A corporation’s scanning of the environment should include analyses of all relevant elements in the task environment. Managers need to consider the competitive environment, also referred to as the task environment or industry environment. The profitability of the firm and the nature of competition in the industry are more directly influenced by developments in the competitive environment.
Industry – group of firms producing a similar product or service.
The firm interacts with a more specific environment, the industry.
4 main components that exert influence on industry:
2. Competitors and potential substitutes
3. Potential entrants
Competitors, potential substitutes and potential entrants
The number of firms operating within the industry as well as the number of firms wishing to enter the industry are regulated by barriers to entry which determine continued participation in and/or exit from the industry. Some of the constraints are the rate of industry growth, the level of fixed costs, and the degree of differentiation. Potential competitors are not limited to firms considering to offer exactly the same or differentiated products or services, substitutes to the existing products and services are also a potential threat. Substitute products/services may co-exist with the present range of products and services or may render the present range obsolete.
Buyers and Suppliers
The competitive situation of business firms is influenced by the nature of its transactions with its buyers and suppliers. Buyers exert their power in the industry when they force down prices, bargain for higher quality or more services, and play competitors against each other. Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods or services. In addition, we usually think of suppliers as other firms. But labor has to be recognized as a supplier as well – one that exerts great power in many industries.
Michael Porter’s Approach to Industry Analysis
- The ‘five forces model’ developed by Michael E. Porter, has been the most commonly utilized analytical tool for examining the competitive environment.
- It describes the competitive environment in terms of five basic forces: threat of new entrants, bargaining power of the firm’s suppliers, bargaining power of the firm’s customers, threat of substitute products, and intensity of rivalry among firms.
- The collective strength of these forces determines the ultimate profit potential in the industry, which profit potential is measured in terms of long run return in invested capital.
- They also determine the nature and extent of competition.
- The stronger each of these forces is, the more companies are limited in their ability to raise prices and earn greater profits.
- A strong force can be a threat, likely to reduce profits
- A weak force can be an opportunity, may allow greater profits
1. threat of new entrants
New entrants- newcomers to an existing industry. They typically bring new capacity, a desire to gain market share, and substantial resources.
Entry barrier – an obstruction that makes it difficult for a company to enter an industry. Economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantage independent of size, government policy are examples of entry barriers.
2. rivalry among existing firms
Rivalry- amount of direct competition in an industry.
Intense rivalry is related to the presence of the following factors: number of competitors, rate of industry growth, product or service characteristics, amount of fixed costs, capacity, height of exit barriers and diversity of rivals.
3. threat of substitute products or services
Substitute products- products that appear different but can satisfy the same need as another product.
4. bargaining power of buyers
Buyers can affect industry through their ability to force down prices, bargain for higher quality or more services, and play competitors against each other. A buyer is powerful when:1)A buyer purchases a large proportion of the seller’s product or service, 2)A buyer has the potential to integrate backward by producing the product itself, 3)Alternative suppliers are plentiful because the product is standard or undifferentiated, 4)Changing suppliers costs very little, 5)The purchased product represents a high percentage of a buyer’s costs, thus providing an incentive to shop around for a lower price, 6)A buyer earns low profit and is thus very sensitive to costs and service differences, 7)The purchased product is unimportant to the final quality or price of a buyer’s products or services and thus can be easily substituted without adversely affecting the final product.
5. the bargaining power of suppliers
Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchased goods and services. A supplier is powerful when 1)The supplier is dominated by a few companies, but it sells to many, 2)Its product or service is unique or it has built up switching costs, 3)Substitutes are not readily available, 4)Suppliers are able to integrate forward and compete directly with their present customers, 5)A purchasing industry buys only a small portion of the supplier group’s goods and services and is thus unimportant to the supplier.
Applying the Five Forces Model
Analyzing the industry using a five forces model helps a company choose competitive strategy options. In combination, the five forces can be used to explain the nature of competition in an industry, as well as examine a company’s profit potential.
Competitive Forces and Industry Evolution
Most industries evolve over time through a series of stages from growth to maturity, to eventual decline.
The strength of the forces varies according to stages. The industry life cycle can be useful to predict trends among the forces that drive industry competition.
If the industry is new, people buy regardless of price because it fulfills a unique need. This is likely to be a fragmented industry, an industry in which no firm has a large market share, each firm serves only a small price of the total market. As new competitors enter, prices drop as a result of competition. As a result, competitors try to differentiate their products from one another to avoid fierce price competition common to a maturing industry. As an industry enters maturity, products become commodities. This is now a consolidated industry. A consolidated industry dominated by a few large firms struggling to keep their products differentiated. As an industry goes through maturity and possible decline, the growth rate slows down and may decrease.
There are governmental institutions that, as a component of the general environment, affect not only one industry. Certain constitutional provisions likewise, pose as opportunities or threats to firms.
Selznick defines it as sustained and focused control exercised by a public agency over activities that are valued by a community.
Baldwin and Cave recognize as the first mode of regulation “ a specific set of commands, where regulation involves the promulgation of a binding set of rules to be applied by a body devoted to this purpose”. Influence also plays a role, as regulation can be a “deliberate state influence”, it has a broader sense and covers all state actions designed to influence industrial or social behavior. Regulation can also encompass “all forms of social control or influence”, where all mechanisms affecting behavior are deemed regulatory.
Minogue states that regulation is based on rules, which may give strict directives, or be broadly enabling in ways which permit further negotiation, rules may also be framed in ways, which concede discretion over their detailed negotiation.
Why the need for government regulation?
1. need to protect public interest
2. creation/facilitation of conditions for effective markets
Landmarks in Philippine Regulatory Governance
1. Constitution of 1987
2. Entry of the Philippines in the World Trade Organization
It is the means by which private firms are constrained from anti-competitive behavior. It aims to bring about social outcomes that approximate that of a competitive environment, particularly in situations where there is a market failure or imperfection, as in a monopoly.
It is a fundamental economic regulatory force. Regulation and competition policy are closely intertwined. The objectives of competition policy being:
1. establish a competitive order as an end in itself to safeguard economic freedom
2. maintain a competitive order to foster economic efficiency and technological and economic progress
3. provide for a level playing field of fair competition
4. maintain a decentralized structure of supply
Major Laws Regulating the Economy
The regulatory regime is shown in three types of laws :
1. laws on the regulation, supervision and even the control of the whole economy or specific portions of it.
2. laws restricting entry and competition
3. laws promoting agriculture, industry and social services
Devolution of regulation
Some powers and functions of the national government were transferred to Local Government Units (LGU’s). Regulatory powers include:
1. power to reclassify agricultural lands
2. power to enforce environmental laws and the Building Code
3. process and approve subdivision plans
4. inspect food products
5. regulate the operation of tricycles
6. regulate the provision of health, agriculture, social welfare and other services already devoted to them
7. tax real property
8. give business license and permit
9. collect business taxes
Legislative and Judicial Involvement in Regulation
The focus of the legislative section is on the committees directly involved in regulation and the process a bill undergoes to become a law. The judiciary’s role is to interpret economic policies in the light of the Constitution.
The Executive Branch and Regulation
Regulatory institutions in the Philippines were established at the start of American colonial administration. One of the first established was the Securities and Exchange Commission (SEC). As of 2002, there are 18 government agencies engaged primarily in economic regulation.
Non-state regulatory mechanisms
This is the private sector’s power of regulation. It has introduced two relatively new regulatory forms: the self-regulatory organization and the organization created out of privatization.
Regulatory institutions in the Philippines need a balance of involvement and independence for them to be able to operate effectively. Involvement should also include disinterest, as regulators must be at arm’s length from the focus of regulation. This is so because no industry exists in a social vacuum where the interests of the individual members are necessarily the interest of the public.