Understanding Business Environments and Competitive Strategies
Concept and Types of Environment
Levels of Environment
- Global: The competitive field of reference is global.
- International: The environment is shaped by a particular combination of national markets.
- National: The generic environment of a country.
- Regional: The environment is represented by a homogeneous economic area.
- Local: Referring to the immediate environment of businesses.
Types of Environment
- Generic: Factors that affect all businesses equally at a given time and space.
- Specific: Factors that influence decisions and outcomes of companies with similar characteristics.
Dimensions of the Generic Environment
- Economic: Financial system, inflation, fiscal policies, etc.
- Political-Legal: Legislative regulation, political system, etc.
- Socio-economic: Sociological, cultural, demographic factors, etc.
- Technology: Level of technological and scientific progress of society.
Dimensions of the Specific Environment
- Customers: End-users and distributors.
- Suppliers: Of resources and production factors.
- Competitors: Direct and indirect.
- Socio-political: Related to the organization and its activities.
- Technology: For procurement and product development.
Porter’s Five Forces Model
- Potential Entrants: Threat of new competitors entering the market.
- Substitutes: Threat of substitute products or services.
- Buyers: Bargaining power of buyers.
- Suppliers: Bargaining power of suppliers.
- Competitors in the Industry: Rivalry among existing competitors.
The Structure of the Competitive Framework
Types of Decisions
- Strategic Decisions: Involve the allocation of important long-term resources for the whole enterprise.
- Tactical Decisions: Mobilize resources for the organization to develop strategic decisions.
- Operational Decisions: Repetitive, routine, and can be programmed.
Consistency in Strategic Analysis
- Consistent with Goals and Values: The primary responsibility of the company is profitability.
- Consistent with the Industry Environment: A successful strategy must exploit opportunities for competitive advantage.
- Consistent with Resources and Capabilities: Financial resources should meet the investment needs of the strategy.
- Consistent with the Organization and Systems: The organization and systems should be appropriate for the strategy.
- Internal Consistency: A strategy should be internally consistent.
Dynamic Environment: Competition and Cooperation
The level of rivalry among competitors can determine the attractiveness of a sector. Strong competition in a sector with numerous companies and poorly differentiated products leads to lower prices and reduced profits.
Types of Competition
- Degree of rivalry based on the number of competitors, changes in demand elasticity, etc.
Competitive Advantages
- Cost leadership
- Differentiation advantage
Barriers to Mobility and Exit
- Mobility Barriers: Arise from the presence of strategic groups protecting their market share.
- Exit Barriers: Prevent firms from leaving an industry, even with low returns on investment. Examples include specialized assets, fixed costs, resettlement costs, and strategic relationships.
Strategies of Cooperation
According to Gulati, these are voluntary agreements involving the exchange, sharing, or joint development of products, technologies, and services.
Reasons for Cooperation
- Complementary technologies
- High costs
- Knowledge transfer
- Access to new markets
- Reduced financial risks
- Tougher competition
- Lower costs/economies of scale
- Increased competitive power
- Institutional reasons
Forms of Partnership
- Partnership: A long-term alliance formalized by a contract.
- Contracts on Specific Activities: Agreements for providing services or products for a specific period.
- Franchising
- Joint Venture: Two or more companies create a separate legal entity for a specific venture.
- Contract: One company outsources production or service delivery to a subcontractor.