CHAPTER 7 – ORGANIZATION ENVIRONMENT

Objectives:

Define the industry or industries in which the organization operates.

Identify the organization’s or unit’s competitors.
Discuss the opportunities and threats to the organization that the
environmental analysis raises.

An organization’s environment as the external surroundings in which the organization

operates, and this can include its competitors (and non-competitors), suppliers, buyers
and governments. Organizations act to both shape their environment and to respond to
events that occur in it.

Industry Definition

Levitt (l960) attributes the decline of the US Railway industry to the inability of its
management to define their industry environment in such a way that the opportunities
and threats could be recognized, understood and managed. Grant (l995) suggests that
businesses can be usefully analyzed by looking at the markets they serve and/or by the
technology they employ. So, from a technological/supply side perspective, an industry
can be defined as a group of companies that would find it easy to switch their
production facilities to manufacture each other’s products.

Identifying the organization’s competitors: Strategic Groups

A group of firms who have similar strategic approaches and operate in similar ways are
said to comprise a strategic group. If a market is homogeneous, such that all consumers
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have needs that are met by products and associated services (delivery method, after
sales care, etc.) that have very similar features, then strategic groups will emerge on
internal dimensions.

Constructing Strategic Group Maps

The first stage is to identify dimensions or characteristics that distinguish firms from
each other. Examples of such dimensions are product line breadth, brand image,
number and type of distribution channels, product features, service features, cost
position, price policy, geographic reach, degree of vertical integration and market
segments served.

The second stage is to plot the firms on a graph with the axis represented by two
minimally correlated dimensions. Repeat this procedure using a variety of axes until a
pattern emerges that consistently groups companies together. Porter (l996) argues that
if organizations follow similar market strategies, they will inevitably end up with similar
resource configurations because they all benefit from the dissemination of knowledge.
Benchmarking, re-engineering and total quality management are cited as examples of
technique diffusion.

Structural analysis of industries: Porter’s Five Forces Model

A key concept in Porter’s five forces model is the view that some industries are
attractive and others as less attractive. The ability to identify industry attractiveness is
therefore important, and Porter argues that industries can be characterized and
evaluated by looking at, and analyzing, the following five forces:

The threat of substitute products.

The threat of new entrants.
The power of buyers.
The power of suppliers.
The rivalry amongst industry members.

The Threat of Substitute Products

If the product of an industry can be substituted by that of another, the purchaser of that
product has choices that extend beyond rival products. When analyzing a specific
segment, it is advisable to identify the products that are direct competitors and chose
that are not considered direct competitors, especially when these alternatives could be
first choice purchases if circumstances were to change slightly.

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Substitute products are a strong threat when:

They offer a similar level of benefits at proximate prices.

The consumer will not incur switching costs in moving between
alternatives.
The consumer is price sensitive.

The Threat of New Entrants

When new entrants enter an industry, they bring extra capacity to the industry. If
demand is increasing the new entrants can use this capacity to meet the increased
demand. This is frequently the case during the growth stages of an industry, but as the
industry matures demand growth slows and new entrants will have to start competing
with existing companies for a share of existing demand.

In this situation the new entrants will have to gain market share by offering similar
products at competitive prices or by redefining the market to increase product demand.
When this type of imitation produces a similar competitive position and a similarity of
resources, the entrants will face the following entry barriers:

✓ economies of scale.
✓ access to secret technology (patented and not patented).
✓ brand recognition.
✓ capital costs of entry.
✓ access to distribution channels.

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✓ lack of experience in carrying out operational activities leading co learning

gaps, producing cost disadvantages.
✓ high customer switching costs.
✓ access to low cost inputs (e.g. labor).
✓ legislative barriers to entry.

The Power of Buyers

Buyers (customers) are powerful when the following conditions exist:
➢ There are few buyers who purchase in large quantities.
➢ Buyers have low switching costs.
➢ Buyers have choices because there is a large volume of sellers.
➢ The product or service supplied is not an important one.
➢ The buyer has the ability to produce the product supplied (back- wards
integration).
➢ The buyers have information about the costs of production and other
buyers’ prices.

The Power of Suppliers

The factors that influence buyer power are similar to choose that influence supplier
power, they just act in the opposite direction.
Supplier power is high when:

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➢ there are few alternative sources of supply and there are many buyers.
➢ a particular buyer is not an important customer to the supplier.
➢ the product or service supplied is an important input for the buyer.
➢ the buyer cannot make the product cheaper than the supplier can.
➢ there are no substitutes for the supplied product.
➢ the supplied product has a good brand reputation, especially when chis
branding is important to the final product.

The Rivalry amongst industry members

Two extreme possibilities form reference points for this part of the analysis:

Competition between industry members is low. Each industry member is

content with its market share and gets involved only minimally with
competitive activity. The main concern is to maintain industry profitability
by tacit co-operation.
Competitive rivalry is high and is manifested in direct and indirect price
cutting, promotional activities and discounted products.

Rivalry tends to be high when:

Demand is growing slowly or declining. This causes greater rivalry when

it is difficult to leave the industry (i.e. when sunk costs are not
recoverable and fixed assets cannot be sold or turned to other uses).
Customers can switch products easily (products are undifferentiated).
New entrants, especially if they are cross-subsidized by rich parents, are
seeking to gain market share by price cutting.
Industry members are of similar size and have similar market power.
There is excess capacity, especially where this results in high fixed costs.
In this situation some industry members may be prepared to sell at prices
that exceed variable costs but do not necessarily cover total costs. This is
likely when companies can differentially price products to different
customers so that total revenue exceeds total costs for a complete
product mix, with some customers or segments paying lower than
average prices.
Industry members believe that gaining increased market share will lead to
long-term profits through economies of scale and experience effects, and
believe that these can be achieved by driving out weaker competitors
before an industry matures.

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The Impact of the wider environment on firms and industries

The impact that the wider environment has on firms and industries can be significant,
which is why it is important that we understand and recognize the forces that impact on the
organization and the industry it operates in.

Two of the most important environmental forces impacting on organizations are the
globalization of markets and organizations and the development of the Internet. Although
difficult, a cause and effect approach have to be adopted when assessing the drivers of
such environmental change.

Political Factors: Organizations are influenced by the responses of governments to

activities in the wider business environment. Pressure groups, for instance, will purposely
target governments in the hope that it will influence or change policy. This is also true of
business, with trade and management associations applying political pressure to
support perceived needs.

Economic Factors: The economic factors that influence organizations fall into two
main categories; chose that impact on their costs and chose that affect their ability to sell.
Examples of chose that impact on cost are:

Interest rates.
The cost of inputs – some inputs impact across a range of industries (e.g.
energy and fuel costs).
Inflation rates.
Exchange rates.

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Sociological Factors: An organization’s outputs are only valuable if people or

organizations find chem sufficiently useful that they will purchase them. Societal factors
that affect the demand for goods and services are clearly important, and examples include:
a concern for the ecological environment.
attitudes to eating.
the importance of status and fashion in cloches and other personal items.
attitudes to the use of drugs and alcohol.
Beliefs about private control/ownership of utilities, education and the
health services
attitudes to trading with unpopular political regimes.

Technological Factors: Technological changes cover the whole range of inventions and
technological innovations that impact along the length of firms’ value chains and on the
lifestyles of producers and consumers. Significant technological developments over the
last 5O years include:

The development of computers and information technology leading to

changes in product design through computer-aided design, the control of
inventory, links between suppliers and buyers and the development of
robotics and automated manufacturing.
The development of non-computer-based ideas in manufacturing
including just-in-time concepts.
The development of drugs and pharmaceuticals leading to eradication of
disease.
Development of fertilizers and farming methods.
Development of improved land and air transportation.

The Impact of Environmental Factors on Organizations and Industries

Having conducted an environmental audit the next task is to identify the forces that are
driving industry change and what impact these are having on firms and industries. It is
especially useful to identify the race at which change is taking place and whether the impact
of a particular factor is the same across industries or varies for different groups of firms or
specific organizations.

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To know more information about Organizational Environment

Please click the link: https://www.youtube.com/watch?v=m2wWTo-fhiM

To know more information about Michael Porter’s 5 Forces Model

Please click the link https://www.youtube.com/watch?v=33XmkfbzwO8

To know more information about PEST Analysis (PESTLE)

Please click the link: https://www.youtube.com/watch?v=7qrahnx94nc

Strategic Management and Business Analysis / David Williamson, Wyn Jenkins,

Peter Cooke and Keith Moreton