2. The External and Internal Environment2
chapter
The External and Internal Environment
McGraw-Hill/Irwin
Principles of Management
© The McGraw-Hill Companies, Inc., All Rights Reserved.

3. Learning Objectives
Identify the major components of an organization’s task environment (environment in which the organization operates)
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.

4. The Environment of Managers
See Learning Objective 1: Identify the major components of an organization’s task environment.
See text page: 28

5. SWOT Strengths Weaknesses Opportunities Threats
See Learning Objective 1: Identify the major components of an organization’s task environment.
See text pages: 29
Opportunities
Threats

6. Strengths / Weaknesses Opportunities / Threats
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

7. Strengths / Weaknesses Opportunities / Threats
SWOT
Let’s take a moment and do this analysis for yourself. What are your…
Strengths / Weaknesses
Opportunities / Threats

8. Bargaining Power of Suppliers Bargaining Power of Buyers
Task Environment
Porter’s Competitive Forces Model
Bargaining Power of Suppliers
Threat of Entry
Threat of Substitutes
Bargaining Power of Buyers
Intensity of Rivalry
See Learning Objective 1: Identify the major components of an organization’s task environment.
See text pages: 29

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
See Learning Objective 2: Explain how each component in the task environment impacts the organization.
See text page: 30

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
See Learning Objective 2: Explain how each component in the task environment impacts the organization.
Wal-Mart in India?
This slide presents some interesting points for students to explore with regards to how Wal-mart’s entry may affect present Indian retailers as well as looking at the factors what type of factors may affect Wal-Mart’s entry in to the Indian market.
Some points to consider:
Wal-Mart already sources about $1.2 billion in merchandise from India and it is expected to grow by 30%
India’s consumer market has grown from about 35 million in 1996 to about 80 million today
It is the second most populated country in the world
Size of India’s retail trade -- $206 billion and growing at 5% per year
Source: Adapted from:
Source: Adapted from:

11. 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…
See Learning Objective 2: Explain how each component in the task environment impacts the organization.
See text page: 31

12. 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
See Learning Objective 2: Explain how each component in the task environment impacts the organization.
See text page: 32

13. 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
See Learning Objective 2: Explain how each component in the task environment impacts the organization.
Supplier’s Bargaining Power with Wal-Mart
Ask the students – Do the suppliers have any bargaining power? (obviously the answer here is no – Wal-Mart generally is in a commanding position given its size)
Why then would any company want to do business with Wal-Mart? (Companies make money by going after the volume here. Overhead and fixed costs are covered and low margin but big volume generates a decent level of profitability….otherwise the business will not survive).
Wal-Mart is known for squeezing the suppliers. Ask the students -- is this good or bad? Explain. (The driving force here from the consumer viewpoint is that it keeps the prices low.)

14. 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
See Learning Objective 2: Explain how each component in the task environment impacts the organization.
See text page: 32

15. 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
See Learning Objective 2: Explain how each component in the task environment impacts the organization.
See text page: 33

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.
See Learning Objective 2: Explain how each component in the task environment impacts the organization.
Question
This should be an interesting exercise for students to explore applying the forces to the retail industry to determine the profitability of the industry. Overall, it should be noted that, unlike pharmaceutical industry, the retail industry profitability like restaurant industry is very low.

17. 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
See Learning Objective 2: Explain how each component in the task environment impacts the organization.
See text page: 34

18. 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
See Learning Objective 2: Explain how each component in the task environment impacts the organization.
See text page: 35

19. Competitive Structure
Another relevant point to consider is the competitive structure of an industry.
Competitive Structure - # and size of firms
Fragmented Industry
Consolidated Industry
See Learning Objective 2: Explain how each component in the task environment impacts the organization.
See text page: 34

20. 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.
fragmented; consolidated
tangible; intangible
intangible; tangible
consolidated; fragmented
See Learning Objective 2: Explain how each component in the task environment impacts the organization.
See text page: 36
Answer: A

21. Bargaining Power of Buyers Bargaining Power of Suppliers
The Sixth Force
Threat of Entry
Intensity of Rivalry
Bargaining Power of Buyers
Bargaining Power of Suppliers
See Learning Objective 2: Explain how each component in the task environment impacts the organization.
See text page: 37
Complements
Availability
Price
Threat of Substitutes
See p. 38 in book

22. The General Environment
Political & Legal Forces
International Forces
Sociocultural Forces
Macroeconomic Forces
Demographic Forces
See Learning Objective 3: Identify the major components of an organization’s general environment.
See text page: 38
Technological Forces

23. 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
See Learning Objective 3: Identify the major components of an organization’s general environment.
Political and Legal Issues Affecting Restaurant Industry
This slide presents some of the front and center political and legal issues affecting the restaurant industry.
Ask the students – How do each of these issues affect the industry? Which side of the issue would they be 1) if they were the restaurant owner or 2) other stakeholder – employee or customer, etc.?
Source:

24. Demographics: China vs. India
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: 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: years
Language: Hindi, English plus 14 other official languages
See Learning Objective 3: Identify the major components of an organization’s general environment.
Demographics: China vs. India
This slide presents the demographics information on China and India – the two most populated countries in the world.
Ask the students – why as a manager they should care about these two countries’ demographics (opportunities and inevitability for business and trading, dealings with people from these countries, etc. are prime reasons why as a manager you need to understand these and other aspects of different countries.)
Interesting observation – Indian population is significantly younger than Chinese. Also, Indian population growth rate is more than twice that of Chinese (1.38% vs. 0.59%) What does this mean? (Eventually, at this rate, India will take over as the most populated country.)
Ask the students – What types of trends should you focus on? (One quick observation – In India, one should focus on the youth population whereas in China, one can focus on the growing aging population.)
Source:

25. 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%
See Learning Objective 3: Identify the major components of an organization’s general environment.
Cellular vs. Landlines
This slide presents the top three reasons why people refuse to give up their landline telephones.
Ask the students – how many of them have both? At parents home vs. themselves? More and more younger population is going with the cellular only model whereas the older population still uses both or only land lines given above reasons.
Now the convergence of technology is bringing the ease of s and Internet on the cellular phones along with the videos, music and other attributes.
Source:

26. Macroeconomic Forces Inflation Economic Growth Interest Rates Etc.
See Learning Objective 5: Discuss the nature of change in the external environment.
See text page: 42

27. International Forces Foreign Economic Growth
Effects of Foreign Stock Markets
Emergence of Trade Blocs
See Learning Objective 5: Discuss the nature of change in the external environment.
See text page: 43

28. External Environmental Changes
How Fast?
Uncertainty
See Learning Objective 5: Discuss the nature of change in the external environment.
See text page: 42

29. 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.
See Learning Objective 5: Discuss the nature of change in the external environment.
See text page: 42

30. 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
See Learning Objective 5: Discuss the nature of change in the external environment.
See text page: 43

31. The Internal Environment
Organization of the firm
Employees
Resources
See Learning Objective 6: Outline the main components of the internal environment of an organization and articulate their implications for managerial actions.
See text page: 44

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
See Learning Objective 6: Outline the main components of the internal environment of an organization and articulate their implications for managerial actions.
See text page: 45

33. Human Capital Knowledge Skills Capabilities
See Learning Objective 6: Outline the main components of the internal environment of an organization and articulate their implications for managerial actions.
See text page: 45
Capabilities

34. Resources Tangible resources – physical assets Intangible resources
– non physical assets
See Learning Objective 6: Outline the main components of the internal environment of an organization and articulate their implications for managerial actions.
See text page: 46

35. Uniquely Strong Resources
See Learning Objective 6: Outline the main components of the internal environment of an organization and articulate their implications for managerial actions.
See text page: 47

36. External Environment – More from an Intl. Context
Key Variables
Population
Economic
Development
Trade and Natural Resources
Foreign Investment
See Learning Objective 6: Outline the main components of the internal environment of an organization and articulate their implications for managerial actions.
See text page: 47

37. 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
Slide 2-2
INTERNATIONAL MANAGEMENT 5/e
Beamish, Morrison, Inkpen and Rosenzweig
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.

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
Beamish, Morrison, Inkpen and Rosenzweig
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.

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
Beamish, Morrison, Inkpen and Rosenzweig
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.

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
Beamish, Morrison, Inkpen and Rosenzweig
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.

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
Beamish, Morrison, Inkpen and Rosenzweig
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.

42. Questions Go to p. 49 in the text.
Let’s work on #1 and #5 (From a Korean perspective)
Slide 2-6
INTERNATIONAL MANAGEMENT 5/e
Beamish, Morrison, Inkpen and Rosenzweig
McGraw-Hill
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.