Welcome to Class 4 Part One Chapter 2 Business Environments are divided into two (2) primary Categories External & Internal Business Environments General External Competitive Environments Resources Internal 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 The external environment = GENERAL & COMPETITIVE The internal environment = RESOURCES & LEADERSHIP Environments can change rapidly changes in corporate strategies may be required 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 Models Scenario 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 External Environment General Environment Competitive Environment The Five Factors of the General Environment (1) Sociocultural (2) Demographic (3) Economic (4) Technological (5) Political/Legal Sociocultural General Environment Political/Legal Technological Demographic Economic Changes in one General environmental factor can influence changes in others. For example a weak economy can influence Political/Legal positions. Sociocultural Factors Sociocultural factors relate to a country's: 1. 2. 3. 4. 5. Dominant religions The population's general desire for leisure-time Attitudes toward consumerism Environmentalism Gender roles in society and business. In general, sociocultural factors are characterized by The lifestyles Values Belief systems of populations Demographic Factors Demographic factors pertain to changes: 1. In the population size of a country 2. Geographic distribution of people 3. Ethnic mix 4. Income distribution 5. Average age 6. 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 Factors Economic factors relate to a country's: 1. Inflation or deflation rates 2. Interest rates 3. Tariffs 4. Balance of trade issues 5. Growth of national economies 6. Exchange rates 7. Unemployment rates 8. Labor availability 9. Gross domestic products 10. Savings rates, etc. Technological Factors Technological factors pertain to a country’s: 1. Reception to innovation 2. 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 Factors Political/Legal Factors center on: 1. 2. 3. 4. 5. 6. The political stability of a country Its legal system Number of Antitrust laws Success of enforcement Philosophies of regulations vs deregulation General attitude toward business. The Competitive Environment External Environment General Environment 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 Creditors Competitors Competitive Environment Substitutes Unions Associations Interest Groups New Entrants 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 of Threat of New Entrants Buyers Porter's Five Forces Threats of Substitutes Bargaining power of Suppliers Rivalry of Competing Firms Intensity 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 revenues 2. More favorable shipping terms offered to customers 3. Selling firms may offer more relaxed payment terms 4. Increased expenses as services to customers added Buyer Power is high when… 1. Rivalry between suppliers is intense 2. Buyers for the products or services are few 3. Buyer is the primary customer of the supplier 4. 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). Supplier Power is high when 1. There are few suppliers 2. Demand exceeds availability 3. There are few or no substitute 4. 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). 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 barriers 2. Lack of differentiation of current products or services 3. Lack of brand loyalty by consumers 4. Low switching costs by customers 5. Low government intervention a) few or no licensing b) no permits required c) industry minimally regulated 6. Easy access to distribution channels 7. Favorable supplier welcome End of Part One: Business Environments Re-Read Chapter Two Relax!