Your Business and External Analysis

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The business environment is truly dynamic and organisations need a dynamic and responsive disposition to succeed. Opportunities arise from varied and numerous sources, such as:

Changes in regulatory environments on a national and international perspective.

New products, markets, industries and economies.

New and improved technologies (the digital age).

Convergence of technologies (camera, phone, computer)

Porter (1985, 2006), the strategic environment of an industry is shaped by five forces. The five forces are the:

  1. Threat of new entrants to the industry
  2. Threat of substitute products
  3. Power of customers
  4. Power of suppliers
  5. Intensity of completion

New Entrants

  • New entrants will mean there is increased capacity to produce more and the volume of product will increase. Economics shows that when supply increases, prices will fall.
  • Trying to build a market share the new entrant is likely to set prices below market prices.
  • The new entrant will need to secure scarce resources for production inputs and thus push the price upward. (skilled labour may become more expensive)
  • Deregulation and elimination of global trade barriers, the threat of new entrants arises from both domestic and international markets. Small local markets being overtaken by global markets.

Alternative or Substitute Products

An alternative or substitute products offers similar functions to that product or service being provided by an organisation. The presents of alternatives decrease demand for the organisation’s product or service and drives down prices.

Customers

Customers may have some power over the price of a sale and how that is made as the customer may:

  • Purchases large quantities of product, so, is an important customer.
  • Might attempt to take over the organisation.
  • The customer can exercise their liberty to switch to alternative products or suppliers for virtually no difference in the cost.

Suppliers

Supplier power is opposite to customer power and powerful suppliers are able to drive up the price of business inputs which will strongly impact an organisation’s sustainable competitive advantage. Suppliers may have power because:

  • Supplier size compared to the organisation it’s selling to.
  • Supplier might attempt a takeover of the organisation.
  • Restrictive choice of alternative products or suppliers for the organisation.
  • The supplier provided product is important in terms of the value of the organisations own products.

Existing Competitors

Adopted strategies by an organisation must be developed in relation to competitive strategies adopted by rivals. Knowledge of competitor’s product/market portfolio assist in predicting the reaction of a competitor to their own strategic moves.

  • Competitor has a narrow market portfolio, the competitor’s response to a threat to its market will be prompt and aggressive.
  • Competitor has a broad market portfolio, the competitor’s response to a threat towards a section of its broad market portfolio may be less aggressive.

While internal analysis is a valuable part of operating an organisation, and creating strategies against threats, threats also come from external factors. The decision-making process in operating an organisation and protecting against threats needs to be a holistic view.

There is nothing wrong with employing external professionals to help in the identification of external threats and assist in setting up strategies to help recognise threats and put actions in place to reduce or minimise the impact of these threats. One of the objective of running a successful organisation is being prepared.

Thank you for your time .

Ray Nixon
Integra Business Accountant