Understanding the environment of business organization.

University Degree Business and Administrative studies

INTRODUCTION:

It is important for managers of any organization to understand the environment their organization is surrounded with, because there are various external factors that affect an organisation’s acquisition of inputs and generation of outputs, directly or indirectly. These factors form a part of the macro and micro environmental factors. The macro forces affect all the businesses operating in that particular market and the micro forces are company specific and include factors such as information, suppliers, competitors, buyer’s etc.

STEPS IN ENVIRONMENTAL ANALYSIS:

Source: Johnson & Scholes (pp 99).

UNDERSTANDING THE NATURE OF THE ENVIRONMENT:

It is important to understand the uncertainty in the environment. A Company generally operates in a simple/static environment or a dynamic & complex environment. The Airline Industry and the Car Industry operates in a Dynamic environment and a complex environment to some extent.

Source: Johnson & Scholes (pp 101).

AUDITING ENVIRONMENATL INFLUENCE

According to Richard Lynch, there are two techniques that can be used to explore the general environment that surrounds an organization they are the PEST analysis and the scenarios.

A scan of the external macro-environment in which the firm operates can be expressed in terms of the following factors: Political, Economic, Social, & Technological. A PEST analysis fits into an overall environmental scan as shown in the following diagram:

“although the items in a PEST analysis rely on past events and experience, the analysis can be used as a forecast of the future. The past is history and corporate strategy is concerned with future action, but the best evidence about the future may derive from what happened in the past” (Lynch pp110).

The Economic Forces: The overall state of the economy fluctuates in all the countries around the world. Economic changes alter customer behaviour such as buying power, ability to spend, willingness to spend etc. These factors affect the companies’ ability to earn. During prosperity the economy is growing, the buying power is high, and the companies are doing well but during recession the conditions reverse and people look for cheaper substitutes. In the case of the airline industry during the recession of the European Market, the cheap airline industry was making enormous profits compared to the larger airlines like British Airways and Lufthansa. As these major flights were targeting first and business class passengers and when the economy was in recession people preferred to take cheaper flights within Europe such as Ryan Air and Easy Jet etc.

The currency exchange rates have a direct impact on competitors on international level. When a countries currency is of a lower value compared to other currencies the product’s manufactured in ones own country are relatively cheaper to the ones manufactured in other countries. And therefore the threat of foreign competition is low and it creates opportunities for business abroad. For example in the car industry, “the fall in the value of the dollar against the Japanese yen that occurred between 1985 and 1993, when the dollar/yen exchange rate declined $1 = Y240 to $1 = Y 105, has sharply increased ...

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The Technological Forces: “Technological changes can make established products obsolete overnight. At the same time it can create a host of new product possibilities” (Hill and Jones pp 80). Therefore the technological forces have both opportunities and threat. With the E - commerce coming to dominate various aspect of life, the way we buy our airline tickets have also changed, airline sell tickets directly to the customers over the Internet at cheaper rates, because it cuts down the need of large manpower and the travel agents.

In the car industry manufacturers have to stay ahead of time with new products, customers are looking for safe and environment friendly cars with good mileage. General Motors is the world market leader, with close competition from Ford and Toyota.

The Political and Legal Environment: These forces have opened gates for many and have choked up for few industries, for instance the airline industry after the deregulation has opened up the market to low fare carriers. And it has raged a price war in the European Airline Market, but at the same time the widening of the European Union has opened business opportunities for many. Airlines from any EU country can have their base in another EU country, giving opportunities to expand.

Some governments impose heavy duties and taxes on foreign imported goods, to encourage domestic manufacturers. E.g. to sell any products in an EU nation, the firm has to manufacture or assemble their products in an EU nation. Honda faced this problem for many years before it came up with a joint venture with a local partner in the European Union.

Social Cultural Forces: These to tend to create opportunities and threats for an industry. For instance after the September 11, terrorist attack in the United States there has been a significant drop in the number of airline passenger, and it has created opportunities for other industries like railways. And on the other hand in the car industry many manufacturers are trying to market their products under the umbrella of the Green Movement. Most of the German cars companies are ahead in this race such as Volkswagen, Mercedes, and BMW etc.

Companies after getting relevant data concerning their organization can construct models of the possible future that the organization may face; this is called scenario based analysis.

THE COMPETITIVE ENVIRONMENT:

FIVE FORCES ANALYSIS: According to Johnson and Scholes it is the means of identifying the forces which affect the level of competition in an industry. The model was developed by Michael Porter, it describes the various forces that act on organization so that Managers can design a strategy to develop opportunities and protect itself from competition and other threats.

Source: Exploring Corporate Strategy 5th Ed. Johnson & Scholes.

THREAT OF NEW ENTRANTS: It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms may enter the industry also affects competition. Barriers to entry are unique industry characteristics that define the industry. Barriers reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry. New firms feel reluctant to enter markets that are extremely uncertain especially if entering involves expensive start-up costs, (which does exist in the Airline and Car Industry). From a strategic perspective, barriers can be created or exploited to enhance a firm's competitive advantage. Barriers to entry arise from several sources, such as the Government, although the principal role of the government in a market is to preserve competition through anti-trust actions, government also restricts competition through the granting of monopolies and through regulation. The other barriers of entry are:

Brand Loyalty: It is the buyer’s preference for a product of certain company. When a company succeeds in fostering some degree of customer’s loyalty to a brand, it makes it difficult for new entrants to take market share away from established companies. Therefore it can be said that brand loyalty can reduce the threat of new entrants.

Absolute Cost Advantage: Established companies have an absolute cost advantage. Compared to other potential entrants such as Mercedes & BMW in the luxury car market.

Economies of Scale: Many large companies have the advantage of economies of scale. And it is a big risk for new entrants to enter markets where established firms have the economies of scale.

The Airlines and car industry faces an Oligopoly competition where there are few sellers who control the supply of a large proportion of products. Products are generally homogenous with the same basic need. Barriers of some sort avoid market entry such as financial resources in the two mentioned industries and marketing skills are also important.

Threat of New Entrants in the Airline Industry in Europe:

Monopolistic national carriers have traditionally characterised Europe’s airline industry with strong links to their national governments, a lack of competition on routes, prices and services. But since the Liberalisation things have changed in the European market. Now the industry has low barriers of entry, and there is always a threat for newcomers. Traditional airlines can easily launch their own low-cost line, using the slots they already have at popular airports. On the other hand, distribution channels, which were a barrier before, it is nowadays almost not existent because of Internet. On many routes, however, congestion, slot availability problems, and low profitability due to competition from other modes of transport may have discouraged the entry of new competitors.

“When the risk is low, established companies can charge higher prices and earn greater profits then would be possible otherwise. Clearly it is in the interest of companies to pursue strategies consistent with raising barriers to entry.” (Hill & Jones 1998, pp 75).

Substitutes for airline industry: the threat for substitutes is fairly low, as there are no technological advancement yet, that replaces air transport and something that is as fast as air travel. But there are in some cases possible to take train or boat (e.g. Eurostar), but usually, low-cost airlines are it self substitutes for trains or boats (like cheap flights to several European capitals instead of Inter-Rail).

Threat of New Entrants in the Car Industry:

In the case of the Luxury Car market, which is highly competitive in Europe, very few companies like Toyota have managed to enter the segment with the Lexus. According to Tony Jacobs the major barriers to entry has been brand names and recognition. Clear differentiation both from standard car models and from other luxury car manufacturers is needed. Also, increasingly a network of suppliers is required to source the specialists components required for a luxury car. This network takes time and experience to build and suppliers may be reluctant to commit to it for a manufacturer not already established in the market place. (Johnson & Scholes pp118).

COMPETITIVE RIVALRY AMONGST ESTABLSIHED FIRMS:

If the competition in the market is very strong it is very difficult to sell products at very expensive prices. With the deregulation in the Airline Industry, and the introduction of the cheap airlines there has been a price war in Europe and United States market. This price war dint exists before the deregulation and the airlines were competing against each other on everything else except the price like good service. Price competition reduces the profit margin that can be earned on sales. There are three main factors that are responsible for the extent of rivalry in industries, viz.: the industries competitive structure, demand conditions and the height of exit barriers in the industry.

Competitive Structure: The Car and Airline Industries are consolidated industries where nature and intensity of rivalry is much more difficult to predict. In consolidated industries, one company is interdependent on the action of other, in the sense it’s marketing strategy, product line, price, service etc. As mentioned above the price war in the airline industry is good example. Cheap flights like Ryan Air, Easy Jet in Europe offer flights at very cheap rates for example a flight from United Kingdom to Germany can start from anything as low as £1. This competitive interdependence is dangerous for the entire industry as companies push the profit down in the process. In the case of the car industry, there has not been a price war to this limit yet. Companies compete with each other on other on factors such as new technology, design, functionality, product quality, brand positioning, advertising, promotions etc. Each company is coming up with new range of cars in very short period to keep the product moving.

“This type of competition constitutes an attempt to differentiate the company’s product from those of competitors, thereby building brand loyalty and minimising the likelihood of a price war. The effectiveness of this strategy, however, depends on how easy it is to differentiate the industries product.” (Hill & Jones 1998). According to them it is easy to differentiate in the car industry but more difficult to differentiate in the airline industry.

CONCLUSION:

It is important for managers to collect the relevant data and analyse it and a lot of data should not be collected, as it becomes more difficult to analyse the same. It is important that there is competition in the market as competition brings challenges, which in turn bring in innovation.

BIBLIOGRAPHY:

STRATEGI MANAGEMENT AN INTEGRATED APPROACH – VHARLES W.L. HILL & GARETH R. JONES. FOURTH AND FIFTH EDITION.
EXPLORING CORPORATE STRATEGY – GERRY JOHNSON & KEVAN SCHOLES. FIFTH EDITION
CORPORATE STRATEGY – RICHARD LYNCH. THIRS EDITION.

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