chapter

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 organizations task
environment.
2. Explain how each component in the task environment impacts
the organization.
3. Identify the major components of an organizations 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
Porters
Competitive
Forces Model
Bargaining Power
of Suppliers

Threat of Entry

Intensity
of
Rivalry

Threat of
Substitutes

Bargaining Power
of Buyers

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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

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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-Marts
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
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

2 - 10

Suppliers 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-Marts 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
Porters 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 lions
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

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The Sixth Force

Threat of Entry

Bargaining Power
of Suppliers

Intensity
of
Rivalry

Threat of
Substitutes

Bargaining Power
of Buyers

Complements
Availability
Price

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The General
Environment
Political & Legal
Forces
International
Forces

Sociocultural
Forces

Macroeconomic
Forces

Demographic
Forces
Technological
Forces

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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/

Demographics:
China vs. India
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

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

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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
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.

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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

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The Internal
Environment
Organization
of the firm

Employees

Resources

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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

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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

Uniquely
Strong
Resources

Rare

Nonsubstitutable