chapter 2 The External and Internal Environment Mc

chapter 2 • The External and Internal Environment Mc. Graw-Hill/Irwin Principles of Management © 2008 The Mc. Graw-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/Whatto. India. 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/Whatto. India. 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 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 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; 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 Uniquely Strong Resources Rare Nonsubstitutable