This document discusses the external and internal factors that influence managers and organizations. It describes Porter's five forces model of competition and introduces the general environment that organizations operate within, including technological, sociocultural, demographic, macroeconomic, political/legal, and international forces. The internal environment of an organization includes its culture, human capital, resources, and organizational structure. Managers must understand these external and internal factors to effectively lead their organizations.

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The External and
Internal Environment
McGraw-Hill/Irwin
Principles of Management © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

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The Environment
of Managers
General
Environment
Task
Environment
Internal
Environment
The Manager

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Task Environment
Bargaining Power
of Suppliers
Threat of Entry
Threat of
Substitutes
Bargaining Power
of Buyers
Intensity
of
Rivalry
Porter’s
Competitive
Forces Model

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Threat of Entry
• Barriers to entry – factors that might make it costly
for potential competitors to enter an industry and
compete with firms already in the industry
• Economies of scale – cost reduction associated
with large output
• Brand loyalty – the preference of consumers for
the products of established companies

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Bargaining Power
of Buyers
• Buyers are most powerful when:
- They are few in number and purchase large quantities
- They can choose between equivalent products from many
different firms
- They can switch easily between the offerings of different firms
• Buyers are least powerful when:
- They are plentiful and purchase in small quantities
- They have little choice
- They cannot switch easily between the offerings of
different firms
• Switching Costs

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Bargaining Power of
Suppliers
• Firm has greater power over suppliers when:
- The firm purchases in large quantities
- It can choose between multiple suppliers
- The costs of switching between suppliers is low
- The firm is not dependant on any single
supplier for important inputs

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The Threat of
Substitutes
• The goods or services of different businesses or
industries that can satisfy similar customer needs
• The existence of substitutes is a strong competitive
threat because it limits the price that companies in
one store can change
• If there are few substitutes, firms have the
opportunity to raise prices

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The Intensity
of Rivalry
• The nature of the product
- The intensity of rivalry depends on how close the
product is to a commodity (a product that is difficult to
differentiate from those produced by rivals).

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The Sixth Force
Bargaining Power
of Suppliers
Threat of Entry
Threat of
Substitutes
Bargaining Power
of Buyers
Intensity
of
Rivalry
Complements
•Availability
•Price

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The General
Environment
Technological
Forces
Sociocultural
Forces
Demographic
Forces
Macroeconomic
Forces
Political & Legal
Forces
International
Forces

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The Internal
Environment
Employees Resources
Organization
of the firm

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Culture
• The basic pattern of values and
assumptions shared by
employees within an
organization.
• Important because it influences
what a manager can and cannot
do and what is encouraged or
discouraged by the organization

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Human Capital
Knowledge Skills
Capabilities

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Resources
•Tangible resources
– physical assets
•Intangible
resources – non
physical assets