CHALLENGES IN

THE INTERNAL
ENVIRONMENT
CHAPTER 3
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
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 service, and
societal responsibilities
e. politically in terms of peace, security, stability, and governance
2. Create 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 adjust treatment

CULTURE: A Communal Convergence

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 has greatly influence by diverse cultures: Chinese,
Japanese, Spanish, and American. Such evolution has nurtured in the
Filipinocertain distinct beliefs, tradition, and practices, which are either a pride to
the country or otherwise.Worth mentioning are thefollowing:
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.

4. 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.
5. The habits of ningas kugon, mañana, 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

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
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.
 Competitors: The Business Threats
Competition is an economic scenano 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 of the target market. They fall in
different categories.

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.

Similar Products. They are companies who sell similar products. Tea and coffee are similar
products.

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.

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

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.

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.

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.
 1. Determining similarity in characteristics.
How can a One way of identifying competitors is by
determining similarity in the products and
company services offered, the specific technologies
applied, and the strategies employed,
then know whether marketing, financial, and managerial.

who its 2. Studying consumers. Observing and

competitors studying consumers in terms of demographic

variables can also help identify competitors:

are? sex, civil status, age, educational attainment,

monthly income, employment, and
psychographic variables like needs, wants,
There are different ways of attitudes, perceptions, purchase patterns,
identifying them and they are the and buying behavior.
following:
How can a 3. Researching company data. Competitors
can also be identified through hard company
company data: capitalization outlay, number of

then know customers, distribution outlets, employees,

financial strength, number of years in
who its operation, and company growth.

competitors 4. Considering corporate success. Lastly,

are?
There are different ways of
identifying them and they are the
following:
some competitors look at the degree of
success of other companies by studying
their sales volume and amount of sales,
market leadership, and goodwill.
 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
Customers: their existing products and services. Customers are
the focus of companies’ business plans and
The Business programs and the thrust of their strategies.

Challenge 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 “uncertainly”.
 elicits
Good gives Customer Customer
Product/Service Satisfaction Approval

provides assures
Quality Customer Customer
Product/ Service Satisfaction Patronage

creates Customer strengthens

Quality Customer
Satisfaction
Relationship 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. 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 distinct impact
on them.
The last level of change in customer behavior is customer intimacy. Customer intimacy
refers to the relationship between the company and the customers. It is manifested in varied
forms like sending birthday cakes, cards or sharing one’s expertise with a “customer” who is in
bad financial shape. Customer intimacy seals customer patronage or better referred to as
customer loyalty.
Company
Figure 3. 2 Customer Relationship
Managementt

Customer Relationship
Management
Product Customers
 Customer relationship management (CRM) is the emphasis of the most companies. In
essence, it revolves around the interplay of three significant variables, namely:
1. The company that produces the product
2. The product produced
3. The customers who buy the product
In an environment characterized by cut-throat competition,
businesses have to produce quality products. This degree of

Suppliers: quality is greatly dependent on a number of variables, one of

which is the supplier component.
Suppliers refer to individuals and companies engaged in
The Business the delivery of raw materials, machinery, technology, labor,
expertise, skills, and other forms of services. The supplier
component is important for the following reasons:
Partners 1. It is responsible for the quality of the products produced
and the services rendered.
2. It affects continuity in operational processes. (production,
scheduling, and delivery)
 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, standard
of living, family background, religions, and educational attainments. As such, the
community, in principle, is the rationale of the “business framework”. It is very reason
why stakeholders invest their capital and venture into business. It is “customer,
suppliers, and competitors” all bundled as one. It is the primary concern of the
government.

Porter’s Five Forces Model

Organization, particularly businesses, are the lifeblood of any nation. They sustain
the continued existence and staying power of countries. As a player of economy,
they are essentially competitors. Call them by any term; competition is the name of
the game.
 One of the more popular ways to strategizing an
Bargaining Power organization to attain profitability and market share is
of Customers
to scan the competitive environment.
Figure 3. 3 Porter's Five
Forces Model Competitive Environment is best described and
illustrated by Michael Porter’s Five Forces Model in
Industry Competition.
Michael Porter
Bargaining
Power of Competitive Rivalry Threats of
Products within the Industry New Entrants

He is an aerospace and mechanical engineer.

Porter pursued his doctorate degree in industrial
Bargaining Power of economics. He was a professor at the Harvard
suppliers
Business School. His book COMPETITIVE
STRATEGY (1980).
 Five Forces that
1. Bargaining Power of Suppliers
determine the
2. Bargaining Power of Buyers/Customers
intensity,
3. Ease of Entry of New Firms
profitability, and 4. Availability of Substitute Products
attractiveness of an 5. Rivalry among existing firms within the

industry; Industry
 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
b. There are no substitute for the specified input
c. Switching costs from one supplier to another are high
d. Customers of suppliers are not united but fragmented
2. The bargaining power of customers is high when:
a. Customer 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
d. Product switching is easy
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, and good supplier customer relationship
c. Production and operation pluses like access to raw materials and scarcity and costs
of qualified labor
 4. Threats of substitute are present when complementary, alternative, and similar
products are existence and sold at lower prices.
To reduce 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 growth of a company is at the expense of the other

Three Fundamental Generic Strategies

1. Cost Leadership
2. Optimizing the Learning Curve
3. Stressing on Operational Excellence
Thank you!
Kyle Esteva
Sofia Isabel Morilla