Salazar, Darren Ace G.

BSBA MM 3-2

The External Environment

1. The General Environment:

An organization’s environment includes factors that it can readily affect as

well as factors that largely lay beyond its influence. The latter set of factors are said
to exist within the general environment. Because the general environment often has
a substantial influence on an organization’s level of success, executives must track
trends and events as they evolve and try to anticipate the implications of these
trends and events.

Economic Forces- The economic segment centres on the economic conditions within which

organizations operate. It includes elements such as interest rates, inflation rates, gross
domestic product, unemployment rates, levels of disposable income, and the general growth or
decline of the economy. The economic crisis of the late 2000s has had a tremendous negative
effect on a vast array of organizations. Rising unemployment discouraged consumers from
purchasing expensive, nonessential goods such as automobiles and television sets. Bank failures
during the economic crisis led to a dramatic tightening of credit markets. This dealt a huge blow
to home builders, for example, who saw demand for new houses plummet because mortgages
were extremely difficult to obtain.

Socio-cultural- A generation ago, ketchup was an essential element of every American

pantry and salsa was a relatively unknown product. Today, however, food manufacturers sell
more salsa than ketchup in the United States. This change reflects the social segment of the
general environment. Social factors include trends in demographics such as population size,
age, and ethnic mix, as well as cultural trends such as attitudes toward obesity and consumer
activism. The exploding popularity of salsa reflects the increasing number of Latinos in the
United States over time, as well as the growing acceptance of Latino food by other ethnic
groups.

Government- When marketing your products or services to the government, it’s important to
create a government-focused marketing plan, look at a value-based understanding of your
company’s scope and abilities, create a government-specific web presence, and have
government-focused capabilities statements for each agency. Using this knowledge and these
tools will help target the needs of the government and its agencies. This will inevitably lead to
greater government sales from new and reoccurring customers.

Political & Legal F- The centres on how the courts influence business activity. Examples of
important legal factors include employment laws, health and safety regulations, discrimination
laws, and antitrust laws.

Intellectual property rights are a particularly daunting aspect of the legal segment for many
organizations. When a studio such as Pixar produces a movie, a software firm such as Adobe
revises a program, or a video game company such as Activision devises a new game, these firms
are creating intellectual property. Such firms attempt to make profits by selling copies of their
movies, programs, and games to individuals. Piracy of intellectual property—a process wherein
illegal copies are made and sold by others—poses a serious threat to such profits. Law
enforcement agencies and courts in many countries, including the United States, provide
organizations with the necessary legal mechanisms to protect their intellectual property from
piracy. In other countries, such as China, piracy of intellectual property is quite
common. Three other general environment segments play a role in making piracy a
major concern. First, in terms of the social segment, China is the most populous
country in the world. Second, in terms of the economic segment, China’s affluence is
growing rapidly. Third, in terms of the technological segment, rapid advances in
computers and communication have made piracy easier over time. Taken together,
these various general environment trends lead piracy to be a major source of angst
for firms that rely on intellectual property to deliver profits.

Technology- The technological segment centres on improvements in products and services

that are provided by science. Relevant factors include, for example, changes in the rate of new
product development, increases in automation, and advancements in service industry delivery.
One key feature of the modern era is the ever-increasing pace of technological innovation. In
1965, Intel cofounder Gordon E. Moore offered an idea that has come to be known as Moore’s
law. Moore’s law suggests that the performance of microcircuit technology roughly doubles
every two years. This law has been very accurate in the decades since it was offered.

Demographic Forces- Demographic forces are the ones that define things like population
structure, the age of the people, gender ratio, occupational structure, family size, marital status
etc. 
2. The Competitive Environment:
A competitive environment is a system where different businesses compete with each
other by using various marketing channels, promotional strategies, pricing methods, etc. This
system has regulations within it that companies should follow

Customers- The major task of a business is to create and sustain customers. A business exists
only because of its customers. The choice of customer segments should be made by considering
a number of factors including the relative profitability, dependability, and stability of demand,
growth prospects and the extent of competition. Types of Customers are Wholesalers,
Retailers, Industries, Government, and Other Institutions Foreigners

Suppliers- An important force in the micro environment of a company is the suppliers, i.e.,
those who supply the inputs like raw materials and components to the company. The
importance of reliable source/sources of supply to the smooth functioning of the business is
obvious. They must be reliable and business must have multiple suppliers i.e. they should not
depend upon only one supplier.

Associations- It is the game plan that brings stakeholders together for a common set of goals,
whether it's reinventing your organization, repositioning for greater market penetration,
shifting to seize opportunity, accelerating growth, fortifying your position as the leader in your
space, or moving past a competitor.

Interest Group- Employees are part of the internal environment, but it is very likely that a
percentage of the employees will belong to a union.  A union is a formal group that acts to
represent the views of employees.  The union will often be used when there is a disagreement
with the managers, or during the process of negotiating the wages and conditions of the firm.
This type of pressure group retains a fairly direct association with the large scale organization;
there are other pressure groups that may operate with a less direct influence. 

Union- Unions are voluntary associations of workers formed to improve the negotiating

leverage of their members through collective bargaining. Workers and employers need each
other to create economic value, but often disagree about how that value should be
apportioned, because owners of capital are typically much wealthier and often more powerful
than individual suppliers of labour, such disagreements have historically tended to resolve in
favour of capital.

Competitors- Large scale organizations require large amounts of money.  This means using
the financial services that are offered by banks.  When a bank provides access to a loan, it is
normal for certain conditions to be attached.  In this way the bank (which is external to the
business) can affect the operations of the large scale organization.  At a simple level, a loan
must be repaid, which will require the commitment of future cash flow to make this possible. 

Creditors- Large scale organizations require large amounts of money.  This means using the
financial services that are offered by banks.  When a bank provides access to a loan, it is normal
for certain conditions to be attached.  In this way the bank (which is external to the business)
can affect the operations of the large scale organization.  At a simple level, a loan must be
repaid, which will require the commitment of future cash flow to make this possible. 

3. Porter's 5-Forces Analysis of Competition

What Are Porter's Five Forces?

Porter's Five Forces is a model that identifies and analyses five competitive forces that shape
every industry and helps determine an industry's weaknesses and strengths. Five Forces
analysis is frequently used to identify an industry's structure to determine corporate strategy.

Porter's model can be applied to any segment of the economy to understand the level of
competition within the industry and enhance a company's long-term profitability. The Five
Forces model is named after Harvard Business School professor, Michael E. Porter.

1. Competition in the Industry

The first of the Five Forces refers to the number of competitors and their ability to undercut a
company. The larger the number of competitors, along with the number of equivalent products
and services they offer, the lesser the power of a company.

Suppliers and buyers seek out a company's competition if they are able to offer a better deal or
lower prices. Conversely, when competitive rivalry is low, a company has greater power to
charge higher prices and set the terms of deals to achieve higher sales and profits.

2. Potential of New Entrants into an Industry

A company's power is also affected by the force of new entrants into its market. The less time
and money it costs for a competitor to enter a company's market and be an effective
competitor, the more an established company's position could be significantly weakened.

An industry with strong barriers to entry is ideal for existing companies within that industry
since the company would be able to charge higher prices and negotiate better terms.
3. Power of Suppliers

The next factor in the Porter model addresses how easily suppliers can drive up the cost of
inputs. It is affected by the number of suppliers of key inputs of a good or service, how unique
these inputs are, and how much it would cost a company to switch to another supplier. The
fewer suppliers to an industry, the more a company would depend on a supplier.

As a result, the supplier has more power and can drive up input costs and push for other
advantages in trade. On the other hand, when there are many suppliers or low switching costs
between rival suppliers, a company can keep its input costs lower and enhance its profits.

4. Power of Customers

The ability that customers have to drive prices lower or their level of power is one of the Five
Forces. It is affected by how many buyers or customers a company has, how significant each
customer is, and how much it would cost a company to find new customers or markets for its
output.

A smaller and more powerful client base means that each customer has more power to
negotiate for lower prices and better deals. A company that has many, smaller, independent
customers will have an easier time charging higher prices to increase profitability.

5. Threat of Substitutes

The last of the Five Forces focuses on substitutes. Substitute goods or services that can be used
in place of a company's products or services pose a threat. Companies that produce goods or
services for which there are no close substitutes will have more power to increase prices and
lock in favourable terms. When close substitutes are available, customers will have the option
to forgo buying a company's product, and a company's power can be weakened.

Understanding Porter's Five Forces and how they apply to an industry, can enable a company to
adjust its business strategy to better use its resources to generate higher earnings for its
investors.