September 16, 12
Environmental Awareness: Involves continuously scanning and interpreting
environmental trends to generate information forecasts.
Forecasting provides the lead information necessary to choose an appropriate
response to environmental change.
To determine whether emerging conditions are favorable or unfavorable for their
business, managers observe changes in demographics, consumer spending levels,
competitor’s moves, and availability of supplies.
Favorable conditions: are opportunities that, when effectively exploited will lead a
firm to its desired end.
Unfavorable conditions: are threats that, when not effectively dealt with, can harm a
firm’s current business, profitability, and future plans.
Business environment is generally broken down into a generic (or macro)
environment and industry environment
GENERIC (MACRO) ENVIRONMENT
The generic environment comprises economic, social, cultural, technological, and
political legal sectors.
ECONOMIC: The economic environment reflects the living standards and general
well being of a society. Businesses watch for trends that indicate economic growth,
slowdown, or decline. Economic growth increases consumer income and ability to
• Higher interest rates reduce consumer incentive to borrow, thereby limiting
demand for durable goods such as houses, cars, and refrigerators.
• Inflation represents erosion in the value if a currency. Inflationary conditions
adversely affect a firm’s capital cost thereby restricting its expansion plans.
High inflation makes investment planning difficult because a firm cannot
accurately predict the value of future returns on new investments and will
not, therefore, make such investments.
• Currency exchange rate affects the price of goods in international markets.
• Stock market performance affects the discretionary income of customers.
Significant rises in stock indices create wealth for stockholders.
SOCIAL: Comprises demographic and lifestyle trends. These trends indicate to
managers the changing needs and preferences of a population in general and which
population segment is undergoing significant change.
CULTURAL: Cultural change refers to changes in the value and beliefs of a society.
They point managers to products and services that a society may value and trends in
people’s attitudes toward work and business.
POLITICAL LEGAL: political-legal change involves changes occurring in the political
and regulatory ideology of a society, which may lead to more or less governmental
oversight of business.
TECHNOLOGICAL: Refers to the information used in converting scientific
knowledge into commercial goods.
GLOBAL: global changes involve changes occurring in markets, economies, and
political systems of the major regions of the world.
HOW DO YOU DEAL WITH MACRO LEVEL CHNAGES?
• Controlling external factor to prevent change and remain flexible enough to
quickly adapt the firm’s operations to suit external conditions.
• Forecast change and be prepared to adapt when change occurs.
HOW DO FIRMS FORECAST MACRO LEVEL CHANGE?
To forecast is to predict the future.
• Economic forecast: predict economic growth using trends in money supply,
interest rate, employment data, growth in personal income, consumer
sentiment, new orders for durable goods, business investments in plant and
equipment, and manufacturing inventories.
• Social forecast: predict demographic and lifestyle changes using trends in
population growth, life expectancies, education and training, family
formation, and travel and leisure activities of people.
• Technological forecast: predict what types of technologies are likely to
emerge in the future using trends in private and public sector R&D
investments, growth rate in categories of scientific personnel, patents
awarded, and rate of technological obsolesce.
• Political forecast: predict government legislation likely to emerge using
public opinion trends on matters of economic and social importance.
WHAT IS INDUSTRY?
Industry can be defined, as a group of firms offering products or services that are
similar and that satisfy the same customer needs.
Strategic groups are clusters of firms within an industry that pursue common or
The strategic group concept helps managers in many ways.
- By clearly delineating a firm’s industry segment and rivals, it gives managers
focus in environmental and competitor analysis. Opportunities and threats
differ from segment to segment and a clear description of the segment a firm
belongs to helps managers to achieve precision in environment analysis. It
also helps managers to effectively analyze other segments in the industry in
regard to their relative attractiveness.
INDUSTRY ANALYSIS: THE FIVE FORCES MODEL
According to Porter a firm can control industry-level forces by building a dominant
market position; or it can defend itself against these forces by choosing a safe niche.
Porter also asserts that the aim of a firm should be to select an attractive industry
and build an excellent competitive position that will give it a dominating influence
over industry forces or an ability to defend itself against their ill-effects.
A firm earns above average profits when it has and excellent competitive position in
an attractive industry. Of the two it is competitive position that is crucial for
success because even if the industry turns unattractive, a firm’s positional
strengths should allow it to change industry conditions in its favor and thus
continue to earn superior profits.
Rivalry among incumbent firms: Refers to the strength of competition among
incumbent firms, that is, current competitors in an industry.
Several factors influence rivalry among competing sellers. The most important of
a) Industry Competitive structure: The number of current sellers in an industry,
their size, and the type of products they offer determine the competitive
structure of the industry.
b) Demand Conditions: Growth in demand, due to new customers entering the
market or additional purchases made by existing customers, minimizes the
degree of competition by increasing opportunity for every firm.
c) Exit Barriers:
1. Economic of scale: As the production volume increases, the fixed cost is
spread over larger number of units, thereby bringing per unit cost down. In
other words when fixed costs remain the same, unit cost is lower at higher
volume (Fixed Cost/ Quantity = Average Cost or Unit cost)
2. Capital Requirements: The higher the capital needed to enter industry, the
higher is the barrier to entry.
3. Brand loyalty: Existing firms in an industry many enjoy high brand loyalty,
achieved through high product quality, innovation, advertising, and good
4. Experience Curve Effects: Per unit cost declines successively because firms
cumulative experience in making the product.
5. Government Regulations:
6. Switching costs: These are cost that the buyer must assume when switching
form the product of an incumbent form to the new entrant.
7. Access to Key Supplies/ Distribution Channels: In some industries,
incumbents may enjoy close relationship with suppliers and distributors due
to long-standing ties, deriving cost, speed-to market.
Bargaining power of suppliers: When the negotiating or bargain power of
suppliers relatives to the incumbent firm is high, suppliers can increase price, or
force the incumbent to accept reduced quality and frequent delivery delays.
Suppliers are most powerful when:
• There are only few suppliers or a single supplier has a dominant market
• Product sold by supplier is unique and has no substitutes
• Supplier has a proprietary technology
• Buyer firm must incur a high cost to switch another supplier
• Buyer firm is unable to backward integrate and manufacture its own supply
Bargaining power of buyer: Buyers are most powerful when:
• They buy in large quantities
• There are few buyers or a single dominant buyer in the industry
• Products sold by the incumbent fir is a commodity and has many substitutes
• Buyers can backward integrate and become their own supplier
• Switching from one supplier to another is expensive
Substitute Threats: Substitute products are those that consumer perceive as
alternatives to an incumbent firm’s products.
Availability and price of complementary products: A complementary product is one
that s necessary for using another product.
INDUSTRY ANALYSIS: RECAP
The five forces model is an effective tool that managers use to analyze and
understand industry competition. The model describes the pressures exercised by
rival firms, potential competitors, suppliers, buyers, and substitute products to gain
unique advantages and the industry conditions under which they will succeed.
According to the five forces model; market position yields competitive advantage
and superior profits.