Business Environment: Competitive Strategies & Legal Framework

Posted on Dec 11, 2024 in Economy

Item 3: The Environment of the Company

The General Environment

The general environment is the global framework or set of factors and circumstances which apply equally to all firms in a given society or geographical area.

The Specific Environment

The specific environment is more specific and refers only to those factors influencing a group of companies that have common characteristics and concur in the same sector of activity.

General Environmental Factors

  1. Economics: Some factors have a more temporary impact, such as the level of economic activity within a country. Others have a more permanent impact on business, for example, the level of economic development and industrialization of a country.
  2. Socio-cultural factors: These may include education level, lifestyle, and consumption habits. All these factors affect the demand for companies, which are forced to react and adapt to changes if they want to ensure their survival.
  3. Political-legal factors: These include measures taken by governments in economic policy and the laws establishing the legal framework within which companies operate.
  4. Technological factors: Changes and technological advances affect both the products offered by companies and their production processes. The emergence of technical improvements requires companies to incorporate them if they want to maintain their position in the market.

Factors in the Specific Environment

  • Vendors and suppliers of raw materials and other resources to the productive activity of the company.
  • Customers or consumers who buy the products of the company.
  • Competitors or companies that produce the same type of goods and services, and therefore participate in the same market and target the same customers.
  • Brokers or dealers who facilitate access of products to consumers through the channels and points of distribution and sale.

Sector or Specific Environment: Business and the Market

A sector consists of all companies that offer similar products aimed at meeting the same type of consumer needs. The structure of a sector is determined by the number and relative size of firms, the presence or absence of entry barriers, etc.

Production of a Sector and Market Share

To know the extent of the importance of a sector, we use the concept of turnover or production of a sector, which is the total amount of sales generated in this sector over a period of time and in a certain geographical area. The resulting figure is known as revenue, income, or sales in the sector. Within the overall output of a sector, the part that corresponds to a particular company involved in this market represents the share of the enterprise market.

Market Share = Net sales of the company / Volume of sales of all firms

Within a sector, the market leader is the company that has a market share higher than its competitors.

Competitive Forces in the Field

These forces are:

  1. Degree of rivalry among competitors: The intensity of competition in the sector will depend on the type of market. It also influences the degree of industry concentration, that is, how the market is distributed among the competitors. The greater or lesser competitive pressure also depends on the maturity of the sector.
  2. The threat of new entry: The entry of new competitors is a function of entry barriers in the sector. The easier the access of an enterprise to a sector, the greater the competition. These barriers may result from several factors:
    • The companies already established in the sector have a cost advantage due to the dominance of technology, experience with suppliers, etc.
    • Product differentiation.
    • The heavy capital investments necessary to start producing.
  3. The threat of substitutes: The emergence of new products can lead to significant changes in the industry.
  4. The bargaining power of suppliers and customers: If providers are scarce and strong enough to impose their conditions and their clients are organized and knowledgeable, companies have less profit margin, thus resulting in increased pressure and competition within the sector.

Strategic Analysis: SWOT Method

The SWOT analysis is a method to analyze the strengths and weaknesses of the company, as well as threats and opportunities presented by the environment, in order to meet its competitive advantages and the best strategy according to their characteristics and market moves.

External Analysis

The first step is to detect and analyze threats and opportunities from the environment. The threats are changes in the environment that, if not addressed on time, may place the company at a competitive disadvantage, for example, an economic crisis. The opportunities are changes in the environment that, if harnessed, can enhance the competitive position of the company, for example, reduced interest rates.

Internal Analysis

Allows you to set the strengths and weaknesses of the organization. The weaknesses of a company are internal issues that pose a competitive disadvantage against their competitors. Some commonly used indicators are:

  • The ability of directors, business, and management: strong or weak.
  • Financial resources: satisfactory or poor.
  • The facilities and technology resources: efficient or obsolete.
  • The retail distribution network: good or poor.
  • The training and motivation of workers: high or low.

The Company’s Competitive Strategy: Strategic Plan

Formulating an organization’s strategy involves a series of steps:

  1. Determine where we are from a diagnosis of the situation. This requires:
    • Knowing the structure of the market where the company competes and opportunities or threats in the environment.
    • Assessing the resources available and their strengths and weaknesses in technological capabilities, organizational, and financial resources.
  2. Decide where we want to get, which involves establishing:
    • The vision or image we have of the future we want for the company.
    • The mission or purpose of the company with questions of why and for what the company exists.
    • Some objectives and targets to materialize the more operational mission.
  3. Establish where we want to go. As there are different possible ways or strategies, the firm will choose its competitive strategy.
  4. Specify how to reach, when, and with what resources. Having defined the strategy, it must be in place by partial plans for different areas of the company to achieve the goals.
  5. Check how we are in the process of implementing the strategy. It is necessary to control the degree of achievement of the objectives at all times.

The Choice of Strategy

The company’s competitive strategy is pursued by seeking a favorable position in a given sector. The basis for this favorable position is to get some kind of competitive advantage that enables the company to get better results from their bodies. To gain a competitive advantage, there are three possible strategies.

  1. Cost Leadership: A company has this advantage when, based on their efficiency, it produces at lower costs than its competitors while maintaining an acceptable quality. This strategy allows the company to lower their costs and increase market share, at the same time that it challenges its competitors.
  2. Differentiation: This strategy seeks to ensure that the good or service offered on the market is perceived as unique and exclusive. Thus, customers are willing to pay even a little more to get this differentiated product.
  3. Segmentation and creation of niche markets: It consists in choosing a part or segment of the market where the company decides to specialize. By focusing on meeting the needs of a segment, the company can be more effective than others targeting a broader market.

Social and Environmental Responsibility

Corporate social responsibility refers to the set of obligations and legal and ethical commitments that the company takes to care for and improve the impacts of their activities on the social, employment, and environment.

Areas of Social Responsibility

  • Commitment to society: We demand that companies commit to economic, social, and cultural development of the area where they act, to maintain employment and avoid layoffs, etc.
  • Climate of trust with workers: Business management is proposed to generate a climate of cooperation, motivation, and participation of workers.
  • Credibility with customers and consumers: Consumers’ associations require companies to have greater respect for their rights and improve the credibility and reliability of products.
  • Respect the environment: It requires companies to use efficient techniques to address emissions and discharge pollutants.

The Legal Framework for Business

Acquire the status of employer all individuals who carry out economic activities in a professional, regular, and on behalf of itself and all commercial companies in any legal forms.

Basic Legal Principles

  1. Company Liberty: Freedom to create and manage companies, but always according to the needs and general interests of society.
  2. Right to property: Much of the commercial operations is done according to property rights, that is, the right to use and dispose of things for those who are recognized as owners.
  3. Freedom of contract: The majority of the agreements at the enterprise level is done by contract. To be effective, the law has to meet certain requirements:
    • The agreement must be voluntary.
    • The parties must be competent.

Other Aspects of the Legal Framework of Companies

Exclusive rights: The law guarantees the exclusive use for a time of invention and innovations applicable to businesses that serve to distinguish one product from others. To this must be obtained for industrial property title through registration in the Spanish Office of Patents and Trademarks.

Antitrust: The law of competition has created an independent institution of government, the National Commission Competition, as a body responsible for surveillance, inspection, and investigation of such practices, to investigate the cases against those who engage in them and to establish appropriate sanctions. Unfair Competition law seeks to prevent the unfair conduct of the company.

Accounting policies, fiscal, and labor: The regulatory role of the state involves a broad set of obligations that affect the company in its different areas.