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The External and Internal Environment. McGraw-Hill/Irwin Principles of Management . © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 2. chapter. Identify the major components of an organization’s task environment.

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The External and Internal Environment

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the external and internal environment
The External and Internal Environment


Principles of Management

© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.



learning objectives
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





task environment
Task Environment

Porter’s Competitive Forces Model

Threat of Entry

Intensity of Rivalry

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitutes

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

Threat of Entry
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

Wal-Mart in India?

Source: Adapted from:

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

Bargaining Power of Buyers
bargaining power of suppliers
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
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

Supplier’s Bargaining Power With Wal-Mart

Source: Adapted from:

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

The Threat of Substitutes
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

The Intensity of Rivalry

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
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
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

the sixth force
The Sixth Force

Threat of Entry

Intensity of Rivalry

Bargaining Power of Buyers

Bargaining Power of Suppliers

  • Complements
  • Availability
  • Price

Threat of Substitutes

the general environment
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

Political and Legal Issues Affecting Restaurant Industry


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: 72.58 years

Language: Standard Chinese or Mandarin


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


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%

Cellular vs. Landlines


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.

Incremental Vs. Discontinuous Change
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

Environmental Uncertainty
the internal environment
The Internal Environment

Organization of the firm



  • 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
human capital
Human Capital




  • Tangible resources – physical assets
  • Intangible resources – non physical assets