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Describe the three tiers of environmental factors that affect firm
List and explain the five factors in the remote environment
Give examples of the economic, social, political, technological, and
ecological influences on a business
Explain the five forces model of industry analysis and give examples of
Give examples of the influences of entry barriers, supplier power, buyer
power, substitute availability, and competitive rivalry on a business
List and explain the five factors in the operating environment
Give examples of the influences of competitors, creditors, customers,
labor, and direct suppliers on a business
The factors beyond the control of the firm that influence its choice of
direction and action, organizational structure, and internal processes
The Firm’s External Environment
Comprised of following Components:
Economic, social, political, technological, and ecological factors that
originate beyond, and usually irrespective of, any single firm’s operating
The Firm’s External Environment
Prime interest rates
Trends in the growth of the gross national product
Globalization of the economy
Present in the external environment:
Beliefs & Values
Attitudes & Opinions
Three Profound Social Changes
Entry of large numbers of women into the labor market
Accelerating interest of consumers and employees in quality-of-life issues
Shift in the age distribution of the population
Cutting across the above three issues is concern for individual health
Political constraints on firms:
Minimum Wage Legislation
Pollution and Pricing Policies
Impact of Political Activity
Political activity has a significant impact on two governmental functions
that influence the remote environment of firms:
– Supplier function
– Customer function
Technological forecasting helps protect and improve the profitability of
firms in growing industries.
It alerts strategic managers to impending challenges and promising
The key to beneficial forecasting of technological advancement lies in
accurately predicting future technological capabilities and their probable
The quasi-science of anticipating environmental and competitive
changes and estimating their importance to an organization’s
Ecology refers to the relationships among human beings and other living things
and the air, soil, and water that supports them.
Ecological Factors (contd.)
Threats to our life-supporting ecology caused principally by human activities in an
industrial society are commonly referred to as pollution
Loss of habitat and biodiversity
Company actions that produce more useful goods and services while
continuously reducing resource consumption and pollution.
Harvard professor Michael E. Porter propelled the concept of industry environment into the
foreground of strategic thought and business planning.
The cornerstone of Porter’s work first appeared in the Harvard Business Review, in which he
explains the five forces that shape competition in an industry.
Porter’s well-defined analytic framework helps strategic managers to link remote factors to
their effects on a firm’s operating environment.
Industry Environment Defined
The general conditions for competition that influence all businesses that provide
similar products and services.
How Competitive Forces Shape Strategy
The essence of strategy formulation is coping with competition.
Intense competition in an industry is neither coincidence nor bad luck.
Competition in an industry is rooted in its underlying economics, and competitive forces exist
that go well beyond the established combatants in a particular industry.
The corporate strategists’ goal is to find a position in the industry where his or her company can
best defend itself against these forces or can influence them in its favor.
Ex. 4.9 Forces Driving Industry Competition
Threat of Entry
Common Barriers to Entry
Economies of Scale
Cost Disadvantages Independent of Size
Access to Distribution Channels
A supplier group is powerful if:
It is dominated by a few companies and is more concentrated than the industry it sells to
Its product is unique or at least differentiated, or if it has built-up switching costs
It is not obliged to contend with other products for sale to the industry
It poses a credible threat of integrating forward into the industry’s business
The industry is not an important customer of the supplier group
A buyer group is powerful if:
It is concentrated or purchases in large volumes
The products it purchases from the industry are standard
The products it purchases from the industry form a component of its product
and represent a significant fraction of its cost
It earns low profits
The industry’s product is unimportant to the quality of the buyers’ products or
The industry’s product does not save the buyer money
The buyers pose a credible threat of integrating backward
By placing a ceiling on the prices it can charge, substitute products or services limit the
potential of an industry
Substitutes not only limit profits in normal times but also reduce the bonanza an industry
can reap in boom times
Substitute products that deserve the most attention strategically are those that are
subject to trends improving their price-performance trade-off with the industry’s
produced by industries earning high profits