CIMA: EM: Nature of the competitive environment

This section is mainly a more detailed continuation from the previous chapter (read here) along with few more theories and frameworks introduced for assessing the competitive environment.

Nature of the competitive environment

Environment impact assessment

A study which considers the impacts to the environment of an investment or operation.

Environment structure

Environment could be          
        Micro

        Macro (PESTEL)

 

 

 

 

1 . Assessing the macro environment

PESTEL was discussed in strategic management . Some other frameworks used for macro analysis are,

                -DEEPLIST Demographic, Economic, Environment, Political, Legal, Informational, Social and Technological

                -LoNGPEST This includes a new dimension to the PEST framework as, Local (immediate city or region) Nation (operating country) Global (anything outside the local scale)

Scenario-based analysis – PEST framework could be unsuitable for turbulent and uncertain environments, here the managers could use scenario-based analysis. Building different scenarios for possible future conditions and planning appropriate strategies for each scenario. When the time comes according to the current environment the management could choose the strategy accordingly.

2 . Assessing the micro environment

Porters five forces was discussed in the previous chapter, but here more detailed application is needed.

Uses of the five forces model
 

- Help the management to decide whether to enter into a new industry or not. (if the forces are weak the return could be high) 

- Deciding whether to expand in a particular industry
- To identify what competitive strategy is needed (if an individual company deals with the five forces better than rivals it could gain competitive advantage)

i . Threat of new entry

The threat of new entry to the market would depend on the barriers for entering the market such as,

-          Economies of scale

-          Product differentiation

-          Capital requirements

-          Switching cost

-          Access to distribution channels

-          Government policy

ii . Threat of substitute products

iii . Bargaining power of buyers

This bargaining power of the buyers could demand lover prices or higher quality from firms, the power would be greater if,

-          Buyer power is concentrated in few hands

-          Products are undifferentiated

-          Buyer earns low profits

-          Buyer knowledge about alternatives

-          Low switching costs

iv . Bargaining power of suppliers

Bargaining power of suppliers would be greater if,

-          Only few large suppliers are present

-          Suppliers have unique product differentiations

v . Rivalry among existing firms

Reasons for having high competition in some industries are,

-          High number of rivals

-          Low industry growth rate

-          High fixed costs (Operating gearing)

-          Low differentiation of products

-          Low switching cost

Industry life cycle analysis

Benefits of environment models

- The management would have a broad range of possibilities in mind when making strategies
- Key strategic issues could be recognized
- Provides a common way to generate strategies
- Information gathering and analysis work could be divided and shared

Limitations of environment models

- They can distort reality
- The boundary separating micro/macro environments and the firm itself is not certain
- Networks and interdependencies could be overlooked (by seeing them as rivals)
- Management cannot be expected to formulate a strategy addressing all the issues identified by the frameworks

Uncertainty

When analyzing the uncertainty of an environment the                 
–Complexity

-Dynamism, are important. 
When environments are more complex and dynamic the uncertainty will increase.  High uncertainty affects the business decisions in couple of ways

-          Makes it impossible to plan ahead for long periods

-          Encourages emergent strategies

-          Regular need for information

-          Management may become more conservative

Competitor analysis

Levels of competitors (according to Kotler)

                i . Brand competitors – (similar product, similar scale)

                ii . Industry competitors – (similar product, different scale)

                iii . Form competitors – (satisfy same needs, different products)

                iv . Generic competitors – (target same income, different products)

Gathering competitor intelligence

-          Identifying the current strategy

-          Identifying competitors objectives

-          Identifying competitors assumptions about the industry

-          Identify competitors resources and capabilities

Competitor response profiles (according to Kotler)

-          Laid-back competitor – (no response for competitive moves)

-          Selective competitor – (reacts only to some market threats)

-          Tiger competitor – (responds aggressively)

-          Stochastic competitor – (unpredictable responces)

National competitive advantage

 Porters Diamond

 
- Demand conditions ~ companies could gain economies of scale, gain experience, products maturity stage would be reached faster~ 
- Related and supporting industries
- Factor conditions ~ Basic factors, Advance factors 
- Firm structure , strategy and rivalry 
- Other events – Role of government, chance events

Clustering may help national competitive advantages. The deterioration of the porters diamond factors would cause the nations to lose their competitive advantages.

Criticisms of porters diamond 

- Cant explain why some countries have successful and unsuccessful companies in the same industry where the factors are same 
- Ignore multinational companies 
- Ignores the target country
- Less applicable to service sector

Information sources for environment analysis

                i . Primary sources

                ii . Secondary sources

                iii . Internet based sources