chapter 2 The External and Internal Environment McGraw-Hill/Irwin Principles of Management © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-3 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. The Environment of Managers Internal Environment The Manager General Environment Task Environment 2-4 2-5 SWOT Strengths Weaknesses Opportunities Threats 2-6 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 2-7 SWOT Let’s take a moment and do this analysis for yourself. What are your… 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 2-8 2-9 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 - 10 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 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… 2 - 11 Bargaining Power of Suppliers 2 - 12 • 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 Supplier’s Bargaining Power With Wal-Mart • • • • 2 - 13 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 The Threat of Substitutes 2 - 14 • 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 and supply conditions - If demand is growing the industry will appear favorable. - Demand trends are influenced by economic growth & rising income levels 2 - 15 2 - 16 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 - 17 Adjustment Processes 2 - 18 High barriers to entry Low barriers to entry Excess demand 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 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 2 - 19 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 intangible; tangible consolidated; fragmented 2 - 20 2 - 21 The Sixth Force Threat of Entry Bargaining Power of Suppliers Intensity of Rivalry Threat of Substitutes Bargaining Power of Buyers Complements •Availability •Price See p. 38 in book 2 - 22 The General Environment Political & Legal Forces International Forces Sociocultural Forces Macroeconomic Forces Demographic Forces Technological Forces 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/ 2 - 23 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 - 24 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 2 - 25 Macroeconomic Forces • Inflation • Economic Growth • Interest Rates • Etc. 2 - 26 International Forces • Foreign Economic Growth • Effects of Foreign Stock Markets • Emergence of Trade Blocs 2 - 27 External Environmental Changes •How Fast? •Uncertainty 2 - 28 Incremental Vs. Discontinuous Change 2 - 29 • 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 - 30 The Internal Environment Organization of the firm Employees Resources 2 - 31 2 - 32 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 - 33 Human Capital Knowledge Skills Capabilities 2 - 34 Resources • Tangible resources – physical assets • Intangible resources – non physical assets 2 - 35 Uniquely Strong Resources Valuable Owned by the Firm Inimitable Rare Uniquely Strong Resources Nonsubstitutable External Environment – More from an Intl. Context Key Variables •Population •Economic •Development •Trade and Natural Resources •Foreign Investment 2 - 36 External Environment – More from an Intl. Context 2 - 37 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 Slide 2-2 INTERNATIONAL MANAGEMENT 5/e McGraw-Hill Beamish, Morrison, Inkpen and Rosenzweig © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 2 - 38 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 Slide 2-3 INTERNATIONAL MANAGEMENT 5/e McGraw-Hill Beamish, Morrison, Inkpen and Rosenzweig © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 2 - 39 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 Slide 2-4 INTERNATIONAL MANAGEMENT 5/e McGraw-Hill Beamish, Morrison, Inkpen and Rosenzweig © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 2 - 40 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. Slide 2-5 INTERNATIONAL MANAGEMENT 5/e McGraw-Hill Beamish, Morrison, Inkpen and Rosenzweig © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 2 - 41 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 Slide 2-6 INTERNATIONAL MANAGEMENT 5/e McGraw-Hill Beamish, Morrison, Inkpen and Rosenzweig © 2003 The McGraw-Hill Companies, Inc. All rights reserved. 2 - 42 Questions 1. Go to p. 49 in the text. 2. Let’s work on #1 and #5 (From a Korean perspective) Slide 2-6 INTERNATIONAL MANAGEMENT 5/e McGraw-Hill Beamish, Morrison, Inkpen and Rosenzweig © 2003 The McGraw-Hill Companies, Inc. All rights reserved.