2

Chapter

The
Management
Environment

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 The Organizational Environment
 In an organization as an Open System----- An organization interacts
with its environment as it takes inputs and distributes outputs for
absorption
 External environment has the following impacts worldwide
For Example
 Skyrocketing in costs of food around the world is the biggest factor in
runway demand
 Many Governments are trying to save megawatts of energy through
renewable energy productions
 Systems are being automatic and they are now interconnected for
exchanging information and data
 As these examples show, environmental forces play a major role in
shaping a manager’s actions
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 Economic Technological
Globalisation conditions conditions

Rivals

Social-
Political/Legal The
Suppliers Cultural
conditions Customers organisation conditions

Pressure
groups

Environmental Demographic
conditions conditions
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Defining the External Environment
• External Environment
– Those factors and forces outside the organization that
affect the organization’s performance.
• Components of the External Environment
(1) Specific environment: external forces that have a
direct and immediate impact on the organization.
(2) General environment: broad economic, socio-
cultural, political/legal, demographic, technological,
and global conditions that may affect the organization

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 The External
Environment

Figure 2.1
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 Industry Environment
• Set of factors directly influencing a firm and its
competitive actions and competitive
responses.
– Threat of new entrants
– Power of suppliers
– Power of buyers
– Threat of product substitutes
– Intensity of rivalry among competitors
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PESTEL/ PESTLE FRAMEWORK

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General Environment
• Dimensions in the broader society that influence the
industry and the firms within it.
– Political/legal
– Economic
– Sociocultural
– Technological
– Environmental
– Demographic
– Global
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Economic Segment
An economic factor has a
direct impact on the
economy and its
performance, which in turn
directly impacts on the
organization and its
profitability.

It includes GDP, interest

rates, employment or
unemployment rates,
inflation rates, income and
foreign exchange rates
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General Environment
• The Economic Segment
– GDP
– Inflation rates
– Interest rates
– Exchange rate
– Income
– Unemployment level

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GDP/ GDP growth rate
• The gross domestic product (GDP) of a
country is one of the main indicators
used to measure the performance of a
country’s economy. When GDP growth is
strong, firms hire more workers and can
afford to pay higher salaries and wages,
which leads to more spending by
consumers on goods and services.
• Firms also have the confidence to invest
more when economic growth is strong,
and investment lays the foundation for
economic growth in the future. When
GDP growth is very low or the economy
goes into a recession, the opposite
applies (workers may be paid lower
wages, and firms are reluctant to invest).

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Inflation rates
Inflation normally occurs when supply
of money is larger than the availability
of goods and services. And is followed
by increased costs of raw materials,
production and utilities. In order to
sustain business, the prices of goods
have to increase.
As a consequence, inflation can
reduce the purchasing power of
consumers, unless employers increase
wages based on the level of inflation.
Q: What effect does the high inflation
rate have on the business? (revenue,
cost, profit)

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Interest rates
- Deposit interest rate: A deposit
interest rate is the rate of return a
financial institution pays you on your
deposits into its account.

- Lending interest rate: Lending rate or

interest rate is the amount charged
by lenders for a certain period as a
percentage of the amount lent or
deposited. Many businesses rely on
loans from banks and other financial
institutions as a source of
financing. High interest rates result
in higher total company expenses.

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Exchange rate
It directly affects companies
with import and export activities
Changing exchange rates might
affect how much a company has
to pay to its international
supplier to satisfy them, which
can affect profit margins, as well
as take a lot of resources to stay
on top of.
Q: If the USD/VND exchange
rate increases, the company
will increase its import or
export activities? Why?

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Income
Income is the total earning of an
individual or an entire family. Income
affects the buying habits of the
consumers and thus impacts the
commercial businesses.
People with low income tend to buy
only goods and services which are
necessary for living and don’t spend
much money on entertainment and
luxurious items.
We can say that the high income of
people is good for commercial
businesses and low income of the
population is cause loss to commercial
businesses.

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Unemployment level
The countries with high
unemployment level have a
weaker economic environment.

If most of the population will

not earn, then they will not
have sufficient money to spend
on buying goods and services.
This creates a bad economic
cycle in the country.

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General Environment (cont’d)
• The Political/Legal Segment
– Antitrust laws
– Taxation laws
– Labor laws
– Educational
philosophies and
policies
– Corporate laws

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 Political/Legal Segment
The political/legal component looks
at federal, state, and local laws, as
well as global laws and laws of other
countries. It also includes a country’s
political conditions and stability.
•Companies might be required to
change the production process of a
product according to the change in
government policies.
•For example, companies required to
stop the production of certain drugs
after they were banned by the
government.
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Political/Legal Segment
An organization must understand what is
legal and allowed within the territories
they operate in. They also must be
aware of any change in legislation and
the impact this may have on business
operations

There are various laws such as labor

laws, competition laws, factory act,
commercial act; industrial laws.
Companies are required to set up their
business by being bound by the law, and
violation of any law can result in a
penalty or the cancellation of business
licensees operations.

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General Environment (cont’d)
• The Sociocultural Segment
– Women in the workplace
– Workforce diversity
– Attitudes/Norms
– Concerns about environment
– Shifts in work and career
preferences
– Religion
– Customs

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Sociocultural Segment
 Managers must adapt their practices to the
chaining expectations of the society in which
they operate
 As values, attitudes, trends, traditions, lifestyles,
beliefs, tastes, and patterns of behavior
 Ex: The demand of more balanced life by the
workers, organizations have had to adjust by
offering family leave policies, flexible work
hours and on-site child care facilities

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General Environment
• The Demographic Segment
– Population size
– Age structure
– Geographic
distribution
– Ethnic mix

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 The Demographic Segment
 Demographic conditions encompass trends in
population characteristics such as gender, age,
level of education, geographic location and
family composition
 Changes in these conditions may constrain
how managers plan, organize, lead and control
 Specific Age Cohorts in United States
 Depression Group (born 1912-1921)
 World War-II Group (born 1922-1927)
 Postwar Group (born 1928-1945)
 Baby Boomers Group (1946-1964)
 Generation X (born 1965-1977)
 Generation Y (born 1978-1994)
 Generation Z (1995 – 2010s)

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General Environment (cont’d)
• The Technological Segment
– Product innovations
– Applications of
knowledge
– Focus of private and
government-supported
R&D expenditures
– New communication
technologies

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Technological Segment
• The technological
component is concerned
with scientific or industrial
innovations.

Q: What opportunities and

challenges does the
development of technology
bring to businesses?

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Technological Segment
• Affect product quality and cost.
• Shorten product and technology life cycles.
• Changing product demand.
• Technology changes rapidly, and organizations are required to
change their technology or update their technology to keep
up with the changing technological environment.
• This requires the organizations to update their machinery and
hire new employees with new skills or to train existing
employees to use new technology

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Environmental Segment
• Including: natural conditions, geographical location, climate,
natural resources
• Organizations should:
- Prioritize development of natural exploitation activities on the
basis of maintenance and regeneration
- Saving and efficient use of resources, switching from non-
renewable resources to using man-made materials
- Promote R&D activities to protect the environment, reduce
the impact of pollution

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Globalization
 Managers are challenged by an increasing number of global
competitors and markets as part of the external environment
 Globalization has impacted the way as mangers plan, organize, lead
and control
 Lower or remove barriers to international trade and investment.
Q: What opportunities and challenges does globalization bring to
businesses?

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Globalization
Create market expansion opportunities.
Learn management experience, modern
technology.
Increased competition, risk.

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The external environment

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PESTEL
• A PESTLE/PESTEL analysis is a _____ that can provide prompts
to the governors, management and staff involved in the
analysis of the changes in the ______ that could impact future
management _______.
• A PESTLE is usually as a part of the strategic development of a
business _______, however a PESTLE analysis can be used as
part of identifying the _____ and _____ for operational
planning within environments.
• The PESTLE provides a simple framework within which to
consider ______ factors. 

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 Industry Environment

The Five Forces of

Competition Model

Figure 2.2
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 Power of buyers/ customers
Customer classification
-Individual customers
-Corporate customers
-Government customers

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Power of buyers/ customers
Customers have high power when:
-Customers buy in bulk
-Supply > demand
-Importance of customers (VIP)
-Customer's supplier switching cost is not high
-Customers have full information about needs, suppliers,
and actual prices in the market
- Customers can implement backward vertical integration
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bolts and screws

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 Power of suppliers
A supplier is a person, organization, or other entity that provides
something that another person, organization, or entity needs.
For example: raw materials, semi-finished products, machinery,
capital, labor or services (information, management, market
research,...).

Any organization/ person needs a supplier.

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Power of suppliers
Suppliers have high power when:
-Small number of suppliers, supply < demand
-The customer is not the supplier's key customer.
-The supplier's products are an important input for the business's
operations
-The cost of switching suppliers of enterprises is high
-Enterprises cannot easily find substitute products if they do not
use the products of current suppliers
-Suppliers can implement forward vertical intergration
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 Threat of Substitutes
A product that can satisfy some of the same customer needs as another
Energy drinks have become a substitute product for coffee.

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Threat of Substitutes
- Substitutes provide choices and alternatives for consumers
while creating competition and lower prices in the
marketplace.
•Prices and quality
•Features
•New models, new consumption trends

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Rivalry among competing firms

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Competitors/ Rivals
A competitor is a person, business, team, or organization that
competes against you or your company.
In business, we call a close a competitor a rival. In other words,
rivals are the same size and make similar products.
“A company which rivals another. Two companies that operate
in the same industry, make similar products, and target the same
consumers, are competitors.”

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 Competition Among Existing Firms
The extent of competition among established firms depends on:
- Competitive structure
Fragmented industry: low entry barriers & commodity-type
products  price wars
Consolidated industry tacit agreement
- Rate of industry growth
If demand decreases, is there an opportunity or a threat?
If demand increases, is there an opportunity or a threat?
-Exit barriers
•Investment costs and other costs
•Legal and strategic constraints
•Psychological factors: values, prestige of leaders in the business

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Threat of New Entrants
In Porters five forces, threat of new entrants refers to
the threat new competitors pose to existing competitors in an
industry.
Therefore, a profitable industry will attract more competitors
looking to achieve profits.

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Threat of New Entrants: Barriers to
Entry
• Economies of scale
• Product differentiation
• Capital requirements
• Switching costs
• Access to distribution channels
• Government policy

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