Business Environment and Competitive Forces in the Market
Business Environment
The business environment, or business context, is where a company operates. It influences and is influenced by the company. It can be categorized as general and specific:
- General environment: Circumstances that apply equally to all companies within a certain company or geographic area.
- Specific environment: Factors that influence a particular group of companies acting in the same sector and sharing common characteristics.
General Environmental Factors
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Economic factors: Economic factors of nature affecting the company.
- Temporary: Unemployment, lower interest rates (making it easier to repay loans and therefore increasing the likelihood of investments and economic movement).
- Permanent: Degree of economic development, infrastructure, etc.
- Socio-cultural factors: Fashion, language, habits, social differences.
- Political and legal factors: The legal framework that sets the rules of the game. Laws and rules governing markets (strike law, antitrust, temporary contracts, etc.).
- Technological factors: These affect the products that companies offer as well as the technology used for their manufacture. This facilitates improved products at a cheaper cost, and the same applies to manufacturing.
Continuous and constant adaptation to a changing business environment is crucial. Failure to adapt to changes in the market or the environment can mean the death of the company.
Specific Environmental Factors
These are the factors that most affect the market in which a company operates. Companies must be aware of and consider these factors when making decisions.
- Suppliers and administrators of raw materials.
- Customers or consumers.
- Intermediaries or distributors: This includes promoting, selling, and distribution.
- Competition.
Sector or Specific Environment: Business and the Market
A sector consists of all firms offering similar products, more or less differentiated, that aim to satisfy the same type of consumer needs.
Sector Output and Market Share
To understand the extent or importance of a sector, we use the turnover or production of a sector, which is the total amount of sales generated in that sector in a given period. It can be expressed in units sold or in monetary units.
The portion of a sector’s production corresponding to a company is known as its market share. This is the ratio between the company’s sales and the industry’s sales. The market leader is the company with the largest market share.
Competitive Forces in the Field
Porter’s model (1982) identifies the competitive forces or aspects of a sector. These forces are:
- Degree of rivalry among competitors: The intensity of competition depends on the number of competitors, concentration (market sharing between competitors), and the maturity of the sector (emerging or stagnant).
- The threat of new competitors: Potential competitors are likely to enter a market. This is a threat that companies should reduce and protect against by creating barriers to entry. The importance of this threat depends on the height of these barriers (cost advantage of the already installed product differentiation, strong investment needed) and the force of the reactions that potential competitors expect to encounter.
- The threat of substitute products: Substitute products are those that perform the same function for the same group of consumers but are based on a different technology. These products constitute a permanent threat to the extent that replacement can be provided. This threat is greater in companies where changes are constant and rapid technologically.
- The bargaining power of customers and suppliers: Customers hold negotiating power with suppliers. They may influence the potential profitability of an activity by forcing the company to lower prices, requiring more comprehensive services and more favorable payment conditions, or pitting one business competitor against another. The power of supplier negotiation: Suppliers have power over customers in that they are able to increase the prices of their supplies, reduce the quality of products, or limit the quantities sold to a particular customer. Hazardous providers can then push down on the profitability of a business if customers are unable to pass on their own cost price increases.