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?