The External and Internal Environment

2. The External and Internal Environment McGraw-Hill/Irwin Principles of Management © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 2 chapter

3. Identify the major components of an organization’s task environment. Explain how each component in the task environment impacts the organization. Identify the major components of an organization’s general environment. Explain how each component in the general environment impacts the organization. Discuss the nature of change in the external environment. Outline the main components of the internal environment of an organization and articulate their implications for managerial implications. Learning Objectives

4. The Environment of Managers

5. SWOT Strengths Weaknesses Opportunities Threats

6. Task Environment Porter’s Competitive Forces Model Threat of Entry Intensity of Rivalry Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitutes

7. 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 Threat of Entry

8. 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 Wal-Mart in India? Source: Adapted from: http://ibef.org/attachment/WhattoIndia.pdf

9. 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 Bargaining Power of Buyers

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 Bargaining Power of Suppliers

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 Supplier’s Bargaining Power With Wal-Mart Source: Adapted from: http://ibef.org/attachment/WhattoIndia.pdf

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 Threat of Substitutes

13. 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 The Intensity of Rivalry

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.

15. Barriers to Exit • The fixed costs of closing down capacity • An unwillingness to reduce capacity due to a belief that demand will soon rebound • Government regulations

16. Adjustment Processes

17. 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. fragmented; consolidated tangible; intangible intangible; tangible consolidated; fragmented Question

18. The Sixth Force Threat of Entry Intensity of Rivalry Bargaining Power of Buyers Bargaining Power of Suppliers • Complements • Availability • Price Threat of Substitutes

19. The General Environment Political & Legal Forces International Forces Sociocultural Forces Macroeconomic Forces Demographic Forces Technological Forces

20. 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 Political and Legal Issues Affecting Restaurant Industry Source: http://www.restaurant.org/government/

21. 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 Demographics: China vs. India Source: http://en.wikipedia.org/wiki/Demographics_of_mainland_China; http://www.indexmundi.com/india/demographics_profile.html

22. 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% Cellular vs. Landlines Source: http://www.usatoday.com/news/snapshot.htm

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. Incremental Vs. Discontinuous Change

24. 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 Environmental Uncertainty

25. The Internal Environment Organization of the firm Employees Resources

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

27. Human Capital Knowledge Skills Capabilities

28. Resources • Tangible resources – physical assets • Intangible resources – non physical assets

29. Uniquely Strong Resources