Module 2 – CHALLENGES IN THE INTERNAL ENVIRONMENT and

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PROGRAM OUTCOMES

By the time of graduation, the students of the program shall be able to:
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INTRODUCTION

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 itself of an
organization. Thus, this lesson discusses the constructs within the internal environment itself and the
relevance and application of Porter’s Five Forces Model.

Because of the volatility of the environment, business survival has become more challenging than
ever. Therein a greater demand for an honest reviews of functional activities and development of a proactive
mindset through various strategic modes of growth and competitive. Realignment, enhancement, reinventing,
strategizing, and refocusing have become more imperative to any organization. Lesson two deals with value
chain analysis and the different types of business strategies. These include growth strategies, competitive
strategies, life cycle strategies, stability strategies, and turnaround strategies.

This module is divided into two lessons, namely:

Lesson 1 the internal environment, and
Lesson 2 deals with value chain analysis.

MODULE LEARNING OUTCOMES

In this module, you should be able to:

1. assess the internal environment;
2. explain Porter’s Five Forces Model; and
3. explain why companies opt to implement stability or retrenchment strategies.

Lesson 1: The Internal Environment

SPECIFIC LEARNING OUTCOMES

In this lesson, you should be able to:

1. identify the role of the government as the business caretaker;
2. appreciate the role of culture as a venue of communal convergence;
3. classify and compare the types of competitors;
4. relate consumer behaviour to specific consumer outcomes; and
5. appreciate the importance of suppliers in any business transaction.

PRE-ASSESSMENT

IDENTIFICATION: Read each sentence carefully then identify what is being described. Write your answers
on the space provided.

_______1. The setting in which an organization locally exists.

_______2. Filipinos are generally warm people.
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_______3. This practice creates an atmosphere of unity and concern among the townspeople.
_______4. The Filipinos are flexible people.
_______5. Some companies appear to compete with themselves.
_______6. There are companies whose relationships among each other are strategic cooperative.
_______7. Refers to the relationship between the company and the customers.
_______8. A condition where come from experiencing quality service, product excellence, product versatility,
or any attribute that will greatly gratify and create a distinct impact on them.
_______9. Refer to individuals and companies engaged in the delivery of raw materials, machinery,
technology, labor, expertise, skills, and other forms of services.
_______10. The emphasis of most companies.

LESSON MAP

CHALLENGES IN THE INTERNAL ENVIRONMENT

Government: The Business Caretaker

Culture:A Communal Convergence

Stakeholdlers: The Business Investor

Competitor: The Bussiness

Customers: The Business Challenges

Suppliers: The Business ppartners

Community : The Business Concern

Figure 1 describes the flow of Challenges in the Internal Environment

CORE CONTENTS

ENGAGE: Image Analysis

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Base on the image above give your analysis in one paragraph.

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EXPLORE: Reading Concepts

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 a
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 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
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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 Iives.
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 paint 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.

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 and
enhanced while negative Filipino values be restrained, if not eliminated.
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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 the 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.
• 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
market place 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, classes C and D; and average-cost housing to middle-income class families.
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2. Collaborative Competition. Similarly, there are companies whose relationships among each other
are strategic and cooperative. Examples are the off companies in the country.
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 when 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 consumer. Observation and studying consumers in terms of demographic variables can
also help identify competitors: sex, civil status, age, educational attainment. monthly incomes,
employment, and psychographic variables like needs, wants, attitudes, perceptions, purchase
patterns, and buying behaviour.

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.

CUSTOMERS: THE BUSINESS CHALLENGES

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, want,
demands, and sophisticate lifestyles of consumer, there is an exigent need to employ various
approaches to ensure their patronage and customer and loyalty.
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• Consumer behaviour 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.”

At the very least, any product or service should provide customer satisfaction. In other words, any
product must fulfil 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
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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 behaviour 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.

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.
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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 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 business to thrive. It is “customer, suppliers, and competitors” all
bundle 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 a the
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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 behaviour 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.

PORTER'S FIVE FORCES MODEL

Organizations, particularly businesses, are the lifeblood of any nation. They sustain continued
existence and staying power of countries. As drivers of survival, growth, and develop businesses create and
energize the pulse of selling, producing, venturing, and transacting activities. Companies, corporations,
conglomerates, partnerships, transnational’s, 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

Treats of Substitute Competitive Rivalry within Threats of New Entrants

Products the Industry

Bargaining Power of Supplier

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
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(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, production and
operation pluses like access to raw materials and scarcity and costs of qualified labor.
and good supplier-customer relationships; and
c. production and operation pluses like access to raw materials and scarcity and cots 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 - present when complementary, alternative, and similar products are in
existence and sold at lower prices.
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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.

EXPLAIN: Review Questions

INSTRUCTIONS: Briefly answer the question below.

Question I
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?

Question II

1. Can you say that the Filipino culture is uniquely Filipino? Why?
2. When is bayanihan a good Filipino characteristic?
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Question III
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?

Questions IV
1. Draw a profile of the Filipino consumer of today: his needs, wants, demands, and expectations.
2. How can customer relationships enhance customer intimacy?

Questions V
1. Explain Michael Porter’s five Forces Model of Industry Competition.

TOPIC SUMMARY

In this lesson you have learn that..

• The internal environment is the setting in which an organization locally exists.
• The government is the sole legitimate institution tasked with overseeing organizational operations in
the country.
• Culture a communal convergence
• Organization exist because there are individual who are willing to take risks, invest their capital, and
engage in business activities in exchange for a return.
• The stakeholder the business investors.
• The competitors the business threats.
• Customers the businesses challenge.
• The suppliers the business partners.
• 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
background, religions, and educational attainments.

REFERENCES
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• Young Felina C. Strategic Management Made Simple, Rex Book Store. 2015.
• David, Fred R. and David, Forest R., Strategic Management Concepts and Cases 16thEdition,
Pearson Educ. South Asia Pte Ltd., 2017. 658. D28.
• Retrieved from: https://higherstudy.org/internal-environment-factors-analysis/Retrieved on March 10,
2022.

1. 1.