MGT10009 – Contemporary Management

Week 7 - The External and internal environments

Principles

Dr.Asanka Gunasekara
 Learning Objectives
• Describe how environmental forces influence organizations and
how organizations can influence their environments.
• Distinguish between the macroenvironment and the competitive
environment.
• Identify elements of the competitive environment.
• Summarize how organizations respond to environmental
uncertainty.
• Define elements of an organization’s culture.
• Discuss how an organization’s culture and climate affect its
response to its external environment.
Open Systems
Organizations are affected by, and affect, their environment.
Inputs:
• Goods and services organizations take in and transform
them into products.
Outputs:
• The products and services organizations create.

3
 Organization as an Open System

Access the text alternative for slide images.

4
External Environment

External environment:
All relevant forces outside a firm’s boundaries, such as competitors, customers,
the government, and the economy.

Competitive environment.
Includes the firm and its rivals, suppliers, buyers, new entrants, and
substitute or complementary products.

Macroenvironment.
Affects all organizations and includes economic, technological, legal and
political, demographic, social, and natural environment factors (PESTEL)
The External and Internal Environments of
Organizations
Macro Competitive Internal
Environment Environment Environment
Economy Rivals Culture
Technology Suppliers Values
Legal and Buyers Climate
regulations
New entrants
Demographics
Substitutes and
Social issues complements
Natural
environment

6
Managers and the Economy
The economic environment affects managers’ ability to function effectively
and influences their strategic choices

Role of managers:

In publicly-held companies, managers may feel required to meet

Wall Street’s earnings expectations.
Managers may focus on short-term results at the expense of long-
term success.
Some managers may be tempted to engage in unethical or unlawful
behavior that misleads investors.
Keep in mind that economic conditions change over time and are
difficult to predict.
Technology
Technological advances create new products and services,
advanced production techniques, and better ways of
managing and communicating.
• As technology evolves, new industries, markets, and
competitive niches develop.

The 3D printing process

has revolutionized design.

8
 Laws and Regulations

Regulators include agencies such as:

Securities and Exchange Commission (S E C).
Occupational Safety and Health Administration (O S H A).
Equal Employment Opportunity Commission (E E O C).
National Labor Relations Board (N L R B).
Office of Federal Contract Compliance Programs (O F C C P).
 Demographics

Measures of various characteristics of the people who make up

groups or other social units.

Demographic trends:

Aging of the workforce.

Increasing education and skill levels.
Immigration factors.
Increasingly diverse workforce.
 Sustainability and the Natural Environment

Organizations depend on the natural environment to provide them with

resources.
Operations impact quality and quantity of resources.
Impacts on local citizens.
The Competitive Environment

12
 Competitors

Competition is most intense when:

There are many direct competitors.

Industry growth is slow.
Product/service is not easily differentiated.
 New Entrants

Barriers to Entry:
Conditions that prevent new companies from entering an
industry.
Government policy, capital requirements, brand
identification, cost disadvantages, and distribution channels.
 Substitutes and Complements
Substitutes:
• Alternative products or services.
• Potential threat.

Complements:
• Products or services that increase purchases of other
products.
• Potential opportunity.

15
 Suppliers

Supply chain management:

Managing the acquisition of materials, their transformation into products, and
the distribution of products to customers.

Switching costs:
Provide resources or inputs needed for production.
Fixed costs buyers face if they change suppliers.
 Customers

Without customers to purchase its

goods or services, a company won’t
survive.
Final consumer (end users).
Intermediate consumer
(wholesalers and retailers).

17
 Environmental Analysis

Environmental uncertainty:
Lack of information needed to understand or predict the future.

Environmental complexity:
The number of issues that must be attended to as well as the
interconnectedness of these issues.

Environmental dynamism:
The degree of discontinuous change that occurs within an industry.
 Environmental Scanning

Environmental scanning:
Searching for useful information, unavailable to most,
sorting that information and interpreting what is important.

Competitive intelligence:
Information that helps managers determine how to
compete better.
Attractive and Unattractive Environments

Environmental
Unattractive Attractive
Factor
Competitors Many; low industry growth; Few; high industry growth;
equal size; commodity unequal size; differentiated
Threat of entry High threat; few entry Low threat; many entry
barriers barriers
Substitutes Many Few
Suppliers Few; high bargaining Many; low bargaining
power power
Customers Few; high bargaining Many; low bargaining
power power

20
 Scenario Development and Forecasting

Scenario:
A narrative that describes a set of future
conditions.
Best-case, worst-case.
e.g., what if the new product did not have a good
customer base or what if we diversify the product
line?

Forecasting:
Method for predicting how variables will change the
future.
e.g., what the profitability of the project ?
 Benchmarking

The process of comparing an organization’s

practices and technologies with those of other
companies.

Identifying the best-in-class performance

by one or more companies in a given
area and comparing your processes to
their processes.

22
 Selecting Your Environment
Strategic maneuvering:
An organization’s maneuver around potential threats and capitalize on
arising opportunities.
Domain selection:
Entrance to a new market or industry with an existing expertise (e.g.,
selecting a new region to sell their products)
Diversification:
Occurs when a firm invests in a different types of businesses or products
(e.g., a firm that focuses on children books diversify into toys and clothing).
Mergers/Acquisition
Two or more companies combine with another.
Divestitures:
A firm sells one or more businesses.
 Adapting to the Environment: Changing the
Organization

To cope with environmental uncertainty and change, organizations can

adjust structures and work processes.
Buffering – keeping excess resources
Smoothing – leveling fluctuations (seasonal sales)
Flexible processes – adapting the technical core (customise
products or services to meet customer needs like EV)
Choosing an Approach
Considerations in managing external environment:
Aim at elements of environment that
1. Cause the company problems.
2. Provide it with opportunities.
3. Allow the company to change successfully.

Choose responses that fit the environmental component of

interest.
Choose actions that offer most benefit at lowest cost.

25
 Organization Culture

The set of important assumptions about the organization and its goals and
practices that its members share.

Strong Cultures:
Majority of people within the organization agree on organizational goals.

Weak Cultures:
Different people hold different values and there is confusion about
corporate goals.
 Organization Culture

Diagnosing culture: useful clues about culture

Corporate mission statements and official goals.

Important business practices.
Symbols, rites, and ceremonies.
The stories people tell.
Cultural assessments.

“At Swinburne, our vision is to bring people and technology together to

build a better world”
 Managing Culture

Manage culture actively.

Communicate with employees regularly and set the right
examples.
Celebrate and reward those who exemplify desired culture.
 Next Week

Ethics, CSR and sustainability Chapter 5