Forces in the task environment result from the actions of suppliers, distributors, customers, and competitors both at home and abroad (see Figure 6.1). These four groups affect a manager's ability to obtain resources and dispose of outputs daily, weekly, and monthly and thus have a significant impact on short-term decision making. p. 181Suppliers
Dell has several suppliers of labor. One source is the educational institutions that train future Dell employees and therefore provide the company with skilled workers. Another is trade unions, organizations that represent employee interests and can control the supply of labor by exercising the right of unionized workers to strike. Unions also can influence the terms and conditions under which labor is employed. Dell's workers are not unionized; when layoffs became necessary after the financial crisis of 2008–2009, Dell had few problems in laying off workers to reduce costs. In organizations and industries where unions are strong, however, such as the transportation industry, an important part of a manager's job is negotiating and administering agreements with unions and their representatives. Changes in the nature, number, or type of suppliers produce opportunities and threats to which managers must respond if their organizations are to prosper. For example, a major supplier-related threat that confronts managers arises when suppliers' bargaining position is so strong that they can raise the prices of the inputs they supply to the organization. A supplier's bargaining position is especially strong when (1) the supplier is the sole source of an input and (2) the input is vital to the organization.4 For example, for 17 years G. D. Searle was the sole supplier of Nutra-Sweet, the artificial sweetener used in most diet soft drinks. Not only was NutraSweet an important ingredient in diet soft drinks, but it also was one for which there was no acceptable substitute (saccharin and other artificial sweeteners raised health concerns). Searle earned its privileged position because it invented and held the patent for NutraSweet, and patents prohibit other organizations from introducing competing products for 17 years. As a result Searle was able to demand a high price for NutraSweet, charging twice the price of an equivalent amount of sugar; and paying that price raised the costs of soft drink manufacturers such as Coca-Cola and PepsiCo. When Searle's patent expired many other companies introduced products similar to NutraSweet, and prices fell.5 In the 2000s Splenda, which was made by McNeil Nutritionals, owned by Tate & Lyle, a British company, replaced NutraSweet as the artificial sweetener of choice, and NutraSweet's price fell further; Splenda began to command a high price from soft drink companies.6 In contrast, when an organization has many suppliers for a particular input, it is in a relatively strong bargaining position with those suppliers and can demand low-cost, high-quality inputs from them. Often an organization can use its power with suppliers to force them to reduce their prices, as Dell frequently does. Dell, for example, is constantly searching for low-cost suppliers abroad to keep its PC prices competitive. At a global level, organizations can buy products from suppliers overseas or become their own suppliers by manufacturing their products abroad. It is important that managers recognize the opportunities and threats associated with managing the global supply chain. On one hand, gaining access to low-cost products made abroad represents an opportunity for U.S. companies to lower their input costs. On the other hand, managers who fail to use low-cost overseas suppliers create a threat and put their organizations at a competitive disadvantage.7 Levi Strauss, for example, was slow to realize that it could not compete with the low-priced jeans sold by Walmart and other retailers, and it was eventually forced to close all its U.S. jean factories and outsource manufacturing to low-cost overseas suppliers to cut the price of its jeans to a competitive level. Now it sells its low-priced jeans in Walmart. The downside to global outsourcing is, of course, the loss of millions of U.S. jobs, an issue we have discussed in previous chapters. p. 182A common problem facing managers of large global companies such as Ford, Sony, and Dell is managing the development of a global supplier network that will allow their companies to keep costs down and quality high. For example, Boeing's 777 jet was originally built using 132,500 engineered components made by 545 global suppliers.8 Although Boeing made the majority of these parts, eight Japanese suppliers made parts for the 777 fuselage, doors, and wings; a Singapore supplier made the doors for the plane's forward landing gear; and three Italian suppliers produced its wing flaps. Boeing decided to buy so many inputs from overseas suppliers because these suppliers were the best in the world at performing their particular activities, and Boeing's goal was to produce a high-quality final product—a vital requirement for aircraft safety and reliability.9 The purchasing activities of global companies have become increasingly complicated as a result of the development of a whole range of skills and competencies in different countries around the world. It is clearly in companies' interests to search out the lowest-cost, best-quality suppliers. IT and the Internet are continually making it easier for companies to coordinate complicated, long-distance exchanges involving the purchasing of inputs and the disposal of outputs—something Sony has taken advantage of as it trims the number of its suppliers to reduce costs. Global outsourcing The purchase or production of inputs or final products from overseas suppliers to lower costs and improve product quality or design. occurs when a company contracts with suppliers in other countries to make the various inputs or components that go into its products or to assemble the final products to reduce costs. For example, Apple contracts with companies in Taiwan to make inputs such as the chips, batteries, and LCD displays that power its digital devices; then it contracts with Chinese outsourcing companies such as Foxcom to assemble its final products—such as iPods, iPhones, and iPads. Apple outsources the distribution of its products around the world by contracting with companies such as FedEx or DHL. Global outsourcing has grown enormously to take advantage of national differences in the cost and quality of resources such as labor or raw materials that can significantly reduce manufacturing costs or increase product quality or reliability. Today such global exchanges are becoming so complex that some companies specialize in managing other companies' global supply chains. Global companies use the services of overseas intermediaries or brokers, which are located close to potential suppliers, to find the suppliers that can best meet the needs of a particular company. They can design the most efficient supply chain for a company to outsource the component and assembly operations required to produce its final products. Because these suppliers are located in thousands of cities in many countries, finding them is difficult. Li & Fung, based in Hong Kong, is one broker that has helped hundreds of global companies to outsource their component or assembly operations to suitable overseas suppliers, especially suppliers in mainland China.10 Although outsourcing to take advantage of low labor costs has helped many companies perform better, in the late 2000s its risks have also become apparent, especially when issues such as reliability, quality, and speed are important. For example, the introduction of Boeing's 787 Dreamliner plane was delayed for over two years because the company, encouraged by the success of its 777 outsourcing program, increased its reliance on companies abroad. To design and make the 787, Boeing turned to its suppliers early in the development process to gain access to foreign ingenuity and cut costs. Boeing uses 50 U.S. suppliers but also 23 suppliers abroad, many of whom had problems in meeting Boeing's delivery requirements. p. 183Design and quality issues arose, such as in 2008 when Boeing announced that an Italian supplier had stopped production of two sections of the fuselage because of structural design problems. The Dreamliner finally took its inaugural flight in 2010.11 By contrast, in 2010 Hanes Brands (HBI), the underwear maker, announced an agreement to sell its yarn and thread operations to Parkdale, a large-scale yarn manufacturer based in Gastonia, North Carolina. In the future Parkdale will be HBI's yarn supplier in North America; because yarn is a simple product to make, HBI did not need to look outside the United States. Clearly outsourcing decisions need to be carefully considered given the nature of a company's products.12 For example, in spring 2010 Caterpillar was deciding whether to “insource” production of excavators back to the United States because lower labor costs and increasing global shipping costs were making this the most efficient way to do business. On the other hand, some companies do not outsource production; they prefer to establish their own factories in countries around the world, as the example of Nokia in the following “Managing Globally” box suggests. (4.0K)
Distributors Distributors Organizations that help other organizations sell their goods or services to customers. are organizations that help other organizations sell their goods or services to customers. The decisions managers make about how to distribute products to customers can have important effects on organizational performance. For example, package delivery companies such as Federal Express, UPS, and the U.S. Postal Service have become vital distributors for the millions of items bought online and shipped to customers by dot-com companies both at home and abroad. The changing nature of distributors and distribution methods can bring opportunities and threats for managers. If distributors become so large and powerful that they can control customers' access to a particular organization's goods and services, they can threaten the organization by demanding that it reduce the prices of its goods and services.14 For example, the huge retail distributor Walmart controls its suppliers' access to millions of customers and thus can demand that its suppliers reduce their prices to keep its business. If an organization such as Procter & Gamble refuses to reduce its prices, Walmart might respond by buying products only from Procter & Gamble's competitors—companies such as Unilever and Colgate. To reduce costs, Walmart also has used its power as a distributor to demand that all its suppliers adopt a new wireless radio frequency scanning technology to reduce the cost of shipping and stocking products in its stores; otherwise it would stop doing business with them.15 It is illegal for distributors to collaborate or collude to keep prices high and thus maintain their power over buyers; however, this frequently happens. In the early 2000s several European drug companies conspired to keep the price of vitamins artificially high. In 2005 the three largest global makers of flash memory, including Samsung, were found guilty of price fixing (they collaborated to keep prices high). All these companies paid hundreds of millions of dollars in fines, and many of their top executives were sentenced to jail terms. And sometimes government regulation can hurt customers because it confers monopoly power on distributors, as the following “Ethics in Action” box suggests. p. 185 (4.0K)
p. 186 Customers Customers Individuals and groups that buy the goods and services an organization produces. are the individuals and groups that buy the goods and services an organization produces. For example, Dell's customers can be segmented into several distinct groups: (1) individuals who purchase PCs for home use, (2) small companies, (3) large companies, and (4) government agencies and educational institutions. Changes in the number and types of customers or in customers' tastes and needs create opportunities and threats. An organization's success depends on its responsiveness to customers—whether it can satisfy their needs. In the PC industry, customers are demanding thinner computers, better graphics and speed, and increased wireless and Internet connections—and lower prices—and PC makers must respond to the changing types and needs of customers, such as by introducing tablet computers. A school, too, must adapt to the changing needs of its customers. For example, if more Spanish-speaking students enroll, additional classes in English as a second language may need to be scheduled. A manager's ability to identify an organization's main customer groups, and make the products that best satisfy their particular needs, is a crucial factor affecting organizational and managerial success. The most obvious opportunity associated with expanding into the global environment is the prospect of selling goods and services to millions or billions of new customers, as Amazon.com's CEO Jeff Bezos discovered when he expanded his company's operations in many countries.18 Similarly, Accenture and Cap Gemini, two large consulting companies, established regional operating centers around the globe, and they recruit and train thousands of overseas consultants to serve the needs of customers in their respective world regions. Today many products have gained global customer acceptance. This consolidation is occurring both for consumer goods and for business products and has created enormous opportunities for managers. The worldwide acceptance of Coca-Cola, Apple iPods, McDonald's hamburgers, Doc Martin boots, and Nokia cell phones is a sign that the tastes and preferences of customers in different countries may not be so different after all.19 Likewise, large global markets exist for business products such as telecommunications equipment, electronic components, and computer and financial services. Thus Cisco and Motorola sell their telecommunications equipment, Intel its microprocessors, and Oracle and SAP their business systems management software to customers all over the world. Competitors One of the most important forces an organization confronts in its task environment is competitors. Competitors Organizations that produce goods and services that are similar to a particular organization's goods and services. are organizations that produce goods and services that are similar and comparable to a particular organization's goods and services. In other words, competitors are organizations trying to attract the same customers. Dell's competitors include other domestic PC makers (such as Apple and HP) as well as overseas competitors (such as Sony and Toshiba in Japan, Lenovo, the Chinese company that bought IBM's PC division, and Acer, the Taiwanese company that bought Gateway). Similarly, dot-com stockbroker E*Trade has other competitors such as Ameritrade, Scottrade, and Charles Schwab. Rivalry between competitors is potentially the most threatening force managers must deal with. A high level of rivalry typically results in price competition, and falling prices reduce customer revenues and profits. In the early 2000s competition in the PC industry became intense because Dell was aggressively cutting costs and prices to increase its global market share.20 IBM had to exit the PC business after it lost billions in its battle against low-cost rivals, and Gateway and HP also suffered losses while Dell's profits soared. By 2006, however, HP's fortunes had recovered because it had found ways to lower its costs and offer stylish new PCs, and Apple was growing rapidly, so Dell's profit margins shrunk. In 2009 HP overtook Dell to become the largest global PC maker, and in 2010 Apple and Acer's sales were also expanding rapidly. Dell's managers had failed to appreciate how fast its global competitors were catching up and had not developed the right strategies to keep the company at the top. p. 187Although extensive rivalry between existing competitors is a major threat to profitability, so is the potential for new competitors to enter the task environment. Potential competitors Organizations that presently are not in a task environment but could enter if they so choose. are organizations that are not presently in a task environment but have the resources to enter if they so choose. In 2010 Amazon.com, for example, was not in the retail furniture or large appliance business, but it could enter these businesses if its managers decided it could profitably sell such products online. When new competitors enter an industry, competition increases, and prices and profits decrease. BARRIERS TO ENTRY In general, the potential for new competitors to enter a task environment (and thus increase competition) is a function of barriers to entry.21 Barriers to entry Factors that make it difficult and costly for an organization to enter a particular task environment or industry. are factors that make it difficult and costly for a company to enter a particular task environment or industry.22 In other words, the more difficult and costly it is to enter the task environment, the higher are the barriers to entry. The higher the barriers to entry, the fewer the competitors in an organization's task environment and thus the lower the threat of competition. With fewer competitors, it is easier to obtain customers and keep prices high. Barriers to entry result from three main sources: economies of scale, brand loyalty, and government regulations that impede entry (see Figure 6.2). Economies of scale Cost advantages associated with large operations. are the cost advantages associated with large operations. Economies of scale result from factors such as manufacturing products in very large quantities, buying inputs in bulk, or making more effective use of organizational resources than do competitors by fully utilizing employees' skills and knowledge. If organizations already in the task environment are large and enjoy significant economies of scale, their costs are lower than the costs that potential entrants will face, and newcomers will find it expensive to enter the industry. Amazon.com, for example, enjoys significant economies of scale relative to most other dot-com companies because of its highly efficient distribution system.23 Brand loyalty Customers' preference for the products of organizations currently existing in the task environment. is customers' preference for the products of organizations currently in the task environment. If established organizations enjoy significant brand loyalty, a new entrant will find it difficult and costly to obtain a share of the market. Newcomers must bear huge advertising costs to build customer awareness of the goods or services they intend to provide.24 Today Google, Amazon.com, and eBay enjoy a high level of brand loyalty and have some of the highest Web site hit rates, which allows them to increase their marketing revenues. Figure 6.2 In some cases, government regulations function as a barrier to entry at both the industry and the country levels. Many industries that were deregulated, such as air transport, trucking, utilities, and telecommunications, experienced a high level of new entry after deregulation; this forced existing companies in those industries to operate more efficiently or risk being put out of business. At the national and global levels, administrative barriers are government policies that create barriers to entry and limit imports of goods by overseas companies. Japan is well known for the many ways in which it attempts to restrict the entry of overseas competitors or lessen their impact on Japanese firms. Japan has come under intense pressure to relax and abolish regulations such as those governing the import of rice, for example. p. 188The Japanese rice market, like many other Japanese markets, was closed to overseas competitors until 1993 to protect Japan's thousands of high-cost, low-output rice farmers. Rice cultivation is expensive in Japan because of the country's mountainous terrain, and Japanese consumers have always paid high prices for rice. Under overseas pressure, the Japanese government opened the market; but overseas competitors are allowed to export to Japan only 8% of its annual rice consumption to protect its farmers. In the 2000s, however, an alliance between organic rice grower Lundberg Family Farms of California and the Nippon Restaurant Enterprise Co. found a new way to break into the Japanese rice market. Because there is no tariff on rice used in processed foods, Nippon converts the U.S. organic rice into “O-bento,” an organic hot boxed lunch packed with rice, vegetables, chicken, beef, and salmon, all imported from the United States. The lunches, which cost about $4 compared to a Japanese rice bento that costs about $9, are sold at railway stations and other outlets throughout Japan and have become very popular. A storm of protest from Japanese rice farmers arose because the entry of U.S. rice growers forced them to leave their rice fields idle or grow less profitable crops. Other overseas companies are increasingly forming alliances with Japanese companies to find new ways to break into the high-priced Japanese market, and little by little, Japan's restrictive trade practices are being whittled away. In summary, intense rivalry among competitors creates a task environment that is highly threatening and makes it increasingly difficult for managers to gain access to the resources an organization needs to make goods and services. Conversely, low rivalry results in a task environment where competitive pressures are more moderate and managers have greater opportunities to acquire the resources they need to make their organizations effective. 4M. E. Porter, Competitive Strategy (New York: Free Press, 1980). 5“Coca-Cola versus Pepsi-Cola and the Soft Drink Industry,” Harvard Business School Case 9-391–179. 6www.splenda.com, 2010. 7A. K. Gupta and V. Govindarajan, “Cultivating a Global Mind-Set,” Academy of Management Executive 16 (February 2002), 116–27. 8“Boeing's Worldwide Supplier Network,” Seattle Post-Intelligencer, April 9, 1994, 13. 9I. Metthee, “Playing a Large Part,” Seattle Post-Intelligencer, April 9, 1994, 13. 10“Business: Link in the Global Chain,” The Economist, June 2, 2001, 62–63. 11www.boeing.com, 2010. 12www.hbi.com, 2010. 13www.nokia.com, 2010. 14M. E. Porter, Competitive Advantage (New York: Free Press, 1985). 15www.walmart.com, 2010. 16www.costco.com, 2010. 17C. Harris, “Costco Loses State Case on Lowering Beer, Wine Prices,” seattlepi.com, January 29, 2008. 18www.amazon.com, 2010. 19T. Levitt, “The Globalization of Markets,” Harvard Business Review, May–June 1983, 92–102. 20“Dell CEO Would Like 40 Percent PC Market Share,” www.dailynews.yahoo.com, June 20, 2001. 21For views on barriers to entry from an economics perspective, see Porter, Competitive Strategy. For the sociological perspective, see J. Pfeffer and G. R. Salancik, The External Control of Organization: A Resource Dependence Perspective (New York: Harper & Row, 1978). 22Porter, Competitive Strategy; J. E. Bain, Barriers to New Competition (Cambridge, MA: Harvard University Press, 1956); R. J. Gilbert, “Mobility Barriers and the Value of Incumbency,” in R. Schmalensee and R. D. Willig, eds., Handbook of Industrial Organization, vol. 1 (Amsterdam: North Holland, 1989). 23Press release, www.amazon.com, May 2001. 24C. W. L. Hill, “The Computer Industry: The New Industry of Industries,” in Hill and Jones, Strategic Management: An Integrated Approach (Boston: Houghton Mifflin, 2003). |