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MGT603 - Strategic Management - Lecture Handout 08

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KEY EXTERNAL FACTORS

Objectives:

Increasing turbulence in markets and industries around the world means the external audit has become an explicit and vital part of the strategic-management process. This lecture provides a framework for collecting and evaluating economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information. Firms that do not mobilize and empower their managers and employees to identify, monitor, forecast, and evaluate key external forces may fail to anticipate emerging opportunities and threats and, consequently, may pursue ineffective strategies, miss opportunities, and invite organizational demise. Firms not taking advantage of the Internet are falling behind technologically.

Economic Forces:

It is important to monitor key economic factors such as:

  • Foreign countries’ economic conditions
  • Import/export factors
  • Demand shifts for goods/services
  • Income differences by region/customer
  • Price fluctuations
  • Exportation of labor & capital
  • Monetary policies
  • Fiscal policies
  • Tax rates
  • ECC policies (European policies)
  • OPEC policies (Organization of Petroleum exporting countries)
  • LDC policies (Less developed countries)

Price fluctuation refers to general price fluctuation. They affect the economic factors and affect the customers buying behaviors. The customers are more conscious about the economic changes and responds according to the changes in key variable factors. So, any change in the price affects the customer buying trend directly.
As far as the exportation of capital and labour is concerned, over the last 300 years Pakistan has seen a tremendous exportation of labour. Capital is not only left a vacuum on organization.
Monetary policies and Fiscal policies are changed every year. The person or businesses engaged in business for profit making or non profit organizations always have to keep an eye on the economic structure of the countries.
As far as the tax rates are concerned, government also changes the tax rate with the passage of time. So it affects the economic forces.
ECC and OPEC policies and LDC policies have also a major effect on the economic factors.

Social, Cultural, Demographic, and Environmental Forces

Social, cultural, demographic, and environmental changes have a major impact upon virtually all products (Preferences change), services, markets, and customers. Small, large, for-profit, and nonprofit organizations in all industries are being staggered and challenged by the opportunities and threats arising from changes in social, cultural, demographic, and environmental variables. In every way, the United States is much different today than it was yesterday, and tomorrow promises even greater changes. We may use the following analysis in understanding the Social, Cultural, Demographic, and Environmental Forces:

Consider Pakistan—

  • Population growing older
  • Increase in younger population
  • Ethnic balance changing
  • Gap between rich and poor widening

Ethnic balance changes due to the migration of the people from different areas to different areas. This affects the ethical behavior very much. As the traditions and norms are very much different in different areas of Pakistan, therefore the behavior of the migrated people also have a major affect on the behavior of the resident people. Due to the increased gap between rich and the poor, there is a tremendous change in the social behavior of the people.

Now consider America—

  • Population growing older
  • Increase in younger population
  • Less Caucasian
  • Gap between rich and poor widening
  • 65 and older will rise to 18.5% of population by 2025
  • By 2075, no racial or ethnic majority

The United States is getting older and less Caucasian, feeding generational and racial competition for jobs and government money. The gap between rich and poor is growing in the United States. America's 76 million baby boomers plan to retire in 2011, and this has lawmakers and younger taxpayers deeply worried and concerned about who will pay their social security, Medicare, and Medicaid. Persons aged 65 and older in the United States will rise from 12.7 percent of the population to 18.5 percent between 1997 and 2025. By the year 2075, the United States will have no racial or ethnic majority. This forecast is aggravating tensions over issues such as immigration and affirmative action. Hawaii and New Mexico already have no majority race or ethnic group and as of the year 2000, neither has California.
An increase in tourism worldwide is an opportunity for many firms. France is the destination for more tourists annually than any other country.
The factors are same as in Pakistan but with a littlie difference, due to the strategies that are different in order to run the social factors.
Also consider the factors:

  • World population > 6 billion
  • U.S. population < 300 million and Pakistan population is 150-160 million (domestic strategy is risky in case of Pakistan)
  • Great potential for domestic production expansion to other markets
  • Domestic only is a risky strategy
  • Same goes for Pakistan

Population of the world passed 6 billion on October 12, 1999; the United States has less than 300 million persons. That leaves billions of persons outside the United States who may be interested in the products and services produced through domestic firms. Remaining solely domestic is increasingly a risky strategy. Given table provides the percentage increase in population projected for major areas of the world between 1998 and 2050. The world population will reach 7 billion in 2013; 8 billion in 2028; and 9 billion in 2054.

World Population Statistics
  1998 2050 % Increase
Asia 3.6 billion 5.3 billion 47.22
Africa 749 million 1.8 billion 140.32
Latin America/Caribbean 504 million 809 million 60.52
Europe 628 million 729 million 16.08
North America 305 million 392 million 28.52
Oceania 30 million 46 million 53.33
Adapted from United Nations Population Division, World Population Prospects, 1999.

NAFTA (regional group)

  • U.S. exports to Mexico increased 170%
  • 2000, U.S. trade deficits:
    • Mexico -- $25 billion
    • China -- $84 billion
    • Japan -- $81 billion
  • 2001 Recession (U.S. and World)
  • 60,000 lay off along Mexico Border with U.S.
  • Consider SAARC & other Regional Assoc.

Trends for the 2000’s
USA:

  • More educated consumers
  • Population aging
  • Minorities more influential
  • Local rather than federal solutions
  • Fixation with youth decreasing
  • Hispanics increase to 15% by 2021
  • African Americans increase to 14% by 2021

Pakistan:

  • Provincial rather than federal solutions
  • Youth getting more independent
  • Steady change in ethnic balance
  • More educated consumers
  • Higher average lifespan
  • Increase in number of youth
  • Minorities have more say (including women)

Social, cultural, demographic, and environmental trends are shaping the way Americans live, work, produce, and consume. New trends are creating a different type of consumer and, consequently, a need for different products, different services, and different strategies. There are now more American households with people living alone or with unrelated people than there are households consisting of married couples with children. Census data suggest that Americans are not returning to traditional lifestyles.
Significant trends for the 2000s include consumers becoming more educated, the population aging, minorities becoming more influential, people looking for local rather than federal solutions to problems, and fixation on youth decreasing. The United States Census Bureau projects that the number of Hispanics will increase to 15 percent of the population by 2021, when they will become a larger minority group than African Americans in America. The percentage of African Americans in the U.S. population is expected to increase from 12 percent to 14 percent between 1999 and 2021. Many states currently have more than 500,000 Hispanics as registered voters, including California, New Mexico, Arizona, Texas, Florida, New York, Illinois, and New Jersey. The fastest-growing businesses in the United States are owned by women of color. The Hispanic population in the United States increased by 40 percent from 1990 to 1998. States with the largest percentage increase of Hispanics during that period were Arkansas (149%), Nevada (124%), North Carolina (110%), Georgia (103%), and Nebraska (96%).
During the 1990s, the number of individuals aged fifty and over increased 18.5 percent, to 76 million. In contrast, the number of Americans under age fifty grew by just 3.5 percent. The trend toward an older America is good news for restaurants, hotels, airlines, cruise lines, tours, resorts, theme parks, luxury products and services, recreational vehicles, home builders, furniture producers, computer manufacturers, travel services, pharmaceutical firms, automakers, and funeral homes. Older Americans are especially interested in health care, financial services, travel, crime prevention, and leisure. The world's longest-living people are the Japanese, with Japanese women living to 86.3 years and men living to 80.1 years on average. By 2050, the Census Bureau projects the number of Americans age one hundred and older to increase to over 834,000 from just under 100,000 centenarians in the United States in 2000. Senior citizens are also senior executives at hundreds of American companies. Examples include eighty-four-year-old William Dillard at Dillard's Department Stores, seventy-six-year-old Sumner Redstone, CEO of Viacom, sixty-eightyear- old Ellen Gordon, President of Tootsie Roll Industries, seventy-four-year-old Richard Jacobs, CEO of the Cleveland Indians, seventy-three-year-old Leslie Quick, CEO of Quick & Reilly, eighty-year-old Ralph Roberts, Chairman of Comcast, and seventy-three-year-old Alan Greenspan, Chairman of the Federal Reserve. Americans age sixty-five and over will increase from 12.6 percent of the U.S. population in 2000 to 20.0 percent by the year 2050.
The aging American population affects the strategic orientation of nearly all organizations. Apartment complexes for the elderly, with one meal a day, transportation, and utilities included in the rent, have increased nationwide. Called life care facilities, these complexes now exceed 2 million. Some well-known companies building these facilities include Avon, Marriott, and Hyatt. By the year 2005, individuals aged 65 and older in the United States will rise to 13 percent of the total population; Japan's elderly population ratio will rise to 17 percent, and Germany's to 19 percent.
Americans are on the move in a population shift to the South and West (Sun Belt) and away from the Northeast and Midwest (Frost Belt). The Internal Revenue Service provides the Census Bureau with massive computer files of demographic data. By comparing individual address changes from year to year, the Census Bureau publishes extensive information about population shifts across the country. For example, Arizona is the fastest-growing state. Nevada, New Mexico, and Florida are close behind. Wyoming is the nation's least-populated state and California the most-populated state. States incurring the greatest loss of people are North Dakota, Wyoming, Pennsylvania, Iowa, and West Virginia. This type of information can be essential for successful strategy formulation, including where to locate new plants and distribution centers and where to focus marketing efforts.
Americans are becoming less interested in fitness and exercise. Fitness participants declined in the United States by 3.5 percent annually in the 1990s. Makers of fitness products, such as Nike, Reebok International, and CML Group&151;which makes NordicTrack&151;are experiencing declines in sales growth. American Sports Data in Hartsdale, New York, reports that "the one American in five who exercises regularly is now outnumbered by three couch potatoes."
A summary of important social, cultural, demographic, and environmental variables that represent opportunities or threats for virtually all organizations is given in Table below.

Key Social, Cultural, Demographic, and Environmental Variables
  • Childbearing rates
  • Number of special interest groups
  • Number of marriages
  • Number of divorces
  • Number of births
  • Number of deaths
  • Immigration and emigration rates
  • Social security programs
  • Life expectancy rates
  • Per capita income
  • Location of retailing, manufacturing, and service businesses
  • Attitudes toward business
  • Lifestyles
  • Traffic congestion
  • Inner-city environments
  • Average disposable income
  • Trust in government
  • Attitudes toward government
  • Attitudes toward work
  • Buying habits
  • Ethical concerns
  • Attitudes toward saving
  • Sex roles
  • Attitudes toward investing
  • Racial equality
  • Use of birth control
  • Average level of education
  • Government regulation
  • Attitudes toward retirement
  • Attitudes toward leisure time
  • Attitudes toward product quality
  • Attitudes toward customer service
  • Pollution control
  • Attitudes toward foreign peoples
  • Energy conservation
  • Social programs
  • Number of churches
  • Number of church members
  • Social responsibility
  • Attitudes toward careers
  • Population changes by race, age, sex, and level of affluence
  • Attitudes toward authority
  • Population changes by city, county, state, region, and country
  • Value placed on leisure time
  • Regional changes in tastes and preferences
  • Number of women and minority workers
  • Number of high school and college graduates by geographic area
  • Recycling
  • Waste management
  • Air pollution
  • Water pollution
  • Ozone depletion
  • Endangered species

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