Chapter 3 Assessing External Environments

Chapter 3
Assessing
External
Environments
PowerPoint slides by
R. Dennis Middlemist
Colorado State University
Learning Objectives
After studying this chapter, you should be
able to:



2
Articulate the role of the external
environment in management decisions and
effectiveness.
Explain the five major dimensions of an
organization’s general environment.
Describe the critical forces in the
organization’s task environment.
©2005 Prentice Hall
Learning Objectives
After studying this chapter, you should be
able to:


3
Describe the key elements of an
organization’s global environment.
Describe the key considerations in
conducting effective environmental
scanning.
©2005 Prentice Hall
The Business Environment
 External environment: a set of forces and conditions
outside the organization that can influence its
performance
 Task environment: forces that have a high potential of
affecting the organization on a immediate basis
 General environment: forces that typically influence the
organization’s external task environment and through them,
the organization itself
 Internal environment: key factors and forces inside
the organization affecting its operation
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Organization Environment
 External Environment
 General Environment
General
Environment
Political-Legal
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Adapted from Exhibit 3.1: Organization Environment
Organization Environment
 External Environment
 General Environment
 Task Environment
Competitors
General
Task
Environment
Environment
Strategic Partners
Political-Legal
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Adapted from Exhibit 3.1: Organization Environment
Organization Environment
 External Environment
 General Environment
 Task Environment
 Internal Environment
Competitors
Internal
Environment
Owners
BoardTask
of Directors
Management
Environment
Employees
Culture
Strategic Partners
Political-Legal
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Adapted from Exhibit 3.1: Organization Environment
General Environment
 Sociocultural forces
 Demographics
 Values
 Technology forces
 Product technological changes
 Process technological changes
 Economic forces
 Current economic conditions
 Economic cycles
 Structural changes
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General
Environment
Political-Legal
Economic Cycles
Good
economic
conditions
Poor
economic
conditions
Time
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Adapted from Exhibit 3.2: Overall Economic Cycles and Industry Cycles
General Environment
 Political and legal forces
 Laws and regulations
 Government spending
General
Environment
Political-Legal
 Global forces
 Impact on and interaction with the other
forces
 Institutional forces
 Physical forces
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General Environment of
Coca-Cola
Environmental Factor
Sociocultural
Demographics
Description
 Baby boomers drinking less soft drinks as
they age
 US population growth is slowing and much
of the growth comes from immigrants who
generally drink less soft drinks
Values
 Baby boomers drinking less soft drinks as
they age
 US population growth is slowing and much
of the growth comes from immigrants who
generally drink less soft drinks
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©2005 Prentice Hall
Adapted from Exhibit 3.3: Description of the General Environment of Coca-Cola
General Environment of
Coca-Cola
Environmental Factor
Technological
Description
 New “canning” technology makes using
recycled aluminum easier and cheaper
 Internet opens up a new means of running
promotion contests and activities
Economic
 Slow economy reduces per person
consumption due to fewer social occasions
at which soft drinks might be served
 Like end of economic downturn and
prospects of economic recovery
 Stricter liability for illness caused by
beverage contamination
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©2005 Prentice Hall
Adapted from Exhibit 3.3: Description of the General Environment of Coca-Cola
The General Environment of
Coca-Cola
Environmental Factor
Global
Description
 Gradual increase in acceptance of
carbonated soft drinks in other countries
such as India and China
 Widely available electricity and increased
ability to afford refrigerators in emerging
countries and economies
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Adapted from Exhibit 3.3: Description of the General Environment of Coca-Cola
The General Environment of
Coca-Cola
Technological
Sociocultural
Sociocultural
Technological
Political-Legal
Global
Economic
•
•
•
•
Baby boomers drinking less
Immigrants drinking less
Concern about recycling
Concerns about health
•
•
New recycle-friendly canning
technology
New promotion opportunities
via the Internet
Economic
Political-Legal
Coca-Cola
•
•
•
Slow economic growth
Prospect of economic
recovery
•
Increased health standards
for bottling
Stricter liability legislation
Global
•
•
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Increase in acceptance of
carbonated drinks in India
and China
Easier consumer access to
refrigeration
Adapted from Exhibit 3.4: The General Environment of Coca-Cola
Task Environment
Competitors
 Organization’s most immediate
external environment
 Consists of
 Competitors
 Strategic partners
 Customers
 Labor
 Suppliers
 Regulators
Task
Environment
Strategic Partners
 Typically largest influence on the organization
 Managers must understand the fit between the
organization and its task environment
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Profits and Industry Forces
•
•
•
•
•
•
•
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Few competitors
Quality-based
competition
High entry barriers
Few new entrants
Many customers
Fragmented
customers
Many suppliers
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•
•
•
Higher
Profits
•
•
•
•
•
Many competitors
Price-based
competition
Low entry barriers
Many new entrants
Many substitutes
Few customers
United customers
Few suppliers
Lower
Profits
Adapted from Exhibit 3.5: Profits and Industry Forces
Task Environment:
The Nature of Competition
Competitors
 How big and strong are your
Task
Environment
competitors?
 What are your competitors weaknesses?
 What is the nature of competition or
rivalry in your industry?
Strategic Partners
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Task Environment:
New Entrants—Potential Competitors
 New entrants increase competition
 Increased competition leads to lower
profits
 More choices for customers causes
companies to increase value to
customers
 Entry barriers keep new entrants out
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Task Environment:
Substitutes
Competitors
 To what extent can alternative
Task
Environment
products or services can
substitute for existing product
or service
 The fewer the available substitutes, the
greater the profits
Strategic Partners
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Task Environment:
Customers
Competitors
 When there are fewer and
united customers, they have
more power to demand
Task
Environment
Strategic Partners
 Lower prices
 Customized products or services
 Attractive financing terms from producers
 These demands reduce profits
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Task Environment:
Strategic Partners
Competitors
 Strategic partners work closely
with a firm to pursue mutually
beneficial goals
 Limited engagements
 Joint ventures
 Sharing of equity interest
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Task
Environment
Strategic Partners
Task Environment:
Labor
 The balance between supply and
demand for types of workers significantly
affects a firm’s performance
 When demand exceeds supply, the
imbalance can lead to high labor costs
 Labor unions can exert pressure on
managers to increase wages and offer other
costly benefits, decreasing performance
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Task Environment:
Regulators
Competitors
 Regulators consist of both
Task
Environment
regulatory agencies and
interest groups
 Regulators can influence and sometimes
dictate organizational actions
Strategic Partners
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Task Environment of JetBlue
Task Environmental
Factor
Competitors
Rivalry
Description
 Primarily price-based, hurting performance
 Many established and big players
New Entrants
 $35 million start-up costs, frequent failures
discourages new entrants
Substitutes
 $ Video conferencing may substitute for
face-to-face (travel) business meetings
Customers
 Business travelers who want convenience
 Leisure travelers who want low price
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Adapted from Exhibit 3.6: Description of the Task Environment of JetBlue
Task Environment of JetBlue
Task Environmental
Factor
Suppliers
Description
 Airbus supplies all of JetBlue’s planes
 Many jet fuel suppliers
Strategic Partners
 Currently not a part of any airline alliance
 Initial partner with satellite TV provider
 Currently not represented by labor unions
 Ample supply of pilots and flight attendants
due to significant downsizing in industry
Regulators
 FAA dictates standards and regulations
 Airport authorities determine access and
cost of landing slots and gates at airports
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©2005 Prentice Hall
Adapted from Exhibit 3.6: Description of the Task Environment of JetBlue
Task Environment of JetBlue
Customers
Competitors
Suppliers
Labor
Regulators
Strategic partners
Customers
Business travelers
Leisure Travelers
©2005 Prentice Hall
Rivalry: Price
New Entrants: Few
Substitutes: Video
conferencing
Strategic
Partners
Suppliers
No airline partners
Initial partnership with
satellite TV provider
JetBlue
Regulators
FAA
Airport Authorities
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Competitors
Planes: Airbus
Jet Fuel: many suppliers
such as Exxon Mobil
Labor
No union representation
Ample supply of pilots and
flight attendants
Adapted from Exhibit 3.7: The Task Environment of JetBlue
The Internal Environment
 Owners
 Single owner can determine
Internal
Environment
Owners
Board of Directors
Management
Employees
Culture
objectives and distribution of profits
 Diversified set of shareholders have more
difficulty agreeing on objectives and profits
 Board of Directors
 Set of individuals elected by shareholders of
the company to represent their interests
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The Internal Environment
 Employees
 Demographics
 Values
 Culture
 Assumptions
 Values
 Beliefs
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Internal
Environment
Owners
Board of Directors
Management
Employees
Culture
Environmental Scanning &
Response
 Know what to scan
 Have a plan of how to scan
 Gain advantage over competitors
 Be superior in analyzing publicly available
information and anticipating how it relates to
your job, company, and industry
 Obtain information from nonpublic sources
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Environmental Scanning
Define
•What type of
information do I
need?
Recognition
Analyze
•What information
is relevant?
•What are the
potential and most
important issues?
Respond
•What impact could
this have and what
is the response?
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Adapted from Exhibit 3.8: Environmental Scanning
Responding Effectively to
Changing Environments
 Direct influence
 Strategic response
 Organization agility
 Information management
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