CHAP 3 mtp mgt and envt

CHAPTER 3
Management and Environment
1
The environment is the set of forces that
surround an organization that have an
impact (direct or indirect) on its ability
to acquire inputs and produce and sell
outputs.
Includes both stakeholders (those with a

direct interest in the organization) and
outside parties.
Must consider both the Internal and

External environments to get a full
picture of the organization
2
Internal Environment
The set of factors internal to the organization that affect its

operations.
 Owners/Shareholders
 Top Management
 Middle Management & Supervisors
 Employees
 Unions
3
Ownership and Management
Most modern organization (especially large ones) have

separation of ownership and management.
Publicly traded companies have Boards of Directors as

shareholder representatives, with internal and external
directors
CEO is responsible for the strategic direction of the firm

COO/President is responsible for day-to-day internal
operations
Top management team supports the CEO and COO/President

(Exec. VPs, Senior VPs, Division Heads)
4
Agency Problem
Top managers play an agent role – they act as the

professional representatives for owners/shareholders
Issue – managers have knowledge and direct control that

owners do not have and can therefore seek self-interests
rather than interests of owners
Answer is to tie the interests of management to those of

owners (e.g. stock ownership/options
5
The External Environment
The set of surrounding an organization and that
has the potential forces to affect the way it
operates and its access to scarce resources (i.e.
raw materials, human resources, information,
customers, technology and financial resources)
6
Levels of the External Environment
Task (Specific) Environment:
The part of the external environment that directly influences

the organization’s operations and performance. It is the
segment of the environment that directly impacts
organizational goals.
General Environment:
The segment of the organizational environment that has only

indirect impact on the organization.
7
8
Environmental Sectors
Task Environment
1.Industry
2.Raw Materials
3.Market for Product
4.Human Resources
General Environment
5.Financial Resources
6.Technology
7.Economic Conditions
8.Legal/Political
9. Socio-cultural
10. International (Globalization
9
The General Environment
Known as the contextual environment or macro-environment
The general environment usually influence all aspects of

organisations
PESTEL analysis
Identifies the most important factors of the organisation

Provides a check list of possible environmental influences
10
PESTEL Analysis
11
Political and Economic
Political
Governments shape what business can do

e.g. taxation, pollution, regulation
Economic
Wealth and stage of development

e.g. wage levels, interest rates, consumer confidence
12
Social and Technological
Social
Demographic trends, consumer fashions, family

structures, attitudes
e.g. opinions on heavy drinking in UK
Technological
Physical infrastructure, transportation,

communications technologies
e.g. convergence of data, intranet
13
Environmental and Legal
Environmental (natural)
Natural resources, pollution and the effects of

climate change on business (threats and
opportunities)
e.g. CO2 emissions
Legal
The framework within which companies operate –

employment, financial or governance regulations
e.g. customer right, privacy
14
Using PESTEL
Subjective interpretation as well as objective

realities
Forces in the general environment affect public

organisations as much as private
The value is not a long list of factors, but

agreement on critical ones that stakeholders
may use to stimulate internal change
15
The Competitive Environment
Known as the immediate Environment, operational Environment or

micro-environment
The general environment usually influence performance of an

organisation
Porter’s five forces

The state of competition in an industry is determined by these
forces
The collective strength of the five forces determine industry
profitability
16
Porter’s Five Forces
17
Threat of New Entrants
Fewer new entrants = more profit
Affected by entry barriers such as
High costs of equipment and facilities
Lack of distribution facilities
Customers loyalty to established brands
Small companies lack of economies
Subsidies/regulations favour existing firms

18
Bargaining Power of Buyers
Greater power of buyers = less profit to seller
Power of buyer increases if:
Buyer takes high percentage of supplier’s sales
Many alternative products or suppliers available
Product of a high percentage of buyer’s costs,

creating incentive to seek alternatives
Cost of switching to other suppliers is low
19
Substitutes
Easy to substitute = less profit to supplier
Substitution becomes easier if:
Buyers willing to change buying habits
Technological developments enable new products and

services
Transport costs fall
New suppliers enter the market

20
Intensity of Rivalry Amongst Competitors
Greater rivalry = lesser profit
Rivalry increases when:
Many firms, but none dominant
Market growing slowly, so firms fight for share
High fixed costs encourage overproduction
High exit cost or specialised assets
Loyalties (family businesses or political support)
prolong overcapacity
21
Managing the Five Forces
Subjective interpretation as well as objective realities
Forces contradict/balance each other
Managers can consciously try to shape them as part of

their strategy
Competitive forces affected by those in the general

environment
22
Stakeholders
People or groups with expectations of the organisation

Customers, communities, government, etc.
How to manage these conflicting interests?
Balance all stakeholders

Satisfy shareholders
Satisfy powerful stakeholders
23
Stakeholder Mapping
24
SWOT Analysis
Matching the environmental threats and
opportunities SWOT Analysis
Finding a ‘fit’ between external environment and internal

capabilities
Summarise the key internal and external issues in an industry
Strengths
Weaknesses
Opportunities
Threats
25
The TOWS Matrix : A Conceptual
Model
Preparation of the enterprise profile
Step 1 :Deals with some basic questions

pertaining to the internal and external
environments
Step 2 and Step3: concern primarily the

present and future situation in respect to the
external environment
26
The TOWS Matrix : A Conceptual Model
Step 4: the audit of strengths and weaknesses,

focuses on the internal resources of the
enterprise.
Step 5 and Step 6: are the activities necessary

to develop strategies, tactics and more
specific actions in order to achieve the
enterprise’s purpose and overall objectives.
27
The TOWS Matrix : A Conceptual Model

Step 7: since an organization operates in a
dynamic environment, contingency plans must
be prepared.
28
There are different ways of analyzing
the situation
Identification of important problems
Determining the purpose and objectives of the

firm
Focus on opportunities
29
The External Environment
Threats and Opportunities categorized :
Economic
Social
Political
Demographic
Product
Service
Technology
Markets
Competitions 30
The Internal Environment
Assessed for Strengths (S) and Weaknesses
(W)
Management
Organization
Operations
Finance
Marketing
31
SWOT Matrix
Four Types of Strategies
Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO)
Strengths-Threats (ST)
Weaknesses-Threats (WT)
32
The SO Strategy (Maxi-Maxi)
Maximize both strengths and
opportunities
Enterprise can lead from strengths,

utilizing resources to take advantage of
the market for its products and services.
33
The WO Strategy (Mini-Maxi)
Minimize the weaknesses and to Maximize

opportunities
Identify opportunities ill the external

environment but have organizational
weaknesses which prevent the firm from taking
advantage of market demands.
34
The ST Strategy (Maxi-Mini)
Based on the strengths of the

organization that can deal with threats in
the environment
The aim is to maximize the former while

minimizing the latter
35
The WT Strategy (Mini-Mini)
Minimize both weaknesses and threats

Ex: such a firm prefer a merger, or may
cut back its operations, with the intent
of either overcoming the weaknesses
or hoping that the threat will diminish
over time
WT Position is one that any firm will try

to avoid.
36
Strengths – S Weaknesses – W
List Strengths List Weaknesses
Opportunities – O SO Strategies WO Strategies

Use strengths to take Overcoming weaknesses
List Opportunities advantage of by taking advantage of
opportunities opportunities
Threats – T ST Strategies WT Strategies

Use strengths to avoid Minimize weaknesses and
List Threats threats avoid threats
37
Organizational Domain
Several organizations operate within a single

environment
Not all environmental factors affect each organization
The organizational domain is the segment of the

external environment that affects a given organization.
Thus, each organization has its own domain.
38
Organizational Uncertainty
The degree of certainty/uncertainty in the

organization’s domain is determined by the
combination of 3 factors:
Complexity
Dynamism
Richness of Resources
39
Resource Dependence Theory
Resource Dependence Theory:
The goal of the organization is to minimize its
dependence on other organizations in obtaining
resources, and to increase the dependence of
other organizations on it.
Dependence management strategies:

Reputation
Cooptation( including others)
Third-Party Linkages
Strategic alliances (long-term contracts,
networks, minority ownership, joint ventures)
Mergers and acquisitions
40
Transaction Cost Theory
Transaction costs – administrative cost associated with
negotiating, monitoring and governing exchanges
between people.
Transaction Cost Theory - Organizations aim to

minimize transaction costs, since these costs add no
value to the organization
Transaction costs are minimized when the organization

controls transactions (formalizes them) or internalizes
them to make them bureaucratic costs
41

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CHAPTER 3

Management and Environment

Includes both stakeholders (those with a

Must consider both the Internal and

The set of factors internal to the organization that affect its

Most modern organization (especially large ones) have

Publicly traded companies have Boards of Directors as

CEO is responsible for the strategic direction of the firm

Top management team supports the CEO and COO/President

Top managers play an agent role – they act as the

Issue – managers have knowledge and direct control that

Answer is to tie the interests of management to those of

Task (Specific) Environment:

The part of the external environment that directly influences

The segment of the organizational environment that has only

Known as the contextual environment or macro-environment

The general environment usually influence all aspects of

Identifies the most important factors of the organisation

Governments shape what business can do

Wealth and stage of development

Demographic trends, consumer fashions, family

Physical infrastructure, transportation,

Natural resources, pollution and the effects of

The framework within which companies operate –

Subjective interpretation as well as objective

Forces in the general environment affect public

The value is not a long list of factors, but

Known as the immediate Environment, operational Environment or

The general environment usually influence performance of an

Porter’s five forces

Fewer new entrants = more profit

Affected by entry barriers such as

High costs of equipment and facilities

Lack of distribution facilities

Customers loyalty to established brands

Small companies lack of economies

Subsidies/regulations favour existing firms

Greater power of buyers = less profit to seller

Power of buyer increases if:

Buyer takes high percentage of supplier’s sales

Many alternative products or suppliers available

Product of a high percentage of buyer’s costs,

Cost of switching to other suppliers is low

Easy to substitute = less profit to supplier

Substitution becomes easier if:

Buyers willing to change buying habits

Technological developments enable new products and

Transport costs fall

New suppliers enter the market

Rivalry increases when:

Many firms, but none dominant

Market growing slowly, so firms fight for share

High fixed costs encourage overproduction

High exit cost or specialised assets

Loyalties (family businesses or political support)

Subjective interpretation as well as objective realities

Forces contradict/balance each other

Managers can consciously try to shape them as part of

Competitive forces affected by those in the general