Business

Environments:
External and Internal

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
Scenario Models are sets of potential environmental
refined
into
alternate models which form the basis for
conditions that range from very likely to possible but
Contingency
Strategies.
unlikely.
Contingency Strategies are alternative strategic plans to

match the conditions highlighted in scenario models.

The General Environment

External
Environment

General
Environme
nt

Competitiv
e
Environme
nt

The Five Factors of the

General Environment
(1)
(2)
(3)
(4)
(5)

Sociocultural
Demographic
Economic
Technological
Political/Legal

Sociocultur
al

General
Environment
Political/Leg
al

Technologic
al

Demographi
c

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 countrys:
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. The political stability of a country
2. Its legal system
3. Number of Antitrust laws
4. Success of enforcement
5. Philosophies of regulations vs deregulation
6. General attitude toward business.

The Competitive Environment

External
Environment

General
Environme
nt

Competitiv
e
Environme
nt

Competitive Environment:
Nine Factors
(1)
(2)
(3)
(4)
(5)
(6)

Customers
Suppliers
Unions
Associations
New Entrants
Interest
Groups
(7) Substitutes
(8) Competitors
(9) Creditors

Customer
s
Suppliers

Creditors

Competito
rs

Competitive
Environment

Substitute
s

Unions

Associatio
ns

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

Threat of
New
Entrants

Threats of
Substitutes

Porter'
s
Five
Forces

Bargaining
power of
Buyers

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 buyers
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!