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When I talked to executives in seminars or in trainings, I would always ask them if they have done a good job as an executive. They would proudly tell me that they had done well and then tried to justify their conclusion by listing things they did in their department. When asked whether they should pay attention to the five factors (population, political/legal, economic, technological and social/cultural factors) in the general environment, some of them had no idea what these five factors were and most of them would give the same answer that they are not interested in the five factors in the general environment and it is the CEO’s radar domain. Interestingly, many CEOs would endorse their managers’ perception.
I would tell them that after the seminar, if you still have the same perception, we would all have something wrong. That is the beautiful hook I use to get attention and respect from firm executives. Every time, it works.
First of all we need to brush up with the concept of demand. From the economics perspective, demand is the reversed relationship between price and quantity. When the demand is elastic, the cheaper the price is, the more firms can sell their products.
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Figure 1: Demand Dynamics
Figure 1 indicated that when price is $50, customers will buy 300 units of products in D0; . When price sets at $25, the market will consume 400 units of products. When price and quantity run on the same line such as D0 , it is called quantity demanded. It represents the negative relationship between price and quantity. It is easily understood that when price is higher, people will buy less.
However, if the curve (D0) shifts to the right to D0, with the same price of $50 firms can sell 410 units, compared with 300 units in D0. When price gets as low as $25, people will buy as many as 620 units, in comparison with D0of 400 units.
On the other hand, if the curve (D0 ) shifts to the right to D1 , with the same price of $50 firms can sell only 130 units, compared with 200 units in D0. With $25, people are willing to buy only 240 units, in comparison with D0of 300 units in D0.
Summary: Firms will not be happy to see the demand cure for their shift to the left because with the same price, they will sell for fewer units of their products.
People will be curious to know what really result in these shifts of demand in the marketplace. Research indicated that there are five major reasons that trigger the change of demand curve. These five change factors or forces are 1) population, 2) regulation, 3) technology, 4) disposable income, and 5) change of customers’ taste and preferences.
It is not hard for people to se that when more people come into the market, they will create shortage in supply because of the sudden increase of demand.
If government or political parties make certain regulations such as environmental policies, these regulation and policies will not only influence the suppliers in their operations, but also impact the demand of the customers.
Technology is a huge factor in creating demand for varies products at different times. Some products are quickly become obsolete and will no longer meet the customers’ need, while other new innovations will dominate the market.
Disposable income is the money that people can use at their discretion. If customers have more money, they tend to buy more products. Good economic situation will give them strong confidence for the marketplace.
Customers’ taste and preferences are always changing because social and cultural values are changing.
Summary: five forces will trigger the change of customers’ demand.
In the process of tracing the causes of change or shift in customers’ demand, we will be amazed to find that the five forces that trigger the change in demand are, in fact, the five factors in the general environment. These five factors are population, political and legal factor, economic factor, technological factor, and social and cultural factor. Now we know that scanning and observing the changes of the general environment help firms to predict the trend for future demand. Now it is the high time to answer the question of “So what for organizations, big or small?”
It is of critical significance to create sharpness or sensitivity in managers toward general environment factors and cultivate a habit of conducting regular environment scanning to pick up signals and clues for potential changes. Management team needs to meet regularly and informally to communicate with one another about what is happen in the general environment and how other firms are doing to keep the right level of vigilance because any change in the five factors will become a lethal challenge to the firm for its survival.
Summary: All people in an organization have the responsibility to function as a sensor for environmental change collection. Only when people in a firm conscientiously bring back clues and signals of environmental change and try to get the firm ready for the next move, can the firm take the lead in the industry instead of playing the catching-up game and stuck in the middle.
Please be careful that driving forces are the forces that WILL be, not WERE factors that will trigger the changes of Company’s strategy and structure in the future. This section has identified the challenges in the external environment that you need to address in your recommendation after you evaluate your SW. You may want to focus on 4-6 driving forces that closely related to Company’ future development direction. Another way you can do is that you have conclusion section for your driving force analysis, and indicated the most significant one in their priority with brief summary. Please read the handouts that I gave concerning key success factors and driving forces.
