To understand the business environment of a particular firm, you need to analyze both the
general environment and the firm’s industry and competitive environment. Generally, firms
compete with other firms in the same industry. An industry is composed of a set of firms
that produce similar products or services, sell to similar customers, and use similar methods
of production. Gathering industry information and understanding competitive dynamics
among the different companies in your industry is key to successful strategic management.
One of the most basic techniques for analyzing firm and industry conditions is SWOT
analysis. SWOT stands for strengths, weaknesses, opportunities, and threats. It provides
“raw material”—a basic listing of conditions both inside and surrounding your company.
The Strengths and Weaknesses refer to the internal conditions of the firm—where your
firm excels (strengths) and where it may be lacking relative to competitors (weaknesses).
Opportunities and Threats are environmental conditions external to the firm. These could
be factors in either the general or the competitive environment. In the general environment, one might experience developments that are beneficial for most companies, such
as improving economic conditions that lower borrowing costs, or trends that benefit some
companies and harm others. An example is the heightened concern with fitness, which is a
threat to some companies (e.g., tobacco) and an opportunity to others (e.g., health clubs).
Opportunities and threats are also present in the competitive environment among firms
competing for the same customers.
The general idea of SWOT analysis is that a firm’s strategy must:
• Build on its strengths.
• Remedy the weaknesses or work around them.
• Take advantage of the opportunities presented by the environment.
• Protect the firm from the threats.
Despite its apparent simplicity, the SWOT approach has been very popular. First, it
forces managers to consider both internal and external factors simultaneously. Second, its
emphasis on identifying opportunities and threats makes firms act proactively rather than
reactively. Third, it raises awareness about the role of strategy in creating a match between
the environmental conditions and the firm’s internal strengths and weaknesses. Finally, its
conceptual simplicity is achieved without sacrificing analytical rigor.
While analysis is necessary, it is also equally important to recognize the role played by
intuition and judgment. Steve Jobs, the legendary former chairman of Apple, took a very
different approach in determining what customers really wanted:30
THE GENERAL ENVIRONMENT
The general environment is composed of factors that can have dramatic effects on firm strategy.31 We divide the general environment into six segments: demographic, sociocultural,
political/legal, technological, economic, and global. Exhibit 2.2 provides examples of key
trends and events in each of the six segments of the general environment.
Before addressing each of the six segments in turn, consider Dominic Barton’s insights in
response to a question posed to him by an editor of Fortune magazine: What are your client’s worries right now? (Barton is global managing director of McKinsey, the giant consulting firm.)
The Demographic Segment
Demographics are the most easily understood and quantifiable elements of the general environment. They are at the root of many changes in society. Demographics include elements
such as the aging population,33 rising or declining affluence, changes in ethnic composition,
geographic distribution of the population, and disparities in income level.34
The impact of a demographic trend, like all segments of the general environment, varies
across industries. Rising levels of affluence in many developed countries bode well for brokerage services as well as for upscale pets and supplies. However, this trend may adversely
affect fast-food restaurants because people can afford to dine at higher-priced restaurants.
Fast-food restaurants depend on minimum-wage employees to operate efficiently, but the
competition for labor intensifies as more attractive employment opportunities become prevalent, thus threatening the employment base for restaurants. Let’s look at the details of one
of these trends.
The aging population in the United States and other developed countries has important
implications. Although the percentage of those 65 and over in the U.S. workforce bottomed
in the 1990s, it has been rising ever since.35 According to the Bureau of Labor Statistics,
59 percent of workers 65 and older were putting in full-time hours in 2013, a percentage that
has increased steadily over the past decade. And, according to a 2014 study by Merrill Lynch
and the Age Wave Consulting firm, 72 percent of preretirees aged 50 and over wanted to
work during their retirement. “Older workers are to the first half of the 21st century what
women were to the last half of the 20th century,” says Eugene Steuerle, an economist at the
Urban Institute.
There are a number of misconceptions about the quality and value of older workers. The
Insights from Research box on pages 44 and 45, however, debunks many of these myths.
The Sociocultural Segment
Sociocultural forces influence the values, beliefs, and lifestyles of a society. Examples
include a higher percentage of women in the workforce, dual-income families, increases
in the number of temporary workers, greater concern for healthy diets and physical fitness, greater interest in the environment, and postponement of having children. Such forces
enhance sales of products and services in many industries but depress sales in others. The
increased number of women in the workforce has increased the need for business clothing
merchandise but decreased the demand for baking product staples (since people would have
less time to cook from scratch). The health and fitness trend has helped industries that
manufacture exercise equipment and healthful foods but harmed industries that produce
unhealthful foods.
Increased educational attainment by women in the workplace has led to more women in
upper-management positions.36 Given such educational attainment, it is hardly surprising
that companies owned by women have been one of the driving forces of the U.S. economy; these companies (now more than 9 million in number) account for 40 percent of all
U.S. businesses and have generated more than $3.6 trillion in annual revenue. In addition,
women have a tremendous impact on consumer spending decisions. Not surprisingly, many
companies have focused their advertising and promotion efforts on female consumers.
The Political/Legal Segment
Political processes and legislation influence environmental regulations with which industries must comply.37,38 Some important elements of the political/legal arena include tort reform, the Americans with Disabilities Act (ADA) of 1990, the repeal of the Glass-Steagall
Act in 1999 (banks may now offer brokerage services), deregulation of utilities and other
industries, and increases in the federally mandated minimum wage.39
Government legislation can also have a significant impact on the governance of corporations. The U.S. Congress passed the Sarbanes-Oxley Act in 2002, which greatly increases
the accountability of auditors, executives, and corporate lawyers. This act responded to the
widespread perception that existing governance mechanisms failed to protect the interests
of shareholders, employees, and creditors. Clearly, Sarbanes-Oxley has also created a tremendous demand for professional accounting services.
Legislation can also affect firms in the high-tech sector of the economy by expanding the
number of temporary visas available for highly skilled foreign professionals.40 For example,
a bill passed by the U.S. Congress in October 2000 allowed 195,000 H-1B visas for each
of the following three years—up from a cap of 115,000. However, beginning in 2006 and
continuing through 2015, the annual cap on H-1B visas has shrunk to only 65,000—with
an additional 20,000 visas available for foreigners with a master’s or higher degree from a
U.S. institution. Many of the visas are for professionals from India with computer and software expertise. In 2014, companies applied for 172,500 H-1B visas. This means that at least
87,500 engineers, developers, and others couldn’t take jobs in the United States.41 As one
would expect, this is a political “hot potato” for industry executives as well as U.S. labor and
workers’ rights groups. The key arguments against H-1B visas are that H-1B workers drive
down wages and take jobs from Americans.
Strategy Spotlight 2.2 discusses recent U.S. legislation that requires companies to disclose metals in their supply chain that are connected to war-torn regions.
The Technological Segment
Developments in technology lead to new products and services and improve how they are
produced and delivered to the end user.42 Innovations can create entirely new industries and
alter the boundaries of existing industries.43 Technological developments and trends include
genetic engineering, Internet technology, computer-aided design/computer-aided manufacturing (CAD/CAM), research in artificial and exotic materials, and, on the downside, pollution and global warming.44 Petroleum and primary metals industries spend significantly to
reduce their pollution. Engineering and consulting firms that work with polluting industries
derive financial benefits from solving such problems.
Nanotechnology is becoming a very promising area of research with many potentially
useful applications.45 Nanotechnology takes place at industry’s tiniest stage: one-billionth
of a meter. Remarkably, this is the size of 10 hydrogen atoms in a row. Matter at such a tiny
scale behaves very differently. Familiar materials—from gold to carbon soot—display startling and useful new properties. Some transmit light or electricity. Others become harder
than diamonds or turn into potent chemical catalysts. What’s more, researchers have found
that a tiny dose of nanoparticles can transform the chemistry and nature of far bigger things.
The Economic Segment
The economy affects all industries, from suppliers of raw materials to manufacturers of
finished goods and services, as well as all organizations in the service, wholesale, retail,
government, and nonprofit sectors.47 Key economic indicators include interest rates, unemployment rates, the consumer price index, the gross domestic product, and net disposable
income.48 Interest rate increases have a negative impact on the residential home construction industry but a negligible (or neutral) effect on industries that produce consumer necessities such as prescription drugs or common grocery items.
Other economic indicators are associated with equity markets. Perhaps the most watched
is the Dow Jones Industrial Average (DJIA), which is composed of 30 large industrial firms.
When stock market indexes increase, consumers’ discretionary income rises and there is
often an increased demand for luxury items such as jewelry and automobiles. But when
stock valuations decrease, demand for these items shrinks.
