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 4 ©2005 Prentice Hall Organization Environment  External Environment  General Environment General Environment Political-Legal 5 ©2005 Prentice Hall Adapted from Exhibit 3.1: Organization Environment Organization Environment  External Environment  General Environment  Task Environment Competitors General Task Environment Environment Strategic Partners Political-Legal 6 ©2005 Prentice Hall 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 7 ©2005 Prentice Hall 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 8 ©2005 Prentice Hall General Environment Political-Legal Economic Cycles Good economic conditions Poor economic conditions Time 9 ©2005 Prentice Hall 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 10 ©2005 Prentice Hall 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 11 ©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 12 ©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 13 ©2005 Prentice Hall 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 • • 14 ©2005 Prentice Hall 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 15 ©2005 Prentice Hall Profits and Industry Forces • • • • • • • 16 Few competitors Quality-based competition High entry barriers Few new entrants Many customers Fragmented customers Many suppliers ©2005 Prentice Hall • • • 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 17 ©2005 Prentice Hall 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 18 ©2005 Prentice Hall 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 19 ©2005 Prentice Hall 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 20 ©2005 Prentice Hall 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 21 ©2005 Prentice Hall 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 22 ©2005 Prentice Hall 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 23 ©2005 Prentice Hall 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 24 ©2005 Prentice Hall 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 25 ©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 26 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 27 ©2005 Prentice Hall The Internal Environment  Employees  Demographics  Values  Culture  Assumptions  Values  Beliefs 28 ©2005 Prentice Hall 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 29 ©2005 Prentice Hall 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? 30 ©2005 Prentice Hall Adapted from Exhibit 3.8: Environmental Scanning Responding Effectively to Changing Environments  Direct influence  Strategic response  Organization agility  Information management 31 ©2005 Prentice Hall