Strategic Management

CHAPTER 2: THE ENVIRONMENT AND EXTERNAL

STAKEHOLDERS
INTRODUCTION

 Successful organizations stay abreast of changes in their external environments to

anticipate concerns, predict trends, and generate ideas. These activities lead to the
identification of external opportunities and threats, which are then considered by
managers as they develop strategic direction and formulate and implement organizational
strategies.
 The lack of qualified staff in an area may create an opportunity for an entrepreneur to
consider the development of training program to fulfill the needs of local businesses.
 The external environment can be divided into the broad and operating environments.
The operating environment is different for each firm, although similarities may exist
among firms in the same industries. The broad environment is not firm specific or
industry specific. In other words, the major trends and influences that occur in the broad
environment impact many firms and industries, although the type and level of influence
may be different from one industry to the next
FIGURE 2.1 The organization, its primary stakeholders, and the
broad environment

The Broad Environm ent

Sociocultural Influences Technological Influences

The Operating Environm ent
Com petitors
Activist Local
groups comm unities
The Organization
Suppliers Owners/Board of Directors Custom ers
Managers
Unions Employees
The m edia

Financial
intermediaries Governm ent agencies
and administrators
Economic Influences Political Influences
 ASSESSMENT OF THE BROAD ENVIRONMENT

This describes many of the most important forces in the broad environment and how some organizations
respond to them. The emphasis in here will be on scanning, monitoring, forecasting, and adapting to broad
environmental influences
The broad environment forms the context in which the firm and its operating environment exist. The key
elements in the broad environment, as it relates to a business organization and its operating environment,
are:
1. Sociocultural influences
2. Global economic influences
3. Political influences
4. Technological influences
The Sociocultural Context

Society is composed of the individuals who make up a particular geographic region. Some
sociocultural trends are applicable to the citizens of an entire country. For example, a few of
the major social issues currently facing the United States are:
• Role of government in health care and elder care
• Terrorism and levels of violent crime
• Security of travel and public places
• Global warming
• War and role of the military
• Declining quality of education
• Financial market failures
• Quality and health levels of various imported and manufactured food products
• Pollution and disposal of toxic and nontoxic waste
ANALYSIS OF SOCIETAL TRENDS

The value of watching social trends is that it helps firms to understand preferences, strengthen
ties with existing customers, and create innovative products. The rising popularity of green
hotels and restaurant menus with organic foods are two examples of how broader social
trends can shape the industry. Hospitality firms that pay attention to social trends are able to:

• Recognize opportunities
• Identify unique generational and cultural differences
• Enhance corporate reputation
• Avoid unwanted legislation
 OPPORTUNITY CREATION

 Broader societal influences can create opportunities for organizations. For example, societal interest
in wellness has led to the development of state-of-the-art spas as a differentiating feature in upscale
hotels and resorts. Also, many baby-boomer couples had babies later in life than did past
generations, causing a demographic trend toward older couples with children. The higher income
levels of these more established parents means that they are more likely to travel with their children,
which has led to the development of programs that cater to their special interests.
 Population characteristics, or demographics, are often used in marketing research to understand
subgroups or segments and the behaviors of a typical member of a segment. Demographic trends,
such as the average age of a population, ethnic mix, migration patterns, income levels, and literacy
rates, can help in the development of strategy.
GENERATIONAL AND CULTURAL AWARENESS

Culture is defined as an evolving set of shared beliefs, values, and attitudes that help shape
how a social group thinks, sees, acts, and reacts to various events and situations. A generation
may shape its identity or distinctive beliefs and views as a result of social, political, and
economic events that occur during the preadult years.
CORPORATE REPUTATION

 A positive organizational reputation among stakeholders such as customers and suppliers

may increase demand for products or lead to increased business opportunities. Awareness
of and compliance with the attitudes of society can also help an organization avoid
problems associated with being perceived as a “bad corporate citizen.”
 The distrust of corporations goes hand in hand with greater confidence in the views and
opinions of consumers, particularly the views of other travelers. Social media web sites
and blogs, for example, have become an important tool for prospective hotel guests who
visit these sites to read comments and reviews about the hotels at their destination before
they make a reservation. Online buzz is a powerful way for customers to discover both
bad and good information about travel businesses.
SOCIAL RESPONSIBILITY

 Correct assessment of social trends can help businesses avoid restrictive legislation, which can
be a threat to organizational success. Industries and organizations that police themselves are
less likely to be the target of legislative activity, while being perceived as socially responsible.
 Social responsibility is when a firm takes a proactive stance in its social role, going beyond
what is called for by law. Legislative activity is often generated in response to a public outcry
against the actions of firms or industries.
 A socially responsible firm not only refrains from acting unethically, but also voluntarily seeks
to improve society. Important legislative and regulatory issues that affect the restaurant
industry include obesity lawsuits, health and safety regulations, immigration reform, business
meal deductibility, trans-fat bans, and minimum-wage regulations. A complex social issue
facing the restaurant industry is its role in influencing a healthy lifestyle for diners
 The Economic Context

 Economic forces can have a profound influence on organizational behavior and performance. Economic forces
that create growth and profit opportunities allow organizations to take actions that satisfy many stakeholders
simultaneously, particularly owners, employees, and suppliers. When economic trends are negative, managers
face tremendous pressures as they balance potentially conflicting stakeholder interests, often between
employees and owners.
 Economic growth, interest rates, the availability of credit, inflation rates, foreign exchange rates, and foreign-
trade balances are among the most critical economic factors. Many of these forces are interdependent.
Organizations should constantly scan the economic environment to monitor critical but uncertain assumptions
concerning the economic future, and then link those assumptions to the demand pattern and profit potential for
their products and services.
TABLE 2.2 A Few of Many Global Economic Forces to
Monitor and Predict
F ORCE Po TENTIAL Infl UENCES

Economic Growth Consum er dem and, cost of factors of production, availability of

factors of production (especially labor and scarce resources)

Interest Rates Cost of capital for new projects, cost of refinancing existing
debt, consum er dem and (due to customer ability to finance
purchases)

Inflation Interest rates, cost of factors of production, optim ism or

pessimism of stakeholders

Exchange Rates Ability to profitably rem ove profits from foreign ventures,
government policies toward business

Trade Deficits Government policies, incentives, trade barriers

 The Political Context

 Political forces, both at home and abroad, are among the most significant determinants of organizational success.
Governments provide and enforce the rules by which organizations operate. These rules include laws, regulations,
and policies.
 Governments can encourage new-business formation through tax incentives and subsidies, or through direct
intervention. Governments can also restructure companies or totally close firms that do not comply with laws,
ordinances, or regulations. Alliances among governments provide an additional level of complexity for
businesses with significant foreign operations. Also, some countries have established independent entities to
counsel them on government policy.
 The Technological Context

 Technological change creates new products, processes, and services, and, in some cases, entire new industries. It
also can change the way society behaves and what society expects. Notebook computers, compact discs and MP3
players, direct satellite systems, and cellular telephones are technological innovations that have experienced
extraordinary growth in the last decade, leaving formerly well-established industries stunned, creating whole
industries, and influencing the way many people approach work and leisure. Computers and telecommunications
technologies, for example, have played an essential role in creating the increasingly global marketplace. The
Internet, in particular, added a new communications and marketing tool that has led to many new global business
threats and opportunities
 Technology refers to human knowledge about products and services and the way they are made and delivered.
This is a fairly broad definition of technology. Typically, technology is defined in terms of such things as
machinery, computers, and information systems.
Technological change is difficult, but not impossible, to predict. An understanding of the three
characteristics of innovation can help an organization develop a plan for monitoring
technological change. They are:

1. Innovations often emerge from existing technologies.

2. A dominant design will eventually be widely adopted.
3. Radical innovations often come from outside of the industry group.
 DEALING WITH TECHNOLOGICAL CHANGE

To help identify trends and anticipate their timing, companies may participate in several kinds of
technological-forecasting efforts. In general, organizations may:
• Monitor trends by surfing the Web, studying journals, and staying current with the latest
reports.
• Solicit the opinion of experts outside of the organization. This is a more formal method of
technological forecasting, and these experts may be interviewed directly or contacted as part of a
formal survey, such as a Delphi study.
• Develop scenarios of alternative technological futures, which capture different rates of
innovation and different emerging technologies. Scenarios allow an organization to conduct “what-if
” analyses and to develop alter- native plans for responding to new innovations.
Change and Interdependence among the Broad
Environmental Forces

 Although each of the broad environmental forces has been discussed separately, in reality
they are interdependent. For example, social forces are sometimes intertwined with
economic forces. In some countries for example, birthrates (a social force) are low, and,
because of improved health care and lifestyles (another social force), people are living
longer. This demographic shift toward an older population is influencing economic forces
in society. For instance, the older population means that there are shortages of young
workers to fill the service jobs in hospitality, while demand for premium services by older
consumers is increasing.
TABLE 2.3
Assessment of the
Broad
Environment
Gathering Information on International Environments

These kinds of broad environmental insights necessary for good strategic decision making, or
turn to organizations which provides statistics and market reports for a wide variety of
countries and regions of the world.
Key environmental factors to any firm are:

1. The openness of a country’s borders

2. The infrastructure
3. The availability of support systems
4. Number of vacancies
5. Globalization openness of a country
 ANALYSIS OF EXTERNAL STAKEHOLDERS AND
THE OPERATING ENVIRONMENT

 The operating environment consists of stakeholders with whom organizations interact on a fairly regular
basis, including customers, suppliers, competitors, government agencies and admin-istrators, local
communities, activist groups, unions, the media, and financial intermediaries. Not all stakeholders are
equally important to firm success, nor do any of them play the same roles. Furthermore, stakeholders
have varying levels and types of power to influence an organization.
 This will briefly explore the characteristics that determine the nature of an industry, as well as
relationships that exist between an organization and its external stakeholders. It will discuss the power
particular stakeholder groups have to influence firm behavior and success. To begin, three of these
stakeholder groups will be discussed with regard to economic power in an industry: customers, suppliers,
and competitors.
FIGURE 2.3 Porter’s five forces model of industry competition

1
Porter’s Five Forces, Economic Power, and Industry
Characteristics

These five areas of competitive analysis, referred to as the five forces of

competition, are presented in Figure 2.3. According to Porter, the five forces largely
determine the type and level of competition in an industry and, ultimately, the
industry’s profit potential.
An analysis of the five forces is useful from several perspectives:
 First, by understanding how the five forces influence competition and prof-
itability in an industry, a firm can better understand how to position itself relative
to the forces, determine any sources of competitive advantage now and in the
future, and estimate the profits that can be expected.
 For small and start-up businesses, a five forces analysis can reveal opportunities
for market entry that will not attract the attention of the larger competitors.
 An organization can also conduct a five forces analysis of an industry before
entry to determine the sector’s attractiveness.
 If the firm is already involved in the industry, a five forces analysis can serve as
a basis for deciding to leave it.
 Finally, company managers may decide to alter the five forces through specific
actions.
ECONOMIC POWER OF CUSTOMERS

 Customers provide demand for products and services, without which an organization
would cease to exist. Because customers can withhold demand, they have bargaining
power, a form of economic power. They can influence a firm’s behavior. However, not all
customers have the same amount of bargaining power. For example, a tour operator who
buys 60 percent of rooms inventory of a given hotel has substantial influence over that
operation.
According to Porter, customers tend to exhibit greater bargaining
power under the following conditions:

 They are few in number. This creates a situation in which an industry competitor can’t afford to
lose a customer. The number of customers to hospitality firms tends to be large, so this typically is
not much of a factor.
 They make high-volume (regular) purchases. High-volume purchasers in the hospitality industry
can often dictate contract terms, force price concessions, or demand special services, for example,
when a corporate client books many room nights per year.
 They are few in number. This creates a situation in which an industry competitor can’t afford to
lose a customer. The number of customers to hospitality firms tends to be large, so this typically is
not much of a factor.
 They make high-volume (regular) purchases. High-volume purchasers in the hospitality industry
can often dictate contract terms, force price concessions, or demand special services, for example,
when a corporate client books many room nights per year.
 They are highly motivated to get good deals. This happens when they earn low profits or
when a lot of what they buy comes from the same industry. Terms of a deal may greatly
influence whether they will be successful in the next year. It is interesting to note that
airlines are asking for concessions from the airports they use because they are making
such low profits.
 They can easily integrate backward and thus become their own suppliers. Vertical
integration means that a firm moves forward to become its own customer or, in this case,
backward to become its own supplier.
 They are not concerned about the quality of what they are buying. This happens when the
products or services don’t influence the quality of the buyers own products or services.
Because quality is not affected, customers will be interested primarily in obtaining the
lowest possible price. For example, office supplies don’t influence the quality of services
provided by a high- quality hotel or restaurant.
 They have an information advantage when compared to the firms from which they buy
products and services. Information creates bargaining power. If customers know a lot
about the cost and profit structure of firms from whom they are buying, they can use this
information to their advantage. For instance, Web-based discount hotel retailers have
substantial information about the lodging companies from whom they buy inventory. This
puts them at a relative advantage at the bargaining table.
 They are well organized. Sometimes weaker customers come together to increase their
bargaining power. For example, tourists may join clubs or associations to increase their
ability to get relevant information or to obtain discounts.

In combination, these forces determine the bargaining power of customers—that is, the
degree to which customers exercise active influence over pricing and the direction of product-
development efforts. Powerful customers must be given high priority in strategic management
activities.
ECONOMIC POWER OF SUPPLIERS

Powerful suppliers can raise their prices and therefore reduce profitability levels in the buying
industry. They can also exert influence and increase environmental uncertainty by threatening
to raise prices, reducing the quality of goods or services provided, or not delivering
supplieswhen needed.
Many of the factors that give suppliers power are similar to the factors that give customers
power, only in the opposite direction. In general, supplier power is greater under the
following conditions:
 Suppliers are few in number, or, in the extreme case, there is only one supplier for a good
or service. This limits the ability of buying organizations to negotiate better prices,
delivery arrangements, or quality.
 They sell products and services that cannot be substituted with other products and
services. If there are no substitutes, the buying industry is compelled to pay a higher price
or accept less-favorable terms. Exotic, but popular, foods are often sold at very high
prices, even to restaurants, because they are not substitutable.
 They do not sell a large percentage of their products or services to the buying industry.
Because the buying industry is not an important customer, suppliers can reduce shipments
during capacity shortages, ship partial orders or late orders, or refuse to accept orders at
all, all of which can create turbulence for the buying industry, reduce profits, and increase
competition.
 They have a dependent customer. In other words, the buying industry must have what the
suppliers provide in order to provide its own services. In a literal way, restaurants must
have the foods they prepare in order to remain in business; however, in most markets, the
abundance of potential suppliers offsets this factor.
 They have differentiated their products or in other ways made it costly to switch suppliers.
For example, smaller hotel companies sometimes contract with a reservation service to
handle their bookings. If the company later chooses to purchase these services from a
different supplier, it must remove the reservation system, purchase or contract for a new
system, and retrain employees to use it.
 They can easily integrate forward and thus compete directly with their former buyers.
This happened when PepsiCo. acquired several quick-service restaurants, including Taco
Bell, KFC, and Pizza Hut.
 They have an information advantage relative to the firms they are supplying. If a sup-
plier knows a lot about the cost and profit structure of firms to which it is selling, the
supplier can use this information to its advantage. For instance, if a supplier knows that a
buyer is making high profits, a more attractive sales price can probably be negotiated.
 They are well organized. Sometimes suppliers form associations to enhance their
bargaining power. In a sense, employees who organize into a union are an example of
increasing supplier power.
COMPETITION, CONCENTRATION, AND MONOPOLY POWER

Competitive moves by one firm affect other firms in the industry, which may incite retaliation
or countermoves. In other words, competing firms have an economic stake in one another.
Examples of competitive moves and countermoves include:
• Advertising programs
• Sales force expansions
• New-service introductions
• Capacity expansion
• Long-term contracts with customers
ENTRY BARRIERS AND SUBSTITUTES

Several forces determine how easy it is to enter an industry, and therefore how many new
entrants can be expected. New entrants increase competition in a sector, which may drive
down prices and profits. The new entrants may add capacity, introduce new products or
processes, and bring a fresh perspective and new ideas all of which can drive down prices,
increase costs, or both. Forces that keep new competitors out, providing a level of protection
for existing competitors, are called entry barriers.
 Examples of entry barriers found in many industries
include:

 Economies of scale. Economies of scale occur when it is more efficient to provide a service
at higher volume. For example, the larger hotels enjoy economies of scale because standard
features such as the front desk and communications systems can service multiple rooms
simultaneously.
 Capital requirements. Also known as start-up costs, high capital requirements can prevent
a small competitor from entering an industry. High capital require-ments are sometimes
associated with economies of scale, because new entrants need to invest in a large facility
to be cost competitive.
 Product differentiation. Established firms enjoy a loyal customer base, which comes
from many years of past advertising, customer service, loyalty programs, word of
mouth, or simply being one of the first competitors in a particular market. These factors
make it very difficult for a new entrant to compete.
 High switching costs. Switching costs were mentioned earlier in our discussion of
supplier and buyer power, but they can also serve as an entry barrier to protect
competing firms. Switching costs are generally low in hospitality High switching costs.
Switching costs were mentioned earlier in our discussion of supplier and buyer power,
but they can also serve as an entry barrier to protect competing firms. Switching costs
are generally low in hospitality
 Inimitable resources. Resources that are possessed by industry participants but are
difficult or impossible to duplicate completely may include patents, favorable
locations, proprietary service technology, government subsidies, or access to scarce
raw materials such as land.
 Government policy. Sometimes governments limit entry into an industry, effectively
preventing new competition. For instance, many Native American tribes enjoy
exclusive rights to open casinos on their reservations, while developers in the
surrounding communities do not enjoy the same privilege.
External Stakeholders, Formal Power, and Political
Influence

The emphasis throughout this section so far has been on economics and bargaining
power. Economic analysis is important to strategic management. However,
economic power is not the only type of power available to stakeholders, nor do
economic factors completely determine the competitiveness of organizations. On the
influence side, groups and individuals may enjoy formal power, economic power, or
political power
 Formal power means stakeholders have a legal or contractual right to make decisions for
some part of the company. Regulatory agencies have formal power
 Economic power is derived from the ability to withhold services, products, capital,
revenues, or business transactions that the firm values.
 Political power comes from the ability to persuade lawmakers, society, or regulatory
agencies to influence the behavior of organizations
FIGURE 2.5 Typical roles of various stakeholder
MANAGING THE OPERATING ENVIRONMENT

The operating environment may seem overwhelming to many managers. Powerful

customers or suppliers can limit organizational success and profitability. Powerful
competitors can make it difficult to remain competitive. Substitute products put
pressure on prices and other product features. When entry barriers are low, new
competitors enter the industry on a regular basis.
Economic Actions

Firms may take a variety of economic actions to offset forces in the operating
environment. For example, if entry barriers are low, companies may work to erect
new entry barriers that prevent other firms from entering, thus preserving or
stabilizing industry profitability. Although a difficult task, the erection of entry
barriers can be accomplished through actions such as increasing advertising to
create product differentiation or by constructing larger facilities to achieve
economies of scale.
Competitive Tactics

 Industry rivals apply a variety of competitive tactics in order to win market share, increase
revenues, and increase profits at the expense of rivals.
 Competitive tactics include advertising, new-product launches, cost-reduction efforts, new service
methods, and quality improvements, to name a few. Typically, a particular industry can be
characterized by the dominance of one or more of these tools. For example, the chain restaurant
industry is characterized by high levels of advertising as a competitive weapon. In addition, the
entrance of international competitors into national and regional hospitality markets has placed an
increasing emphasis on product differentiation through high levels of quality
 Competitive benchmarking is a popular technique for keeping up with competitors. Benchmarking
is a tool for assessing the best practices of direct competitors and firms in similar industries, then
using the resulting stretch objectives as design criteria for attempting to change organizational
performance.
Political Strategies

 Political strategies include all organizational activities that have as one of their objectives
the creation of a friendlier political climate for the organization. Many large organizations
hire lobbyists to represent their views to political leaders. While lobbying can be part of a
political strategy, it is only a small part of the bigger political picture.
 Companies may donate to political causes or parties, special-interest groups, or charities.
They may pursue community-relations efforts or become involved in community service.
Most large organizations have public-relations officers, and many do public-relations
advertising.
Partnering with External Stakeholders

Organizations may partner for political reasons; however, many other types of partnerships
exist. Often firms partner to obtain complementary technologies or knowledge. As mentioned
previously, a firm’s most valuable resources may extend beyond the boundaries of the
company
Term that includes many types of organizational cooperation, including the following:
 Joint ventures
 Networks
 Consortia
 Trade associations
 Alliances
 Interlocking directorates
TABLE 2.5 Common Forms of Interorganizational Relationships
I N T ER O RG A N IZ AT IO N A L
F ORM D E S C R IP T IO N

Joint Venture An entity that is created when two or more firms pool a
p o rtio n o f th e ir re s o u rc e s to c re a te a s e p a ra te , jo in tly ow n ed
entity.

Network A hub-and-wheel configuration with a local firm at the hub

o rg a n iz in g th e in te rd e p e n d e n c ie s o f a c o m p le x a rra y o f firm s .

C o n s o rtia (C o o p e ra tiv e S p e c ia liz e d jo in t v e n tu re s e n c o m p a s s in g m a n y d iffe re n t

Partnerships) a rra n g e m e n ts . C o n s o rtia a re o fte n a g ro u p o f firm s o rie n te d
to w a rd p ro b le m s o lv in g a n d te c h n o lo g y d e v e lo p m e n t, s u c h a s
R&D consortia.

Alliance A n a rra n g e m e n t b e tw e e n tw o o r m o re firm s th a t e s ta b lis h e s

a n e x c h a n g e re la tio n s h ip b u t h a s n o jo in t o w n e rs h ip in v o lv e d .

Trade Association Organizations (typically nonprofit) that are formed by

firm s in th e s a m e in d u s try to c o lle c t a n d d is s e m in a te tra d e
in fo rm a tio n , o ffe r le g a l a n d te c h n ic a l a d v ic e , fu rn is h in d u s try -
re la te d tra in in g , a n d p ro v id e a p la tfo rm fo r c o lle c tiv e lo b b y in g .

In te rlo c k in g D ire c to ra te 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
d ire c to ra te s s e rv e a s a m e c h a n is m fo r in te rfirm in fo rm a tio n
sharing and cooperation.
Thank you!
ALDREX G. LAXAMANA, MBA
JOHN EDWARD S. ESTAYO, MBA
ELVIRA B. MERCADO, PH.D