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1200 words total. 3 APA cited references and reference list. NO PLAGIARISM PLEASE!!!1. In a narrative format, discuss the key facts and critical issues presented in the case.2. .Considering the challenges she is facing, what should Anita’s plan be for the strategic planning retreat? How would you reformulate the Art Center’s mission? Does the Center need a new strategy? Why or why not?3. How do some organizations predict the short and long-term future? Explain in detail how a downturn in the economy affects not-for-profit organizations, as opposed to for-profit ones.4. Identify and explain the factors that demonstrate the Walton Art Center’s utilization of the business-level differentiation strategy. What changes could be enacted that would alter the Center’s strategy to one of low-cost? Would this be advisable? Why?For question five 250 words total. 2 APA cited references and reference list. NO PLAGIARISM PLEASE!!!5. Explain the Environmental Scanning Process.Which element do you feel warrants attention?e
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Managing the
External Environment
Chapter Outline:
3-1
The Organization’s Industry
3-2
The Organization’s
Macroenvironment
3-3
Managing Environmental
Uncertainty
3-4
Environmental Scanning
3-5
Forecasting the
Environment
3-6
Crisis Management
Summary
Review Questions
Endnotes
Key Terms
boundary-spanning
buffering
crisis
crisis management
culture
Delphi technique
environmental scanning
V
I
C
K
E
R
S
,
T
E
A
R
D
R
A
1
1
9
1
T
S
gross domestic product (GDP)
imitation
industry life cycle
judgmental forecasting
macroenvironment
multiple scenarios
population ecology
self-reference criterion
time series analysis
uncertainty
3
An organization cannot function effectively unless its managers understand the
forces outside of the organization that influence its performance and survival. There
are two components of the organization’s external environment: the industry—the
collection of competitors that offer similar products or services—and the complex
network of political-legal, economic, social, and technological forces known
as the organization’s macroenvironment. This chapter addresses each of these
components.
3-1 The Organization’s Industry
Each business unit operates among a group of companiesVthat produce competing
products or services known as an industry. Although Ithere are usually some
differences among competitors, each industry has “rules of combat” governing
C
such issues as product quality, pricing, and distribution. This is especially true in
K
industries that contain a large number of firms offering standardized
products and
E States generally offer
services. For example, most service stations in the United
R at prices that do not
regular unleaded, mid-grade, and premium unleaded gasoline
differ substantially from those at nearby stations. If a rivalS
attempts to sell different
grades, it may experience difficulty securing reliable sources
, of supply and may
also confuse consumers by deviating from the standard.
macroenvironment
the general environment
that affects all business
firms in an industry, which
includes political-legal,
economic, social, and
technological forces
industry
a group of competitors
that produces similar
products or services
In a perfect world, each organization would operate in oneT
clearly defined industry.
In the real world, however, many organizations compete in multiple industries, and
E
it may be difficult to clearly identify the industry boundaries. As such, the concept
A
of primary and secondary industries may be useful in defining an industry. A
R competitors, whereas
primary industry may be conceptualized as a group of close
D distinction between
a secondary industry includes less direct competition. The
primary and secondary industry may be based on objective
R criteria such as price,
similarity of products, or location, but is ultimately a subjective
A call.
3-1a Porter’s Five Forces Model
1
Industry factors have been found to play a major role in the
1 performance of many
1
companies, with the exception of those that are its notable
9 leaders or failures.
As such, one needs to understand these factors at the outset before delving into
1
the characteristics of a specific firm. Michael Porter proposed a systematic means
T Porter’s “five forces”
of analyzing an industry’s potential profitability known as
S
model. As aforementioned, this model is based on IO economics
and suggests that
industry structure is the primary determinant of firm performance. According to
Porter, an industry’s overall profitability depends on five basic competitive forces,
the relative weights of which vary by industry:
1. The intensity of rivalry among incumbent firms: Competition intensifies
when a firm identifies the opportunity to improve its position or senses
competitive pressure from other businesses in its industry, which can result
Organizational Theory
3-2
in price wars, advertising battles, new product introductions or modifications, and even
increased customer service or warranties.2
2. The threat of new competitors entering the industry: Unless the market is growing
rapidly, new entrants intensify the fight for market share, lowering prices and, ultimately,
industry profitability.
3. The threat of substitute products or services: Firms in one industry may be competing
with firms in other industries that produce substitute products, offerings produced by
firms in another industry that satisfy similar consumer needs but differ in specific
characteristics.
4. The bargaining power of buyers: The buyers
Vof an industry’s outputs can lower that
industry’s profitability by bargaining for higher
I quality or more services and playing
one firm against another.
C
5. The bargaining power of suppliers: Suppliers
K can extract the profitability out of an
industry whose competitors may be unable to recover cost increases by raising prices.
E
R
S
,
T
E
A
R
D
R
A
Figure 3.1
Porter’s Five Forces Model
1
Each of the five forces suggests that potential profits within
1 an industry may be high, moderate,
or low. Analyzing the five forces for an organization’s9industry can help managers understand
the potential for superior performance within that industry.
It does not guarantee high or low
1
performance, as there are usually substantial performance differences among organizations
T
in the same industry. Porter’s five forces model, however, provides a useful framework for
S
thinking about the effects an industry has on an organization.
There are other valid perspectives on organizations and industries besides Porter’s view. As
Porter suggests, organizations functioning in a given industry generally possess a number of
similarities that are not typically shared by those in other industries. Fast-food restaurants, for
example, tend to be labor-intensive and cost-conscious, with established systems to provide
fast, efficient service to customers. However, new organizations may “buck the trend” from to
time by taking different approached designed to respond to changes in the environment more
Organizational Theory
3-3
effectively. Whereas Porter’s five forces model emphasizes similarities among
organizations within an industry, the population ecology perspective emphasizes
organizational diversity and adaptation.3 According to this view, organizations
can be better understood by examining when and how they are formed, why new
organizations might vary from existing ones, and ultimately why some survive
when others fail. Some insight into this view can be obtained by considering the
life cycle through which an industry passes.
3-1b Industry Life Cycle
Like organizations, industries develop and evolve over time. Not only might the
V constantly, but the
group of competitors within an organization’s industry change
nature and structure of the industry can also change as it Imatures and its markets
become better defined. An industry’s developmental stage
C influences the nature
4
In theory, each
of competition and potential profitability among competitors.
K
industry passes through five distinct phases of an industry life cycle.
E
R
S
,
Figure 3-2
population ecology
a perspective on
organizations that
emphasizes the diversity
among organizations that
perform similar functions
and utilize common
resources
industry life cycle
the stages (introduction,
growth, shakeout,
maturity, and decline)
through which industries
are believed to pass
A young industry that is beginning to form is considered to be in the introduction
stage. Demand for the industry’s outputs is low becauseTproduct and/or service
awareness is still developing. Most purchasers are first-time
buyers, and tend
E
to be affluent, risk tolerant, and innovative. Technology A
is a key concern in this
stage because businesses often seek ways to improve production
and distribution
R
efficiencies as they learn more about their markets. Organizations emerging in
D
this stage often attempt to capitalize on first-mover advantages, similar to the
R
prospector strategy discussed in a previous chapter.
A
Normally, after key technological issues are addressed and customer demand begins
to rise, the industry enters the growth stage. Growth continues during this stage but
tends to slow as the market demand approaches saturation.1Fewer first-time buyers
1
remain, and most purchases tend to be “upgrades” or replacements.
Some of the
industry’s weaker competitors may not survive. Those that9do establish distinctive
competencies that can help distinguish them from their competitors.
1
Shakeout occurs when industry growth is no longer rapid
T enough to support the
increasing number of competitors in the industry. As a S
result, an organization’s
growth is contingent on its resources and competitive positioning instead of a high
growth rate within the industry. Marginal competitors are forced out, and a small
number of industry leaders may emerge.
Maturity is reached when the market demand for the industry’s outputs is
completely saturated. Virtually all purchases are upgrades or replacements, and
industry growth may be low, nonexistent, or even negative. Industry standards for
Organizational Theory
3-4
quality and service have been established, and customer expectations tend to be more consistent than in previous
stages. The U.S. automobile industry is a classic example of a mature industry. Firms in mature industries often
seek new uses for their products or services or pursue new markets, often through global expansion. Because
the field has become crowded and customers have become more sophisticated, many successful organizations
begin to emphasize efficiencies in order to offer greater value.
The decline stage occurs when demand for an industry’s products and services decreases and often begins when
consumers begin to turn to more convenient, safer, or higher quality offerings from organizations in substitute
industries. Some firms may divest their business units in this stage, whereas others may seek to “reinvent
themselves” and pursue a new wave of growth associated with a similar product or service.
The life cycle model is a useful tool for evaluating an industry’s development and the types of organizations
V
that may be most likely to succeed. The key problem with the model, however, is that identifying an industry’s
I follow these exact stages or at predictable intervals.5
precise position is often difficult, and not all industries
For example, the U.S. railroad industry did not reachC
maturity for many decades and extended over a hundred
years before entering decline, whereas the personal computer
industry began to show signs of maturity after
K
only seven years.
E
R
S
3-2 The Organization’s Macroenvironment
,
The second component within an organization’s external environment is the macroenvironment and consists
of political-legal, economic, social, and technological forces. Ultimately, the effects of these forces create
T forces in the macroenvironment affect all competitors
opportunities and threats for an organization. In general,
within a given industry, although the nature of the effects
E can differ among firms. For example, a sharp economic
decline may threaten the livelihood of a luxury automobile
manufacturer, while at the same time creating an
A
opportunity for a carmaker with substantially lower costs.
R
Most organizations have little, if any influence overD
the macroenvironment. On occasion, a large, dominant
firm such as Wal-Mart may be able to exert someRdegree of influence over one or more aspects of the
macroenvironment. For example, the giant retailer’s political action committee contributed about $1 million
A
to candidates and parties in the United States in both 2003 and 2004, presumably in an effort to influence
regulation that might affect the organization.6 However, most organizations must seek to join with others in
1 trade and other associations in an attempt to exert
1 some degree of influence on a particular factor in the
9 macroenvironment.
1
T
S
Figure 3-3
Some factors may be placed neatly into one of these
interrelated categories, whereas others may straddle
two or more classes. For example, automobile safety
has political-legal (e.g., legislation requiring that
safety standards be met), social (e.g., consumer
demands for safe vehicles), and technological (e.g.,
innovations that may improve safety) dimensions.
For clarity concerns, however, each category of
macroenvironmental forces is discussed separately.
Organizational Theory
3-5
3-2a Political-Legal Forces
Political-legal forces include such factors as the outcomes of elections, legislation,
and judicial court decisions, as well as the decisions rendered by various commissions
and agencies at every level of government. Military conflicts are also included in
this arena and can also influence how a number of industries operate, especially
those with tight global ties. In 2003, for example, during the beginning of the war
in Iraq, many American firms modified their promotional strategies, fearing that
their television advertisements might be considered insensitive if aired alongside
breaking coverage of the war. At the same time, others began to plan for meeting
the anticipated future needs in Iraq for such products as cell phones, refrigerators,
and automobiles. In late 2003, American firms began toV
compete vigorously for
lucrative reconstruction contracts, while others preparedI for increased business
activity there in the coming years.7
C
K events specific to
Industries are often affected by legislation and other political
their line of business. For example, the Highway Traffic Safety
E Administration in
the United States constantly tests cars and trucks sold in R
the U.S. and works with
8
carmakers to improve safety performance. Following the sharp declines in air
S
travel in the United States in 2001, airlines on the verge of bankruptcy campaigned
, and an additional $2.9
for and received $15 billion in government support in 2002
billion in 2003.9 All societies have laws and regulations that restrict or control
T nations such as the
business operations. Relatively speaking, free market oriented
United States have fewer restrictions, but the level of regulation
can be extensive
E
in some areas. Many socialist nations have rigid guidelines
A for hiring and firing
employees or establishing operations, and some require that a portion of what is
R
produced in that country be exported to earn foreign exchange. These regulations
D to firms interested
are specific to each nation and create opportunities or pose threats
R
in operating across national boundaries.
A
3-2b Economic Forces
Every organization is affected by changes in the local,1national, and/or global
economies. The first economic consideration is that of the 1
gross domestic product
(GDP), the value of a nation’s annual total production of goods
9 and services. GDP
growth among nations is often interrelated, but all nations
1 do not experience the
same rate of growth. For example, while GDP levels in the West were stagnant
T
during the late 1990s and early 2000s, China’s GDP grew at a staggering pace.10
gross domestic
product
the value of a nation’s
annual total production of
goods and services
S
Consistent GDP growth generally produces a healthy economy fueled by
increases in consumer spending, whereas a decline signals lower consumer
spending and decreased demand for goods and services. When GDP declines for
two consecutive quarters, a nation’s economy is generally considered to be in a
recession. A recession is not detrimental for all organizations. For example, college
and university enrollments often increase as undergraduate and graduate students
Organizational Theory
3-6
seek to gain an advantage in a tight job market.11 Unfortunately, it is difficult to forecast a recession in advance,
and many recessions are identified only after they have occurred.
High inflation negatively affects most, but not all businesses. High rates raise many of the costs of doing
business, and continued inflation can constrict the expansion plans of businesses and trigger governmental
action, such as is the case when the U.S. Federal Reserve Board raises its discount rate during inflationary
periods to slow economic growth. However, oil companies may benefit during inflationary times if the prices of
oil and gas rise faster than the costs of exploration, refinement, and transportation. Sharp increases in the price
of heating oil sparked a resurgence in the market for coal stoves in the winter of 2000–2001.12
Interest rates affect the demand
for many products and services,
V
especially “high ticket” items
I
whose costs are financed over
C
an extended period of time,
such as homes, automobiles,
K
and appliances. At the consumer
E
level, low short-term interest
R
rates benefit retailers such as
S
Wal-Mart and J.C. Penney
,
because they also tend to
lower rates on credit cards,
thereby encouraging consumer
T
spending. At the organizational
E
level, high interest rates can
A
Recessions can be devastating for firms in many industries, but they are difficult to predict.
hinder expansion efforts.
R
Organizations that transact a significant amount of business
with entities outside of its borders are especially
D
vulnerable to changes in rates of exchange between the home and other currencies. When the value of the dollar
R
increases relative to other currencies, for example, American organizations are at a competitive disadvantage
A rise in foreign markets. In addition, American
internationally, as the prices of American-made goods
manufacturers tend to locate more of their plants abroad and make purchases from foreign sources. During this
time, American consumers are more likely to purchase1products produced abroad, which are less expensive than
goods produced at home.
1
9
3-2c Social Forces
1
Social forces include such factors as societal values,
T trends, traditions, and religious practices and can
substantially influence organizational performance. Social
S forces can vary widely among nations, especially
as they are related to other factors. For example, smaller cars have been the vehicle of choice in European
countries since the 1990s. In Europe, roads are more narrow, gasoline is more heavily taxed, and fuel economy
is a greater concern. In the United States, roads are wider, gasoline is less expensive, and fuel consumption does
not play as strong a role in the purchase decision. As a result, American consumers tend to demand relatively
larger vehicles.13 Fashion in China also offers another example, where styles reflect a mix of Asian, American,
and European tastes.14
Organizational Theory
3-7
Social forces often reflect societal practices that have lasted for decades or even centuries. For example, the
celebration of Christmas in the Western Hemisphere provides significant financial opportunities for card
companies, toy retailers, confectioners, tree growers, and gift shops. Some retailers are happy just to break even
during the year and generate their profits during the Christmas shopping season.
Societal trends also include demographic changes that can affect how organizations must function in order to
succeed. Consider the United States as an example. The baby boom, which lasted from 1945 through the mid1960s, initially created opportunities for baby apparel and diaper manufacturers, private schools, and even candy
and snack makers. Later, as this crop of baby boomers departed high school, universities grew at an astounding
rate and organizations had large applicant pools from which to select their employees. More recently, these baby
boomers have begun shopping at home more and are spending heavily on health-care needs, leisure activities,
V
and vacations.15
I
Today, the average American is older, busier, better educated,
more technologically astute, and less likely to be …
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