Chapter 3: Evaluating the External Environment

PESTEL

(1) political, (2) economic, (3) social (4) technological (5) environmental (6) legal.

Why does the environment matter?

1. the environment provides resources that an organization needs in order to create goods and services 2. the environment is a source of opportunities and threats for an organization 3. the environment shapes the various strategic decisions that executives make as they attempt to lead their organizations to success.

Potential New Entrants

are companies that do not currently compete in the industry but may in the future

Threats

are events and trends that may undermine an organization's performance.

Subsitutes

are offerings that differ from the goods and services provided by the competitors in an industry but that fill similar needs to what the industry offers

Limitations of Five Forces Analysis

assume that competition is a zero-sum game, meaning that the amount of profit potential in an industry is fixed -collaboration is a possibility that five forces analysis tends to downplay -The relationships among the rivals in an industry, for example, are depicted as adversarial. In reality, these relationships are sometimes adversarial and sometimes collaborative

Backward Vertical Integration

buyers possess power to the extent that they have the ability to become a new entrant to the industry if they wish

Legal Segment

centers on how the courts influence business activity. -Examples of important legal factors include employment laws, health and safety regulations, discrimination laws, and antitrust laws

Technological Segment

centers on improvements in products and services that are provided by science. Relevant factors include, for example, changes in the rate of new product development, increases in automation, and advancements in service industry delivery

Economic Segment

centers on the economic conditions within which organizations operate - elements such as interest rates, inflation rates, gross domestic product, unemployment rates, levels of disposable income, and the general growth or decline of the economy

Political Segment

centers on the role of governments in shaping business. This segment includes elements such as tax policies, changes in trade restrictions and tariffs, and the stability of governments

Industry (Competitive Environment)

consists of multiple organizations that collectively compete with one another by providing similar goods, services, or both

Social Segment

demographics and social trends - Social factors include trends in demographics such as population size, age, and ethnic mix, as well as cultural trends such as attitudes toward obesity and consumer activism

Opportunities

events and trends that create chances to improve an organization's performance level.

mobility barriers

factors that make it difficult or illogical for a particular company to change groups over time

General Environment (macroenvironment)

includes overall trends and events in society such as social trends, technological trends, demographics, and economic condition

Environmental Segment

involves the physical conditions within which organizations operate. It includes factors such as natural disasters, pollution levels, and weather patterns

Industry concentration

is the extent to which a small number of companies dominate an industry

Suppliers

provide inputs that the companies in an industry need to create the goods and services that they in turn sell to their buyers

Strategic Groups

sets of companies that follow similar strategies to one another

Forward Vertical Integration

suppliers possess power to the extent that they have the ability to become a new entrant to the industry if they wish -Ford, for example, used a forward vertical integration strategy when it purchased rental car company (and Ford customer) Hertz.

Moore's Law

the performance of microcircuit technology roughly doubles every two years -This law has been very accurate in the decades since it was offered.

Environment

the set of external conditions and forces that have the potential to influence the organization

Five Force Analysis

to identify how much profit potential exists in an industry - to do so considers the interactions among the (1) competitors in an industry, (2) potential new entrants to the industry, (3) substitutes for the industry's offerings, (4) suppliers to the industry, and the industry's (5) buyers.