Five Functions of Management

1- Peter Drucker Five Function of Management 2- Henry Fayol

Set Objective Planning: Set Goals, set ways to achieve Forecasting and
(SMART) planning
Organize Organize team, Assign work & Organizing
Authority
Develop People Staffing: Recruit, Select, Training &
Development
Motivate Leading: Motivate, Com. (Direct) Command
Communicate Instructions, guide, coach, problem
solve, resolving conflicts
Establish Yardstick Controlling: result against goals, Control
corrective action.
Coordinate: All
staff work for
same goals
 Mintzberg’s Role of Manager:
Interpersonal Role
Figurehead Symbolic role, manager obliges to E.g. Receive visitors and
carry out social, legal and ceremonial See offatt end court
duties proceedings
Leader Manager’s relationship with E.g. seeking to build
subordinate, especially in allocating teamwork and foster
tasks, hiring, training and motivating employee commitment.
staff.

Liaison The development of a network of E.g. lunches with

contacts outside the chain of suppliers or customers
command through which information
and favors can be traded for mutual
benefits.

Mubashir Wasim (MSc. Economics, MBA

Marketing, MS-IT, MS Business
Management)
 Mintzberg’s Role of Manager:
Informational Role
Monitor The manager collects and sorts out e.g. reading reports
the information which is used to and interrogating
build up a general understanding of subordinate
the organization and its
environment

Disseminator To be a Disseminator means to e.g. passing privileged

spread the information information to
subordinates

Spokespersons Managers transmit information by e.g. a sales

various external groups by acting in presentation to
a PR capacity, lobbying for the prospective the
organization, informing the public customers.
about the organization’s
performance, plans and policies.

Mubashir Wasim (MSc. Economics, MBA

Marketing, MS-IT, MS Business
Management)
Mubashir Wasim (MSc. Economics, MBA
Marketing, MS-IT, MS Business
Management)
 Mintzberg’s Role of Manager:
Decisional Role
Entrepreneur Managers should be looking e.g. launching a new
continually problems and idea or introducing
opportunities when situations procedures such as a
requiring improvement are discovered cost reduction program.

Disturbance A manager has to respond to e.g. strikes

handler pressures over which the department
has no control.

Resource Choosing from among competing e.g. approving

allocate demands for money, equipment, expenditure on a
personnel and management time. project.

Negotiator Manager takes a charge when their e.g. drawing up

organization must engaged in contracts with suppliers
negotiating with others. In these
negotiations, the managers
participates as figurehead,
spokesperson and resources allocate.
Mubashir Wasim (MSc. Economics, MBA
Marketing, MS-IT, MS Business
Management)
Q9 Q.3 Henry Mintzberg carried out research into the activities of
managers and suggested that in reality, role of managers in
organizations is different than that of planning, organizing,
commanding, coordinating and controlling as suggested by the
classical theorists.
Required: Describe the interpersonal and informational roles
which managers perform in accordance with Henry Mintzberg.
(06) [S18]

Mubashir Wasim (MSc. Economics, MBA

Marketing, MS-IT, MS Business
Management)
 Fayol 14 Rules of Managerial Conduct
Taylor is considered the originator of ‘time and motion study’.
Scientific management resulted in:
Division of Labour. When employees are specialized, output can
increase because they become increasingly skilled and efficient.
Authority. Management must have the authority to give order.
Discipline. Discipline must be maintained in organizaiton.
Unity of command. Each employee has one and only one boss.
Scalar Chain (line of authority). Formal chain of command running
from top to bottom of the organization, like military

Mubashir Wasim (MSc. Economics, MBA

Marketing, MS-IT, MS Business
Management)
 Fayol 14 Rules of Managerial Conduct

Taylor is considered the originator of ‘time and motion study’.

Scientific management resulted in:
Equity: Manager should be fair to staff at all times, both in
maintaining discipline and acting with kindness where appropriate.
Esprit de Corps. Should strive to promote team spirit and unity
Initiative. Employees should be given the necessary level of
freedom to create and carry out plans
Centralization. Consolidation of management functions. Decisions
are made from the top.
Remuneration. Should be fair for all (financial and non-financial)

Mubashir Wasim (MSc. Economics, MBA

Marketing, MS-IT, MS Business
Management)
 Fayol 14 Rules of Managerial Conduct
Taylor is considered the originator of ‘time and motion study’.
Scientific management resulted in:
Order: Workplace facilities must be clean, tidy & safe for
employees
Subordination of Individual Interests. When at work, only work
things should be pursued or thought about.
Stability of Tenure of Personnel. Managers should strive to
minimize employee turnover.
Unity of direction. A single mind generates a single plan and all
play their part in that plan.

Mubashir Wasim (MSc. Economics, MBA

Marketing, MS-IT, MS Business
Management)
 Taylor and the scientific school of management
Four Principles of Scientific Management
The four underlying principles of scientific management Taylor
suggested that there should be four underlying principles in
scientific management.
֍There should be a science of work
 Analysis of work method and work times
 Dividing larger tasks into smaller units
 Finding most efficient way of carrying out tasks
 A fair level of performance or efficiency can be identified
 Workers should be rewarded accordingly amount of work they
do

Mubashir Wasim (MSc. Economics, MBA

Marketing, MS-IT, MS Business
Management)
 Taylor and the scientific school of management
֍ Worker should be selected carefully
 Should have skills and abilities that best suits the work
 Should also be trained in how to do the work efficiently
֍ Scientifically-selected and Trained worker
Scientifically-selected and trained workers and science of work
should be brought together for best result and greatest efficiency.
֍Equal Division of Work
There should be an equal division of work between the workers
and management

Mubashir Wasim (MSc. Economics, MBA

Marketing, MS-IT, MS Business
Management)
 Principles of Organizations – Lyndall Urwick
Objective Organization and all parts of it must be an expression of
its main purpose
Balance Various units of an organization should be kept in balance
Authority There should be a clear line of authority to every
individual in the group
Definition Content of each position (duties involved and
responsibilities) and relationship with other position
should be clearly defined in writing and published to all
concerned
 Principles of Organizations – Lyndall Urwick

Co-ordination Facilities co-ordination and unity of effort

Correspondence Responsibility & authority should correspond
Continuity Organization's structure should be designed to
ensure the organization's survival.
Responsibility Responsibility of superior for acts of juniors

Specialization Activities of every member should be confined to the

performance of a single function.
Span of No person should supervise more than 5 or 6 direct
Control subordinates whose work links
Q14: A way to remember
Greenland attacked on
Foxland from two sides
from north where Yellow
Sea is situated at their sea Greenland
sure and the Western
border from the both sides
enemy have a strong Foxland
support of their air force.
Foxland has all four forces
Fox Army (FA), Fax Air
Force (FAF), Fox Navy (FN),
and Fox-Eye (their official
army intelligence agency)
Their Chief and Defense
Authority identified initiative
to defeat enemy
1) Purpose of war should be Objective Definition: duties
clear to soldiers so they
perform best
2) All force fight in Balance
coordination and balance Coordination Correspondence
3) Senior know the
authority and answerable Responsibility of senior for act of junior
for their subordinates Clear line of authority Span of Control
4) War is not a matter of day
it take time Continuity: Survival
5) Success in the war is
dependent on the specific
skills of soldiers and Specialization
officers
 Bureaucracy : Max Weber

He argued that an ‘ideal’ bureaucracy has the following characteristics.

There should be a hierarchy of authority, from top management
down to workers at the bottom.
Impersonal and impartial way.
Written rules of conduct
Promotion of individuals within the organisation, based on their
achievement
Division of labour and specialisation of work.
 Bureaucracy : Max Weber

Max Weber identified three types of legitimate authorities which are

explained below:
(i) Traditional authority is based on custom, gender, birth order and
the like. Traditional authority is associated with the hereditary
power of royal families and chieftains and the ‘head of the
household’, with leadership passing from father to son when the
father dies.
(ii) Rational-legal authority refers to the use of established laws and
rules that are applied uniformly. A superior is obeyed because of
the position occupied within the organisation’s hierarchy. This
authority depends on employees’ acceptance of the
organisations’s rules.
(iii) Charismatic authority is evident when subordinates suspend their
own judgment and comply voluntarily with a leader because of
special personal qualities or abilities they perceive in that
individual. Charismatic leaders often lead social, political and
religious movement e.g. Quaid–e-Azam Mohammad Ali Jinnah.
 Bureaucracy : Max Weber

Q:Q.3 Max Weber defined authority as ‘getting things done by giving

orders, and having those orders accepted as justified and legitimate’.
Briefly explain the different types of legitimate authorities identified by
Max Weber. (06) [17A]
 Rosemary Stewart

Four features of bureaucracy

Reasons for growth

Modern business environment

 Four
features of
Bureaucracy

Clear
hierarchy of
authority

Specializatio
Clearly set
n of job not
rewards individual

Rule
ensure
efficiency
 Reasons for
growth of
Bureaucracy

Complexity
of Work-
Procedures

Equal Increase in
treatment Size of
for all Organization

Rational &
scientific
procedure
 Modern
business Long hierarchy take
environment very long – time in
Cannot change itself to decision
adopt the changing
Tradinational
environmentorganization
unacceptable
is

Not behave like

Quick Flat
Technology
elephant - slow
organization
for quick
development decision

Pace of change is fast

Dance
bureaucracy cannot like mice
cope up with
Work of Dr. Elton Mayo
Mayo conclude that a lack of attention to human relationships
was a major weakness in earlier theories of management.
He was first management theorist to draw attention to social
aspects of working and the effects of motivation on performance
Managers should become more involved with their workers, and
earn the respect of the workers.
Result would be improved motivation and higher productivity.
 Theory X & Theory Y
Theory X:-
Under Theory X, the four assumptions held by managers are:
Employees inherently dislike work and, whenever possible, will attempt to avoid
it.
Since employee dislike work, they must be coerced, controlled, or threatened
with punishment to achieve goals.
Employees will avoid responsibilities and seek formal direction whenever
possible.
Most workers place security above all other factors associated with worked and
will display little ambition.
Theory Y:-
In contrast to these negative views about the nature of human beings, McGregor
listed the four positive assumptions that he called theory Y.
Employees can view work as being as natural as rest or play.
People will exercise self-direction and self-control if they are committed to the
objectives.
The average person can learn to accept, even seek, responsibility.
The ability to make innovative decisions is widely dispersed throughout the
population and is not necessarily the sole province of those in management
position.
The Business Environment
Chapter # 2

Mubashir Wasim (MSc. Economics, MBA

Marketing, MS-IT, MS Business
Management)
 Political and Legal Factors
Here are just a few examples of political and legal factors that might
affect business.
Nationalization of industry and privatization. In some countries,
industry is nationalized and owned wholly or partly by the state (the
government).

Semi-
Public Private
Government
 Political and Legal Factors
Transport and infrastructure. Businesses rely on the transport system to
move their goods (and employees), and the quality of the road transport
system depends on the infrastructure of roads. Although the transport
system might be operated by commercial companies, most of the road
network and possibly also the rail network are state-owned.
 Political and Legal Factors

Education. In most countries the government is responsible for most of

the education system. Education policy affects the quality and skills of
individuals who make up the workforce of business organizations.
Environmental policy. Business organizations might be affected by
changes in the environmental policy of a government, such as policy to
reduce levels of pollution in the air, water or land.
 Political and Legal Factors
Taxation and subsidies. Governments use taxation to raise income. They
might also use taxation to influence behaviour, such as increasing tax on
fuel in order to encourage a reduction in fuel consumption and
increasing tax on the disposal of waste in order to encourage the
recycling of waste. Governments sometimes encourage particular
activities by offering subsidies, such as subsidies towards the cost of
particular skills training.
 Political and Legal Factors

Legal Factors

• Source of legal authority include the following

Supra-National National Regional

 Political and Legal Factors

Supra-National National Regional

United Nations Resolutions National Governments through Local

International Court of Justice Acts of Parliament. Councils
Other International Agreements Senior Courts (e.g. House of can issue
that apply to signatories (e.g. Lords in UK, The Supreme Court bye-laws
The World Trade Organization in the USA) in many
Sets Rules on Trade Between Other Major Courts through the countries
Member States) Principles of Case of Law and the .
European Parliament Setting of Precedents.
European Courts.
 Legal Factors

Employment Law
Here are some of the aspects of employment law.
Minimum wage. A country might have a minimum wage, which is the
minimum hourly rate of pay that may be paid to any employee.
Working conditions. A variety of laws and regulations might specify
minimum acceptable working conditions, such as maximum hours of
work per week or month. There might also be laws relating to a maximum
retirement age and the employment of children. Working conditions are
also covered by health and safety law.
 Legal Factors

Unfair Dismissal. Employment law might give employees certain rights

against unfair dismissal by an employer. The employer must then
demonstrate that although the employee has been dismissed, the
dismissal was not for a reason or under circumstances that the law would
consider ‘unfair’.
 Legal Factors

Redundancy. In some countries, dismissal of employees on the grounds

of redundancy is not unfair dismissal, provided that discrimination is not
shown in the selection of which individual employees should be made
redundant. However, a country’s laws may require an employer to
consider transferring an employee to another job before deciding that
redundancy is unavoidable.
 Legal Factors

Discrimination. Some countries have extensive laws against

discrimination, including discrimination at work. There are laws against
discrimination on the grounds of physical disability, gender, race, religion,
sexual orientation and age.
Competition law
Some countries have laws to encourage fair competition in markets and
avoid anti-competitive practices.
Monopolies
A situation where one firm has complete control over price and output
and there is no close substitution of the product.
The law to avoid monopolies
High prices: When a company has a monopoly of a market, it might
engage in unfair business practices, such as charging higher prices. The
serious risk of anti-competitive behaviour from monopolies is the main
reason for laws restricting them.
Investigations against monopolies: When a company grows to the point
where it becomes a monopoly, a government organisation might carry out
an investigation, with a view to deciding whether measures should be
taken to protect the public.
 Competition law
Mergers: when two companies propose a merger that would create a new
monopoly, a government organisation might investigate the proposed
merger with a view to recommending whether it should be allowed to
happen, or conditions should be placed
Anti-collusion regulations Collusion occurs when two or more business
entities secretly agree to do something for their mutual benefit that is
against the public interest. Typically it is a secret agreement to raise prices,
and avoid competition on process.
Price controls In some countries, the government might impose price
controls on certain key products or services, such as the price of essential
services to consumers – water, electricity or gas. Official bodies might be
established to monitor the activities of ‘utility companies’ (providers of
water, sewage, electricity and gas.
 Consumer Protection
Many countries have legislation which attempts
to protect consumers form falling victim to
unscrupulous and unethical business.

The seller must have legal title

to, or ownership of, the item
they are selling Services Provided
The goods sold must be of
satisfactory quality and fit for Carried out with
their intended purpose. reasonable skill
When a buyer makes a and care
purchase based on the Completed within
description of an item, the a reasonable
goods must correspond with length of time
this description. Completed at a
reasonable price
Legislation Designed
 Macroeconomic Policy

Objective 3: Unemployment
How to ensure every that every one who wants a job has one?
 Objective# 2: Controlling Inflation
Inflation
“Too much money chasing too few goods”
Types of Inflation
Demand-Pull Inflation Cost-Push Inflation
 Objective# 3: Controlling Unemployment
Unemployment
Number of Jobs
Number of Job Jobs are not according to the
Seekers > abilities and skills of the job
seekers
Job seekers got jobs temporary
and seasonal jobs

The types of Unemployment are

1. Cyclical Unemployment
2. Frictional Unemployment
3. Structural and Technological Unemployment
4. Seasonal Unemployment
5. Real Wage Unemployment
 Objective# 3: Controlling Inflation & Unemployment by Fiscal Policy

Fiscal Policy & Budget

Policy of income and expenditure Type of EffectResult Ideal to Control
budget Expected
Govt. income > Govt. Expenditure Deficit Leads Increase in Deflation +
Budget to Aggregate Unemployment
Demand
Govt. income = Govt. Expenditure Balance Leads - -
Budget to
Govt. income < Govt. Expenditure Surplus Leads Decrease in Inflation +
Budget to Aggregate Expectations
Demand
 Objective# 3: Controlling Inflation & Unemployment by Monetary Policy
Monetary Policy
“Monetary policy refers to the management of the money supply in the
economy and is usually understood within the context of monetarism”

Interest Rate Policy Open Market Operations

By increasing rate of interest we can By buying and selling its own bonds
decrease the demand for loan for the government is able to exert some
buying and investment. control over the money supply
Reserve Requirement Introduction of Monetarist
Typical banks operate a fractional reserve
system, i.e. only a part of their deposits are
kept in cash on the assumption that not all
customers will want their money back at the 20%
same time. The proportion deposits retained
in cash is known as the reserve asset ratio or
liquidity ratio. 80%
In this sense if liquidity ratio is 20% it means
by the deposited of $1000/- there will be
 Objective# 4: Faviourable Balance of Payments
Balance of Payment
“Balance of payment is a comprehensive record of economic
transactions of the residents of country with the rest of the world
during particular year.”
It is further subdivided into three accounts.
Current Account The balance on current account relates only to current
transactions. It includes trade balance of visible
exports and imports as well as the services or invisible
items.

Capital Account Transaction consisted of more than one year period,

likewise services or installment of loans, or business
returns, etc.
Monetary Normally BOP is consisted of two accounts only but in
Account case of unfavourable BOP an adjustment account is
also added called Monetary Account either finance by
reserves of previous time periods or loan from IMF
etc.
 Objective# 4: Faviourable Balance of Payments
Balance of Payment Deficits
Expenditure
Reducing Strategies
1. Reduction Demand for
Import
2. Reduction Inflationary
Pressure to Increase
Exports
3. Increase Interest Rate
to Decrease Demand
Expenditure
Switching Strategies
1. Direct imposition of
tariff or quotas
(Protectionism)
2. Revenue can be used
for the payments of
imports bills
3. Lowering exchange rate
by which exports are
increased and imports
are decreased.
 Objective# 4: Faviourable Balance of Payments
Foreign Exchange Rate
“the price of unit of foreign currency in terms of a standard unit of
local currency”
$1 = Rs 80

Nature of Change Export Import

Appreciation in the foreign exchange  
rate ($1 = Rs 150)
Depreciation in the foreign exchange  
rate ($1and
Direct = RsIndirect
200) Tax.
 Capital

o f
to r on
ac c ti
F d u
Pro

Mubashir Wasim (MSc. Economics, MBA

Marketing, MS-IT, MPhil Business
Economics)
 Price Mechanism – Market Equilibrium

Price $ Quantity Quantity

Demanded Supplied
3 100 Kg 300 Kg
2 200 Kg 200 Kg
1 300 Kg 100 Kg

Equilibrium price is what where demand and

supply both are equal.
Price Mechanism if we stay at any other
price the price mechanism brings us back on
the equilibrium price again
Mubashir Wasim (MSc. Economics, MBA
Marketing, MS-IT, MPhil Business
Economics)
 Concept of Elasticity of Demand- Price Elasticity
• It is responsiveness of demand to a change in prices
PED Description Illustration
< 1 Relatively If price changes 10% quantity demand may be
Inelastic changes 7%
= 1 Unit Elastic If price changes 10% quantity demand may be
also changes by10%
>1 Relatively If price changes 10% quantity demand may be
Elastic changes by 13%
 Key Demographic Factors
First we discuss the key social
and demographic factors
• Population – Size, Location,
Density, and Composition
• Wealth – Income, Distribution
• Education- Elementary, Special,
Training, Manpower Planning
• Health
• Social Structure- Attitude,
Values and Tastes.
Mubashir Wasim (MSc. Economics, MBA
Marketing, MS-IT, MPhil Business
Economics)
 Social Trends: Social Structure
Many countries are finding the demand for
housing growing faster than the population.
This is partly explained by increasing wealth
but also by changes in social structure.
For example
I. Proportion of one person family is
increasing
II. Divorce rate is also increasing
III. Joint family system is vanishing in Asia
IV. Love marriages are increasing
V. Mix colour and cast marriages

Mubashir Wasim (MSc. Economics, MBA

Marketing, MS-IT, MPhil Business
Economics)
Social Trends: Values

An increasing concern about green

house gasses and the one layer, testing
of products on animals and generally
greater social awareness could spell
disaster in the future for those firms
unwilling to embrace this culture shift.

Many women are choosing to pursue

career first before having children, so A widespread change in
the average age of a mother on the Lifestyle has been the shift
birth of their first child has risen in any away from the historic ‘7 to 5’
countries. Such older mothers are working days.
often wealthier and more demanding Historic ‘9 to 5’ working day to
of the baby products they buy resulting more flexible working hours.
in an increase in demand for better
quality clothing, prams etc.
Mubashir Wasim (MSc. Economics, MBA
Marketing, MS-IT, MPhil Business
Economics)
 Social Trend Attitude
A change in attitudes taking place in relation to
willingness to seek compensation form organizations.
The potential costs of this ‘compensation culture’
could be huge and may lead to some corporate
causalities. This culture has , to a certain extend, been
import from the united States

Changes in public attitude to recycling have

resulted in opportunities for recycling firms.

People are far more comfortable with computers

and using internet. This has created high
opportunities for online firms and many
conventional retailers have set up websites to sell
their products. Mubashir Wasim (MSc. Economics, MBA
Marketing, MS-IT, MPhil Business
Economics)
 Technological Factors
Technological changes can affect a firm in many different ways
1- organization e.g. employees working form home but still able to access
files and systems at work.
2- Product developments, e.g. turntables were effectively replaced by CD
players which in turn are being replaced by mp3 players.
3- Production changes, e.g. computer-controlled machinery.
4- Marketing, e.g. using the internet to sell the product.
Delayering
Often linked to downsizing, delayering is the
process of removing the layers of management
This is usually to change the organization form
one with a rigid hierarchical framework with
numerous layers of supervisory grades into a
‘flatter’ organization with minimal layers of
management. Such organization tend to
emphasis team working, with people taking on
Mubashir Wasim (MSc. Economics, MBA
different roles in different teams.
Marketing, MS-IT, MPhil Business
Economics)
 Impact on Organization Structure

1- Some of the administrative rules are

replaced by more effective IT System
2- Some of the production rules are
changed by the use of Robots and
Automated Production Lines
3- Improvement in communication
through e-mail, wireless.
Impact of Technology & Downsizing
Downsizing is a term used for reducing the
number of employees in an organization
without necessarily reducing the work or
the output.
Downsizing has been a feature of the
1980s and 1990s and many organizations,
large and small alike, believe that they have
become ‘fitter’ as a resultMubashir Wasim (MSc. Economics, MBA
Marketing, MS-IT, MPhil Business
Economics)
 Technological Changes & Products
Change in Business Model
Some industries have
seen their business
model completely
transformed, e.g.
online baking has
reduced barriers to
entry allowing
supermarkets, among
others, to move into
banking.

Mubashir Wasim (MSc. Economics, MBA

Marketing, MS-IT, MPhil Business
Economics)
 Technological Changes & Products
Customer Support
Customer support is often
provided by call centers in
countries where wage rates are
lower. However some firms have
reinstated call centers into their
home countries after concerns
over customer care.

Mubashir Wasim (MSc. Economics, MBA

Marketing, MS-IT, MPhil Business
Economics)
 Impact of Business on the Physical Environment
Environmental issues have become increasingly important to
businesses. There has been a growth in awareness of the
environmental impact of business organizations.
Society at large holds firms responsible for the environmental impacts
of their operations. The precise nature of the environmental impacts of
a firm varies from industry to industry but might be grouped into the
following areas:
Use of resources
Carbon footprint – The level of CO2 emissions of a business.
Pollution
 Sustainability
Nowadays business should look to be
environmentally sustainable. Sustainability means
that organization should use resources in such a
way that they do not compromise the needs of
future generations.
Taking this approach will benefit a range of
stakeholders

In general, business is described as green if it:

incorporates principles of sustainability into each of its business
decisions;
supplies environmentally friendly products in place of non-green
products;
is greener than traditional competition;
has made an enduring commitment to environmental principles in its
business operations.
Flavorsome, a US-based fast food chain has gained worldwide recognition
due to unique taste, exemplary ambiance and economy meals. It is
considering to exploit an opportunity to expand its business in major cities of
Xanata.
Xanata is a developing country where demand for fast food is ever
increasing and during the last decade, local as well as international fast food
chains have enjoyed substantial profits. Despite widening wealth gap, fast
food has gained immense popularity among lower and middle class.
However, social awareness groups are pressurizing health ministry to revise
public health policy by introducing stringent regulations on food industry.
The government is offering tax holiday to encourage foreign investment.
This incentive is strongly being opposed by local business community. In the
past few years, Xanata has seen high inflation rate and the government is
considering to raise the minimum wage rate by 25%.
Burger Buddy, a leading local fast food chain is gaining popularity because
of its social contributions, advanced technologies, use of social media/mobile
application for promotional activities, etc.
Required: Identify the environmental factors relevant to the above situation
and group them for the purpose of PEST analysis.
Political Factors

Economic Factors

Social Factors

Technological Factors
 Competitive Forces
Part of a firm’s external analysis will involve assessing the degree and
source of competition within the industry. The key issues here is whether
the firm has a sustainable competitive advantage.
The returns that a company is able to generate are subject to two
fundamental influences:
Industry attractiveness – Not all industries offer equal opportunities for
sustained profitability
Competitive position within the industry – Positioning determines
whether a firm’s profitability is above or below the industry average.
Professor Micheal Porter identified three generic strategies
through which an organization could achieve competitive
advantage.

Cost Leadership:-
Set out to the lowest cost producer in an industry. By producing at the lowest
possible cost the manufacturer can compete on price with every other
producer in the industry and earn highest unit profits.
For example: Suzuki, Toyota, Honda, Ford

Quality Leadership:-
Generate a unique value chain for extra quality and charge extra mark-
up with price against good quality.
Innovative companies with large marketing budgets.
For example: Mercdes, Jaguar, BMW
Focus:-
Position oneself to uniquely serve one particular niche in the market. A focus
strategy is based on fragmenting the market and focusing on particular market
segments. The firm will not market it s products industry-wide but will
concentrate on a particular type of buyer or geographical area.
Small business with entrepreneurial flair, strong market knowledge and risk
taking attitude ( often new starts)
For example: Ferrari, Rolls Royce
We can analyze the profit
potential in an industry. Threat of
New
Can Organization sustain
Entrants
in an industry Competiti
ve Rivalry

Threat of
Substitute
Porter’s Five
Forces

Power of
Supplier

Power
of Buyer
1- Power of Supplier
The power of supplier to change higher prices
will be influenced by following:
The presence of one or two dominant suppliers
controlling prices- Monopoly
The degree to which switching costs apply and
substitute are available
The extent which products offered have a
uniqueness of brand, technical performance or
design not available elsewhere.

2- Bargaining Power of Customers

Powerful customers can force price cuts and/or quality improvements. Either
way, margins are eroded. Bargaining power is high when a combination of
factor arises.
A buyer purchases high proportion of supplier- Monopsony.
Similar alternative of products available from other suppliers.
Quality purchases is unimportant, Delivery timing is irrelevant, and prices will
be forced down.
 3- Threat of New Entrants
New entrants into a market will bring extra capacity and intensify competition. The
threat from new entrants will depend upon the strength of the barriers to entry and
the likely response of existing competitors to a new entrant. Barriers to entry are
factors that market it difficult for a new entrant to gain an initial foothold in a market.
Major sources of barrier to entry are.
Economies of Scale, where the industry is one where unit costs decline significantly as
volume increases, such that a new entrant will be unable to start on a comparable cost
basis.
Product Differentiation, where established firms have good brand image and
customer loyalty.
Capital Requirements, where the industry requires a heavy initial investment (e.g.
steel industry, rail transport).
Access to Distribution Channels may be restricted. It is difficult for a new product or
manufacturer to gain shelf space.
Know-how, it is much more difficult to penetrate a business where considerable know-
how and skills are needed than to enter a simple, basic market.
Regulation. Government or professional bodies might supervise and limit new
entrants.
 New Entrant

4- Competitive Rivalry
• Competitors are balance in size
are few just follower
• Fixed Costs of the Industry. may
cause low profit margin but price
war
• Industrial Growth can minimize
the competitive rivalry
• Barriers on Exist can cause tough
Competition
• Product Differentiation can reduce
competition Intensity
 Substitute of Cameras

5- Threat of Substitute Products / Other Products

Product to product substitute or just an additional feature in a
product
Extend to which Substitute
Price and Cost Comparison.
 Value Chain- Primary & Supportive Activities-1
• The approach involves breaking down the firm into five `primary' and four `support' activities,
and then looking at each to see if they give a cost advantage or quality advantage.
 Understand SWOT
This is an integral part of strategic analysis. Unlike PEST analysis, which
focuses on external environmental issues. SWOT analysis is used to view
the internal and external situation that an organization finds itself in.
strengths and weaknesses examine what an organization internally does
well or badly, while opportunities and threats look at positive and
negative factors that might impact on the organization externally.
Opportunities Strengths

Threats Exter Weaknesses Inter Methods of

Matching nal nal
removing
strengths to Anal Anal
ysis ysis weaknesses or
opportunities dealing with
may highlight the threats
new areas for the
organizational organization
development faces
Eat Smart (ES), a family owned business is being managed by Mr. & Mrs. Khan. ES
has been enjoying high profits and strong client base and is highly regarded for its
premium quality diet food, energy drinks and low carb salads. The food is
prepared under the supervision of Mrs. Khan, a foreign qualified nutritionist who
has hired a team of qualified staff having sound knowledge and experience. Mr.
Khan is a marketing graduate and looks after the supply chain activities i.e. from
ordering and safe storage of ingredients to dealing with customer complaints and
encouraging feedback.
At present, ES is offering take-away and delivery services. Dine-in service is not
being offered due to the fact that Mr. & Mrs. Khan have been busy in managing
routine work. ES relies on word of mouth and social media pages for promoting
the business.
Given the low set-up costs and growing demand for healthy food, number of
new online businesses have entered into the market. Some restaurants have also
started to offer separate diet food menus.
‘Be Fit’ (BF), a chain of fitness center, has approached ES to partner with them
in preparing diet plans and meals for its members. Partnering with BF would
mean hiring of additional staff at various levels of operations and management.
Required: (a) Perform SWOT analysis for ES. (08)