Chapter 4: The external environment

Environmental scanning- monitoring, evaluation and

dissemination of information from the external and
internal environments to key people within the
corporation

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 Identifying External Environmental Variables

• Remote environment (general environment) includes

(economic, political, social, ecological)

• Task environment (industry environment)

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 1. Remote environment

• However remote environment is beyond firms control it is a critical

criteria for any organization as it affects organizations:
• Policy
• Resources allocation
• Production style
• Profitability
• Society perspectives
• And sustainability

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 1. Remote environment (cont.)

Remote environment comprises mainly:

1.1 Economic factors
1.2 Social factors
1.3 Political factors
1.4 Technological factors
1.5 Ecological factors

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 1. Remote environment (cont.)

STEEP Analysis- monitoring trends in the societal and natural

environments
– Sociocultural-
– Technological-
– Economic-
– Ecological-
– Political-legal forces

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 1.1 Economic factors

• Economic factors concern with the nature & direction of the economy
in which a firm operates,
• Economic factors can affect:
– Availability of credit
– Tendency of people to spend
– Interest rates
– Inflation rate
– Economic growth

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 Availability of credit

• The amount of money that can be borrowed at a given time

• It may affect organization ability to meet its liabilities:
– Expenses

– Investment

– R & D projects

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 Tendency of people to spend

• Consumers have a tendency to spend a larger

proportion of personal income as their wealth increases.

• Decrease and increase in number of unemployment

affect market demand and consequently affect firms
operating in that market

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 Interest rates

• Cost of borrowing money

• Firms are affected by

– Higher interest expenses

– Lower return on investment

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Inflation rate
• Increase in the general level of prices of products and services over a
specific period of time.
• Firms are affected by:
– Higher cost of operation

– Higher wages paid to employees

– Higher revenue

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Economic growth

• Total production level of products and services

• Total amount of expenditure in the economy

• Unemployment level

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 1.2. Social factors

• Social factors involves :

– beliefs,
– attitudes,
– opinions
– and lifestyles
• It is developed from:
– culture,
– demographic,
– religious,
– education and ethical conditions.
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 1.2. Social factors (cont.)

• As social attitudes changes demand for various types of products

changes.

“ social attitudes are dynamics, as customers continuously trying to

satisfy their needs and desires”

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 1.2. Social factors (cont.)

• One of the most profound social changes in the recent years has
been:
“ the entry of large numbers in women into the labor market
• Its affect:
• Created wide range of products and services; e.g. convenience
food, microwave ovens, and day care centers.

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 1.3 Political Factors

• Political factors define the legal and regulatory parameters within

which firms must operate

• The direction and stability of political factors are a major

consideration for mangers on formulating company strategy.

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 1.3 Political Factors (cont.)

• Political constraints could be:

– Place of firm

– Tax program

– Minimum wages legislation

– Pollution and pricing

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 1.3 Political Factors (cont.)

• As laws and regulations commonly restricted, they tend to reduce the

potential profits of firms.

• However some political actions are designed to benefit and protect

firms:
– Patents laws
“Product research grant
“political factors either limit or benefit the firm they influence”

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 1.4 Technological Factors

• Firms must be aware of technological changes that might influence

its industry.

• Creative technological adaptation can Suggest :

– possibilities for new products
– possibilities for improving existing products
– possibilities for improving manufacturing techniques
– possibilities for improving marketing techniques

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 1.4 Technological Factors (cont.)

• Technological breakthrough can have sudden and dramatic effect on

the firm environment thus firms have to:

– Strive to understand existing technological advances

– Strive to understand probable future advances that can effect its

products or services.

“ technological forecast can help protect and improve the profitability

of the firm in growing industry”

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 1.5 Ecological factors

• The term ecological refers to “the relationships among human beings

and the living things, air, soil, water that support them”

• As a major contribution to ecological pollution, business now is being

held responsibilities for eliminating the toxic by-products of its current
manufacturing process.

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 1.5 Ecological factors (cont.)

• Managers are being required by the governments to incorporate

ecological concerns into their decisions making.

• This could be achieved by:

– Reformulating products
– Modifying process
– Redesign production equipments
– Recycling by-products

• Ex: Steel companies invest billion of Dollars to improve their

equipments to reduce pollution
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 1.5 Ecological factors (cont.)

• Ecological factors and firms perspective:

– Some firms recognize ecological factors as criteria for increasing

its cost and inhabit the growth and productivity of its operation.

– Other firms recognize ecological factors as an opportunity to

capture existing and new market with products that help customer
satisfy their own regulatory standards.

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2-Industry analysis: Task environment analysis

Industry- a group of firms that produces a similar product or service

Porter’s 5 forces:
– Threat of new entrants
– Rivalry among existing firms
– Threat of substitute products
– Bargaining power of buyers
– Bargaining power of suppliers
– Relative power of other stakeholders (added)

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Threat of new entrants- new entrants to an industry bring new
capacity, a desire to gain market share and substantial
resources

Threats of entry depends on:

– Barriers present
– Reaction from existing competitors

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Entry barrier- an obstruction that makes it difficult for a company
to enter an industry

• Economies of scale •Access to distribution

• Product differentiation channels
• Capital requirements •Cost disadvantages
• Government policies

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 2.1. Entry Barriers

 Economics of scale
Production
Research
Marketing
Service
Distribution

 Product/brand differentiation
Spend heavily to overcome customer loyalty
Differentiate their products
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 2.1. Entry Barriers (cont.)

 Capital requirements
Need to invest large financial resources

 Cost disadvantages independent of size(experience).

Cost due to effects of the learning curve (technology,
distributors, suppliers, location)

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 2.1. Entry Barriers (cont.)

 Access to distribution channels

The more limited the wholesale or retail channels; the more
the existing competitors have these tied up, the tougher the
entry into the industry.

 Government policy
 government control (license, limits on access to raw
materials, taxes, air and water pollution standards)

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 2.2 Rivalry Among Existing Firms
This type is related to the presence of a number of factors:

• Number of competitors
• Rate of industry growth
• Product or service characteristics
• Amount of fixed costs
• Capacity
• Height of exit barriers
• Diversity of rivals

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 2.3 Threat of Substitute Products or Services

products that appear different but can satisfy the same need as
another product

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 2.4. Bargaining Power of Buyers
Ability of buyers to force prices down, bargain for
higher quality, play competitors against each other

• Large purchases
• Backward integration
• Product represents a high percentage of buyer’s
cost
• Buyer earns low profits
• Product is unimportant to buyer

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 2.5. Bargaining Power of Suppliers
Ability of suppliers to raise prices or reduce quality

• Industry is dominated by a few companies

• Unique product or service
• Substitutes are not readily available
• Ability to forward integrate
• Unimportance of product or service to the industry

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 2.6. Relative Power of Other Stakeholders

• Government
• Local communities
• Creditors
• Trade associations
• Special interest groups
• Unions
• Shareholders
• Complementors- products that work well with a firm’s product

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Thank you

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