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Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
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The Organization, Its Primary Stakeholders & the Broad Environment
The Organization, Its Primary Stakeholders & the Broad Environment
The OrganizationThe Organization
Owners/Board of DirectorsOwners/Board of DirectorsManagersManagersEmployeesEmployees
The Operating EnvironmentThe Operating Environment
The Broad EnvironmentThe Broad Environment
FinancialFinancialIntermediariesIntermediaries
Government AgenciesGovernment Agenciesand Administratorsand Administrators
LocalLocalCommunitiesCommunities
CompetitorsCompetitors
SuppliersSuppliers CustomersCustomers
ActivistActivistGroupsGroups
UnionsUnions
Socio-cultural InfluencesSocio-cultural Influences Technological InfluencesTechnological Influences
Economic InfluencesEconomic Influences Political/Legal InfluencesPolitical/Legal Influences
The MediaThe Media
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Major Sociocultural Issues in the U.S.Major Sociocultural Issues in the U.S.
• Role of Government in Health Care and Child Care
• Declining Quality of Education
• Legality of Abortion and Stem-Cell Research
• Terrorism and Levels of Crime in General
• Security of Travel and Public Places
• Importance and Role of the Military
• Levels of Foreign Investment/Ownership in the U.S.
• Social Costs of Restructuring, Especially Layoffs
• Role of Government in Health Care and Child Care
• Declining Quality of Education
• Legality of Abortion and Stem-Cell Research
• Terrorism and Levels of Crime in General
• Security of Travel and Public Places
• Importance and Role of the Military
• Levels of Foreign Investment/Ownership in the U.S.
• Social Costs of Restructuring, Especially Layoffs
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Major Sociocultural Issues in the U.S.Major Sociocultural Issues in the U.S.
• Pollution and Disposal of Toxic and Non-Toxic Wastes
• General Increase in Environmental Awareness
• Drug Addiction and Drug Traffic
• Continued Migration Toward the Sun Belt States
• Graying of America
• AIDS and Other Health Problems
• Major Global Issues
• Immigration Restrictions and Programs
• Pollution and Disposal of Toxic and Non-Toxic Wastes
• General Increase in Environmental Awareness
• Drug Addiction and Drug Traffic
• Continued Migration Toward the Sun Belt States
• Graying of America
• AIDS and Other Health Problems
• Major Global Issues
• Immigration Restrictions and Programs
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Why Monitor Society?Why Monitor Society?
• Change = opportunities
• Avoid being called a “bad corporate citizen”
• A good reputation can lead to increased
demand or business opportunities
• Accurate assessment can sometimes help
firms avoid restrictive legislation
• Change = opportunities
• Avoid being called a “bad corporate citizen”
• A good reputation can lead to increased
demand or business opportunities
• Accurate assessment can sometimes help
firms avoid restrictive legislation
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Global Economic Forces to Monitor and Predict
Global Economic Forces to Monitor and Predict
• Economic Growth� Influences consumer demand, cost of factors of
production, availability of factors of production (especially labor and scarce resources)
• Interest Rates� Influences cost of capital for new projects, cost of
refinancing existing debt, consumer demand (due to customer ability to finance purchases)
• Inflation� Influences interest rates, cost of factors of production,
optimism or pessimism of stakeholders
• Economic Growth� Influences consumer demand, cost of factors of
production, availability of factors of production (especially labor and scarce resources)
• Interest Rates� Influences cost of capital for new projects, cost of
refinancing existing debt, consumer demand (due to customer ability to finance purchases)
• Inflation� Influences interest rates, cost of factors of production,
optimism or pessimism of stakeholders
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Global Economic Forces to Monitor and Predict
Global Economic Forces to Monitor and Predict
• Exchange Rates� Influences ability to profitably remove profits from
foreign ventures, government policies towards business
• Trade Deficits� Influences government policies, incentives, trade barriers
• Exchange Rates� Influences ability to profitably remove profits from
foreign ventures, government policies towards business
• Trade Deficits� Influences government policies, incentives, trade barriers
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Political/legal ForcesPolitical/legal Forces
• New Laws
• New Regulations
• Current Administrative Policies
• Government Stability
• Wars
• International Pacts and Treaties
• New Laws
• New Regulations
• Current Administrative Policies
• Government Stability
• Wars
• International Pacts and Treaties
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Government Influences on Organizations in the U.S.
Government Influences on Organizations in the U.S.
Federal, State and Local Regulators
(enforce regulations)
Federal, State and Local Regulators
(enforce regulations)
Federal, State and
Local Revenue
Collectors
(collect taxes and fees,
grant licenses)
Federal, State and
Local Revenue
Collectors
(collect taxes and fees,
grant licenses)
Federal, State and Local
Law Makers
(create laws, regulations, taxes,
agencies, incentives)
Federal, State and Local
Law Makers
(create laws, regulations, taxes,
agencies, incentives)
Federal, State and Local Courts
(enforce laws and regulations, impose fines and penalties, settle disputes, restructure, protect
Federal, State and Local Courts
(enforce laws and regulations, impose fines and penalties, settle disputes, restructure, protect
The
Organization
The
Organization
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Technological ForcesTechnological Forces
• Technology is knowledge about products and services and the way they are made and delivered
• Organizations should monitor� New Production Processes
� New Products/Product Ideas
� Current Process Research Efforts
� Current Product Research Efforts
� Scientific Discoveries that May Have an Impact
• Characteristics of innovation� New innovations often emerge from existing technologies
� A dominant design will eventually be widely adopted
� Radical innovations often come from outside the industry
• Technology is knowledge about products and services and the way they are made and delivered
• Organizations should monitor� New Production Processes
� New Products/Product Ideas
� Current Process Research Efforts
� Current Product Research Efforts
� Scientific Discoveries that May Have an Impact
• Characteristics of innovation� New innovations often emerge from existing technologies
� A dominant design will eventually be widely adopted
� Radical innovations often come from outside the industry
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From Analysis of the Broad Environment to Development of
Alternative Strategies
From Analysis of the Broad Environment to Development of
Alternative Strategies
• For each key influence found during analysis of the broad environment, determine whether it is:� An opportunity
� A threat
� Neutral
• Then determine which strategies the firm might pursue in response to each influence, if action should be taken at all
• This is one way to generate ideas regarding future strategies the firm might pursue
• For each key influence found during analysis of the broad environment, determine whether it is:� An opportunity
� A threat
� Neutral
• Then determine which strategies the firm might pursue in response to each influence, if action should be taken at all
• This is one way to generate ideas regarding future strategies the firm might pursue
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The Organization and Its Operating Environment
The Organization and Its Operating Environment
The OrganizationThe Organization
The Operating EnvironmentThe Operating Environment
FinancialFinancialIntermediariesIntermediaries
Government AgenciesGovernment Agenciesand Administratorsand Administrators
LocalLocalCommunitiesCommunities
CompetitorsCompetitors
SuppliersSuppliers CustomersCustomers
ActivistActivistGroupsGroups
UnionsUnions The MediaThe Media
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Five Forces of Industry CompetitionFive Forces of Industry Competition
Potential Entrants
Suppliers Customers
IndustryCompetitors
Rivalry AmongExisting Firms
Bargaining power of suppliers
Bargaining power of suppliers
Threat of new entrants
Threat of new entrants
Bargaining power of customers
Bargaining power of customers
Substitutes
Threat of substitute products
or services
Threat of substitute products
or services Source: Adapted with the permission of the Free Press, an imprint of Simon & Schuster Adult Publishing Group (see text for complete reference)
Source: Adapted with the permission of the Free Press, an imprint of Simon & Schuster Adult Publishing Group (see text for complete reference)
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Economic Power of CustomersEconomic Power of Customers
• Customers are more powerful if:� They are few in number
� They make high-volume purchases
� They are buying undifferentiated products
� They are highly motivated to get good deals (i.e., earn low profits or buy a lot from the industry)
� They can easily vertically integrate backward and become their own suppliers
� They are not very concerned about quality
� They have an information advantage over the suppliers
� They are well organized
• Customers are more powerful if:� They are few in number
� They make high-volume purchases
� They are buying undifferentiated products
� They are highly motivated to get good deals (i.e., earn low profits or buy a lot from the industry)
� They can easily vertically integrate backward and become their own suppliers
� They are not very concerned about quality
� They have an information advantage over the suppliers
� They are well organized
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Economic Power of SuppliersEconomic Power of Suppliers
• Suppliers are more powerful if:� They are few in number
� They sell products/services that are not easily substituted
� They do not sell a large percentage of their products/services to the buying industry
� They have a dependent customer
� They sell products/services that are differentiated
� They can easily vertically integrate forward and become their own customers
� They have an information advantage relative to their buyers
� They are well organized
• Suppliers are more powerful if:� They are few in number
� They sell products/services that are not easily substituted
� They do not sell a large percentage of their products/services to the buying industry
� They have a dependent customer
� They sell products/services that are differentiated
� They can easily vertically integrate forward and become their own customers
� They have an information advantage relative to their buyers
� They are well organized
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Industry CompetitionIndustry Competition
• A high level of competition is expected when:� There are many competitors and none of them is dominant
� Slow industry growth
� Hard to differentiate products
� High fixed costs exist
� High exit barriers exist (what is lost if you leave the industry)
• Terms to describe industry competition:� A monopoly is a situation in which one firm is the only
significant provider of a good or service
� An oligopoly exists when an industry contains a few very large firms (very common in established industries)
� Hypercompetition is a condition of rapidly escalating competition
• A high level of competition is expected when:� There are many competitors and none of them is dominant
� Slow industry growth
� Hard to differentiate products
� High fixed costs exist
� High exit barriers exist (what is lost if you leave the industry)
• Terms to describe industry competition:� A monopoly is a situation in which one firm is the only
significant provider of a good or service
� An oligopoly exists when an industry contains a few very large firms (very common in established industries)
� Hypercompetition is a condition of rapidly escalating competition
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Entry BarriersEntry Barriers
• Some common entry barriers include:� Economies of scale
� High capital requirements
� High levels of product/service differentiation
� Limited access to distribution channels
� Inimitable resources
� Government policies or regulations that discourage new entry
• Some common entry barriers include:� Economies of scale
� High capital requirements
� High levels of product/service differentiation
� Limited access to distribution channels
� Inimitable resources
� Government policies or regulations that discourage new entry
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Substitute ProductsSubstitute Products
• Substitutes are products or services provided by another industry that can be readily substituted for an industry’s own products or services
• Substitutes place a ceiling on the price that can be charged
• They can also set new performance standards
• Substitutes are products or services provided by another industry that can be readily substituted for an industry’s own products or services
• Substitutes place a ceiling on the price that can be charged
• They can also set new performance standards
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Typical Roles of Various StakeholdersTypical Roles of Various Stakeholders
S
T
A
K
E
S
T
A
K
E
INFLUENCE ON BEHAVIOR (POWER)INFLUENCE ON BEHAVIOR (POWER)
Owner-
ship
Econo-
mic
Depen-
dence
Social
Owner-
ship
Econo-
mic
Depen-
dence
Social
Formal Economic PoliticalFormal Economic Political
Managers w/stock
Directors w/stock
Stockholders
Managers/directors
Venture partners
Creditors
Regulators
Unpaid trustees
Managers w/stock
Directors w/stock
Stockholders
Managers/directors
Venture partners
Creditors
Regulators
Unpaid trustees
Other companies
that own stock
Employees
Customers
Competitors
Financial
community
Other companies
that own stock
Employees
Customers
Competitors
Financial
community
Competitors
For. govern.
Local communities
Activists
The media
Competitors
For. govern.
Local communities
Activists
The media
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Managing the Operating EnvironmentManaging the Operating Environment
• Economic Actions� Erect new entry barriers
� Competitive tactics such as advertising, new-product launches, cost-reduction efforts, new distribution methods or quality improvements (to name a few)
� Competitive benchmarking
• Political Strategies include all firm activities that have as one of their objectives the creation of a friendlier political climate� Direct contact with legislators and government leaders
� Political contributions
� Lobbying
� Creation of collective institutions such as trade associations
• Economic Actions� Erect new entry barriers
� Competitive tactics such as advertising, new-product launches, cost-reduction efforts, new distribution methods or quality improvements (to name a few)
� Competitive benchmarking
• Political Strategies include all firm activities that have as one of their objectives the creation of a friendlier political climate� Direct contact with legislators and government leaders
� Political contributions
� Lobbying
� Creation of collective institutions such as trade associations
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Common Forms of Interorganizational Relationships
Common Forms of Interorganizational Relationships
• Joint Venture� An entity that is created when two or more firms pool a
portion of their resources to create a separate jointly owned entity
• Network� A hub and wheel configuration with a local firm at the
hub organizing the interdependencies of a complex array of firms
• Consortia� Specialized joint ventures encompassing many different
arrangements. Consortia are often a group of firms oriented towards problem solving and technology development, such as R&D consortia
• Joint Venture� An entity that is created when two or more firms pool a
portion of their resources to create a separate jointly owned entity
• Network� A hub and wheel configuration with a local firm at the
hub organizing the interdependencies of a complex array of firms
• Consortia� Specialized joint ventures encompassing many different
arrangements. Consortia are often a group of firms oriented towards problem solving and technology development, such as R&D consortia
Source: Adapted from B.B. Barringer and J.S. Harrison, “Walking a Tightrope: Creating Value Through Interorganizational Relationships,” Journal of Management 26 (2000), p. 383, used with permission.
Source: Adapted from B.B. Barringer and J.S. Harrison, “Walking a Tightrope: Creating Value Through Interorganizational Relationships,” Journal of Management 26 (2000), p. 383, used with permission.
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Common Forms of Interorganizational Relationships
Common Forms of Interorganizational Relationships
• Alliance� An arrangement between two or more firms that establishes
an exchange relationship but has no joint ownership involved
• Trade Association� Organizations (typically nonprofit) that are formed by firms in
the same industry to collect and disseminate trade information, offer legal and technical advice, furnish industry-related training, and provide a platform for collective lobbying
• Interlocking Directorate� Occurs when a director or executive of one firm sits on the
board of a second firm or when two firms have directors who also serve on the board of a third firm. Interlocking directorates serve as a mechanism for interfirm information sharing and cooperation
• Alliance� An arrangement between two or more firms that establishes
an exchange relationship but has no joint ownership involved
• Trade Association� Organizations (typically nonprofit) that are formed by firms in
the same industry to collect and disseminate trade information, offer legal and technical advice, furnish industry-related training, and provide a platform for collective lobbying
• Interlocking Directorate� Occurs when a director or executive of one firm sits on the
board of a second firm or when two firms have directors who also serve on the board of a third firm. Interlocking directorates serve as a mechanism for interfirm information sharing and cooperation
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Major Concepts in Chapter 2Major Concepts in Chapter 2
• The most significant elements in the broad environment include sociocultural influences, economic influences, technological influences and political influences
• The broad environment can have a significant impact on a firm; however, most firms typically have only a marginal impact on the broad environment. Consequently, the emphasis in this part of external analysis is more on understanding and adapting rather than trying to influence.
• The most significant elements in the broad environment include sociocultural influences, economic influences, technological influences and political influences
• The broad environment can have a significant impact on a firm; however, most firms typically have only a marginal impact on the broad environment. Consequently, the emphasis in this part of external analysis is more on understanding and adapting rather than trying to influence.
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Major Concepts in Chapter 2Major Concepts in Chapter 2
• Innovations usually arise from existing technologies, most products and processes evolve towards a dominant design and radical innovations typically come from outside the boundaries of the industry
• The operating environment includes stakeholders with whom a firm interacts regularly. Elements of this environment are subject to a much higher level of influence than the broad environment
• Five major forces that influence industry competition include customers, suppliers, existing competitors, entry barriers and substitutes
• Innovations usually arise from existing technologies, most products and processes evolve towards a dominant design and radical innovations typically come from outside the boundaries of the industry
• The operating environment includes stakeholders with whom a firm interacts regularly. Elements of this environment are subject to a much higher level of influence than the broad environment
• Five major forces that influence industry competition include customers, suppliers, existing competitors, entry barriers and substitutes
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Major Concepts in Chapter 2Major Concepts in Chapter 2
• Organizations can take economic, political, or partnering actions in an effort to influence their operating environments
• Partnering tactics often involve interorganizational relationships such as joint ventures, networks, consortia, alliances, trade associations, and interlocking directorates
• Organizations can take economic, political, or partnering actions in an effort to influence their operating environments
• Partnering tactics often involve interorganizational relationships such as joint ventures, networks, consortia, alliances, trade associations, and interlocking directorates