Chapter 3

EnvironmentalEnvironmentalForcesForces

MGT 301MGT 301

Learning Goals

1. Explain how economic, demographic, and cultural factors affect organizations

2. State the five competitive forces in an industry

3. Describe the political and legal strategies managers use to cope with changes in the environment

4. Explain how technology changes the structure of industries

General Environment—sometimes called themacroenvironment, includes the external

factors that usually affect all or most organizations

Forces Impacting Forces Impacting OrganizationsOrganizations(adapted from Figure 3.1)(adapted from Figure 3.1)

EconomyCountryCulturalValues

TechnologyDemographics

Politics

Organization

Macroenvironment

Competitors

The EconomyThe Economy

EconomicsEconomics is the is the discipline that discipline that focuses on focuses on understanding how understanding how people or people or people or people or nations produce, nations produce, distribute, and distribute, and consume various consume various goods and services.goods and services.

Trends in the New Versus the Trends in the New Versus the Old EconomyOld Economy

(adapted from Table 3.1)(adapted from Table 3.1)

NewNew Value matters – Value matters –

information is keyinformation is key New markets – New markets –

distance vanisheddistance vanished Customers buy Customers buy

activities not activities not products – a click products – a click awayaway

Human capital – rise Human capital – rise of knowledge workerof knowledge worker

OldOld Size of organization Size of organization

matters – matters – manufacturing is keymanufacturing is key

Defined market Defined market segments – segments – demographicsdemographics

Customers for a Customers for a lifetime – loyalty, lifetime – loyalty, repeat businessrepeat business

Physical and capital Physical and capital assets – tangible assetsassets – tangible assets

The New Age of Competition

Source: Adapted from Friedman, T.L. The World is Flat. New York: Farrar, Straus & Giroux, 2005, 48-172.

Old New

Low-cost manufacturing Value-added services

Self-reliance Outsourcing

Made in U.S.A. Borderless competition

The Economy (cont’d)

Local knowledge Customer convenience

Physical laborHuman capital, software,knowledge management

Smoke-stack industries Environmental stewardship

Snapshot

“Our assets leave on the elevator every night. Organizations do not own human capital; they can only rent them. In today’s world, human capital will have greater power than other resources because it is the people who create knowledge.”

Andy Grove, Founder and CEOIntel Corporation

DemographicsDemographics

DemographicsDemographics are the characteristics are the characteristics of a work group, an organization, a of a work group, an organization, a specific market, or various populations.specific market, or various populations.

Some current demographic changes Some current demographic changes include:include: Increasing DiversityIncreasing Diversity Education and SkillsEducation and Skills Managerial ChallengesManagerial Challenges

Impact of Changing Demographics on Organizations

Increasing diversity Women participation rate increasing Hispanic men rate increasing People of color rate increasing

Managerial challenges Multicultural awareness programs Language offerings Career challenges Lifestyle issues Illegal immigration

Culture: refers to the unique pattern of shared refers to the unique pattern of shared characteristics, such as values, that distinguish the characteristics, such as values, that distinguish the Members of one group of people from those of Members of one group of people from those of anotheranother..

Value: a basic belief about a condition that has considerable importance and meaning to individuals and is relatively stable over time

Value system: comprises multiple beliefs that are compatible and supportive of one another

How values can effect a manager?

Why is Culture Important to Managers?(cont’d)

Views otherpeople and

groups

Perceives situations and problems

Goes about solving problems

Determines what isand is notethical behavior

Leadsand controls

employees

Why is Culture Important to Management:Overview of Cultural Factors

Long-TermOrientation

PowerDistance

UncertaintyAvoidance

Gender RoleOrientation

Individualism

Culture

Why is Culture Important to Management:Hofstede’s Framework

Power Distance—the degree to which less powerful members of society accept that influence is unequally divided

Uncertainty Avoidance—the extent to which members of a culture feel threatened by risky or unknown situations

Individualism—a combination of the degree to which society expects to take care of themselves and their immediate family and the degree to which people believe they are masters of their own destinies

Why is Culture Important to Management:Hofstede’s Framework (cont’d)

Gender Role Orientation— refers to the extent to which a society reinforces traditional norms of masculinity versus femininity

Long-Term Orientation—reflects the extent to which a culture stresses that its members accept delayed gratification of material, social, and emotional needs

The opposite of individualism is collectivism—a tight social framework in which group (family, clan, organization, and nation) members focus on the common welfare and feel strongly toward one another

0

10

20

30

40

50

60

70

80

90

100

Power Distance UncertaintyAvoidance

Individualism Gender RoleOrientation

Short-term/Long-termOrientation

Cultural Value Dimension

Imp

orta

nce

of

Cu

ltu

ral

Ori

enta

tion

Japan

USA

Canada

France

Competitive Forces in the Task Competitive Forces in the Task EnvironmentEnvironment(adapted from Figure 3.3)(adapted from Figure 3.3)

Threat of substitute goods

or services

Threat of substitute goods

or services

Supplierbargaining

power

Supplierbargaining

power

Rivalry amongexisting firms in

industry

Rivalry amongexisting firms in

industry

Customerbargaining

power

Customerbargaining

power

Threat of new

competitors

Threat of new

competitors

Bruce D. Henderson, founder and chairman of the Boston Consulting Group

“For virtually all organizations,the critical environment constraint is their actions

in relation to competitors. Therefore, any change inthe environment that affects any competitor will have consequences that require some degree of adaptation. This requires continual change and adaptation by all

competitors merely to maintainrelative position.”

Competitors

High versus low barriers to entry

Economies of scale: achieved when increased volume lowers the unit cost of a good or service produced by a firm

Government regulation: barrier to entry if it bars or severely restricts potential new entrants to an industry

Product differentiation: the uniqueness in quality, price, design, brand image, or customer service that gives one firm’s product an edge over another firm’s

Capital requirements: the dollars needed to finance equipment, purchase supplies, purchase or lease land, hire staff, and the like

Key Influences on New Key Influences on New EntrantsEntrants

In a general sense, all competitors produce substitute goods or services, or goods or services that can easily replace another’s goods or services

Movie rental versus movie theatres

Books versus TV versus newspapers

Purchase versus rental

Cell phone versus hard lines

Customer bargaining power may be relatively great when:

Customer purchases a large volume relative to the supplier’s total sales

Product or service represents a significant expenditure by the customer

Large customers pose a threat of backward integration

Customers have readily available alternatives for the same services or products

CustomersCustomers

Bargaining power of suppliers often controls:

1. how much they can raise prices above their costs or

2. reduce the quality of goods and services they provide before losing customers

Political-Legal Forces: ManagerialPolitical Strategies

Political Strategies Political-Legal Forces

Negotiation Lobbying Alliance Representation Socialization

Political actioncommittees (PACs)

Laws Government Labor unions Others

Technology

Workplace Strategy Manufacturing Distribution

Technology Forces: TechnologyTechnology Forces: TechnologyImpacts on OrganizationsImpacts on Organizations

Snapshot

Meg Whitman, CEO, eBay

“With 135 million users selling goods in more than 45,000 categories in 27

international markets, eBay has left all competitors in the dust. Technology has

really changed people’s lives for the better.”

Technology Impacts on Technology Impacts on OrganizationsOrganizations

Workers need greater problem-solving skills

Outsourcing routine tasks

Virtual organizations

Technology's Impact in the Technology's Impact in the WorkplaceWorkplace

Faster new product introductions to market

Entrance of “electronic” competitors

Formation of “electronic shopping malls”

Wider choice of suppliers for company

More substitute goods and services available to company

Product differentiation based on technological sophistication

MassCustomization

Reduction inManufacturing time

Outsourcing of routine jobs

Internetaccess forshopping

Telecommunicationdevices

Information superhighwayfor global competition