Strategic Analysis..How To Derive Internal And External Factors To A Biz Case
This is a problem because if competitors can easily enter your business sector they will be able to put a ceiling on your profits. The same should apply if you are strategizing for a new market.
Therefore the greater the threat from new entrants entering the sector the higher the levels of competition.
The ease by which new entrants can enter the business segment is largely determined by the extent of the barriers to entry.
The following summarises the main barriers to entry.
- Capital cost of entry.The higher the capital cost the greater the deterrent to someone entering the business
- Economies of scale. This applies if substantial investment is needed by the new entrant to achieve cost parity.
- Differentiation. Differentiation is said to occur if consumers perceive a product or service to have properties which make it unique or distinct from its rivals.
Therefore if new entrants are to be successful in entering the market they will need to spend a lot of money on developing the image of the product, therefore they are likely to be put off.
- Switching costs. If existing customers will incur new expenses by changing to a new supplier they may not wish to change. For example, when the compact disc was invented consumers had to incur a cost of a CD player, as the new compact discs would not work on a conventional record player.
- Legislation. There might be patent protection for a product or the government might only license certain companies to operate in certain segments.
- Access to distribution channels. Existing relationships between manufacturers/suppliers and their key distributors/agents may make it difficult for anyone else to enter the market.
When thinking about the barriers to entry go through the above list in your strategic analysis to see which of them apply to your business case.
The bargaining power of Customers
Do your customers have the power to depress your product prices? If the answer to this question is yes it is likely you will be faced with increased competition. Customers are said to have power when:
- they are concentrated and can exert pressure on the seller;
- the buyer has a choice of alternative sources of supply.
The bargaining power of suppliers
The extent of the power of the suppliers will be affected by:
- the concentration of suppliers: if only a few suppliers, the buyers will have less opportunity to shop around;
- the degree to which products can be substituted by the various suppliers;
- the level of importance attached to the buyer by the supplier. The switching costs of moving to another supplier.
The threat from substitute products
If there are similar products that can be used as substitute then the demand for the product will increase or decrease as it moves upwards or downwards in price relative to substitutes.
The extent of competitive rivalry
The most competitive markets will always be affected by the previously discussed four forces. However they will also be affected by:
- the number of competitors and the degree of concentration;
- the rate of growth of the industry;
- the cost structures if high fixed costs prices are often cut to generate volume;
- the exit costs. If they are high, firms may be willing to accept low margins so as to stay in the industry.
In addition to Porters model, strategic analysis takes view of other factors affecting our business environment under a synonym called LePEST.
Outlined as follows:
Legal Environment; How your countries legal frame affects business .namely Contract Law, employment laws, Performance Disclosure requirements, environmental laws.
Political Environment; Political influence will include legislation on trading, pricing, dividends, tax, employment, as well as health and safety.
Economic Environment; The current state of the economy can affect how your company performs.