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CHAPTER 3: THE

EXTERNALENVIRONMENT

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THE FIRMS EXTERNAL

ENVIRONMENT

THE FIRM

Operating Environment (Global and Domestic)

Competitors LaborSuppliers

Customers

Industry Environment (Global and Domestic)Entry barriers

Supplier power

Buyer power

Substitute availability

Competitive

rivalry

Creditors

Remote Environment (Global and Domestic)EconomicSocial

Political

Technological

Ecological

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ECONOMIC FACTORS

Concern the nature and direction of economy in

which a firm operates Types of factors

General availability of credit

Level of disposable income

Propensity of people to spend Prime interest rates

Inflation rates

Trends in growth of gross national product

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SOCIAL FACTORS

Include beliefs, values, opinions, and lifestyles of

people Recent social trends

Entry of large numbers of women into labor market

Accelerating interest of consumers and employees in

quality-of-life issues

Shift in age distribution of population

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P

OLITICAL FACTORS

Define legal and regulatory parameters withinwhich firms must operate

Types of factors

Fair-trade decisions

Antitrust laws

Tax programs

Minimum wage legislation

Pollution and pricing policies

Administrative jawboning

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TECHNOLOGICAL FACTORS

Focus on technological changes affecting industry

Types of changes

New products

Improvements in existing products

Manufacturing and marketing techniques

Role of technological forecasting

Foresees advancements and estimating their impact onorganizations operations

Alerts managers to impending challenges andpromising opportunities

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ECOLOGICAL FACTORS

Involve relationships among human beings andother living things and air, soil, and water

Current concerns Global warming

Loss of habitat and biodiversity

Air, water, and land pollution

Responsibilities of firms

Eliminating toxic by-products of current manufacturingprocesses

Cleaning up prior environmental damage

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OPERATING ENVIRONMENT

The operating environment, also called the competitive

or task environment, comprises factors in the

competitive situation that affect a firms success in

acquiring needed resources or in profitably marketing

its goods and services

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FACTORS IN THE OPERATING

ENVIRONMENT

Firms competitive position The composition of its customers

Its reputation among suppliers and creditors

Its ability to attract capable employees

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CRITERIA USED IN CONSTRUCTING

COMPETITOR PROFILES

Market share

Breadth of product line

Effectiveness of salesdistribution

Proprietary and key-accountadvantages

Price competitiveness

Advertising and promotioneffectiveness

Location and age of facility

Capacity and productivity

Experience

Raw material costs

Financial position

Relative product quality R&D advantages position

Caliber of personnel

General images

Customer profile

Patents and copyrights Union relations

Technological position

Community reputation

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CUSTOMERPROFILES

Improves ability of managers to

Plan strategic operations Anticipate changes in size of markets

Reallocate resources to support forecasted shifts in

demand patterns

Two approaches to market segmentation

Traditional segmentation approach Exhibit 3-14

Industrial market segmentation Exhibit 3-15

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MAJOR SEGMENTATION

VARIABLES FOR CONSUMER

MARKETS

Geographic Variables

Region County size

City or SMSA size

Density

Climate

Psychographic Variables

Social class Lifestyle

Personality

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Demographic Variables

Age Sex

Family size

Family life cycle

Income

Occupation

Education

Religion

Race

Nationality

Behavioral Variables

Occasions Benefits

User status

Usage rate

Loyalty status

Readiness stage

Attitude toward product

MAJOR SEGMENTATION VARIABLES

FOR CONSUMER MARKETS

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MAJOR SEGMENTATION

VARIABLES FORINDUSTRIAL MARKETS

Demographic

Industry

Company size

Location

Operating

Technology

User-nonuser status

Customer

capabilities

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Purchasing Approaches

Purchasing-function organization

Power structure

Nature of existing relationships

General purchase policies Purchasing criteria

MAJOR SEGMENTATION

VARIABLES FOR

INDUSTRIAL MARKETS

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FACTORS RELATED TO ASSESSING

RELATIONSHIP WITH SUPPLIERSHow costly are shipping charges?

Are suppliers competitive in terms

of production standards?

Are suppliers prices

competitive? Do they offer

quantity discounts?

In terms of deficiency rates, are

suppliers abilities, reputations,

and services competitive?

Are suppliers reciprocally

dependent on the firm?

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FACTORS RELATED TO ASSESSING

RELATIONSHIP WITH CREDITORS

Do creditors fairly value and willingly accept firmsstock as collateral?

Do creditors perceive firm as having an acceptablerecord of past payment?

A strong working capital position? Little or no

leverage? Are creditors loan terms compatible with firmsprofitability objectives?

Are creditors able to extend necessary lines of credit?

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FACTORS RELATED TO ACQUIRING

NEEDED HUMAN RESOURCES

A firms access to needed

personnel is affected by

Reputation as an

employer

Local employment

rates

Availability of people

with needed skills