chapter
2
The External and
Internal Environment
McGraw-Hill/Irwin
Principles of Management
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
2-3
Learning Objectives
1. Identify the major components of an organization’s task
environment.
2. Explain how each component in the task environment impacts
the organization.
3. Identify the major components of an organization’s general
environment.
4. Explain how each component in the general environment
impacts the organization.
5. Discuss the nature of change in the external environment.
6. Outline the main components of the internal environment of
an organization and articulate their implications for
managerial implications.
The Environment
of Managers
Internal
Environment
The Manager
General
Environment
Task
Environment
2-4
2-5
SWOT
Strengths
Weaknesses
Opportunities
Threats
Task Environment
Porter’s
Competitive
Forces Model
Bargaining Power
of Suppliers
Threat of Entry
Intensity
of
Rivalry
Threat of
Substitutes
Bargaining Power
of Buyers
2-6
2-7
Threat of Entry
• Barriers to entry – factors that might make it costly
for potential competitors to enter an industry and
compete with firms already in the industry
• Economies of scale – cost reduction associated
with large output
• Brand loyalty – the preference of consumers for
the products of established companies
2-8
Wal-Mart in India?
• Government policy does not allow foreign
retailers to setup shops in India yet, however,
Wal-Mart has declared its intentions to enter
Indian market as soon as the policy changes.
• Economies of scales and growth – Wal-Mart’s
annual sales $285 billion with only 10 country
presence
• Brand loyalty – Given the price points,
consumers are at least price-loyal
Source: Adapted from: http://ibef.org/attachment/WhattoIndia.pdf
Bargaining Power
of Buyers
• Buyers are most powerful when:
- They are few in number and purchase large quantities
- They can choose between equivalent products from many
different firms
- They can switch easily between the offerings of different firms
• Buyers are least powerful when:
- They are plentiful and purchase in small quantities
- They have little choice
- They cannot switch easily between the offerings of
different firms
• Switching Costs
2-9
Bargaining Power of
Suppliers
2 - 10
• Firm has greater power over suppliers when:
- The firm purchases in large quantities
- It can choose between multiple suppliers
- The costs of switching between suppliers is low
- The firm is not dependant on any single
supplier for important inputs
Supplier’s Bargaining
Power With Wal-Mart
•
•
•
•
2 - 11
Wal-Mart has significant influence over its suppliers
Margins for suppliers are very low to practically nonexistent
Wal-Mart nonetheless has suppliers eager to supply
Products that are sourced from India: apparel, fine jewelry, home
textiles, and house ware
• Items for which sourcing is on the rise from India: office supplies,
seasonal handicrafts, food, shoes, and leather goods.
• With Wal-Mart’s anticipated entry into the Indian market, the
suppliers are already expanding their operations
Source: Adapted from: http://ibef.org/attachment/WhattoIndia.pdf
The Threat of
Substitutes
2 - 12
• The goods or services of different businesses or
industries that can satisfy similar customer needs
• The existence of substitutes is a strong competitive
threat because it limits the price that companies in
one store can change
• If there are few substitutes, firms have the
opportunity to raise prices
The Intensity
of Rivalry
• The nature of the product
- The intensity of rivalry depends on how close the
product is to a commodity (a product that is difficult to
differentiate from those produced by rivals).
• Demand and supply conditions
- If demand is growing the industry will
appear favorable.
- Demand trends are influenced by economic growth &
rising income levels
2 - 13
2 - 14
Question
Based on Michael
Porter’s Five-force
analysis, would you say
that the retail industry is
a profitable industry? In
India? In the USA?
Explain.
Barriers to Exit
1. The fixed costs of closing
down capacity
2. An unwillingness to reduce
capacity due to a belief that
demand will soon rebound
3. Government regulations
2 - 15
Adjustment Processes
2 - 16
High barriers to entry Low barriers to entry
Excess
demand
Excess demand will persist
Excess demand will not
persist
Significant opportunity
Transitory opportunity
Excess supply
(capacity)
High barriers to exit
Low barriers to exit
Excess capacity will persist
Excess capacity will not
persist
Significant threat
Transitory threat
Question
Indian retail industry is characterized by many small to
medium-sized companies which describes a _____
industry. If Wal-Mart were to enter and take the lion’s
share and create a situation where the industry is
dominated by a few large companies, it would refer to a
______ industry.
a.
b.
c.
d.
fragmented; consolidated
tangible; intangible
intangible; tangible
consolidated; fragmented
2 - 17
2 - 18
The Sixth Force
Threat of Entry
Bargaining Power
of Suppliers
Intensity
of
Rivalry
Threat of
Substitutes
Bargaining Power
of Buyers
Complements
•Availability
•Price
2 - 19
The General
Environment
Political & Legal
Forces
International
Forces
Sociocultural
Forces
Macroeconomic
Forces
Demographic
Forces
Technological
Forces
Political and Legal Issues
Affecting Restaurant Industry
• At national level, the front burner issues
for the restaurant industry are:
- Minimum wage increase
- Immigration reform
- Small business health plans
- Frivolous obesity lawsuits
- Health and safety regulations
Source: http://www.restaurant.org/government/
2 - 20
Demographics:
China vs. India
China
• Age structure:
- 0-14 years: 20.8%
- 15-64 years: 71.4%
- 65 years and over: 7.7%
• Median Age: 32.7 years
• Total Population: 1.3
Billion
• Life expectancy: 72.58
years
• Language: Standard
Chinese or Mandarin
India
• Age structure
- 0-14 years: 30.8%
- 15-64 years: 64.3%
- 65 years and over: 4.9%
• Median Age: 24.9 years
• Total Population: 1.09
Billion
• Life expectancy: 64.71
years
• Language: Hindi, English
plus 14 other official
languages
Source: http://en.wikipedia.org/wiki/Demographics_of_mainland_China; http://www.indexmundi.com/india/demographics_profile.html
2 - 21
2 - 22
Cellular vs. Landlines
• With all the technological
developments, top three reasons why
people say they will keep their
telephone landlines:
- Like the safety of them – 26%
- Net access use – 20%
- Unattractive wireless pricing – 12%
Source: http://www.usatoday.com/news/snapshot.htm
Incremental Vs.
Discontinuous Change
2 - 23
• Incremental change – Changes that do not alter the
basic nature of competition in the task environment.
• Discontinuous change – Changes that fundamentally
transforms the nature of competition in the task
environment.
• Punctuated Equilibrium – A view of industry
evolution asserting that long periods of equilibrium are
punctuated by periods of rapid change when industry
structure is revolutionized by innovation.
Environmental
Uncertainty
• The environment is not only constantly changing, the
nature of change is frequently difficult to predict
Management tries to deal with this by:
• Collecting Information
- Marketing Research
- Competitive Intelligence
• Exerting control
2 - 24
The Internal Environment
Organization
of the firm
Employees
Resources
2 - 25
2 - 26
Culture
• The basic pattern of values and
assumptions shared by
employees within an
organization.
• Important because it influences
what a manager can and cannot
do and what is encouraged or
discouraged by the organization
2 - 27
Human Capital
Knowledge
Skills
Capabilities
2 - 28
Resources
• Tangible resources
– physical assets
• Intangible
resources – non
physical assets
2 - 29
Uniquely Strong
Resources
Valuable
Owned
by the Firm
Inimitable
Rare
Uniquely
Strong
Resources
Nonsubstitutable