Understanding the Environment
As depicted in Figure 8.5, important factors in the business environment include the firm’s markets (both input and output), technology (production, information, and communications), and government regulation. Effective managers monitor the business environment to keep abreast of new developments in each of these areas.
Referring to Figure 8.1, managers must understand the business environment to identify opportunities for value creation. For example, what technological opportunities exist to reduce costs? It would be a poor decision to invest in an expensive technology to lower costs, if forecasted technological innovations are expected to make the investment obsolete soon. What opportunities exist to reduce consumer or producer transaction costs? Managers must have a detailed understanding of how transactions take place in the marketplace to discover ways of reducing transaction costs. What opportunities exist for improving consumer products? Are there ways of promoting complementary products? Are there potential industries in which the firm could leverage its resources and capabilities? Are there opportunities to create value through cooperating with other firms?
An understanding of the firm’s environment also is important for identifying opportunities for, as well as threats to, capturing value. For example, what opportunities are there to block entry or the development of substitutes? What threats loom from potential substitutes, buyer power, supplier power, and industry rivalry?