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by: Kristine Mae D.

Taga
Strategy Formulation
Chapter Three:
The External Environment

REMOTE ENVIRONMENT

INDUSTRY ENVIRONMENT

OPERATING ENVIRONMENT

THE FIRM
THREE INTERRELATED FACTORS
REMOTE ENVIRONMENT
Economic
Social
Political
Technological
Ecological
INDUSTRY ENVIRONMENT
Entry
Barriers

Supplier
Power
Buyer
Power

Substitute
Availability
Competitive
Rivalry
OPERATING ENVIRONMENT
Competitors Creditors Customers Labor Suppliers
-Concern in the nature and direction of the
company in which a firm operates.

-Managers must consider the general
availability of credit, the level of disposable
income, and the prosperity of people to
spend (National and International level).
-Affects a firm the beliefs, value attitudes
opinions and lifestyles of person in the
firms external environment.

-Very dynamic, with constant change
resulting from the efforts of individuals to
satisfy their wants and needs.
-Defines the legal and regulatory
parameters within which firms must
operate.

-Designed to benefit and protect firms.

-Has significant impact on two (2)
government functions:
1. Supplier Function
2. Customer Function
-Technological change.

-Avoid obsolescence and promote
innovation, a firm must be aware of
technological changes that might influence
its industry.

-Technological adaptations can suggest
possibilities for new products, improvement
in new products or manufacturing and
marketing techniques.
-Ecology refers to the relationship among
human beings and other living thing and
the air, social and water that support them.

-Specific concerns include global warming,
loss of habitat and biodiversity, as well as
air, water and land pollution.

-Eco-efficiency, describes corporation that
produce more-useful goods and services
while continuously reducing resource
consumption and pollution.
-New entrants to an industry bring new capacity, the desire to
gain market share, and often substantial resources.

-Six (6) Major sources of barriers to entry:
1. Economies of Scale
2. Product Differentiation
3. Capital Requirements
4. Cost Disadvantages Independent Size
5. Access to Distribution Channels
6. Government Policy

Supplier is powerful if:
It is dominated by a few companies and is more
concentrated than the industry it sells.
Its product is unique or at least differentiated or has built-up
switching costs.
It is not obliged to contend with other products for sale to
industry.
It poses a credible threat of integrating forward into the
industrys business.
The industry is not an important customer of the supplier
group.




Buyer is powerful if:
It is concentrated or purchases in large volume.
The product it purchases from the industry are standard or
unidentified.
The product it purchases from the industry form a
component of its product and represent a significant fraction
of its costs.
It earns low profits, which create great incentive to lower
its purchasing costs.
The industry's product is unimportant to the quality of the
buyers product or services.
The industrys product does not save money.
The buyer pose a credible threat of integrating backward
to make the industrys product.






-Substitute products or services limit the potential of an
industry.

-The more attractive the price-performance trade-off offered
by substitute products, the f firmer lid place on the industry's
profit potential.
Related Rivalry Factors:
1. Competitors are numerous or are roughly equal in size an
power.
2. Industry growth is slow, precipitating fights for market
share that involve expansion-minded members.
3. The product or service lacks differentiation or switching
costs, which lock in buyers and protect one combatant
from raids on its customers by another.
4. Fixed costs are high or the product is perishable, creating
strong temptation to cut prices.
5. Capacity normally is augmented in large increments.
6. Exit barriers are high.
7. The rivals are diverse in strategies, origins and
personalities.

Assessing its competitive position
improves a firms chances of designing
strategies that optimize its environmental
opportunities.

Competitors profile criteria:
Scann..


Most important questions that the firm should
address are the following:
-Do the creditors fairly value and willingly
accept the firms stock as collateral?
-Do the creditors perceive the firm as having
an acceptable record of past payment?
-A strong working capital position? Little or no
leverage?
-Are creditors loan terms compatible with the
firm's profitability objectives?
-Are the creditors able to extend the
necessary lines of credit?


-Developing a profile of a firms present and
prospective customers improves the ability of
its managers to plan strategic operations,
anticipate changes in the size of markets and
reallocate resources so as to support forecast
shifts in demand patterns.

-Geographic, Demographic, Psychographic
and Buyer Behavior


Firms access to needed personnel is affected
primarily by:

1. Firms reputation as an employer.
2. Local employment rates
3. Availability of people with the needed skills
- A firm regularly relies on its suppliers for
financial support, services, materials and
equipment.

- Questions for suppliers competitive position:
1. Are the suppliers prices competitive?
Do the suppliers offer attractive
quantity discounts?
2. How costly are their shipping
charges? Are these suppliers
competitive in terms of production
standards?