Business strategy involves seeking a position within an environment or industry that generates a sustainable competitive advantage (implying that a diversified company should have as many business strategies as it has businesses)
Analysing Macro – Environmental Factors:
There are many factors that will effect the strategies and decisions of managers of any organisation. Tax changes, new laws, trade barriers, demographic change, etc are some of the examples. To help analyse these factors, we can categorise these micro – environmental factors using PESTEL model. PESTEL abbreviates Political, economical, social, technological, environmental and legal factors.
Political Factors: These refer to government policy such as the degree of intervention in the economy. What goods and services does a government want to provide? To what extent does it believe in subsidising firms? What are its priorities in terms of business support? Etc
Economical Factors: These include interest rates, taxation changes, economic growth, inflation and exchange rates etc.
Social Factors: Changes in social trends can impact on the demand for a firm’s products and the availability and willingness of individuals to work. For example, in UK, the population has been ageing. This has increased the costs for firms who are committed to pension payments for their employees because their staff are living longer.
Technological factors: Technology is growing very fast nowadays. New and fast machineries are introduced every now and then. New technologies create new products and new processes. Technology can reduce costs, improve quality and lead to innovation. These developments can benefit consumers as well as the organisations providing the products.
Environmental factors: Environmental factors include weather and climate change in macro factors. Change in climate, temperature can impact on many industries. These can benefit one industry and can make other industry down at the same time. For example in hot sunny days, people love to go out and visit beaches instead of going to restaurants and places like them. With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider.
Legal Factors: These are related to the legal environment in which firms operate. The introduction of age discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that affect an organisation’s actions.
LIFE CYCLE ANALYSIS:
Generally, the model assumes that industry growth follows an ‘S’ shaped curve. The flat introductory phase reflects the problems of establishing the new product. Once proven, growth becomes explosive until market saturation is reached. Sales now are limited by the rate of replacement sales and the rate of growth of the population in the market. Eventually the industry will come under pressure from newer technologies and substitute products with superior price performance.
There are four stages in this model. i.e. introduction stage, growth stage, maturity stage and decline stage. In introduction stage, Pioneering firms often after considerable investment and repeated failures, introduce products based on a new technology. Costs tend to be high, and quality tends to be low because of lack of economies of scale or manufacturing experience and the product itself will be very basic. In growth stage, a dominant technology begins to emerge, and competitors standardise around it. There is likelihood of capacity shortages although costs and prices fall as standardisation and the adoption of large scale manufacturing makes possible economies of scale. At maturity stage, Overcapacity begins to emerge in the industry, products differentiation declines as technological know-how becomes widely shared, and price competition intensifies. Consolidation occurs within the industry as weaker firms are acquired by stronger ones. Sales to less developed markets, and the transfer of production to lower labour cost economies accelerates. In decline stage, The industry comes under pressure from new technologies offering superior performance, although this may be reduced by factors such as high price and switching costs associated with the new technology. Price wars erupt as the surviving firms fight for market share in a declining market, and exits from the industry, as well as consolidation within the industry, becomes more likely.
Analysing Micro – Environmental Factors:
The micro – environment consists of stakeholders who are directly or indirectly linked with any business. For example customers, consumers, suppliers, shareholders etc.
Suppliers: Suppliers are major pillars or any business as they provide all the materials essential for any business. Big deal with suppliers is that can they provide high quality products at low price. Can they do this reliably? Have they got the flexibility to respond to a firm’s demands? What is the bargaining power of these suppliers? How dependent is the firm on them? Does their approach to their staff and resources fit with your ethics? Firms must decide on issues such as who to use to supply them, on the responsibility it takes for these suppliers and on the terms and conditions it adopts. Some firms take quite an aggressive attitude towards their suppliers by trying to push down the prices and delay payments. Others view the relationship more as a partnership in which they are working together with suppliers and that by helping each other both can benefit. The importance of suppliers can be seen if things go wrong.
Distributors: Distributor’s job is to deliver your product to market place where it can be sell easily. Imagine you sell shampoo – what you need to sell this is to get it on the shelves in the leading chemists and supermarkets but this means moving someone else’s products off the shelves! So the challenge is to get stores to stock your products; this may be achieved by good negotiating skills and offering appropriate incentives. The distributors used will determine the final price of the product and how it is presented to the end customer. When selling via retailers, for example, the retailer has control over where the products are displayed, how they are priced and how much they are promoted in-store.
Customers: Customers are key to sales. Managers must keep the needs of customers in their mind and try to anticipate how these will develop so that they can meet these requirements effectively now and in the future. To help understand their customers firms are increasingly trying to gather information on them through mechanisms such as loyalty cards. By gathering data on shopping patterns and matching this to data on the individual shoppers firms can build up detailed pictures of their buyers and then offer them appropriate deals.
Competition: The success and behaviour of any business will depend on the degree of competition in its market. In some markets one firm is dominant. This is called a monopoly. If you are in a monopoly position this may allow you to exploit the consumer with relatively high prices (assuming your position is protected in some way) and you may be able to offer an inferior service if customers have no other choices. In other markets a few firms dominate; this type of market structure is called an oligopoly. In oligopolistic markets there is a high degree of interdependence and so firms will think carefully how their rivals might react to any actions they take.
Key Stakeholders, Their Needs & Expectations:
Key stakeholders of a business are: