Management

Environment
Learning Outcomes
 Understand the internal environment of a firm
 Understand the external environment of a
firm
 Understand
the industry/ competitive
environment of a firm
Environmental influences on
management

 Although most of a manager’s time is spent in

interactions with subordinates inside the
organization, the manager must also deal with issues
in the external environment.
Composition of the Management
Environment

 The environmental concept refers to the sum total of

the factors or variables that may influence the
continued existence of an organization.
 They may be factors inside or outside the organization.
 An organization does not exist in a vacuum, but in an
environment that provides resources and limitations.
 To remain prosperous, therefore, it must continually
adapt to its environment, which is constantly changing.
Composition of the Management
Environment

 An organization and its environment are

interdependent.
 The environment provides resources and feedback to
the organization and it, in turn, produces the goods
and services required by the environment.
 An organization exists only for as long as activities
are desired and supported by the environment.
Types of environments

Internal environment
 Refers to the activities and events internal to the organization.
 They influence an organizations activity from within. Internal
forces include:
 The organization and its management
 The mission, goals, objectives and strategies of the
organization.
 The organizational culture.
 The resources of the organization e.g. Information, capital,
material, human resources etc
Information resources
 Refers to the procedures, processes, data and other
kinds of knowledge that managers of an organization
use for decision making.
 Information may be generated by employees and
managers in the organization or often from external
sources for organizational use.
Capital resources
 Refers to the finances and other monetary
instruments used to finance the on going and future
activities in an organization.

 Material resources
 Physical assets e.g. plant, equipment, raw materials,
furniture vehicles etc.
Human resources:
 Refers to members i.e. managers and other
employees involved in running of the organization.
Organizational Culture – the way we doing things
around here. Entails Values and Structure of an
organization.
Market environment
 This is the environment that surrounds the organization also
known as the competitive or industry and comprises of:
 Consumers, their needs, purchasing power and behaviour.
 Suppliers of materials, capital and labour
 Intermediaries e.g. wholesalers and retailers, commercial
agents and brokers, banks etc.
 Competitors e.g. new entrants, existing competitors,
availability of substitute products or services and the
bargaining power of clients, consumers and suppliers.
The General environment

 Is that which exists outside the organization that has the potential to
affect a firm. It comprises:
 Political Environment
 Economic Environment
 Social Cultural Environment
 Technological Environment
 Ecological Environment
 Legal Environment
PESTEL

Political environment
-The government of the day is responsible for creating
a stable framework in which business can be carried
out eg in provision of :
 Physical infrastructure eg transport
 Market Infrastructure Eg policing

Political environment

 Government stability
 Political factors will invalidate the strategy and perhaps
severely damage the firm. Eg political wars and chaos.
 Corruption and nationalization.
 Other government policies and philosophies
 Political changes complicates the planning activities of
many firms, infact political risk is an important
consideration in strategy formulation.
 The Corruption Perceptions Index ranks countries and
territories based on how corrupt their public sector is
perceived to be.
 A country or territory’s score indicates the perceived
level of public sector corruption on a scale of 0
(highly corrupt) to 100 (very clean).

 Where is Kenya GUESS???

 2024 statistics Score 34/100
 2023 statistics score 32/100
 Economic Environment

Firms generally seek to compete in relatively stable

economies with strong growth potential.
The economic environment includes:
Interest rates
Inflation rates
Trade deficits or surpluses
Budget deficits or surpluses
Exchange rates, unemployment rates
Consumer disposable income and energy availability and
cost.
Economic Environment

 For example an increase in interest rates will

increase the cost of borrowing and affect the cash
flow of a business
 The forecast state of the economy will also influence
the planning process for the organization which
operate within it.
Socio/cultural environment

This features long term social trends and peoples'

beliefs and attitudes.
Demography is the study of human population and
population trends.
Important to the organizational planners include :
- Age – Changes in the age distribution, Gender,
population size
 Socio/cultural environment

- Consumer attitudes, preferences/lifestyle

- Buying patterns
- Cultural beliefs, norms and traditions
- Education levels, social classes
- Geography- concentration of a population in a
given area
- Ethnicity – A population may have groups with
different ethnic origins
- Household and family structure eg size,
Technological environment
Developments in technology-New technologies can
improve efficiency, reduce costs, enhance quality, and
open new markets.
Automation -Use of machines to perform a task.
Automation reduces reliance on manual labor and
increases consistency.
Technological Access and Affordability
Internet and E-Commerce-Online platforms enable
direct-to-consumer sales, reduce distribution costs, and
provide data on customer behavior.
Physical /Ecological environment

Environmental screening is becoming more and more

important. In future, orgs will be responsible for
environmental impact of their activities
Modern orgs now have to be aware of the impact their
businesses have on the environment
Physical /Ecological environment

 Climate Change, Rising temperatures, droughts, floods, and erratic

rainfall patterns
 Consumer Environmental Awareness
 Consumer demand for products that appear to be environmentally
friendly
 Important for logistical reasons,
 Sustainability and Resource Use-Pressure to reduce water, energy,
and material consumption leads to more efficient processes.
 Scarcity of nonrenewable resources Coal, Oil, minerals etc and how we
are managing these- Business to move towards renewable sources of
energy (Solar, Wind etc)
Physical /Ecological environment
 Environmental Regulations
 Governments of the day heed to pressure from green
movements thus putting the environmental issues in their
agendas. Governments may impose limits on emissions, water
usage, or waste disposal, recycling targets requiring compliance
investments
 Pressure from Green Movements also demand that
businesses be charged with the external costs of their activities
 Pressure from Global and Local Stakeholders- investors
are increasingly demanding environmental reporting and action.
 Most country's have laws to cover smoking emissions, water
pollution and the destruction of animals and natural habitat
Legal environment

The addition or removal of legislative or

regulatory constraints can pose major strategic
threats and opportunities.
The organization needs to know what changes in
regulation are possible and what their impact
might be
And what laws and incentives are being
developed that might affect strategy
Legal environment

Other factors to consider include:

Competition law, Environmental laws, Laws to protect
consumers, fire precaution and safety procedures,
Employment laws, Criminal laws i.e insider dealing
theft, and contract law.
Tax law
Company law
Anti discrimination law
Sexual harassment laws
Disability laws
Competitive
environment
Industry or Sector Analysis

 To be able to understand, the dynamics of the

competitive structure of an industry need to be
well understood.
 The most influential analytical model for
analyzing the nature of competition in an
industry is Porter’s Five Forces Model.
Michael Porters Five forces
Michael Porters Five forces

 Michael Porter’s Five Forces Model is a framework that was developed

in 1979 that is used for analyzing the competitive forces that shape
every industry.
 It helps you understand the strength of your firm's position and the
potential profitability of an industry.
 It is still widely used today.
 The rivalry amongst competitors
in the industry
If entry to an industry is easy then competitive rivalry
is likely to be high. If it is easy for customers to move
to substitute products for example from coke to water
then again rivalry will be high. Generally competitive
rivalry will be high if:
 There is little differentiation between the products
sold between customers.
 Competitors are approximately the same size and
hence capability
 If the competitors all have similar strategies.
The rivalry amongst competitors
in the industry

 Switching costs- If buyers switch easily suppliers will

compete fiercely
 It is costly to leave the industry hence they fight to
just stay in (exit barriers)
 These exit barriers might include:
 The cost of redundancy payment to employees
 The effect of withdrawal on the other operations
within the group
 Bargaining power of suppliers
 Itrefers to the ability of suppliers to raise input
prices or provide poor quality inputs.
 Ifsuppliers are strong, they can demand higher
prices or dictate terms, eating into your profits.
 NB Porter takes Labour as supplier of inputs
Supplier’s power comes from:
 Ifthey are the only supplier or one of few
suppliers who supply that particular raw material.
(monopoly or oligopoly prices )
Bargaining power of suppliers

 Ifit is costly for the organization to move from one

supplier to another (known also as switching cost)
 Whether the supplier has other customers outside
the industry and do not rely on the industry for the
majority of their sales
 The importance of the suppliers products to the
customers business
 Whether the supplier has differentiated product
which buyers need to obtain
Bargaining power of buyers/
Customers
How much influence do your customers have?
It refers to the ability of buyers to bargain down the prices
charged by companies or demand better product quality.
If buyers are strong, they can push for lower prices, better
quality, or more service, reducing industry profitability.
Buyers or customers can exert influence and control over an
industry in certain circumstances. This happens when:
 How much the customer buys
 How many buyers there are
 There is little differentiation over the product and
substitutes can be found easily hence low switching cost .
Bargaining power of buyers/
Customers

 Customers are sensitive to price.

 Whetherthe products are standard items
hence easily copied or specialized
 How critical the produce is to customers own
business
 Price awareness of consumers
The threat from substitute
products

Are there alternative products that customers

can purchase over your product that offer the
same benefit for the same or less price?
If customers can easily find an alternative, they
might switch, putting pressure on prices and
profits.
The threat of substitute is high when:
The threat from substitute
products

 Availability of alternatives
 Price of that substitute product is low
 Itis easy for consumers to switch from one
substitute product to another. buyer
switching costs is low
 Itoffers an attractive alternative to the
industry's product
Threat of new entrants ( and
barriers to entry to keep them
out)
How easy or difficult is it for new companies to enter
the market?
If new firms can easily enter, they can drive prices
down and reduce profitability.
The threat of a new organization entering the industry
is high when it is easy for an organization to enter the
industry i.e. entry barriers are low.
The more firms that enter an industry, the more
competitive an industry is likely to become.
The more competitive the industry the lower the levels
of profit likely to be earned by its companies
Threat of new entrants ( and barriers
to entry to keep them out)

 The strength of this threat is likely to

vary from industry to industry and
depends on two things:
 The strength of the barriers to entry
 Thelikely response of existing
competitors to the new entrant
Barriers to entry may be

 Economies of scale
 Product differentiation
 Capital requirements
 Patent rights
 Experience and know how
 Favored access to raw materials
Criticisms of the 5 Force Model

 The forces that are in the model are major

determinants of industry competition in the
free market competitive economy.
 Developing countries may not have such
economies and therefore the Porter’s model
requires adaptation.