CHAPTER 3

CHALLENGES IN THE INTERNAL ENVIRONMENT

Learning Outcomes
Particularly at the end of this chapter, the students should be able to:
1. assess the internal environment;
2. identify the role of the government as the business caretaker;
3. appreciate the role of culture as a venue of communal convergence;
4. classify and compare the types of competitors;
5. relate consumer behavior to specific consumer outcomes;
6. appreciate the importance of suppliers in any business transaction; and
7. explain Porter’s Five Forces Model.

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
chapter 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
eliminate 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.
Questions 3.1
1. Why is there a need for the government to regulate business activities? Explain
your answer. 2. How responsible Is the government in bringing about a robust
economy? What Is the extent of this responsibility?
3. Why Is infrastructure important to the economy of a nation?
4. How should government regulate monopolistic and oligopolistic entitles? What are
anti-trust laws? Give examples.
5. How can the government stimulate an otherwise stagnating economy? Give
examples.

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 at 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 end parents. They do not send them to homes
for the aged, which is the usual practice in developed countries.

4. Pakikisama and utang na Ioob. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.
Questions 3.2
1. Can you say that the Filipino culture is uniquely Filipino? Why?
2. The Filipinos’ spirit of hospitality is expressed through the celebration of town
fiestas. Is this a good Filipino trait?
3. When is bayanihan a good Filipino characteristic?
4. Is emphasis on close family ties always a positive trait?
5. Why is the manana habit a bad Filipino practice?
6. When does kanya-kanya become detrimental to our growth as a nation?
7. Is being politicized a good or bad trait? Explain your answer.
8. How does culture affect the conduct of business activities in the Philippines?
Stakeholders: The Business Investors
Organizations exist because there are Individuals who are willing to take risks.
invest capital, and engage in business activities in exchange for a return. This return on
their investments 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 m 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 "t 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 0fo 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 OH
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 amount 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.
Question 3.3
1. What kinds of risks do stakeholders face when they venture in
any business? 2. How important are stakeholders to the economy
of the government?
3. In what ways are government and employees considered indirect stakeholders?
4. In what ways are the stakeholders responsible to the community? Explain
company social responsibility.
5. Can companies share business secrets among themselves and still consider each
other as competitors?
6. Why are some companies competing against themselves?
7. Why is there a need for a company to identify and know its competitors?
8. Define unfair competition. Give examples.
9. Categorize the different types of products and give an example for each type. 10.
Differentiate the forms of competition. Discuss the advantages and disadvantages of
these types of competition.
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 computes pursue new
product developments and differentiate their existing products and services. Customers
are the focus of companies’ business plans and programs and the thrust at 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 / Quality Product / gives provides Customer

Service Service Satisfaction
Customer elicits assures Customer Customer
Delight Approval Patronage

Quality creates Intimacy strengthens

Relationship Customer 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 offend. Customer delight may come from experiencing quality service,
product excellence. prom versatility, or any attribute that will greatly gratify and create a
distinct impact on them. Attaining 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 to the relationship between the company and the customers. This Is best
described as m complimentary, supportive, and “businessly” personal. Customer
intimacy is manifested in waned forms llke 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 smile power and competitiveness.

Company

Customer
Relationship
 Management

Product Customers

Figure 3.2 Customer Relationship Management

Today, customer relationship management (CRM) isthe emphasis of most

companies. In essence, it revolves around the Interplay at three significant variables,
namely, the company that produces the product, the product produced, and the
customers who buy the product. To achieve optimum level at oath 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 relationship’s.
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-in-time” (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 essential 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 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 organization. the importance of the customers cannot be
overemphasized, simply because they the buyers or consumers of the products and
services offered by the organization. Thus, differ 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' societal responsibility to them.
Questions 3.4
1. Draw a profile of the Filipino consumer of today: his needs, wants, demands, and
expectations. 2. In what sense has customer satisfaction graduated to simply
becoming a minimum requirement in business?
3. How can customer relationships enhance customer intimacy?
4. How critical Is the role of a supplier?
5. What ethical implications can be drawn from the malpractices of
suppliers? 6. Is JIT applicable here in our country? Why?
7. Explain fully the statement, “The community, in principle, is the rationale behind
the business framework.”
8. How can the variables in the local environment help improve the lives of the poor?

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 entitles 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
Powers of
Customers

Threats of Substitute Bargaining Power of Entrants

Products Suppliers
Competitive Rivalry
Threats of New
within the Industry

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;
c. 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.
Questions 3.5
1. Explain Michael Porter’s Five Forces Model of Industry Competition and discuss
each of the forces. 2. Cite examples for each force, stressing when they present an
advantage or otherwise.
World's Greatest Strategists
Tadashi Yanai: Fast Retailing
Tadashi Yanai, 65, is the son of a menswear merchant. He likes to say that he
was “brainwashed by American culture.” Fast Retailing is a cross-border style setter
with fashionable financials. His house in Japan has a miniature golf range and his
business empire sells the sort of brightly colored sportswear that plays well in the
United States, where the company operates 17 of its 1,300 Uniqlo stores.
Most of his stores are in Japan and Asia, but Yanai has big plans. He wants Fast,
which also owns Theo and Helmut Lang labels, to become the world’s No.1 apparel
retailer with annual sales of $48 billion by 2020, up from $12.6 billion now. Currently,
Fast is No.4 behind Zara, H&M, and Gap.
Strategies
∙ “Unless they look at the details of day-to-day operations, I don’t think you can call
them real managers.”

∙ “No matter if you have ten stores, or 100 stores or 1,000 stores or 10,000 stores,
everything starts from one store, and everything starts from satisfying one
customer. And every store needs to sustain its own business... Every customer is
buying one particular item of clothing or maybe two but no one buys 10,000
garments. So each product, each piece in each product, each stone, and each
customer is essential in the retail business.”

∙ “My ideal company is a small company with one boss, making his own products and
selling everything in his own store. I think that is ideal. But that is not feasible.”

∙ “I keep telling this to my staff: you are representing me. You are representing the
CEO. What I’m trying to convey is that I want all staff to have a business owner's
point of view.”
Source: I. P. N, Barron‘s Special Report 2014

Strategic Guides:
1. Study the biography of Tadashi Yanai, CEO of Fast Retailing. Include his
childhood, if there is something significant, his interests, his educational
attainment, professional and career orientation, and other facts that might have
contributed to the success he is enjoying now.

2. Study the beginnings of Fast Retailing, the challenges it encountered through the
years. and its journey toward success.
 3. From the management, result-driven, practical, and inspirational strategies
implemented by Yanai at Fast Retailing, which struck you as something worth
imitating? Explain your answer.

Multiple Choice
Directions: Read each item carefully. Choose the letter of the correct answer.
1. They initiate business operations and compete among themselves:
a. Competitors
b. Stakeholders
c. Managers

2. It is pulling down others and not being happy for them:

a. “utang na loob”
b. Self-centeredness
c. Crab mentality

3. It is the spirit of coping with difficulties in life:

a. Spirit of resiliency
b. Close family ties
c. Spirit of “bayanihan”

4. The business caretaker:

a. Management
b. Government
c. Stakeholders

5. Watching television and going to movie houses are:

a. Similar products
b. Same products
c. Complementary
6. Form of competition where the relationships among the companies are
strategic and cooperative:
a. Collaborative
b. Corrupted
c. Complementary

7. Studying consumers means:

a. Identifying competitors through hard company data
b. Determining similarity in the products and services
 c. Observing and studying consumers in terms of demographic and
psychographic variables

8. Delighting the customers helps ensure:

a. Customer patronage
b. Customer satisfaction
c. Customer enjoyment

9. Customer satisfaction elicits:

a. Customer approval
b. Customer delight
c. Customer intimacy

10. Quality relationship create:

a. Customer approval
b. Customer delight
c. Customer intimacy

11. 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: a. Customer development
b. Customer relationship management
c. Customer planning

12. Delays in delivery schedule may cause inventory problems like:

a. Management problems
b. Consumer disapproval
c. Stockouts

13. Advantageous customer-supplier relationship where stocks are delivered at

reorder point level: a. Just-in-time
b. Re-engineering
c. Enterprise resource planning

14. Have a societal responsibility to help the deprived and marginalized poor to
improve and attain quality of life:
a. Community
b. Customers
c. Suppliers

15. Porter’s Five Forces Model describes the:

a. Global environment
 b. Macro environment
c. Competitive environment

Identification

Directions: Read each item carefully. identify the correct terminology to complete the
given statements.

1. is the setting in which an organization locally exists. = internal environment

2. are individuals who are willing to take risks, invest their capital, and engage in
business activities in exchange for a return. = stakeholders
3. is the habit of procrastinating work and other required commitments = ningas kugon

4. is the sole legitimate institution tasked with overseeing organizational operations in

the country. = government

5. is the communal aggregation and convergence of a country3 philosophy, beliefs,

traditions, values, attitudes, aspirations, and practices which have historically evolved
since a country’s inception = nation’s culture

6. make the market. = Customers

7. is an economic scenario where nations, communities, companies and individuals offer

and sell their products and services. = competition

8. refer to individuals and companies engaged in the delivery of raw materials,

machinery, technology, expertise, skills, and other forms of services. = suppliers

9. is a form of competition where companies produce “fake” products. = corrupted

competition

10. continuously strive to outplay and outsmart each other, hoping to get a larger share
of the target market. = competitors

11. is a marketing reality that is difficult to discern, understand, and study with

definiteness. = consumer behavior

12. is a condition where customers become excited over the products or the services

offered. = customer delight

13. relationship is best described as warm, complimentary, supportive, and

“businessly” personal. = customer intimacy

14. is the intermixture of peoples coming from all walks of life with different “provincial or
city cultures.” = community

15. is a relationship where the supplier is assured of orders while the customer is
assured of stock delivery. = just-in-time