Topic 3

The External Environment

Prof. Niki Lukviarman, SE, MBA, DBA, Akuntan

Topic Outline

Remote Environment
International Environment
Industry Environment
Industry Analysis and Competitive Analysis
Operating Environment
The Firms External Environment

Economic Remote Environment Technological

Social (Global and Domestic) Ecological
Political
Industry Environment (Global and Domestic)
Entry barriers Buyer power Competitive rivalry
Supplier power Substitute availability

Operating Environment (Global and Domestic)

Competitors Labor
Creditors Suppliers
THE FIRM Customers
Remote Environment

Comprises factors that originate beyond,

and usually irrespective of, any single
firms operating situation; economic,
social, political, technological & ecological
factors
Presents firms with opportunities, threats
& constraints, but rarely does a single firm
exert any meaningful reciprocal influence
Economic Factors
Concern the nature and direction of economy in
which a firm operates

Types of factors
General availability of credit
Level of disposable income
Propensity of people to spend
Prime interest rates
Inflation rates
Trends in growth of gross national product
Social Factors
Include beliefs, values, opinions, and lifestyles of
people (developed from cultural, demographic.
religious, educational & ethnic conditioning)
Social forces are dynamic, resulting from the
efforts of individuals to satisfy their desires &
needs by controlling & adopting to environmental
factors
Recent social trends
Entry of large numbers of women into labor market
Accelerating interest of consumers and employees in
quality-of-life issues
Shift in age distribution of population
Political Factors
Direction & stability factors major consideration
for managers on formulating company strategy
Define legal and regulatory parameters within
which firms must operate affected the supplier
& demand functions
Types of factors
Fair-trade decisions (e.g. AFTA)
Antitrust laws
Tax programs
Minimum wage legislation
Pollution and pricing policies
Technological Factors

Focus on technological changes affecting industry

Types of changes
New products
Improvements in existing products
Manufacturing and marketing techniques

Role of technological forecasting

Foresees advancements and estimating their impact on
organizations operations
Alerts managers to impending challenges and
promising opportunities
Ecological Factors
Involve relationships among human beings
and other living things and air, soil, and water
Current concerns
Global warming
Loss of habitat and biodiversity
Air, water, and land pollution

Responsibilities of firms
Eliminating toxic by-products of current
manufacturing processes
Cleaning up prior environmental damage
International Environment
Assessing each non-domestic market on
the same factors that are used in a
domestic assessment
While the importance of factors will differ,
the same set of considerations can be
used for each country
Beware of interplay among international
markets during the assessment processes
Factors Used to Assess
the International Environment
Economic Environment Political System
Level of economic development Form of government
Population
GNP
Political ideology
Per capita income Stability of government
Literacy level Strength of opposition parties
Social infrastructure Social unrest
Natural resources Political strife and insurgency
Climate
Membership in economic blocs
Governmental attitude toward
foreign firms
Monetary and fiscal policies
Wage and salary levels Foreign policy
Nature of competition
Currency convertibility
Inflation and interest rates
Taxation systems
 Factors Used to Assess the
International Environment
Legal Environment Cultural Environment
Legal tradition Customs, norms, values,
Effectiveness of legal beliefs
system Language
Treaties with foreign Attitudes
nations
Motivations
Patent trademark laws Social institutions
Laws affecting business
firms Status symbols
Religious beliefs
Industry Environment
Porters concept of industry environment for
developing strategic thought & business
planning (the I/O Model of SM)
Porters framework; the nature & degree of
competition in an industry hinge on 5 forces
Strategic agenda should consider how they
work in its industry & how they affect a
company in a particular situation
How Competitive Forces Shape Strategy?
The essence of strategy formulation is coping
with competition
The collective strength of five forces determines
the ultimate profit potential of an industry
Strategy; to find a position in the industry where
a company can best defend itself against five
forces or can influence them in its favor
The strongest competitive force (s) determine
the profitability of an industry and so are of
greatest importance in strategy formulation
 Forces Driving Industry Competition
Potential
Entrants

Threat of new entrants

Bargaining power
Industry Competitors of buyers

Suppliers Buyers

Bargaining power Rivalry Among

of suppliers Existing Firms
Threat of substitute
products or services

Substitutes
 Competitive Force: Threat of Entry
Seriousness of threat depends on
Barriers to entry
Reaction of existing firms

Barriers to entry
Economies of scale (large scale/cost disadvantage)
Product differentiation (spend heavily for cons loyalty)
Capital requirements (expenditures in up-front)
Cost advantages independent of size (e.g. learning curve)
Access to distribution channels (secure distribution)
Government policy (license requirements or limits on
access to raw materials)
Competitive Force: Suppliers
A supplier group is powerful if:
It is dominated by a few companies and is
more concentrated than industry it sells to
Its product is unique, or differentiated, or has
built up switching costs
It is not obliged to contend with other
products for sale to industry
It poses a threat of integrating forward into
industrys business
Industry is not an important customer of
supplier group
Competitive Force: Buyers
A buyer group is powerful if:
It is concentrated or purchases in large volume
Products purchased from industry are standard or
undifferentiated
Products purchased from industry form a component
of its product, representing a significant fraction of
its cost
It earns low profits, creating incentives to lower its
costs
Industrys product is unimportant to quality of
buyers products or services
Industrys product does not save buyer money
Buyer poses credible threat of integrating backward
Competitive Force: Substitute Products

Relevance of substitutes
By placing a ceiling on prices charged, they limit
profit potential of an industry

Substitutes deserving the most attention

are those
Subject to trends improving their price-performance
trade-off with the industrys product
Produced by industries earning high profit
Competitive Force: Jockeying for Position

Rivalry among existing competitors takes a

familiar form of jockeying for position
Tactics of competitive rivalry
Price competition
Product introduction
Advertising slugfests
What Causes Rivalry to be Intense?
Numerous competitors or they are roughly equal
in size and power
Slow growth in industry (fights for market share)
Product lacks differentiation or switching costs
High fixed costs or perishable product
Capacity normally augmented in large increments
High exit barriers (e.g. very specialized assets)
Rivals are diverse in strategies, origins, and
personalities (have different idea on how to
compete head-to-head)
Industry and Competitive Analysis

1. What are the boundaries of the

industry?
Questions
involved
2. What is the structure of the industry?
in
designing
viable
3. Which firms are our competitors?
strategies
4. What are the major determinants of
competition?
Industry and Competitive Analysis

Industry; a collection of firms that offer

similar products or services
Similar products; products that customers
perceived to be substitutable for one
another
Where do the boundaries of the industry
begin and end?
 Why a Definition of Industry
Boundaries is Important?

Helps executives determine arena in which

their firm competes
Focuses attention on firms competitors
Helps executives determine key factors for
success
Gives executives another basis on which
to evaluate their firms goals
Sources of Difficulty in Defining
Industry Boundaries

Evolution of industries
over time creates new
opportunities and threats

Industry evolution creates Industries are becoming

industries within global in scope
industries
Issues in Defining an Industry

What part of the industry corresponds to our firms

goals?
What are the key ingredients of success in that part of
the industry?
Does our firm have the skills needed to compete in that
part of the industry?
Will the skills enable us to seize emerging opportunities
and deal with future threats?
Is our definition of the industry flexible enough to allow
necessary adjustments to our business concept as the
industry grows?
 Characteristics of Industry Structure

Structural attributes Enduring characteristics giving

an industry its distinctive character (different industries
have very different requirements for success)
Variations among industries involves examining
Concentration Extent to which industry sales are
dominated by only a few firms
Economies of Scale Savings firms within an industry
achieve due to increased volume
Product Differentiation Extent to which customers
perceive products of firms in industry as different
Barriers to Entry Obstacles a firm must overcome to
enter an industry
Innovation-Friendly Regulation

Enable corporations to abide by the ever-

increasing regulations while keeping cost
down, maintaining competitiveness, and
enhancing creativity

Need the principles of regulatory design

that will promote innovation, resource
productivity, and competitiveness
Variables in Identifying Competitors

How do other firms define the scope of their

market?
The more similar the definitions of firms, the more likely
the firms will view each other as competitors
How similar are the benefits the customers
derive from the products and services other firms
offer?
The more similar the benefits, the higher the level of
substitutability between them
How committed are other firms to the industry?
To size up commitment of potential competitors to
industry, reliable intelligence data are needed concerning
potential resource commitments
Common Mistakes
in Identifying Competitors

Overemphasizing current and known

competitors while ignoring potential entrants
Overemphasizing large competitors while
ignoring small ones
Overlooking potential international competitors
Assuming competitors will continue to behave in
same way
Common Mistakes
in Identifying Competitors
Misreading signals indicating a shift in focus of
competitors
Overemphasizing competitors financial
resources, market position, and strategies while
ignoring their intangible assets
Assuming all firms in industry are subject to
same constraints or are open to same
opportunities
Believing purpose of strategy is to outsmart
competition, rather than satisfy customer needs
Industry Analysis

Using SWOT analysis to identify Critical

Success Factors (CSF)
CSF can vary overtime and by industry
Both opportunities and threats can be
the CSF
Freund identify of CSF should be;
Important to achieving long-term and
annual objectives
Measurable
Relative few in number
Applicable to all competing firms
Hierarchical
Communicated and distributed widely in
the organization
Application of CSF:
Competitive Intelligence Program/CI
To provide a general understanding of an
industry and its competitors
To identify areas in which competitors are
vulnerable and to assess the impact strategic
actions would have on competitors
To identify potential moves that a competitor
might make that would endanger a firms
position in the market
Industry Analysis Matrix
The External Factor
Evaluation (EFE) matrix
Lists of opportunities and
threats factors
Allows strategists to
summarize & evaluate the
external factors
The Competitive Profile
Matrix (CPM)
Includes both internal and
external issues
Identifies a firms major
competitors & their
particular strengths &
weaknesses in relation to a
firms strategic position
CPM versus EFE
CSF in CPM are broader; may focus on
internal issues
CPM do not grouped into opportunities
and threats as they are in EFE
CPM comparative analysis between
firms within industry
CPM provides important internal
strategic information
Operating Environment

The operating environment, also called the

competitive or task environment,
comprises factors in the competitive
situation that affect a firms success in
acquiring needed resources or in profitably
marketing its goods and services
Factors in the Operating
Environment

Firms competitive position

The composition of its customers
Its reputation among suppliers and
creditors
Its ability to attract capable
employees
Criteria Used in Constructing
Competitor Profiles
Market share
Breadth of product line
Effectiveness of sales
distribution
Proprietary and key-account
advantages
Price competitiveness
Advertising and promotion
effectiveness
Location and age of facility
Capacity and productivity
Experience
Raw material costs
Financial position
Relative product quality
R&D advantages position
Caliber of personnel
General images
Customer profile
Patents and copyrights
Union relations
Technological position
Community reputation
Customer Profiles

Improves ability of managers to

Plan strategic operations
Anticipate changes in size of markets
Reallocate resources to support forecasted shifts in
demand patterns

Two approaches to market segmentation;

Traditional segmentation approach (example a)
Industrial market segmentation (example b)
Example a:
Major Segmentation Variables for
Consumer Markets

Geographic Variables; Psychographic Variables;

Region Social class

County size Lifestyle
City or SMSA* size Personality
Density
Climate
* SMSA = Standard Metropolitan Statistical Area
Example a:
Major Segmentation Variables for
Consumer Markets
Demographic
Variables Behavioral Variables
Age Occasions
Sex Benefits
Family size
User status
Family life cycle
Usage rate
Income
Loyalty status
Occupation
Education Readiness stage
Religion Attitude toward product
Race
Nationality
Example b:
Major Segmentation Variables in
Industrial Markets

Demographic Operating

Industry Technology
Company size User-nonuser status
Location Customer capabilities
Example b:
Major Segmentation Variables in
Industrial markets

Purchasing Approaches
Purchasing-function organization
Power structure
Nature of existing relationships
General purchase policies
Purchasing criteria
Example b:
Major Segmentation Variables in
Industrial Markets

Perfect
Situational Factors Characteristics

Urgency Buyer-seller similarity

Specific application Attitudes toward risk
Size of order Loyalty
 Factors Related to Assessing
Relationship With Suppliers
How costly are shipping charges?
Are suppliers competitive in terms of
production standards?

Are suppliers prices Are suppliers reciprocally

competitive? Do they offer dependent on the firm?
quantity discounts?

In terms of deficiency rates, are

suppliers abilities, reputations, and
services competitive?
Factors Related to Assessing
Relationship with Creditors
Do creditors fairly value and willingly accept firms
stock as collateral?
Do creditors perceive firm as having an acceptable
record of past payment?
A strong working capital position? Little or no
leverage?
Are creditors loan terms compatible with firms
profitability objectives?
Are creditors able to extend necessary lines of credit?

Answer to these questions help a firm forecast

the availability of the resources it will need to
implement and sustain its competitive strategies
 Factors Related to Acquiring Needed
Human Resources

Reputation as an
employer

Local employment A firms access to needed Availability of people

rates personnel is affected by with needed skills

good people attract good people Tony Fernandez (CEO AirAsia)