The Environment of Business

III

Stakeholders
Stockholders : dividend price appreciation Customers : product/service quality : employment wages personal growth

Employees

opportunity

Stakeholders
Suppliers through sale opportunity Local community : jobs civic : revenue growth

involvement economic development Society at large : economic health environment protection

The Components of a Companys

MACROENVIRONMENT The Economy at Large

Suppliers

Substitutes

Riva l Firm s

COMPANY

Buy ers

New Entrants
IMMEDIATE INDUSTRY AND COMPETITIVE ENVIRONMENT

Political and Legal

Deregulation Repeal of Glass-Steigall Act 1999 Tort Reform Disabilities Act

Economy
Interest rate Exchange rate Unemployment Trend in GDP

Technology

barrier Biotechnology Pollution/Global Warming Wireless communication Miniaturization

Reduced height of entry

Socio-cultural
Health Consciousness

Postponement of family formation More women in workforce Greater concern for environment

Demography
Aging population Rising affluence Greater disparities in income levels Geographic distribution of population

Global
WTO Currency Exchange Rate Emergence of China and India

#1. Dominant Economic Traits

Market Size Scope of Competition (Local, Regional, National, Global) Industry Growth Cycle (Early, Takeoff, Mature, Stagnant, Decline) Number of Rivals and their relative sizes Number of Buyers and their relative sizes Prevalence of Backward and Forward Linkage Ease of Entry and Exit Pace of Technological Change Learning Curve Effect Capital Requirement Profitability (above/below par)

#2 Porters Five Forces

Substitute Products
(of firms in other industries)

Supplier s of Key Inputs

Rivalry Among Competing Sellers

Buyers

Potential New Entrants

Bargaining Power of Buyers

- Many small companies and few buyers, Large buyers - Buyers can switch orders between suppliers enabling them to play one supplier against another

- Vertical integration is a feasible option

Suppliers
- Product has few substitutes and are important to the buyers - Products are differentiated to the extent that buyers cannot easily switch - Threat of vertical integration - Buying companies cannot threaten with backward integration

Rivalry
- Demand conditions growing/declining - Exit barriers high/low :

- Competitive structure : fragmented, consolidated

Substitutes
- Products serving similar consumer needs sugar vs artificial sweetener taxi vs bus private vs public university

Threat of Entry
- Brand loyalty - Economies of scale - Entry barriers - Govt. regulation

Generic Competitive Strategies

Two basic types: - Low cost - Differentiation

Three generic strategies resulting from the scope of application : - Cost - Differentiation - Focus.

Generic Competitive Strategies

COST leadership promoted by means such as frugality, discipline and attention to details. DIFFERENTIATION facilitated by a culture of encouraging innovation, individualism and risk taking.

Cost OR Differentiation
An organizational structure that is supportive of cost leadership can be ruinous for differentiation e.g. tight control system pursuit of scale economies dedication to learning curve.

Stuck in the Middle

Being all things to all people can be a recipe for disaster and such firms cannot have a sustainable competitive advantage. Whatever strategy is chosen, it has to be sustainable. This can be made through making it difficult for imitators by putting up a moving target.

Risks
Cost : imitation technology changes proximity to differentiation : imitation
loss of attraction of
differentiation base

Differentiation

Focus

: imitation target segment gets unattractive new focusers arrive