Industry Environment example essay topic

CONTENT PAGE 1. Question Paper 22. Introduction 33. PEST Analysis 4 (3.1) Political Legal Environment 4 (3.2) Economic Environment 4 (3.3) Social Environment 5 (3.4) Technological Environment 54.

Industry Analysis 55. The Michael Porter Five Forces 6 (5.1) Threat Of New Entrants 7 (5.2) Rivalry of existing firms 7 (5.3) Threats of substitutes 7 (5.4) Bargaining power of buyer 8 (5.5) Bargaining power of suppliers 96. Conclusion 97. Bibliography 108.

References 10 EXECUTIVE DIPLOMA IN BUSINESS ADMINISTRATION STRATEGIC MANAGEMENT (BA 423) APRIL 2004 STRATEGIC MANAGEMENTQUESTIONThe study of the external environment is a crucial step in the mapping of business strategy for an organization. Discuss how the assessment of external forces can be performed with business examples to support your analysis. [Total 100 marks]- END OF PAPER - Introduction Business environment is an element that will affect all the activities of an organization. Beside, it will bring firms both opportunities and threats because of its uncertainties. Business environment is uncertain, complex & dynamics; organization should apply more flexibility & discontinuity ways to manage them.

A firm cannot control the environment because it is unpredictable in its direction and speed of change, such as interest rates, rate of inflation and exchange rate. Business environment can classifies in two categories that are internal environment and external environment. Internal factors close to the company that have a direct impact on the organizations strategy, these factors include employee, customer, suppliers, shareholder, banker etc. External environment comprises those factors and trends outside the organisation that might have an influence upon an organisation and its future. Many external factors can have an effect upon an organisation - from changes in government legislation to the entry of new competition into a market. All businesses and organizations operate in a changing world and are subject to forces that are more powerful than they are, and which are beyond their control.

Any business strategy needs to take account of all these forces so that opportunities and threats can be identified and the organization can navigate its way to success by matching its internal strengths to external opportunities. There are many ways and techniques that a firm can adopt to assess the external environmental forces. The most common and popular techniques are the PEST analysis and Industry Analysis, and these are illustrated below in figure 1. Figure 1: External environment analysis Pest Analysis It is useful to consider as a starting point, what environmental influences have been particularly important in the past, and the extent to which there are changes occurring, which may make any of these more or less significant in the future, for the organization and its competitors. PEST analysis (a mnemonic for Political, Economic, Social and Technological factors) is the most frequently used tool to consider the impact of the general environment.

It provides a broad framework for considering a wide range of potential factors in order to summarise the most important influences of the general environment. Beside, it can evaluate the potential impact of these influences, while the opportunities and threats to be faced. Is positive or negative. Each of the four headings can be broken down further to suggest more detailed consideration of particular factors and changes that might influence the organisation both currently and in the future. Whilst varying dependent upon the particular context, the list of factors and changes may include: 1.) Political Legal Environment: Political environment include factors that affect the confidence and sentiment of foreign investment and trade relation. Political and legal developments can expand a company's freedom of action; it will make the environment to be more supportive of its activities.

Political factors can have a direct impact on the way business operates. Decisions made by government affect our every day lives and can come in the form of policy or legislation such as competition policy, trading standards, financial regulation, planning policies. The governments Organization today among will more consider to this factors such as greater deregulation, more lenient interpretation of antitrust laws, greater environmental protection legislation, growing power etc. An example: Nike's international operations are subject to the usual risks of doing business abroad, such as possible revaluation of currencies, export duties, quotas, restrictions on the transfer of funds and, in certain parts of the world, political instability. Nike's products manufactured overseas and imported into the United States and other countries are subject to customs duties collected by customs authorities. Customs information submitted by Nike is routinely subject to review by customs authorities.

Nike is unable to predict whether additional customs duties, quotas or other restrictions may be imposed on the importation of our products in the future. The enactment of any such duties, quotas or restrictions could result in increases in the cost of our products generally and might adversely affect the sales or profitability of NIKE and the imported footwear and apparel industry as a whole. 2.) Economic Environment: Economic environment has its patterns and trends in overall economic activity and world trade; movements in exchange rates, interest rates and taxation both within particular countries and internationally; fluctuations in capital markets; broad changes in market demand; industrial trends like increasing industry concentration and increased mergers and acquisitions activity. All businesses are affected by economical factors nationally and globally. Whether an economy is in a boom, recession or recovery will also affect consumer confidence and behavior. A truly global player has to be aware of economic conditions across all borders and ensure they employ strategies and tactics that their protects their business An example: In the early 1990's when the UK economy was in a slump, and businesses were folding repeatedly, a security company called 'Dreadlocks security? to combat falling sales embarked on strategy of cutting back on labour costs, and doubling advertising expenditure.

The companies? theory was that not their entire target segment was affected by the recession and he had to fight for the customers that still had the income to spend on security products. 3. Social Environment: Social environment will include changes in demographic patterns like the increasing age profile of populations in developed countries; changing social attitudes and tastes such as the way in which people spend their leisure time; patterns of spending on education and health; public concern on issues like the environment, smoking and food safety. As society changes, as behaviors change organizations must be able to offer products and services that aim to complement and benefit peoples lifestyle and behavior because these factors will affect customer needs and the size of potential markets. An example: UK peoples attitudes are changing towards their diet and health. As a result the UK is seeing an increase in the number of people joining fitness clubs and a massive growth for the demand of organic food.

On the other end of the spectrum the UK is worried about the lack of exercise its youngster are obtaining. These 'fast food games console? children are more likely to experience health problems in their future because of the lifestyle they are living now. 4. Technological Environment: Changes in technology are changing the way business operates.

Technological factors are vital for competitive advantage, and are a major driver of change and efficiency. The Internet is having a profound impact on the marketing mix strategy of organizations. Consumers can now shop 24 hours a day comfortably from their homes. The challenge these organization faces is to ensure that they can deliver on their promise.

This technological revolution means a faster exchange of information beneficial for businesses as they can react quickly to changes within their operating environment. An example: Nike is looking for new ways to boots sales by capitalizing on direct Internet sales to customers. Nike has taken the lead in e-commerce by being the first market with its e-commerce web site. Nike increased its e-commerce presence by launching NIKE ID that enables online customers to design key elements of the shoes they purchase. Nike already has an expansive online operation, but new marketing ideas will push the envelope in Internet sales possibilities.

Soon, Nike Team Sports, Inc. will launch web side - Nike Team. com, allowing athletic teams to build, customize and order Nike uniforms, footwear and equipment over the Internet One of technology that Nike has applied is Global Technology Network. The goal for applying this system is? to create a seamless flow of information shared by any browser using Nike employee around the world.? (K allin, 1999). This system enhances their product cycle by using intranet. Using this, employees can reduce time for getting information and they can obtain the information about their company and product anywhere.

As a result, Nike increased more than 40% of their global sales. Industry Analysis Refer to the nature and strength of competition between sellers in an industry; there are many techniques to analyze an industry environment. Whilst the general environment is important, the more immediate environment that surrounds most organisations is the competitive environment. Competition is at the very root of a market economy. Today, most politicians invoke the market economy as a superior system, focusing on the incentives and the dynamism provided by competition.

The firms usually compete in 2 ways, that is 1. Price competition: They try to undersell on another and capture markets, customers and profits through manipulating prices and lowering costs. 2. Non-price Competition: The suppliers or firms will differentiate their products, marketing, advertising, promoting, branding and otherwise attempting to retain their own customers and attract their rivals.

The Michael Porter Five Forces According to Michael Porter theory, whether an industry produces a commodity or a service, or whether it is global or domestic in scope, the level of competition in an industry depends upon the strength of the competitive forces to which it is exposed. These forces, act individually and together to determine the ultimate profit potential of the industry and are a result of the structure (the underlying economics) of the industry An understanding of the competitive dynamics of an industry requires analysis of the structural factors influencing each of these five forces of competition. In them, Michael Porter described a concept that has become known as the 'five forces model'. This concept involves a relationship between competitors within an industry, potential competitors, suppliers, buyers and alternative solutions to the problem being addressed. By studying the Porter " structure of and dynamics between these forces, one you can discover opportunities for improving upon your strategies. Porter's five forces model is illustrated in figure 2 below.

Figure 2: Porter's five Forces model Sources: Strategic Management and Business Policy Entering 21st Century Global Society (Sixth edition) - Thomas L. Wheelen & J. David Hunger 1. Threat Of New Entrants The ability of new competitors to enter the industry will depend upon the existence of barriers to entry? the higher they are, the less likely it is that new competitors will pose a threat. These barriers to entry could come from factors such as large economies of scale, difficulty of access to distribution channels, high capital investment requirements, strong existing brand names, and scarce skills or resources. Reputation, service, technology, and experience can also provide a means for building barriers to entry. Imagine the difficulty in trying to penetrate a market where other firms already possess large customer databases and years of experience with specific products An example: Building entry barriers can provide one of the most powerful strategic uses of IT. An entry barrier exists if a firm already in business has a much better position in the industry than a new entrant.

For example, a large information-intensive firm may own multiple networked computer systems. The capital required to purchase or lease computers, allowing a new business to compete in the market, could discourage new entrants. Supercomputers allow drug researchers to graphically model proteins and enzymes. For a new entrant, investing in IT to be competitive with firms already owning this technology would be quite costly. 2. Rivalry of existing firms Intensity of industry rivalry depends on factors beyond the control of the individual firm, such as degree of concentration, diversity, or dependency; rate of industry growth; or switching costs.

It is critical to understand the strategies of one's rivals in detail. For instance, Ford's strategy depends on the strategies of Toyota, Nissan, GM, and Volkswagen, and vice versa. IT can also be used to create alliances between rivals, such as ATM networks. An example: To compete against existing industry rivals, firms can use IT to form a new basis for competition. New product and markets are a means of forming new bases of competition. It is clear, however, that relationships among firms within an industry must also be cooperative to be healthy for the industry.

If firms are too competitive, prices are driven down, and the entire industry loses profitability. Shared IT is an example of how firms cooperate to provide products and services that are beneficial to the industry as a whole. Alliances for ATM networks formed by banks provide nationwide access for banking customers. Pooling resources allowed multiple banks to provide services to customers without the requirement of nationwide branch coverage 3. Threats of substitutes This threat will be high when customer needs can be met by alternative products or services to those produced within the industry.

The existence of substitutes is an important competitive consideration because it limits the price that a firm can charge for its product or service. The relative price-performance of substitutes, the extent of switching costs and the propensity of buyers to use substitutes, will all affect the intensity of this threat. Two ways in which a firm can compete against substitute products are with relative price performance and product features. An example: Relative price performance refers to a firm's ability to substitute a product by offering it at a lower cost or improving its perceived value. IT can support offering lower cost by creating efficiencies in bringing the product to market and passing the cost savings along to the consumer. Wal-Mart offers retail products that are also available at other chains but at significant savings to consumers.

Buying in bulk and warehousing lets Wal-Mart demand discounts from suppliers. Savings incurred by use of this strategy are passed on to customers. If a firm cannot compete on price, it may differentiate its products by offering features that increase perceived performance. Many financial institutions offer credit, cash withdrawal, and money market fund investing. In 1980, with the use of IT, Merrill Lynch marketed Cash Management Accounts (CMAS) that combined all these services. CMAs grew from 180,000 in 1980 to over 1 million in 1983, with an average balance of $70,000.

All features of the product had existed previously. The innovation of combining them caused a strategic advantage. 4. Bargaining power of buyer The bargaining power of customers or buyers is the mirror image of that exerted by suppliers to an industry.

If there are relatively few buyers / they can switch easily between suppliers, then the bargaining position of the industry will be weakened, with pressures to reduce prices or increase the quality of products provided. Buyer power depends on the level of switching costs, the competitive position of the buyer in the industry whether the buyer can purchase a commodity product, or whether the buyer poses a serious threat of backward integration (i. e., buying out or merging with its suppliers). An example: Wickes obtained software through a software house, Integrated Computer Graphics (ICG), that would aid contractors in using customized building components carried by Wickes. They also began selling prefabricated house 'shells' that Wickes delivered to building sites. Purchasers of these shells were typically customers building their own homes.

Wickes provided ten different home designs, with regional differences in building codes as a modifiable factor. Wickes is not only supplying the shell but supplying the products to finish the shell as well. This product area was known as the Affordable Homes Program (AHP). In the early 1980's, high interest rates caused a slump in the construction market. Sales generated by the AHP greatly decreased too. However, Wickes felt that by providing computerized home customization, they could lock in customers.

Most customers were owners that wished to build their own homes. They were believed to be more motivated by economics than by other factors, so Wickes provided a cheaper means of planning a new home. For $200, a customer could buy standard blueprints and customize them. Wickes would assess the markups for feasibility and then offer to return the customers' money or continue planning.

Implementing changes to the plans typically took two weeks. Plans were shipped to a processing office in Atlanta and then implemented with an advanced version of I CGs original design software. Computerization made the quick turnaround possible and provided an accurate cost and resources estimate. If the customer made a commitment to purchase $2,000 of building materials from Wickes, the plans and materials list were given to them.

Wickes actually lost $300 in producing each customized plan but made it back by selling the materials. Customers also saved money because they did not have to go to expensive independent architects to build a customized home. Wickes provided for the planning step in their building process in a cost-effective manner. 5. Bargaining power of suppliers The bargaining power of suppliers affects the costs incurred by the industry. If it is hard to switch suppliers because there are few of them or it is expensive to change, or the product supplied is a relatively minor market for suppliers, then suppliers? bargaining strength will be high and costs will be passed on to the industry.

Suppliers become competitors if they can bypass your firm and access your buyers directly. They can also affect your profitability if you are more dependants on them than they are on you. Within the electronic world, e-commerce opens up a ready channel from any supplier direct to any potential buyer. You may thus find yourself being squeezed. Even if you are not, the fact that the threat remains will weaken your position. You may find it harder to control the prices you pay, and your profitability may suffer.

Conversely, if your supplier previously held significant power over you, this may now be weakened. An example, if they charged a premium because there were only a few sources of supply within your area, the Internet opens up the possibility of sourcing your supply from any firm in the world. Clearly there are many issues with importing, but the Internet can certainly reduce many of them. Again, it is not always doing it that is the issue; more the fact that your supplier realizes you can do it and so needs to respond accordingly

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