Chapter 3
Environmental
Forces
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
1
Learning Objectives
• Describe how economic and cultural factors
influence organizations.
• Identify the five competitive forces that affect
organizations in an industry.
• Describe the principle political and legal
strategies used by managers to cope with
changes in the environment.
• Explain how technological forces influence
changes in industries.
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
2
The Environment
• General Environment - sometimes called the
macroenvironment, includes the external
factors that usually affect all or most
organizations.
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
3
Forces Impacting Organizations
(adapted from Figure 3.1)
Macroenvironment
Technology
Demographics
Politics
Country
Cultural
Values
Competitors
Organization
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
Economy
4
The Economy
• Economics is the
discipline that
focuses on
understanding how
people or people or
nations produce,
distribute, and
consume various
goods and services.
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
5
Trends in the New Versus the Old
Economy
(adapted from Table 3.1)
New
• Value matters –
information is key
• New markets – distance
vanished
• Customers buy activities
not products – a click
away
• Human capital – rise of
knowledge worker
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
Old
• Size of organization
matters – manufacturing
is key
• Defined market segments
– demographics
• Customers for a lifetime –
loyalty, repeat business
• Physical and capital assets
– tangible assets
6
Demographics
• Demographics are the characteristics of a work
group, an organization, a specific market, or
various populations.
• Some current demographic changes include:
– Increasing Diversity
– Education and Skills
– Managerial Challenges
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
7
Cultural Forces
• Culture refers to the unique pattern of shared
characteristics, such as values, that distinguish
the members of one group of people from
those of another.
– A value is a basic belief about a condition that has
considerable importance and meaning to
individuals and is relatively stable over time.
– A value system comprises multiple beliefs that are
compatible and supportive of on another.
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
8
Cultural Forces
• Values can effect how a manager
–
–
–
–
–
Views other people and groups
Perceives situations and problems
Goes about solving problems
Determines what is and is not ethical behavior
Leads and controls employees
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
9
Hofstede’s Framework
• Power Distance – the degree to which less powerful
members of society accept that influence is unequally
divided.
• Uncertainty Avoidance – the extent to which members of a
culture feel threatened by risky or unknown situations.
• Individualism – is a combination of the degree to which
society expects to take care of themselves and their
immediate family and the degree to which people believe
they are masters of their own destinies.
• Masculinity – the degree to which assertiveness and the
acquisition of money and material things are valued.
• Long-Term/Short-Term Orientation – reflects the extent to
which a culture stresses that its members accept delayed
gratification of material, social, and emotional needs.
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
10
Hofstede’s Ranking
(adapted from Figure 3.2)
100
Importance of Cultural Orientation
90
80
70
Japan
60
USA
50
Canada
40
France
30
20
10
0
Power
Distance
Uncertainty
Avoidance
Individualism
Masculinity
Short-term/
Long-term
Orientation
Cultural Value Dimension
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
11
Competitive Forces in the Task Environment
(adapted from Figure 3.3)
Supplier
bargaining
power
Threat of
substitute goods
or services
Threat
of new
competitors
Customer
bargaining
power
Rivalry among
existing firms in
industry
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
12
 Risk of Entry by Potential Competitors
Potential Competitors are companies that are not
currently competing in an industry but have the capability
to do so if they choose. Barriers to new entrants include:
1. Economies of Scale – as firms expand output unit costs fall via:
 Cost reductions – through mass production
 Discounts on bulk purchases – of raw material and standard parts
 Cost advantages – of spreading fixed and marketing costs over large volume
2. Brand Loyalty
 Achieved by creating well-established customer preferences
 Difficult for new entrants to take market share from established brands
3. Absolute Cost Advantages – relative to new entrants
 Accumulated experience – in production and key business processes
 Control of particular inputs required for production
 Lower financial risks – access to cheaper funds
4. Customer Switching Costs for Buyers – where significant
5. Government Regulation
 May be a barrier to enter certain industries
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
13
 Rivalry Among Established Companies
Competitive Rivalry refers to the competitive struggle
between companies in the same industry to gain market
share from each other. Intensity of rivalry is a function of:
1. Industry Competitive Structure
 Number and size distribution of companies
 Consolidated versus fragmented industries
2. Demand Conditions
 Growing demand – tends to moderate competition and reduce rivalry
 Declining demand – encourages rivalry for market share and revenue
3. Cost Conditions
 High fixed costs – profitability leveraged by sales volume
 Slow demand and growth – can result in intense rivalry and lower profits
4. Height of Exit Barriers – prevents companies from leaving industry
 Write-off of investment in assets
 Economic dependence on industry
 Maintain assets - to participate
effectively in an industry
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
 High fixed costs of exit
 Emotional attachment to industry
 Bankruptcy regulations – allowing
unprofitable assets to remain
14
 Bargaining Power of Buyers
Industry Buyers may be the consumers or end-users who
ultimately use the product or intermediaries that distribute or
retail the products. These buyers are most powerful when:
1. Buyers are dominant.
 Buyers are large and few in number.
 The industry supplying the product is composed of many small companies.
2. Buyers purchase in large quantities.
 Buyers have purchasing power as leverage for price reductions.
3. The industry is dependant on the buyers.
 Buyers purchase a large percentage of a company’s total orders.
4. Switching costs for buyers are low.
 Buyers can play off the supplying companies against each other.
5. Buyers can purchase from several supplying companies at once.
6. Buyers can threaten to enter the industry themselves.
 Buyers produce themselves and supply their own product.
 Buyers can use threat of entry as a tactic to drive prices down.
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
15
 Bargaining Power of Suppliers
Suppliers are organizations that provide inputs such as
material and labor into the industry. These suppliers are
most powerful when:
1. The product supplied is vital to the industry and has few substitutes.
2. The industry is not an important customer to suppliers.
 Suppliers are not significantly affected by the industry.
3. Switching costs for companies in the industry are significant.
 Companies in the industry cannot play suppliers against each other.
4. Suppliers can threaten to enter their customers’ industry.
 Suppliers can use their inputs to produce and compete with companies already in the
industry.
5. Companies in the industry cannot threaten to enter suppliers’ industry.
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
16
 Substitute Products
Substitute Products are the products from
different businesses or industries that can satisfy
similar customer needs.
1. The existence of close substitutes is a strong
competitive threat.
 Substitutes limit the price that companies can
charge for their product.
2. Substitutes are a weak competitive force if an
industry’s products have few close substitutes.
 Other things being equal, companies in the
industry have the opportunity to raise prices and
earn additional profits.
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
17
Managerial Political Strategies
(adapted from Figure 3.4)
Political Strategies
• Negotiation
• Lobbying
• Alliance
• Representation
• Socialization
Copyright © 2005 by South-Western, a division of Thomson Learning
All rights reserved
Political-Legal Forces
• Political action
• committees (PACs)
• Laws
• Government
• Labor unions
• Others
18