The Environment of Business

III

Stakeholders

• Stockholders : dividend price appreciation

• Customers : product/service quality

• Employees : employment wages personal growth opportunity

Stakeholders

• Suppliers : revenue through sale growth opportunity

• Local community : jobs

civic involvement economic development

• Society at large : economic health environment protection

The Components of a Company’s MACROENVIRONMENT

Legislation and

Regulation

Societal Values

and LifestylesPopulatio

n

Demographics

Technology

The Economy at Large

COMPANY

Suppliers Substitutes

Buyers

NewEntrants

Rival Firms

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

• Reduced height of entry barrier

• Biotechnology

• Pollution/Global Warming

• Wireless communication

• Miniaturization

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 Porter’s Five Forces

Substitute Products(of firms in

other industries)

Suppliers of Key Inputs

Buyers

PotentialNew

Entrants

RivalryAmong

CompetingSellers

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

• Differentiation : imitation

loss of attraction of differentiation base

• Focus : imitation

target segment gets unattractive

new focusers arrive