Module 2 – Environment of Organizations: External and Internal Contingencies

A good business model answers following questions:

1. Who is the customer?
2. What does the customer value?
3. How do we make money in this business?
4. What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?

Business modeling is the managerial equivalent of the scientific method—you start with a hypothesis, which you then test in action and revise when necessary. A business model isn’t the same thing as a strategy, even though many people use the terms interchangeably today. Business models describe, as a system, how the pieces of a business fit together. But they don’t factor in one critical dimension of performance: competition. Sooner or later—and it is usually sooner—every enterprise runs into competitors. Dealing with that reality is strategy’s job.


Industries evolve along four distinct trajectories—radical, progressive, creative, and intermediating—that set boundaries on what will generate profits in a business. two types of threats of obsolescence. The first is a threat to the industry’s core activities—the activities that have historically generated profits for the industry. The second is a threat to the industry’s core assets—the resources, knowledge, and brand capital that have historically made the organization unique.

Radical change occurs when an industry’s core assets and core activities are both threatened with obsolescence.


Radical change occurs when an industry’s core assets and core activities are both threatened with obsolescence.

When neither core assets nor core activities are threatened, the industry’s change trajectory is progressive.

Creative change occurs when core assets are under threat but core activities are stable.

Intermediating change occurs when core activities are threatened with obsolescence—customer and supplier relationships are stretched and fragile—while core assets retain their capacity to create value.




Which Trajectory Are You On?

The first step is to define your industry.
The second step is to define the industry’s core assets and activities.
The third step is to determine whether the core assets and activities are threatened with obsolescence.
The final step in the diagnosis is to evaluate the phase of the evolutionary trajectory.


The Process of Value Creation

– Understanding your firm’s environment and business model
– Building a strategy to compete better
– Designing the organization
– Executing the strategy effectively


What are Internal and External Contingencies?

Business Model: How does the existing business model of our industry (including government regulations, technological changes and customer preferences) influence our choices?
Industury history and life-cycle: How do historical changes in an industry influence organizational action?
Operational Technology: How does the combination of skills, knowledge, tools, techniques, and actions that are used to convert organizational inputs into outputs influence structure?
Firm Strategy: How are the adjustments and changes made to strategy incorporated into structure?


OLD: A business model is a set of well established expectations in an industry about the ways the industry participants create value for all its players espacially its customers. NEW: A business model is the act of converting an insight into an executable business that is continually tested in the marketplace.



Business models directly address the following questions:

What is the boundary of your firm?
Which activitites should be performed by your firm or by your external partners?
What is the value proposition your firm provide to its customers?


Types of Workflow Interdependecies

Pooled: Each department or unit contributes separately to the performance of the whole organization
Sequential: Actions of one unit directly affect the actions of another unit in a predetermined sequence.
Reciprocal: Actions of one unit affect the actions of other units but the sequence is not predetermined.





Firm’s operation technology for production

Unit/Small batch production: Sale _-> Design –> Production (Aircraft carrier for US Navy)
Large batch production: Design —> Production —> Sale (Cars)
Continuous production: Design —> Sale —> Production (Oil)