UNIT 2 (REFERENCE CHAPTER 3)ORGANIZATIONAL ENVIRONMENTS AND

CULTURE:OPPORTUNITY AND CHALLENGE

Unit 2 (Ch. 3)

Environments and Culture:

Opportunity and Threat

Unit Outline Unit 2 examines the impact of the external

environment on organizations. The unit outline:

• Components of the external environment

• Basic characteristics of the external

environment

• Porter’s five strategic forces*

• Environmental scanning

• Environmental scanning and Paradigm shifts*

• Your turn: ____________________________* From sources outside the textbook

• External environments are the events outside a company

that have the potential to influence or affect it.

• External environments as Opportunities and Threats

• An external environment is in kind general or specific

External Environments

Characteristics of External Environments• Environmental change – the rate at which environments change and

can be either slow (stable) or fast

• Environmental complexity – environmental forces affecting business

can be either many (complex) or few (simple)

• Resource scarcity—the abundance or shortage of critical resources in

an external environment

• Environmental uncertainty—the extent to which managers can

understand or predict the external changes and trends.

Characteristics of the Environmentand Management Confidence

• When environmental change and complexity are extensive,

resources are scare, and uncertainty is high, managers

may not be at all confident that they can understand,

predict, an handle the external forces affecting their

businesses.

• In stable, certain, simple, resources-rich environments,

managers feel confident that they can understand, predict,

and react to the external forces.

PORTER’S FIVE STRATEGIC FORCES

An industry is said to be either “favorable” or “unfavorable,”

depending on how the five strategic factors affect business.

The strategic forces (or factors) are five in kind:

• Barriers to entry

• Bargaining power of buyers

• Bargaining power of suppliers

• Substitute products

• Intensity of Rivalry

BARRIERS TO ENTRY Barriers to entry are the factors that make it costly

for potential competitors to enter an industry and compete with firms already in the industry.

Barriers to entry contribute to a favorable market condition for a new entrant when incumbents are weak (opportunity) and to an unfavorable market condition when they are strong (threat).

The factors that create such barriers include:• economies of scale• brand loyalty• trade barriers

BARGAINING POWER OF BUYERS BPB is the ability of buyers to bargain down prices or

demand better product quality and service and is determined by the degree to which a supplier relies on a buyer because of the importance of that buyer to the supplier’s sales.

Buyers tend to be powerful when:• Buyers are few in number and purchase large

quantities• Many firms are in competition for selling• Their switching costs are low

Powerful buyers contribute to an unfavorable market condition (threat), while weak buyers, a favorable market condition (opportunity)

BARGAINING POWER OF SUPPLIERS BPS is the ability of a supplier to negotiate for higher prices

or more favorable contract terms.

Suppliers are powerful when:

• There are few suppliers in the industry.

• The product or service being offered is important or

represents a significant cost of input to the buyer.

• A highly specialized product that the buyer needs, that is,

when buyer switching costs are high

BP of buyers over its suppliers is greater when the buyer

purchases in large quantities, choose between multiple

suppliers, has switching costs low, and is not dependent on

any single supplier for important inputs.

The Threat of Substitutes Substitute products are those goods that can satisfy a similar

customer need.

The threat of substitute goods tends to be low (favorable

market condition) when substitutability is low, presenting an

opportunity to charge higher prices.

What did the airlines discover immediately post 9/11 as an

adequate substitute for business travel?

Do not confuse substitutes and competitor!

THE INTENSITY OF RIVALRY The greater the rivalry between competitors, the greater the threat facing

firms in that industry.

The factors that affect the intensity of rivalry include:

• Nature of the product

• Demand and supply conditions

• Barriers to exit

• Costs structure of firms fixed costs

• Competitive structure of the industry

Complements as a sixth force – goods or services that are complementary

to the product produced by firms in the industry tends to be a favorable

market condition

Answer the Question!

• Based on Porter’s five-force analysis,

would you say that the retail

industry is a profitable Industry, say,

in the USA? Answer the question in

terms of each of the five forces.

• Do the same for the pharmaceutical

industry

Another Question

The 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.

a. fragmented; consolidatedb. tangible; intangiblec. intangible; tangibled. consolidated; fragmented

BARRIERS AND ADJUSTMENT PROCESSES

High barriers to entry

Low barriers to entry

Excessdemand

Excess demand will persist

Significant opportunity

Excess demand will not persist

Transitory opportunity

High barriers to exit

Low barriers to exit

Excesssupply

Excess capacity will persist

Significant threat

Excess capacity will not persist

Transitory threat

Environmental Scanning• Searching the environment for important events or issues that

might affect an organization.

• Managers scan the environment to reduce uncertainty and

Identify threat and opportunity

• Threat—managers typically take steps to protect the company

from further harm.

• Opportunity—managers consider strategic alternatives for

taking advantage of those events to improve performance.

Environmental scanningand Paradigm shifts

• A paradigm shift occurs when a new

technology (or a business model) comes along

that dramatically alters the nature of product

demand and market competition,

• As seen in Kodak’s loss of market dominance in

film and photographic equipment business by

the rise of a digital world.

• Additional examples:

Paradigm shifts, why?

• Paradigm shifts appear to be more likely in an industry when:

• a new technology is taking root in market niches poorly

served by the companies that use the mature technology.

• a company develops a new business model that is radically

different from one used by competitors and enables it to

capture more market inches.

• The conditions that are conducive to include:

• limits to the technology

• disruptive technology and new business model

Punctuated Equilibrium

Industry becomes more consolidates again, but different firms now lead the

market.

Change is triggered by the emergence of

new technology. New entry results in a more fragmented

industry.Time 0 time 1 time 2

Conso

lidate

d

Fragmen

ted

Indu

stry

str

uctu

re

Stable Period Stable Period of Change Period

Technology S-Curves

Probability of paradigm shift increases as

technology approaches natural limit.Natural limit of technology

Diminishing returns

Inflection point

Increasing returns

Accumulated R&D effortPer

form

ance

/fun

ctio

nali

ty

of

des

ired

att

ribu

tes

Established and Successor Technologies

Successor technology automobiles

Par

adig

m s

hift

T1 T2 TimePer

form

ance

/fun

ctio

nali

ty

of d

esir

ed a

ttri

bute

s

Established technology: horse and cart

Your turn

• How are organizational culture created and sustained?

• How can organizational cultures help companies be

successful?

• What are the characteristics of successful organizational

cultures?