The External

and Internal
Environments

Chapter Two

McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives
LO 1 Describe how environmental forces influence
organizations and how organizations can
influence their environments.
LO 2 Distinguish between the macroenvironment
and the competitive environment.
LO 3 Explain why managers and organizations
should attend to economic and social
developments.
LO 4 Identify elements of the competitive
environment.
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 Learning Objectives (cont.)
LO 5 Summarize how organizations
respond to environmental uncertainty.
LO 6 Define elements of an organizations
culture.
LO 7 Discuss how an organizations culture
and climate affects its response to its
external environment.

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 Organization Inputs and Outputs
Figure 2.1

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 Open Systems
Open systems
Organizations that are affected by, and that
affect, their environment.

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 Open Systems
Inputs Outputs
Goods and services The products and
organizations take in services organizations
and use to create create.
products or services.

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 Open Systems
External environment
All relevant forces outside a firms
boundaries, such as competitors, customers,
the government, and the economy.
Competitive environment
The immediate environment surrounding a
firm; includes suppliers, customers, rivals,
and the like.

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 Open Systems
Macroenvironment
The general environment; includes
governments, economic conditions, and
other fundamental factors that generally
affect all organizations.

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 The External Environment
Figure 2.2

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 The Economy
The economic environment dramatically
affects managers ability to function
effectively and influences their strategic
choices.
Interest and inflation rates affect the
availability and cost of capital, growth
opportunities, prices, costs, and
consumer demand for products.

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 Twelve Month Comparison of
Stock Markets
Figure 2.3

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 The Economy
In publicly held companies, managers may
feel required to meet Wall Streets
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

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 Technology
Technological As technology
advances create evolves, new
new products, industries, markets,
advanced and competitive
production niches develop.
techniques, and
better ways of
managing and
communicating.

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 Laws and Regulations
Regulators include agencies such as:
Occupational Safety and Health
Administration (OSHA)
Interstate Commerce Commission (ICC)
Federal Aviation Administration (FAA)
Equal Employment Opportunity Commission
(EEOC)
National Labor Relations Board (NLRB)
And many others
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 Demographics
Demographics
Measures of various
characteristics of the
people who make up
groups or other social
units

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 Demographics
Demographic trends
Growth of the labor force
Increasing education and skill levels
Immigration
Increased numbers of women in the
workforce
Increasingly diverse workforce

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 Social Issues
Societal trends regarding how people
think and behave have major implications
for management of the labor force,
corporate social actions, and strategic
decisions about products and markets.
Family leave, domestic partner benefits

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 The Competitive Environment
Figure 2.4

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 Competitors
Competition is most intense when:
There are many direct competitors
Industry growth is slow
Product/service is not easily differentiated

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 New Entrants
Barriers to entry
conditions that prevent new companies from
entering an industry
capital requirements, restrictive distribution
channels

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 Substitutes and Complements
Substitutes Complements
alternative products or products or services
services that increase
purchases of other
products

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 Question
____________ costs are fixed costs buyer
face if they change suppliers.
A.Exchange
B.Lever
C.Switching
D.Transfer

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 Suppliers
Suppliers
provide resources or
inputs needed for
production
Switching costs
fixed costs buyer face
if they change
suppliers

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 Suppliers
Supply chain management
managing the network of facilities and people
that obtain materials from outside the
organization, transform them into products,
and distribute them to customers

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 Customers
Final customers Intermediate
purchase products in customers
their finished form purchase raw material
or wholesale products
before selling them to
final customers

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

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 Environmental Uncertainty
Environmental Environmental
complexity dynamism
The number of issues The degree of
to which a manager discontinuous
must attend as well change that occurs
as the within an industry
interconnectedness
of these issues

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 Environmental Analysis
Environmental Competitive
scanning intelligence
searching out Information that helps
information that is managers determine
unavailable to most how to compete
people and sorting better.
that information to
interpret what is
important and what is
not.

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 Environmental Analysis
Scenario Forecasting
development Method for predicting
A narrative that how variables will
describes a particular change the future
set of future
conditions
Best-case, worst-case

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 Question
What is the process of comparing an
organizations practices and technologies
with those of other companies?
A.Comparative technology
B.Benchmarking
C.Process synchronization
D.Process asynchronization

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 Environmental Analysis
Benchmarking
The process of comparing an organizations
practices and technologies with those of
other companies.

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Changing the Environment You are
In
Strategic maneuvering
An organizations conscious efforts to change
the boundaries of its task environment
Domain selection
Entrance to a new market or industry with an
existing expertise
Diversification
Occurs when a firm invests in a different
product, business, or geographic area

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Changing the Environment You are
In
Mergers Prospectors
One or more Continuously change the
companies combine boundaries of their task
with another environment by seeking
new products and
Acquisitions markets, diversifying and
One firm buys another merging, or acquiring
new enterprises
Divestiture
A firm sells one or Defenders
more businesses Stay within a stable
product domain as a
strategic maneuver

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 Influencing Your Environment
Independent Cooperative
strategies strategies
Strategies that an Strategies used by two
organization acting on or more organizations
its own uses to change working together to
some aspect of its manage the external
current environment. environment.

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 Independent Action
Table 2.3

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 Cooperative Action
Table 2.5

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 Adapting to the Environment
Buffering Smoothing
Creating supplies of Leveling normal
excess resources in fluctuations at the
case of unpredictable boundaries of the
needs. environment.

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 Organization Culture
Organizational culture
The set of important assumptions about the
organization and its goals and practices that
members of the company share
In strong cultures, the majority of people within
the organization agree on organizational goals
In weak cultures, the majority of people within
the organization disagree on organizational
goals

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 Competing Values Model of
Culture
Figure 2.6

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 Video: Pike Place Fish Market

What does it mean at Pike Place Fish to be world

famous? Why does it take some new employees months
to understand this concept?
What role does organizational culture play in Pike Place
Fishs quest to be world famous? Why are other firms
such as Coffee Bean & Tea Leaf adopting the fish
philosophy?
How does Pike Place Fish create the context for workers
to reach their maximum potential? What role does
socialization and mentoring play in
creating and nurturing this atmosphere?

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