General manager must always forecast the direction of environmental change.
This always includes uncertainty because information is not always perfect
o 3 types of uncertainty
State uncertainty: you don’t know how the environment will
Response uncertainty: you don’t know how or when to
respond to change
Outcome uncertainty: given certain actions, you don’t know
how it will turn out
o Reduce uncertainty by (descriptive model)
Imitation of leaders, similar firms, direct competitors, large
Political (e.g. r&d, tax incentives, regulations)
Economic (e.g. GDP, interest rates, unemployment rate)
Socio-Cultural (e.g. demography, cultural change)
Technological (e.g. smartphones, internet, clouding computing, solar energy)
o Change in P.E.S.T will lead to change in firm behavior/strategy, because they
want to respond to changes in external environment. Firms are passive.
o At times firm’s strategy can change the environment. These firms are active.
Industry Evolution; descriptive model
# Of firms
Founding Rate Failure Rate
Industry Age Industry Age 1. Legitimacy: Social acceptance of your industry
2. Competition: Firms will die out if they are not efficient and innovative
Leads to market consolidation, mergers and acquisitions and
inefficient firms will die out
Resource Partitioning: company tries to divide resources within
the market, leads to two types of firms; generalists and specialists
Industry Structure (Porters Five Forces Model); prescriptive/descriptive
Model can be used to assess whether the industry is attractive or whether your firm
is in a good position.
You need to take into consideration industry boundary, both in operations
and geographic (Furniture manufacture vs. Furniture retailer; National vs.
Who are your players? (Suppliers, Buyers, Competitors); Be critical in your
What are the implications from the analysis? Is the industry attractive?
Why? Is the firm in a good position or bad position?
Threats of New Entrants
Barriers to entry
Economies of Scale
Access to Distribution Channels
Marginal Cost Marginal Cost
Units Produced Cumulative Units
Economies of Scale Learning Curve
Increase in both economies of scale and learning curve decrease marginal cost. The Bargaining Power of Buyers
Symbiotic relationship = one parties output is input of the other; non-
competitive, rather co-dependent
Power Relationship depends on:
o Availability, Volume of Purchase, Lack of Uniqueness, Low
Switching Costs, Threat of Backward Integration, Importance of
These factors will determine whether the buyer has more
power over the firm
Bargaining Power of Supplier
Supplier can threaten to raise prices, alter the terms of supply or even reduce
The supplier industry is dominated by a few companies and is more
The industry is not an important customer of the supplier
The suppliers product is an important input to the buyer’s business
The suppliers products are differentiated or it has built up switching costs
for the buyer