are divided into two primary
External & Internal
The external environment encompasses all issues,
occurrences, trends, etc. that are peripheral to the
corporation and beyond the control of the TMT.
The internal environment relates to all aspects within
the confines of the organization and generally are
within the control of the TMT.
Both environments exert significant influence over the
formation of a company's strategy and its degree of
Changes in the external environment
(general & competitive) may require a
company to adjust its strategic plans.
Likewise, changes within the internal environment of a
firm may force a company to change its tactics and
For example, new personnel with unique knowledge and
skills may join the company OR valuable employees with
unique knowledge and skills may leave the firm.
Predicting the extent, direction, and speed of
environmental change with any degree of
precision is difficult and often – impossible.
Abrupt environmental changes can quickly
transform strategic plans from “effective to
A firm must be prepared to rapidly adapt to
unexpected changes since this can mean the
difference between success and failure.
Environments Change (Cont)
Scenario Models are tools that can aid in the rapid
adaptation to environmental changes.
Scenario Models help TMTs prepare for a wide range of
possible future conditions from the highly likely to
possible but not expected.
Scenario Models facilitate the preparation of
Scenario Models (Cont)
Scenario models evolve during STRATEGY FORMULATION
(data synthesis stage). They focus on predicting the future
of the business environment.
When predicting the future business environment, TMTs
structure their strategies on "likely-to-happen" conditions
but they also imagine/brainstorm/consider other
conditions that “could-happen.”
The less likely to occur but "could happen" scenarios are
refined into alternate models which form the basis for
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
The Five Factors of the
Although the general environmental factors are divided into specific
and unique categories they are vigorously interactive,
interrelated, and interdependent.
Sociocultural factors relate to a country's dominant
religions, the population's general desire for
leisure-time, attitudes toward consumerism,
environmentalism, and the role of gender in
society and business.
In general, sociocultural factors are characterized by the
lifestyles, values, and belief systems of populations.
Demographic factors pertain to changes in the
population size of a country, geographic distribution of
people, ethnic mix, income distribution, average age,
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 relate to a country's inflation or
deflation rates, interest rates, tariffs, balance of trade
issues, growth of national economies, exchange
rates, unemployment rates, labor availability, gross
domestic products, savings rates, etc.
Technological factors pertain to a country’s reception to
innovation. Some national cultures discourage change
while others embrace and support it.
Political/Legal Factors center on the political stability of
a country, its legal system, and its general attitude toward
E.G., Antitrust laws are examined and current
philosophies of regulation and deregulation are assessed.
The Competitive Environment
See the HOMEWORK slides at
the end of these lecture notes.
Factors that can amplify the intensity with
which firms compete:
High fixed costs (costs that cannot be eliminated easily as
High storage costs
Lack of differentiation between products or services
Low switching costs (customer can switch suppliers without
significant cost or inconvenience)
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 of Competing Firms
Rivalry of Competing Firms increases in intensity
when the size of markets shrinks or ceases to grow.
It also increases when there are numerous
competitors or equally balanced competitors seeking
the same set of customers.
Prices may fall, more favorable shipping terms may be
offered to customers, or selling firms may offer more
relaxed payment terms.
The consequence of increased rivalry for most firms is
lower net revenues from reduces prices and increased
expenses associated with the additional services and
There is intense rivalry between suppliers
There are few buyers for the products or services
The buyer is the primary customer of the supplier
The buyer is extremely large and purchases in large
quantities or major parts of an industry's output
The switching costs are low (can change suppliers without
The buyer is capable of backward integration (may enter the
sellers industry and supply its own needs).
Buyer Power is high when…
There are few suppliers
There is greater demand than availability
There are few or no substitute
The products or services are crucial to the buyer’s
The buyers are small purchasers
The supplier has an ample supply of customers
There are high switching costs for the buyer
When there is a risk of forward integration by the
supplier (supplier may enter the industry of the buyer
and become a direct competitor).
Supplier Power is high when
Threats of Substitutes is high when
The customers of the focal industry have low switching
The price of the substitute product or service is lower
The quality and suitability of the substitute is comparable
(or better) than the current product or service.
Threats of new entrants (Newbies) is high when
Low entry barriers
Lack of differentiation of current products or services
Lack of brand loyalty by consumers
Low switching costs by customers
Low government intervention (few or no licensing and/or
permits required, industry minimally regulated)
Easy access to distribution channels
Favorable supplier welcome
End of Part One: Business Environments
Re-Read Chapter Two
Review the following slides carefully as
part of your homework assignment
Please review the following
slides carefully as part of your
Customers are the ultimate determining factor in
whether or not a particular business succeeds or fails.
Although hard to fathom, customers are frequently not a
primary consideration in the formulation of corporate
Each factor in the competitive environment is crucial to
the success of an organization but there is probably no
quicker path to corporate self-destruction than to
routinely neglect customer interests.
Customers should be central to any operating strategy.
Suppliers are fundamentally important to a firm's
ability to achieve competitive advantages.
If suppliers are non-cooperative they can make it
financially and/or physically impossible to satisfy
Maintaining a strong working relationship with
suppliers requires effort, patience, and
Unions are not the enemy of businesses or TMTs.
Contrary to conventional wisdom, organized labor can
actually enhance a well-managed corporation is
fulfilling customer needs.
Unions represent resource of crucial intellectual
All employees unionized or otherwise, should be
included in every dimension of the strategic
Associations, and organizations such as the Chamber of
Commerce, SHRM, (Human Resource Management), IMA
(Institute of Management Accountants), and other
professional and trade association, albeit it frequently
subtle, have an impact on how business is conducted.
Through meetings, proclamations, and publications these
association can stimulate new ideas, new behaviors, promote
emerging technologies, and even create friendships from
what may have been previously hostile competitors.
The influence of associations over how businesses act and
react with their competitors as well as their stakeholders is
New Entrants, also referred to as "Newbies" are always a
threat to existing businesses.
They can consume market share, introduce new
marketing ideas, and innovate in unexpected ways.
They can also adversely affect the current pricing structure
thereby threatening profitability of existing firms.
New entrants to an industry often have an inadequate
understanding of market realities.
They may have difficulty gaining a sufficient market share
and react by simply lower prices, frequently below the
point at which they or anyone else can make a profit.
Newbies should always be monitored carefully.
Interest Groups, particularly public interest groups such as
environmentalists, humanists, or other types of activists can force
businesses to alter or eliminate practices that are frequently
deemed essential to their strategies by the TMT.
The power of interest groups can debilitate a firm that is
This is not suggested that "interest groups" are out of sync with
reality or out to destroy corporations.
Neither is it to suggest that their concerns and distresses are
irrelevant or unwarranted.
If fact, the ideas of interest groups may actually strengthen a
corporation and enhance not only its qualitative performance but
also, over the long term give it a competitive advantage over rivals
and improve its financial performance.
Concerns and issues of interest groups must be anticipated and
always be addressed in a firm's tactical and strategic plans.
Employee rights groups frequently refer to themselves as humanists
in contrast to capitalists.
Substitutes for products or services that are suitable
replacements for current products and services can be an
enormous challenge to the TMT.
The financial industry is continuously caught off guard by the
creation of new investment products.
Substitutes can occasionally lurk in the shadows by taking a
shape or form not envisioned as a substitute. For example, the
U.S. Postal Service has petitioned Congress for a rate increase
because email and significantly reduced the traditional method
of sending letters, cards, invoices, late notices, and even
Further, some studies to suggest that "texting" is slowly
diminishing the market for "cell phone calling.“
Competitors are an integral part of nature, of sports, and of
Competing is not an undesirable activity although losing
can have undesirable consequences.
Whenever two or more participants strive for an identical
goal, disappointment is a certainty.
Winning the competitive battle is a strategic mandate.
Knowing the opponent is the first step, monitoring is the
second, and gathering competitive intelligence is the third.
A compounding factor in the competitive battle is the fact
that all competitors are easily visible.
Some, such as new entrants are off the radar screen until too
Creditors are differentiated from suppliers of goods and
services although these companies extend credit.
Creditors this context refers to providers of financial capital
for operations, acquisitions, or facilities expansion.
Creditors are a crucial lifeline most corporations and when
their leverage is too great they are capable of demanding
behavior concessions from businesses that may be
counterproductive to corporate strategies.
They are a force with which most businesses must reckon.
Unless the TMT develops an appropriate working relationship
with creditors, growth and expansion may be seriously