Module 3 Challenges In the Internal Environment

MODULE 3 CHALLENGES IN THE INTERNAL ENVIRONMENT LEARNING OBJECTIVES After completing this module, you are expected to: i. ii. iii. iv. v. vi. vii. assess the internal environment; identify the role of the government as the business caretaker; appreciate the role of culture as a venue of communal convergence; classify and compare the types of competitors; relate consumer behavior to specific consumer outcomes; appreciate the importance of suppliers in any business transaction; and explain Porter’s Five Forces Model. Module 3 Challenges in the Internal Environment LEARNING ACTIVITIES Individual Activity ASSESSMENT/EVALUATION I. Synchronous Test with time limit. Long test link will be provided through our group chat. This is a synchronous test with a time limit. II. Asynchronous Learning See: Individual Activity Below While the external environment plays an essential role in the survival and competitiveness of an organization, the internal environment presents a more direct impact on how organizations should conduct themselves toward success. There are different challenges within the internal environment of an organization. Thus, this module discusses the constructs within the internal environment itself and the relevance and application of Porter’s Five Forces Model. The Internal Environment Aside from understanding the developments and changes occurring in the global environment, organizations need to understand the internal environment, or better referred to as the local milieu. The internal environment is the setting in which an organization locally exists. As one studies the local environment, there are existing unique and interrelated variables that directly affect any organization or business. Understanding these variables is essential if one has to conduct his organization successfully these areas are government, culture, the stakeholders, competitors, suppliers, customers, and the community. Government: The Business Caretaker The government is the sole legitimate institution tasked with overseeing organizational operations in the country. In implementing these administrative functions and responsibilities, the government undertakes the following: 1. Provides the needed infrastructure— a. Physically in the form of roads, bridges, electricity, and water services; b. technologically through information technology infrastructure and communication facilities; c. economically by providing availability of loans, banking services, low interest rates, and tax incentives; d. socially through housing, welfare, waste management policies, community services, and societal responsibilities; and e. politically in terms of peace, security, stability, and governance. 2. Creates an atmosphere of fair and robust competition among industry and company players, monitors and regulates monopolies and oligopolies, and eliminates unfair and illegitimate practices. 3. Formulates business policies, implements business operating guidelines, and regulates the conduct of business activities such as payment of taxes, health and safety practices in food, manufacturing, construction, and other service industries, ensures quality of products and services, and mandates minimum wages of employees, and their fair and just treatment. Culture: A Communal Convergence As mentioned previously, a nation's culture is the communal aggregation and convergence of the country's philosophy, beliefs, traditions, values, attitudes, aspirations, and practices that have historically evolved since a nation's inception. The Philippines has its own culture-a culture that was greatly influenced by diverse cultures: Chinese, Japanese, Spanish, and American. Through many years of national growth and development, this culture has been shaped by environmental variables happening within and outside the country and until today, continues to change, mature, and transform. Such evolution has nurtured in the Filipino certain distinct beliefs, traditions, and practices, which are either a pride to the country or otherwise. Worth mentioning are the following: 1. The trait of hospitality. Filipinos are generally warm people. They are cordial, friendly, and accommodating. Their doors are open to relatives and friends, most especially during town celebrations called "fiestas." 2. The practice of bayanihan. Filipinos, most especially those in the provinces, are generally helpful. This practice creates an atmosphere of unity and concern among the townspeople. 3. Filipinos generally take care of their parents, old relatives, and siblings. They work hard to send their brothers and sisters to school. Because of this priority, some set aside their own personal lives. In addition to this, most Filipinos take care of their aging grandparents and parents. They do not send them to homes for the aged, which is the usual practice in developed countries. 3. Pakikisama and utang na loob. Many Filipinos prioritize friendship to the point of sometimes sacrificing principles. Some develop bad habits like smoking, drinking, taking drugs, and breaking laws due to pakikisama. Furthermore, they tend to remember the good things done to them by people in the past, wishing that someday they can repay them. These nagging feelings of indebtedness can be abused. 4. The habits of ningas kugon, manana, and 'Filipino time. Some Filipinos excitedly begin something without finishing what they have started. This explains why a celebrated and urgent political, social, or economic issue dies a natural death. Filipinos sometimes tend to procrastinate tasks and responsibilities. They seem to work better when they cram. They are generally late when it comes to meetings and appointments, something of an "easy life" attitude. 5. The attitudes of crab mentality and bahala na. Some Filipinos are not happy with the good fortunes of others. They have a subconscious tendency to bring down their own fellow citizens. This is prevalent here and among Filipinos overseas. Moreover, some Filipinos leave their life to the natural course of events. There seems to be no sense of urgency. 6. The virtue of resiliency. The Filipinos are a flexible people. Despite the difficulties in their personal and social lives, they can easily adjust and bounce back. They are born survivors. 7. The idea of kanya-kanya. Filipinos, on the other hand, tend to be individualistic. At times, they are selfish and are indifferent to the plight of others. 8. The consciousness of being politically involved. As often noted, Filipinos are highly politicized. They are up-to-date with the latest political issues. The ordinary Filipino in barbershops, the vendors along the walkways, and the drivers on the streets generally talk about politics. The ordinary Filipino housewife is not exempted. Somehow, everyone has his own political views, leanings, and biases. One can see that culture plays an important role in the growth of any country. In a sense, the positive values that are characteristic of Filipinos have helped the nation to move forward toward development. On the other hand, the negative values of the Filipinos have, to a certain extent, retarded the progress of the Philippines. It is hoped that positive Filipino values be further reinforced and enhanced while negative Filipino values be restrained, if not eliminated. Stakeholders: The Business Investors Organizations exist because there are individuals who are willing to take risks, invest their capital, and engage in business activities in exchange for a return. This return on their investment is profit. Stakeholders are business investors. Some are actively involved in the conduct of their business while others prefer to be silent investors. Stakeholders are assets to the country. They provide opportunities for exchange of products and services. They initiate business operations and compete among themselves. They boost and energize economic activity, provide employment to the community, and help the government by paying business taxes. Without them, a country is paralyzed. While owners of businesses are the direct stakeholders, others are indirect stakeholders. These are individuals or entities that stand to benefit from the investments of the owners. They are the employees, the government, and the community. Competitors: The Business Threats There are various forms of competition as well as several types of competitors. Competition is an economic scenario where nations, communities, organizations, companies and individuals offer and sell their products and services. Competitors continuously strive to outplay and outsmart each other, hoping to get a larger share of the target market. They fall in different categories. 1. Same Products. They are companies who sell exactly the same products or offer the same services. They are direct competitors. Examples are Unilever and Procter & Gamble. Both are engaged in the same line of business and they sell the same products. 2. Similar Products. They are companies who sell similar products. Tea and coffee are similar products. 3. Substitute Products. Some companies sell substitute products. For example, the competitors of marketplaces are fast-food centers who sell primarily cooked food, and secondly, convenience. Instead of going to the market to buy meat, fish, and vegetables, they now go to fast-food centers for their meals. 4. Different Products. Still, there are companies who sell different products but market to the same market segments. Competitors also differ with respect to the strategies they adopt. 1. Complementary Competition. Some companies appear to compete with themselves. For capturing a larger market, they produce the same products, use different brand names, and target different market segments. An example is a real estate company that sells low-cost housing to target markets, classes C and D; and average-cost housing to middle-income class families. 2. Collaborative Competition. Similarly, there are companies whose relationships among each other are strategic and cooperative. Examples are the oil companies in the country. They are in "friendly" competition. 3. Corrupted Competition. Lastly, some companies produce "fake" products. They compete with legitimate businesses by boldly and unethically transgressing the intellectual property rights of other companies through plagiarism, duplication, and false branding. They produce and sell these products at low prices. How can a company then know who its competitors are? There are different ways of identifying them and they are the following: 1. Determining similarity in characteristics. One way of identifying competitors is by determining similarity in the products and services offered, the specific technologies applied, and the strategies employed, whether marketing, financial, and managerial. 2. Studying consumers. Observing and studying consumers in terms of demographic variables can also help identify competitors: sex, civil status, age, educational attainment, monthly income, employment, and psychographic variables like needs, wants, attitudes, perceptions, purchase patterns, and buying behavior. 3. Researching company data. Competitors can also be identified through hard company data: capitalization outlay, number of customers, distribution outlets, employees, financial strength, number of years in operation, and company growth. 4. Considering corporate success. Lastly, some competitors look at the degree of success of other companies by studying their sales volume and number of sales, market leadership, and goodwill. The lifeblood of any organization consists of the stakeholders or business investors who have financially invested in the company. In addition, the employees are likewise considered stakeholders. Together, they collaborate to make the organization succeed. Moreover, with competitions existing everywhere, the challenge of organizations is to handle them effectively. Customers: The Business Challenge Competitors continuously compete to capture a bigger share of the market. Customers make the market. They are the very reason why companies pursue new product developments and differentiate their existing products and services. Customers are the focus of companies' business plans and programs and the thrust of their strategies. Without consumers, companies have no reason to exist. Because of the changing needs, wants, demands, and sophisticated lifestyles of consumers, there is an exigent need to employ various approaches to ensure their patronage and loyalty. Consumer behavior is a marketing reality that is difficult to discern, understand, and study with definiteness. The following facts on customer approval, customer patronage and customer loyalty can help address this "uncertainty." Good Product/Service Quality Product/Service Quality Relationship Customer Satisfaction gives provides creates Customer Delight Customer Intimacy elicits assures Customer Approval Customer Patronage strengthens Customer Loyalty Figure 3.1 Changes in Consumer Behavior At the very least, any product or service should provide customer satisfaction. In other words, any product must fulfill its intended use, and that is to attract customers and gain customer approval. For example, a shampoo should be able to clean the hair. It should satisfy the minimum requirement of cleanliness. However, customer satisfaction is not enough. More than this, emphasis is now on customer delight, a condition where customers become excited over the products or the services offered. Customer delight may come from experiencing quality service, product excellence, product versatility, or any attribute that will greatly gratify and create a distinct impact on them. Attaining this level will assure customer patronage. In other words, aside from cleaning the hair, a shampoo can delight its customers with other added attributes like fragrance, smoothness, and softness. The last level of change in customer behavior is customer intimacy. Customer intimacy refers to the relationship between the company and the customers. This is best described as warm, complimentary, supportive, and "businessly" personal. Customer intimacy is manifested in varied forms like sending birthday cakes, cards or sharing one's expertise with a "customer" who is in bad financial shape. In addition to being pleased about the product, customers continue supporting the product. Customer intimacy seals customer patronage or better referred to as customer loyalty. In effect, the relationships shown in Figure 3.1 are customer strategies that can help keep a product's staying power and competitiveness. compan y Custo mer Relati onshi p product custome rs Figure 3.2 Customer Relationship Management Today, customer relationship management (CRM) is the emphasis of most companies. In essence, it revolves around the interplay of three significant variables, namely, the company that produces the product, the product produced, and the customers who buy the product. To achieve optimum level of gain and patronage, products should be competitively priced, of good quality, accessible, and ideally the best. Companies should do their part in satisfying customer expectations and delighting them with quality, innovations, and personalized business relationships. Suppliers: The Business Partners In an environment characterized by cut-throat competition, businesses have to produce quality products. This degree of quality is greatly dependent on a number of variables, one of which is the supplier component. Doing business involves supplier-customer relationship. By definition, suppliers refer to individuals and companies engaged in the delivery of raw materials, machinery, technology, labor, expertise, skills, and other forms of services. They are essentially business partners. Without them, certain products cannot be produced and some services cannot be rendered. The supplier component is important for the following reasons: 1. It is responsible for the quality of the products produced and the services rendered. If the supplier is not managed well, it may result in the delivery and sale of substandard raw materials, low quality equipment and machinery, diluted admixtures of metals and chemicals, decrease in the number of delivered items, and deficiency in weight, size, and number of units of delivered items. 2. It affects continuity in operational processes (e.g ., production, scheduling, and delivery). Delays in delivery schedules may cause inventory problems like stockouts, work stoppages, and work force displacement. A concrete example of an advantageous customer-supplier relationship is the "just-intime" (JIT) relationship between Toyota and its suppliers. Here, a memorandum of agreement is negotiated between the business partners, clearly stating the stock items to be delivered and their specifications like quantity, weight, and quality, the ordering lead-time and date of delivery, and the respective costs involved. Here, the supplier is assured of orders while the customer is assured of stock delivery. Both parties benefit from this formal arrangement. Community: The Business Concern The community is the intermixture of peoples coming from all walks of life with different "provincial or city cultures," different values, attitudes, aspirations, traditional beliefs, standards of living, family backgrounds, religions, and educational attainments. It is essentially heterogeneous but characteristically homogeneous in its end goal of attaining quality life. As such, the community, in principle, is the rationale of the "business framework." It is the very reason why stakeholders invest their capital and venture into business. It provides opportunities for businesses to thrive. It is "customers, suppliers, and competitors" all bundled as one. It is the primary concern of the government. A community has to be self-reliant. In instances when a community is not able to attain this level of self-sufficiency, the government, stakeholders, customers, competitors, and suppliers have a societal responsibility to help the deprived and marginalized poor improve and attain quality life. While the stakeholders and competitors play their respective roles in the management of an organization, the importance of the customers cannot be overemphasized, simply because they are the buyers or consumers of the products and services offered by the organization. Thus, different approaches to consumer patronage are essential to ensure repeat business. Studies on consumer behavior need to be done. In addition, supplier relationships have to be handled with a high degree of professionalism. Lastly, communities need to be a consideration of any organization in terms of its societal responsibility to them. Porter's Five Forces Model Organizations, particularly businesses, are the lifeblood of any nation. They sustain the continued existence and staying power of countries. As drivers of survival, growth, and development, businesses create and energize the pulse of selling, producing, venturing, and transacting activities. Companies, corporations, conglomerates, partnerships, transnationals, multinationals, enterprises, firms, and organizations are entities engaged in trade and commerce. As players in any economy, they are essentially competitors. Call them by any term; competition is the name of the game. Bargaining Power of Customers Threats of Substitute Products Competitive Rivalry within the Industry Threats of New Entrants Bargaining Power of Suppliers Figure 3.3 Porter’s Five Forces Model One of the more popular ways of strategizing an organization to attain profitability and market share is to scan the competitive environment. The competitive environment is best described and illustrated by Michael Porter's Five Forces Model of Industry Competition. An aerospace and mechanical engineer, Porter pursued his doctorate degree in industrial economics. He was a professor at the Harvard Business School. His book Competitive Strategy (1980), enumerated five forces that determine the intensity, profitability, and attractiveness of an industry: (1) bargaining power of suppliers; (2) the bargaining power of buyers/customers; (3) ease of entry of new firms; (4) availability of substitute products; and (5) rivalry among existing firms within the industry. Porter spelled out one by one when is each of these five forces high, and proposed ways of reducing these situations. 1. Suppliers are sources of input needed to produce goods and services. The bargaining power of suppliers is high when: a. few large suppliers dominate the market where they form a powerful oligopolistic bloc; b. there are no substitutes for the specified input; c. switching costs from one supplier to another are high; and d. customers of suppliers are not united but fragmented. To deal with this situation, strategies may include buying out, collaborating, and providing training on supply chain management. 2. The bargaining power of customers is high when: a. customers buy in large volumes; b. their products are not unique, such that they can be replaced or customers can produce those products themselves; c. suppliers are fragmented and few; and d. product switching is easy. To deal with this situation, firms can collaborate, reach out, create loyalty, and increase value-added incentives in customers, improve on supply chain management, and work hard to move purchase decision from price. 3. Factors that heighten barriers to threats of new entrants are: a. financial in nature like economies of scale, high initial investments, fixed costs, and cost advantage due to the learning curve; b. marketing advantages that include brand loyalty of customers, controlled distribution channels, protected intellectual property on products and services, and good supplier-customer relationships; and c. production and operation pluses like access to raw materials and scarcity and costs of qualified labor. To reduce the threats of new entrants, firms can produce better products, increase their efficiency, create and promote their brand image, enhance relationships with suppliers and distributors, and pursue aggressive marketing strategies. 4. Threats of substitutes are present when complementary, alternative, and similar products are in existence and sold at lower prices. To diminish these threats, enhance brand loyalty of customers and increase switching costs. 5. Competitive rivalry among players is high when: a. there are many players with similar strategies; b. rivalry is not differentiated; d. the barriers for exit are high; and d. the growth of a company is at the expense of the other. To deal with this situation, products and services can be differentiated and price competition can be avoided. Collaboration among competitors can be promoted while different segments can be focused. Porter enumerated three fundamental generic strategies: (1) cost leadership, which can be achieved by exploiting economies of scale; (2) optimizing the learning curve, and (3) stressing on operational excellence. Furthermore, differentiation can be portrayed through product and service leadership and customer intimacy. Lastly, focus can be demonstrated by segmentation.