What is General Environment - Principles of Management

General Environment and task Environment

The general environment is the larger environment within which the task environment is embedded. It includes political and legal forces, macroeconomic forces, demographic forces, sociocultural forces, technological forces, and international forces. Elements in the general environment impact the organization through the medium of the task environment.

What is the General Environment ?

The general environment helps shape the task environment, thus determining the magnitude ofthe opportunities and threats confronting the organization. The general environment is remoteand less easy to shape than the task environment, but it is no less important.

POLITICAL AND LEGAL FORCES

Political and legal forces are the result of changes in laws and regulations. Political processes shape a society’s laws, which constrain the activities of organizations and thus create both opportunities and threats. For example, throughout much of the industrialized world during the last 20 years there has been a strong trend toward deregulation of industries and the privatization of organizations once owned by the state.

In the United States deregulation of the airline industry in 1979 allowed 29 new airlines to enter the industry between 1979 and 1993. The increase in passenger carrying capacity after deregulation led to excess capacity on many routes, intense competition, and fare wars.

The interplay between political and legal forces and industry competitive forces is a two way process in which the government sets regulations that influence competitive structure, and firms in an industry often seek to influence the regulations that governments enact.

For example, in 2002 the United States Steel Industry Association was a prime mover in persuading President Bush to impose a 30 percent tariff on imports of foreign steel into the United States. The purpose of the tariff was to protect American steelmakers from foreign competitors, thereby reducing the intensity of rivalry in the U.S. steel market.

Industry-specific regulators are an important and often overlooked aspect of the general environment of many firms. Industry-specific regulators are government agencies with responsibility for formulating, interpreting, and implementing rules specific to a particular industry. These rules shape competition in an industry; thus government regulators can have a profound impact on the intensity of competition in a firm’s task environment and on the opportunities and threats confronting its managers.

Some important industry-specific regulators include the Federal Drug Administration (which has to approve all new drugs for marketing), the Federal Communications Commission (which licenses firms to offer communication services), and the Federal Aviation Authority (which regulates the airline industry).

For an example of the influence exerted by industry regulators, consider the Federal Communications Commission (FCC), which licenses companies to deliver communication services. In 1997 the FCC created a huge opportunity when it agreed to allow firms to offer satellite radio service.

The FCC set up an auction, and the two highest bidders in the auction, Sirius and XM Radio, were granted exclusive licenses to offer satellite radio in the United States until 2012. By 2005 over 5 million people were subscribing to satellite radio services, and demand was growing rapidly.

Although those licenses will probably be renewed, the FCC could transform this opportunity into a threat for XM Radio and Sirius if it decides to offer additional licenses in the future, thereby increasing the number of satellite radio providers and competitive intensity in the market. Note that this decision to license two satellite radio operators has been a threat to established terrestrial radio stations, which face new competition from satellite radio firms.

Managers try to influence industry-specific regulators, lobbying both them and the politicians who oversee the regulators to get them to introduce legislation that is in the interests of the firm. When the FCC was considering whether to license spectrum to satellite radio providers, for example, established radio companies, who correctly saw satellite radio as a threat to their business, lobbied the FCC, arguing that it would be a mistake to allow satellite radio because that would lead to the demise of socially valuable local radio services. Fortunately for satellite radio firms, these efforts were not successful.

MACROECONOMIC FORCES

Macroeconomic forces affect the general health and well-being of a national or the regional economy, which in turn affect the profitability of firms within that economy. Four important factors in the macroeconomic environment are the growth rate of the economy, interest rates, currency exchange rates, and inflation (or deflation) rates. Economic growth, because it leadsto an expansion in customer expenditures, tends to produce a general easing of competitive pressures within an industry.

This lets firms expand their operations and earn higher profits. Because economic decline (a recession) leads to a reduction in customer expenditures, it increases competitive pressures. Economic decline frequently causes price wars in mature industries whose products are commoditylike and where buyers are powerful. The level of interest rates can determine demand for afirm’s products.

Interest rates are important whenever customers routinely borrow money to finance their purchase of products. The most obvious example is the housing market, where mortgage rates directly affect demand. Interest rates also affect the sale of autos, appliances, and capital equipment, to give just a few examples. For firms in such industries, rising interest rates are a threat and falling rates an opportunity.

Currency exchange rates define the value of different national currencies against each other. Movement in currency exchange rates has a direct impact on the demand for a firm’s products in the global marketplace. Between 2002 and 2004 the dollar fell in value against the euro, the currency used by many members of the European Union. The result was to make U.S. products cheaper in Europe.

In general, a low or declining dollar reduces the threat from foreign competitors while creating opportunities for increased foreign sales. Conversely, a rising dollar can be a threat because it makes U.S. products more expensive, which can hurt sales.

Price inflation can destabilize the economy, producing slower economic growth, higher interest rates, and volatile currency movements. If inflation keeps increasing, investment planning becomes hazardous. The key characteristic of inflation is that it makes the future less predictable. In an inflationary environment it may be impossible to predict with any accuracy the real value of returns that can be earned from a project five years hence.

Such uncertainty makes firms less willing to invest. In turn, low investment depresses economic activity and ultimately pushes the economy into a slump. Thus high inflation is a threat to organizations.

DEMOGRAPHIC FORCES

Demographic forces are outcomes of changes in the characteristics of a population, such as age, gender, ethnic origin, race, sexual orientation, and social class. Like the other forces in the general environment, demographic forces present managers with opportunities and threats and can have major implications for an organization. Changes in the age distribution of a population represent an example of an important demographic force.

Currently most industrialized nations are experiencing the aging of their populations as a consequence of falling birth and death rates and the aging of the baby boom generation. In Germany the percentage of the population over age 65 is expected to rise from 15.4 percent in 1990 to 20.7 percent in 2010. Comparable figures for Canada are 11.4 and 14.4 percent; for Japan, 11.7 and 19.5 percent; and for the United States, 12.6 and 13.5 percent.

The aging of the population is increasing opportunities for firms that cater to older people; the home health care and recreation industries are seeing an upswing in demand for their services. As the baby boom generation from the late 1940s to the early 1960s has aged, it has created a host of opportunities and threats. During the 1980s many baby boomers were getting married and creating a surge in demand for the appliances normally bought for first households.

Companies such as Whirlpool Corporation and General Electric capitalized on the resulting demand for washing machines, dishwashers, dryers, and the like. In the 1990s many of these same baby boomers were starting to save for retirement, creating an inflow of money into mutual funds and a boom in the mutual fund industry.In the next 20 years many of these same baby boomers will retire, increasing demand for retirement communities.

SOCIOCULTURAL FORCES

Sociocultural forces refer to the way in which changing social mores and values affect an industry. Like the other forces discussed here, social change creates opportunities and threats. One major social movement of recent decades has been a trend toward greater health consciousness.

Its impact has been immense. Firms that recognized the opportunities early have often reaped significant gains. PepsiCo was able to gain market share from its rival Coca-Cola by being the first to introduce diet cola and fruit-based soft drinks. At the same time the health trend has created a threat for many industries. The tobacco industry, for example, is in decline as a direct result of greater customer awareness of the health implications of smoking.

TECHNOLOGICAL FORCES

Over the last century the pace of technological change has accelerated. This has unleashed a process that has been called a “perennial gale of creative destruction.” 19 Technological change can make established products obsolete overnight and simultaneously create a host of new product possibilities. Thus technological change is both creative and destructive—both an opportunity and a threat.

One of the most important impacts of technological change is that it can affect the height of barriers to entry and therefore radically reshape industry structure. The pervasive Internet has changed the competitive structure of many industries. It has lowered entry barriers and reduced customer switching costs, increasing the intensity of rivalry in many industries and lowering both prices and profits. 20 For example, the Internet has lowered barriers to entry into the news industry.

Providers of financial news now have to compete for advertising dollars and customer attention with new Internet-based media organizations that sprang up during the 1990s such as TheStreet.com, the Motley Fool, and Yahoo’s financial section.

The increase in rivalry has given advertisers more choices, enabling them to bargain down the prices they pay to media companies. Similarly, in the automobile industry, the ability of customers to comparison-shop for cars online and purchase cars online from a number of distributors such as Auto Nation has increased customers’ ability to find the best values. Customers’ increased bargaining power enables them to put downward pressure on car prices and squeeze profits out of the automobile industry.

INTERNATIONAL FORCES

The last half century has witnessed enormous changes in the world economic system. We review these changes in detail in the next chapter when we discuss the global environment. For now the important points to note are that barriers to international trade and investment have tumbled, and an increasing number of countries areenjoying sustained economic growth.

Economic growth in places like Brazil, China, and India is creating large new markets for goods and services, giving enterprises an opportunity to profit by entering these nations. Falling barriers to international trade and investment have also made it much easier to enter foreign nations.

For example, 20 years ago it was almostimpossible for a Western company to set up operations in China. Today Western and Japanesecompanies are investing over $50 billion a year in China. By the same token, however, falling barriers to international trade and investment have made it easier for foreign enterprises to enter the domestic markets of many firms (by lowering barriers to entry), thereby increasing the intensity of competition and lowering profitability.

Because of these changes, many formerly isolated domestic markets have now become part of a much larger, more competitive global marketplace, creating myriad threats and opportunities for firms


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