legal Context (Contd.) • Monitoring and complying with laws and regulations is a good idea from a financial perspective. • Involvement in illegal activities can result in a significant loss of firm value. • Fines and penalties imposed by government units can run in the millions of dollars. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

The Political & Legal Context (Contd.) • Lawmakers often pursue legislation in response to requests and pressures from constituents. • Regulatory agencies and revenue-collection agencies develop the specifics of the regulations needed to carry out new laws, and they serve an enforcement role as well. • The courts handle disputes, interpret laws as needed, and levy fines and penalties. • Courts may also make decisions that alter the makeup or strategies of organizations, as in the case of anti trust actions. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

The Political & Legal Context (Contd.) • Although one organization may not be able to dramatically alter major political forces as a whole, it may have considerable impact within its own specific industries and operating domain. • Consequently, • major political forces are considered a part of the broad environment, • while government agencies and administrators are considered a part of the operating environment Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

The Technological Context • Technology refers to human knowledge about products and services and the way they are made and delivered • Technological change creates new products, processes, and services, and, in some cases, entire new industries. • Changes in the technological environment can change the way society behaves and what society expects. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

The Technological Context (Contd.) • Just because these technologies are simple does not mean that technological opportunities do not exist. • There is still room for innovation and improvement. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

The Technological Context (Contd.) Basic innovation…… • When an innovation has an impact on more than one industry or market, it is referred to as a basic innovation. Examples : Microprocessor, the light bulb, superconductors, and fiber optics. • Basic innovations reverberate through society, transforming existing industries and creating new ones. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Assessment of Broad Environment Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Porter's Five Forces, Economic Power, and Industry Characteristics • Michael Porter developed a model that helps managers evaluate industry competition • Industry • Industries are often difficult to define • But in general they refer to a group of organizations that compete directly with each other to win orders or sales in the market place. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Five Forces of industry competition • Porter described how the economic power of customers and suppliers influences the ability of a firm to achieve economic success • He reviewed factors that lead to high levels of competition among direct competitors • He also noted how entry barriers and the strength of substitute products increase or decrease the level of competition Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Importance of analyzing the Five Forces • By understanding how the five forces influence competition and profitability in an industry, • a firm can better understand how to position itself relative to the forces, • determine any sources of competitive advantage now and in the future, and • estimate the profits that can be expected. Example For small and start-up businesses, a five forces analysis can reveal opportunities for market entry that will not attract the attention of the larger competitors. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Importance of analyzing the Five Forces (Contd.) • An organization can also conduct a five forces analysis of an industry prior to entry to determine the sector's attractiveness. If the firm is already involved in the industry, a five forces analysis can serve as a basis for deciding to leave it. • Company managers can decide specific actions to alter the five forces. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Five Forces in Detail Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Economic Power of Customers • Customers provide demand for products and /or services, without which an organization would cease to exist. • Because customers can withhold demand, they have bargaining power, a form of economic power. • They can influence firm behavior. • However, not all customers have the same amount of bargaining power. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Determinants of Consumer Power According to Porter, customers tend to exhibit greater bargaining power under the following conditions: • They are few in number. This creates a situation in which an industry competitor can't afford to lose a customer. • They make high-volume purchases. High-volume purchasers can often dictate contract terms, force price concessions, or even tell their suppliers what to produce Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Determinants of Consumer Power (Contd.) • The products they are buying are undifferentiated (also known as standard or generic) and plentiful. This means that customers can find alternative suppliers. • They are highly motivated, as customers, to get good deals. This happens when customers earn low profits or when a lot of what they buy comes from the same industry. Terms of a deal may greatly influence whether the customer will be successful in the next year. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Determinants of Consumer Power (Contd.) • They can easily integrate backward and thus become their own suppliers. Vertical integration : firm moves forward to become their own customer Backward Integration: become their own supplier. • They are not concerned about the quality of what they are buying. This happens when the products or services don't influence the quality of their own products or services. Since quality is not affected, customers will be interested primarily in obtaining the lowest possible price. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Determinants of Consumer Power (Contd.) • They have an information advantage relative to the firms they are buying from. Information creates bargaining power. If a customer knows a lot about the cost & profit structure of firms from whom they are selling, the supplier can use this information to their advantage. • They are well organized. Sometimes weaker customers can increase their bargaining power. Example smaller retailers buying clubs or associations to purchase items in bulk. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Economic Power of Suppliers • Powerful suppliers can raise their prices and therefore reduce profitability levels in the buying industry. • They can also exert influence and increase environmental uncertainty • by threatening to raise prices, • reducing the quality of goods or services provided, or • not delivering supplies when needed. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Determinants of Supplier Power In general, supplier power is greater under the following conditions • They are few in number, or, in the extreme case, there is only one supplier for a raw material, good, or service. This limits the ability of buying organizations to negotiate better prices, delivery arrangements, or quality. Product makers of patented products frequently exercise great power. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Determinants of Supplier Power ( Contd.) • They sell products and services that cannot be substituted with other products and services. If there are no substitutes, the buying industry is compelled to pay a higher price and/or accept less-favorable terms. • They do not sell a large percentage of their products or services to the buying industry. Since the buying industry is not an important customer, suppliers can reduce shipments during capacity shortages, ship partial orders or late orders, or refuse to accept orders at all, all of which can create turbulence for the buying industry, reduce profits, and increase competition. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Determinants of Supplier Power ( Contd.) • They have a dependent customer. In other words, the buying industry must have what the supplier provides in order to manufacture its own products or services. Examples: Microcomputer manufacturers need micro processing chips. • They have differentiated their products or in other ways made it costly to switch suppliers. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Determinants of Supplier Power ( Contd.) • They can easily integrate forward and thus compete directly with their former buyers. Example: A company that supplies electronic equipment to retail chains and is dissatisfied with prices or contract terms can open its own retail outlets to handle sales of its products. • They have an information advantage relative to the firms they are supplying. If a supplier knows a lot about the cost and profit structure of firms to whom they are selling, the supplier can use this information to their advantage. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Determinants of Supplier Power ( Contd.) Example: If a supplier knows that a buyer is making high profits, a more attractive sales price can probably be negotiated. • They are well organized. Sometimes suppliers form associations or trade unions to enhance their bargaining power. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Competition, Concentration, and Monopoly Power • In most industries, competitive moves by one firm affect other firms in the industry, which may incite retaliation or countermoves. • In other words, competing firms have an economic stake in each other. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Examples of competitive moves and counter moves • Advertising Programs • Sales Force Expansions • New-Product Introductions • Capacity Expansion and • Long-Term Contracts with Customers. Chamara Bandara FCA,ACMA,MBA (USQ - AUS )

Strategic Management Process