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.
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” 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.
|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.
 Wikipedia, “Michael Porter”, http://en.wikipedia.org/wiki/Michael_Porter
 4054 numbered The Turkish Republic’s Act of Competition, Article 3.
 Eren, a.g.e., p. 141.