The external business environment is one of the most challenging prospects for any business to encounter, as the environment is ever changing, thus causing competitive advantage to constantly vary.
Generic Competitive Strategies
There are three main strategic positions that are conventionally adopted by businesses. Cost leadership is a strategic position that tries to offer the lowest market prices to customers – for example, McDonalds have such low margins that they are able to offer the lowest prices in the fast food industry, helping to keep competition out.
Differentiation takes the position where businesses offer a wider variety of products or services to the customer. This position is currently being used by the supermarket industry, which now offer additional services such as funeral care (The Co-op) and banking (Sainsbury’s Bank) etc.
The third strategic position is focus – which can be bifurcated into cost focus and differentiation focus. Cost focus is a position whereby the business may not necessarily provide products or services at the lowest market price, however, their prices are considered cheaper than the majority of their competitors. An example of where this position is adopted is the fashion jewellery market; Claire’s Accessories are generally more expensive than shops such as Primark, however they are cheaper than other high street stores like Topshop and River Island etc. Cost differentiation offers a unique product or service to satisfy the demands of a narrow market, for example a specific target market (internet shops) or a particular demographic (Asian food shops).
As well as trying to establish a strategic position within their respective industries, some businesses may also use ‘psychological perception’ as a tool to give them a competitive advantage. An example of where this would be used is in high-end retailers, for example Next, whose clothes are more expensive and thus are perceived by customers to be of better quality, giving the company a greater competitive advantage with little effort. This strategic tool incorporates elements of the ‘perceived quality’ pricing strategy.
Porter’s Five-Force Model (1985)
Competition is often looked at too narrowly by managers, who tend to focus on direct competition as opposed to indirect competition. Porter’s Five-Force Model (1985) takes a holistic approach to looking at the competitive scope within an industry, and aims to make managers think about and consider other external factors.
Each force has its own driving factors, which push it in a particular direction.
The first force looks at the bargaining power of suppliers, and considers factors such as supplier loyalty, and importantly, the dependency relationship between the supplier and the business. An example of where this force may be high is in Patak’s curry sauces, which use coconut milk as a base in many of their curry’s sauces, however as coconuts are only available from certain parts of the world, the bargaining power of the suppliers increases as the dependency of the business increases.
The next force looks at the threat of new entrants to the industry and market. This force analyses the industry more as a whole, identifying how easily penetrable the market is, and the ease with which a competitor may set up. For example, this force will be very low in the supermarket industry, due to the high capital requirements, established supplier relationships and reputation, making it extremely hard for new competitors to enter the market. Despite this, new entrants may still enter the market and prosper as has been shown with both German supermarkets Lidl and Aldi.
Similar to suppliers, the bargaining power of customers also considers the loyalty of customers, as well as the nature of the market i.e. narrow or wide, as this will greatly affect the dependency relationship between customers and the business (narrow – high, wide – low). For example, supermarket customers are generally quite loyal (those who do a weekly shop), but a good balance should be achieved, as there are other stores available.
The threat of substitutes looks at how unique the product or service is, and whether there are other, similar items in the current market. For example, this force is high in the technology industry as there is a wide variety of mobile phones, tablets etc.
PESTEL analysis is another tool used by companies to look at the other external factors not mentioned in Porter’s model.
Political factors such as a change in government will affect all businesses. For example, if UKIP got voted into power, the UK would leave the EU and this would have drastic and profound implications on import and export costs and prices, which would affect many industries – in particular the manufacturing industry.
The ecological factor considers more the environmental issues surrounding businesses such as sustainability and carbon footprint, and tries to get businesses to think more ethically. This factor would impact some industries significantly more than others e.g. airlines, car manufacturers, fishermen etc.
The social factor looks at the market behaviour in terms of people, and tries to identify social trends, education, disposable income etc, as these are the factors most likely to directly affect sales. A current example of social trends is Loom bands with smaller children, and stores such as Poundland, The Works etc having experienced high sales volumes due to this product.
Technological advancement and development is more important in some industries than others – it may be considered a necessity or an advantageous tool depending on the industry. For example, companies such as Apple, HTC, and Microsoft etc. are constantly developing new software and innovative new technologies to maintain their competitive advantage over the competition.
The economy may arguably be the most important factor for a company to consider, as changes in the economy are often directly reflected in the companies profits. A recent example was, when hit by the recession in 2009/2010, many companies saw a fall in profits, whilst other, generally cheaper companies such as Poundland, 99p Stores etc. thrived, as customers switched to cheaper products.
Finally, all businesses will be affected by some form of legislation. For example, any business that employs staff will be subject to changes in employment law – minimum wage is reviewed every October and regularly changes, affecting staffing costs.
In conclusion, businesses may choose to conduct a SWOT analysis to asses the strengths, weaknesses, opportunities and threats of their respective industries, to try and exploit the environmental and market conditions to maximise the business efficiency, effectiveness, and perhaps profitability, to enhance their competitive advantage.
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