Unit 2 (Reference Chapter 3) Organizational Environments and Culture: Opportunity and Challenge

1. Unit 2 (Ch. 3) Environments and Culture: Opportunity and Threat Unit 2 (Reference Chapter 3)Organizational Environments and Culture:Opportunity and Challenge

2. 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

3. External Environments • 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

5. 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.

6. 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.

7. 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

8. 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

9. 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)

10. 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.

11. 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!

12. 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

13. 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

14. Another Question TheIndian 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. • fragmented; consolidated • tangible; intangible • intangible; tangible • consolidated; fragmented

15. Barriers and adjustment processes

16. 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.

17. 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:

18. 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

19. Punctuated Equilibrium Consolidated Industry becomes more consolidates again, but different firms now lead the market. Stable Period Stable Period of Change Period Industry structure Change is triggered by the emergence of new technology. New entry results in a more fragmented industry. Fragmented Time 0 time 1 time 2

20. Technology S-Curves Probability of paradigm shift increases as technology approaches natural limit. Natural limit of technology Performance/functionality of desired attributes Diminishing returns Inflection point Increasing returns Accumulated R&D effort

21. Established and Successor Technologies Established technology: horse and cart Paradigm shift Performance/functionality of desired attributes Successor technology automobiles T1 T2 Time

22. 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?