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The External Environment - Cengage Learning

The External EnvironmentThe Broad EnvironmentSocio-cultural ForcesGlobal economic ForcesGlobal Technological ForcesGlobal Political/Legal ForcesThe Task EnvironmentCompetitive ForcesExternal Stakeholders and Environmental UncertaintyPartnering with External StakeholdersStrategic GroupsKey Points SummaryEnd Notes2 CHAPTERJust like the steel and auto in-dustries during earlierdecades, the music industry isunder siege. In recent years,the technological, economic ,legal, and competitive forceshave conspired to alter adecades-old business traditional music recordingand production companies inthe $40 billion music industryare being forced to evolvefrom selling products to simplyproviding a CDs each cost about$.50 to make, but retail for$ or more. The $ price covers the cost ofproduction, marketing, distribu-tion, royalties to the artists, andpercentages for the record com-panies and the retailers.

The External Environment The Broad Environment Socio-cultural Forces Global Economic Forces Global Technological Forces Global Political/Legal Forces

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Transcription of The External Environment - Cengage Learning

1 The External EnvironmentThe Broad EnvironmentSocio-cultural ForcesGlobal economic ForcesGlobal Technological ForcesGlobal Political/Legal ForcesThe Task EnvironmentCompetitive ForcesExternal Stakeholders and Environmental UncertaintyPartnering with External StakeholdersStrategic GroupsKey Points SummaryEnd Notes2 CHAPTERJust like the steel and auto in-dustries during earlierdecades, the music industry isunder siege. In recent years,the technological, economic ,legal, and competitive forceshave conspired to alter adecades-old business traditional music recordingand production companies inthe $40 billion music industryare being forced to evolvefrom selling products to simplyproviding a CDs each cost about$.50 to make, but retail for$ or more. The $ price covers the cost ofproduction, marketing, distribu-tion, royalties to the artists, andpercentages for the record com-panies and the retailers.

2 In amajor settlement with recordcompanies, the Federal TradeCommission recently concludedthat consumers may have over-paid more than $450 million forCDs in the past three years. Theagreement requires that recordcompanies change their more significant threat tothe traditional business model istechnological change. TheInternet has spawned a series ofstart-up companies that allowSTRATEGY IN FOCUS swapping and downloading ofmusic files. Several companies,with Napster being the most fa-mous, capitalized on the ease oftransferring MP3 music files. Theapproach used by these compa-nies is to simply act as a switch-board for matching up customerswith their music interests, whichallows users to copy music fromother users free of expected, Napster s ac-tivities have been challenged incourt as a violation of copyrightlaws. A San Francisco federaljudge ordered Napster to ceaseits music transfer has argued that it nevertakes possession of files orstores them on its server it justmoves the files from one cus-tomer to the other.

3 Although thelegality of the issue is still beingassessed, the implications forthe record companies are should a record companyproduce millions of CDs thenship them via distributors all overthe world? Why should retailersmaintain an inventory of CDswhen it is so easy to create aCD on the spot? What is toprevent a well-known musicgroup with a young, Internet-savvy fan base say, theBackstreet Boys from justrecording their own music thenputting it out via their group sown Web site, circumventingrecord companies altogetherand collecting all of the profitsdirectly?The implications are pro-found. In the future, record com-panies may just control accessto copyrighted music rather thanparticipate in production anddistribution. According to one in-dustry consultant, The musicbusiness will become aboutgrowing the size of the becomes more like radio ortelevision. Payment to artistsmay be based on a royalty perdownload.

4 Traditional retailersmay be largely cut out of theloop and, once established,artists may choose to accesstheir market directly. As notedby Time magazine writer, KarlTaro Greenfeld, Ultimately, itwill be technology and econom-ics, not lawyers and megabands, that will call the tune inthe music business. Already,record companies like Sony,Warner, Universal, EMI, andBMG are making plans to selldigital files of music, either asalbums or Music IndustryThis chapter is about the influence of the External Environment on organiza-tions. Although an organization cannot have much direct influence on its broadenvironment ( , society, the economy, technology, global politics), it can bufferitself from threats and take advantage of opportunities. On the other hand, the ex-ternal stakeholders that compose an organization s task Environment ( , cus-tomers, suppliers, competitors) are subject to substantial firm influence.

5 As de-scribed in the previous example, the fundamental technological trends and theresulting economic trends, both of which are part of the broad Environment , arelargely beyond the influence of any one firm. The competitive implications suchas the threat of substitute business models like the Napster model, and the rela-tionships with artists, distributors, and retailers can be influenced by organiza-tions within the music industry. Whether they treat these fundamental changes asthreats or opportunities may determine their survival. We will now discuss thebroad Environment , followed by the task BROAD ENVIRONMENTF orces in the broad Environment can have a tremendous impact on a firm and itstask Environment ; however, individual firms typically have only a marginal abil-ity to influence these forces. In rare cases, individual firms can influence trends inthe broad Environment , as when innovations at Intel influence technologicaltrends in the microprocessor, microcomputer, and software industries.

6 In general,however, it is virtually impossible for one independent firm to dramatically in-fluence societal views on abortion, policies on free trade with China, migration tothe Sun Belt, the number of school-age children, or even the desirability of par-ticular clothing styles. Consequently, although firms may be able to influence thebroad Environment to some degree, the emphasis in this book generally will beon analyzing and responding to this segment of the Environment . The most im-portant elements in the broad Environment , as it relates to a business organizationand its task Environment , are global socio-cultural, economic , technological, andpolitical/legal ForcesA few of the major socio-cultural issues currently facing the United States areshown in Exhibit Analysis of societal trends is important from at least fourperspectives.

7 First, because most of the other stakeholder groups are also mem-bers of society, some of their values and beliefs are derived from broader societalinfluences, which can create opportunities and threats for organizations. For ex-ample, societal interest in health and fitness has led to business opportunities inthe home fitness and nutritional supplements industries, whereas concerns aboutsmoking have set the stage for a regulatory and legal backlash against the , firms may reduce the risk of gaining a bad ethical reputation by an-ticipating and adjusting for socio-cultural trends. In the late 1990s, Bill Gates, thefounder of Microsoft, was facing rising societal concern about the extraordinaryprofits generated by Microsoft and by his unimpressive philanthropic record. 2In 1999, he donated $ billion to the William Gates Foundation, which providesgrants for health and human services organizations, the Gates Learning20 Foundations in Strategic ManagementChapter 2 The External Environment21 Exhibit Social Issues in the United StatesRole of government in health care and child careDeclining quality of educationLegality of abortionInfluence of World Wide WebImportance and role of the militaryLevels of foreign investment/ownership in the United StatesSocial costs of restructuring, especially layoffsPollution and disposal of toxic and nontoxic wastesGeneral increase in environmental awarenessDrug addictionContinued migration toward the Sun Belt statesGraying of AmericaAIDS and other health problemsMajor global issuesImmigration restrictionsFoundation, which gives software, computers.

8 And services to libraries in low-income observers speculated that he was giving the money to gar-ner sympathy as he was entering his antitrust investigation. In another example,the Denny s restaurant chain was known for many years as one of America s mostracist companies. However, Ron Petty, Denny s CEO, introduced initiatives thatturned the company into a model of multicultural 2000, after twoyears in the top 10, Denny s was number one on the list of Fortune s best compa-nies for , correct assessment of socio-cultural trends can help businesses avoidrestrictive legislation. Industries and organizations that police themselves are lesslikely to be the target of legislative activity. In 2000, Microsoft was judged to be amonopoly and ordered to break into two separate businesses. Although the judg-ment is under appeal at the time of this writing, the decision raises the question could Microsoft have done something to avoid the investigation in the first place?

9 Could they have anticipated and avoided the wrath of competitors and the at-tention of regulators? In another example of societal concerns about businesspractices, the United States Sentencing Guidelines (USSG), compulsory guide-lines courts must use to determine fines and penalties when corporate illegalitiesare proven, were a direct response to public outcry over negligence on the part ofbusinesses in preventing white-collar fourth reason why analysis of socio-cultural values is important is thatdemographic and economic changes in society can create opportunities for andthreats to the revenue growth and profit prospects of an organization. For exam-ple, many baby boomer couples had babies later in life than their counterparts inpast generations, causing a demographic trend toward older couples with chil-dren.

10 In the 1990s, the higher levels of income of these more established 30- and40-something parents led to the development of higher quality baby accessories,clothing, and supplies, as well as new business opportunities in child care and22 Foundations in Strategic Managementspecialized education. Seemingly unrelated industries, such as the motion pictureand television industries, took advantage of these trends by producing manymovies and television shows that centered on families and children. In the nextseveral years, more of these aging baby boomers, who were born between 1945and 1965, will be entering their wealthy empty-nest years and retiring. Theirnumbers and their wealth will continue to stimulate growth in recreational andleisure industries, and in luxury products and services. Furthermore, the baby-boomers children have purchasing power greater than previous generations ofchildren, stimulating demand for music, entertainment, and fashion.


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