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Transcript of chapter 2 The External and Internal Environment McGraw-Hill/Irwin Principles of Management © 2008...
chapter 2The External and
Internal Environment
McGraw-Hill/IrwinPrinciples of Management
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Learning Objectives
1. Identify the major components of an organization’s task environment (environment in which the organization operates)
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.
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The Environment of Managers
General Environment
Task Environment
Internal Environment
The Manager
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SWOT
Strengths Weaknesses
Opportunities Threats
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SWOT
You can talk about SWOT in many different contexts. It can related not only to businesses and countries but also to you as a person!
Let’s do this analysis for a well-known company.
Strengths / Weaknesses
Opportunities / Threats
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SWOT
Let’s take a moment and do this analysis for yourself. What are your…
Strengths / Weaknesses
Opportunities / Threats
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Task Environment
Bargaining Power of Suppliers
Threat of Entry
Threat of Substitutes
Bargaining Power of Buyers
Intensity of
Rivalry
Porter’s Competitive Forces Model
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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-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
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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• Identify examples for each…
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Bargaining Power of Suppliers
• A 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
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Supplier’s Bargaining Power With Wal-Mart
• 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
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The Threat of Substitutes
• 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
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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
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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.
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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
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Adjustment Processes
High barriers to entry Low barriers to entry
Excess demand
Excess demand will persist
Significant opportunity
Excess demand will not persist
Transitory opportunity
High barriers to exit Low barriers to exit
Excess supply (capacity)
Excess capacity will persist
Significant threat
Excess capacity will not persist
Transitory threat
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Competitive Structure
1. Another relevant point to consider is the competitive structure of an industry.
Competitive Structure - # and size of firms Fragmented Industry Consolidated Industry
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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. fragmented; consolidated
b. tangible; intangible
c. intangible; tangible
d. consolidated; fragmented
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The Sixth Force
Bargaining Power of Suppliers
Threat of Entry
Threat of Substitutes
Bargaining Power of Buyers
Intensity of
Rivalry
Complements
•Availability
•Price
See p. 38 in book
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The General Environment
Technological Forces
Sociocultural Forces
Demographic Forces
Macroeconomic Forces
Political & Legal Forces
International Forces
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Political and Legal Issues Affecting Restaurant Industry
• At the national level, the front burner issues for the US 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/
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Demographics: China vs. IndiaChina
• 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
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Techno Forces: 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
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Macroeconomic Forces
• Inflation• Economic Growth• Interest Rates• Etc.
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International Forces
• Foreign Economic Growth• Effects of Foreign Stock Markets• Emergence of Trade Blocs
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External Environmental Changes
•How Fast?•Uncertainty
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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
Employees Resources
Organization of the firm
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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
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Resources
• Tangible resources – physical assets
• Intangible resources
– non physical assets
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Uniquely Strong Resources
Owned by the Firm
Inimitable Nonsubstitutable
Rare
Valuable
Uniquely Strong
Resources
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External Environment – More from an Intl. Context
Key Variables•Population•Economic•Development•Trade and Natural Resources•Foreign Investment
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External Environment – More from an Intl. Context
Key Variables
• Population
• Economic Development Indices
- Gross National Income - GNI
- Purchasing Power Parity – PPP
- Gross Domestic Product - GDP
• International Trade and Natural Resources
• Foreign Investment
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 2-2INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
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Population
• 6 billion in 2000 – estimated to grow to 8.5 billion by 2025
• Half of world’s population is in Asia-Pacific region
• 30% of the world’s population is under the age of 15
• Implications exist for the types of products demanded
• Rural – urban divides exist in population distribution within a country
• Migration to other countries can have a major impact on overall trade and balance of payments of a country
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 2-3INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
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Economic Development
• The position of the G7 countries is under challenge
• As of 2000, India, Mexico, Russia and Brazil have economies that are larger than that of Canada when measured using PPP (Purchasing Power Parity)
• GNI levels indicate income levels
• PPP restates GNI for each country with the same prices for a basket of goods and services
• PPP addresses the problem of changing exchange rates
• Gross Domestic Product - GDP
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 2-4INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
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Trade and Natural Resources
• Trends in the trade of manufactured products
- Volume of trade in manufactured products has risen dramatically
- Number of source countries has risen
- Composition of the trade of many countries has changed - trade in services has increased as a percentage of international trade (eg. Trade in tourism)
• The relative value of unprocessed natural resources in international trade has declined.
• A combination of technology transfer and relatively low labor costs has led to increase in the number of countries exporting fresh and processed agricultural and fishery products.
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 2-5INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
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Foreign Investment
• Foreign direct investment has become one of the major means by which companies operate internationally
• FDI is highly concentrated among a relatively few countries.
- Three-fourths of FDI flows are among the high-income countries in Europe, Japan, and North America.
- Of the FDI flows to lower-income countries, about two-thirds is concentrated among 10 countries
• Heightened awareness of interconnectedness and environmental issues has raised both ethical and legal problems for MNEs
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 2-6INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
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Questions
1. Go to p. 49 in the text.
2. Let’s work on #1 and #5 (From a Korean perspective)
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 2-6INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig