• Why is it important to understand the external environment for strategy and firm performance?
• What are the critical elements of external
Environment: the general, industry, competitor environment • What are the major features of an industry and the forces that affect industry profitability?
The external Environment of the Organization
Population size, Age structure,
Ethnic mix, Geographical distribution
Income distribution, Immigration
A society’s attitudes and values, Women in the workforce, Workforce diversity,
Environmental Concerns, Work life quality attitudes
Competition Laws, Labor Laws, Taxation laws , Education philosophies & policy,
De-/ Regulation philosophy
The general economic health of the country, The impact of purchasing power, the unemployment rate, and the interest rates, currency exchange rate
Product innovations, Process innovations, Focus of private & governmentsupported R&D expenditures, New communication technologies
Global integration versus local differentiation
New markets as well as existing markets
Ecological, social, and economic factors that can affect the physical environment and business practices
Rise and Fall of Krispy Kreme Donut
• Firms will have normal profits (enough profit to cover the cost of capital) if an industry has perfect competition.
– Numerous sellers and buyers (No monopolies)
– Perfect information
– Relatively homogeneous products
– No barriers to entry or exit
• What if not?
What is an industry
• An industry is a group of firms that produce or sell the same product in a market.
• Complication of defining industry boundaries
A model of industry structure:
Porter’s 5 Forces Model
Rivalry Among Competing
Firms in Industry
Industry Value Chain
Threat of New Entrants
• The higher the entry barriers, the higher the returns for existing firms in the industry
• Sources of the entry barriers:
Bargaining Power of Suppliers
• Suppliers exert power in the industry by threatening