When environment is mentioned we understand the outside factors
affecting the structure and the activities of the organization. These factors cannot
be directly managed and controlled by the organizations. Nevertheless, although
we have dealt with the factors that are affecting the activities of all
companies that are operating in the same market in far environmental analyses,
we are going to deal with the factors that are affecting directly the
activities of a single company. These factors are stated in the following:
§ The factors that are related to the regulations: The regulations and
the policies of the governments are directly affecting the decisions of the
companies. These factors may increase or decrease both the opportunities and
threatens for the company.
§ Market conditions and customer behaviors: The people who are taking
decisions or making strategic analyses may go through a close environmental
analysis regarding the market activities and the customer requirements. In
these analyses the analyst may face with the changes in customers’ needs which
results after a change in population pyramid or income distribution or in
changes in the life cycle situation of the products and where their new
location in this cycle.
§ The factors related to the suppliers or the suppliers market: The
companies must provide sufficient resources in order to serve better to their
customers. These resources might be the raw materials, semi-products or
products or the human resources. This analysis will show the dependence of the
company to its suppliers. The market of the suppliers might be a free market or
controlled by one or a couple of suppliers. This will increase or decrease the
bargaining power of the company.
§ The factors related to the financial institutions: It is clear that
the companies do not only have relations with the suppliers or the customers.
They may have relations with the financial institutions such as banks, leasing
companies etc. These relations may be short, medium or long term depending on
the financial need and the eligibility of the customer. These companies may
need short term cash finances where they may need long term non- cash finances
such as letter of credit or letter of guarantee transactions. Due to these
reasons when the banks change the conditions for finance these may have
positive or negative impacts to the company activities. If the company is a big
enough one, the bargaining power will be more than the smaller ones.
§ Relations with labor unions: The labor union organizations have
great impact on the activities of the companies. They may convince the work
force to strike and stop working for the company. Nevertheless, if their needs
are satisfied the work force will work more effectively.
The above mentioned environmental analysis shows that how the
outside factors affect the activities of the company. For this analysis the
most famous model designed is the competition analysis which can be also named
as Porter’s 5 Forces Analyses. Michael Eugene Porter is an American academician focused on management
and economics.
He has made important contributions to strategic management and strategy
theory, Porter's main academic objectives focus on how a firm or a region can
build a competitive advantage and develop competitive strategy.[1]
Before we go through Porter’s competition
analysis, we must define what the competition is. The competition is defined as
“the race takes place in product or service markets between the institutions,
that helps the companies to take free economic decisions”[2] Therefore in order to be competitive in the market the companies
must be eligible enough to compete against the others.
After introducing Mr. Porter and the competition term, we can go
back to the 5 Forces study. These forces are shown in the following:
§ The bargaining power of customers:
o
Buyer concentration to firm
concentration ratio
o
Bargaining leverage
o
Buyer volume
o
Buyer switching
costs relative to firm switching costs
o
Buyer information availability
o
Ability to backward integrate
o
Availability of existing
substitute products
o
Buyer price sensitivity
o
Price of total purchase
§ The bargaining power of suppliers
o
Supplier switching costs
relative to firm switching costs
o
Degree of differentiation of
inputs
o
Presence of substitute inputs
o
Supplier concentration to firm
concentration ratio
o
Threat of forward integration
by suppliers relative to the threat of backward integration by firms
o
Cost of inputs relative to
selling price of the product
§ The threat of new entrants
o
The existence of barriers to
entry
o
Switching costs
o
Capital requirements
o
Access to distribution
o
Absolute cost advantages
o
Learning curve advantages
o
Expected retaliation
o
Government policies
§ The threat of substitute products
o
Buyer propensity to substitute
o
Relative price performance of
substitutes
o
Buyer switching costs
o
Perceived level of product
differentiation
§ The intensity of competitive rivalry
o
Number of competitors
o
Rate of industry growth
o
Intermittent industry
overcapacity
o
Exit barriers
o
Diversity of competitors
o
Informational complexity and
asymmetry
o
Brand equity
o
Fixed cost allocation per value
added
o
Level of advertising expense
As we have seen from the above statements the magnitude of the first
four factors are affecting the last factors magnitude.[3]
 |
| Porter’s 5 Forces Analysis |
It is seen that before the company takes a strategic decision about
the activities of the company the managers must analyze the close environment.
This analysis gives an opportunity to see what the magnitude of the competition
take place and who the main competitors are. According to the above mentioned
statements, it is clear that this analysis must not be done only for the customers,
competitors and the market activities but also the financial institutions and
the labor unions must be covered. Therefore the managers will most probably
understand and project the reactions of the close environment after the company
takes decisions.
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