Introduction
Differences Between Concepts, Theories and Frameworks
- A concept can be described at an idea, a thought, an opinion or a belief. Concepts assist us in explaining a phenomenon. In strategic management, the concepts of vision, mission, values and objectives are key concepts that relate to the formulation of strategy.
- A theory can be described as an organised and structured explanation of a set of interrelated concepts to explain and predict a phenomenon.
- A framework can be described as a verbal, physical or graphical representation of business ideas and concepts that can provide an overview of the organisation or constructs. Framework examples are Porter’s Five Forces, PESTLE analysis and SWOT analysis.
Competitive Environment
In order that management position an organisation competitively in the market, it needs to be aware of the competitive forces that exist in the particular market. They also need to be able to anticipate shifts in the market that may affect the organisation.
External Environment
First considerations in the market are the impacts of buyers, suppliers, current and potential competition and product substitutes that may compete. These are the basis of Porter’s Five Forces framework.
Organisations need to closely examine the macro environment as it impacts on them as there are several factors that can be relevant. This is known as the PESTEL Framework that considers:
- Political Factors
- Economic Conditions
- Socio cultural influences
- Technological factors
- Environmental factors
- Legal and regulatory issues
Whilst organisations generally focus on known elements that can impact on their market, there are other forces that can come into play. Covid 19 is a perfect example of a market factor that was unforeseen. Likewise, issues such as civil unrest, war and terrorism can also have impact.
Sammut-Bonnici and Galea (2015)[^2] content that there are five steps when an organisations analyses its macro environment:
- Complete a PESTEL analysis to identify the most relevant current and future issues for each market if more than one.
- Consider what are the potential impacts of each issue on the organsiation’s competitive position in the market.
- Separate the issues into opportunities and threats for the organisation
- Establish priorities for the factors consistent with their level of impact and amount of time the impact may be for.
- Make strategic decisions to address positive factors and address negative ones.
The Environment of the Industry
Consideration of an organisation’s industry and competition environment can be examined by using a number of concepts according to Thompson et al. (2022)^1:
- What is the strength of the competitive forces in the industry?
- What driving forces exist and what is their impact on the degree of competition and profit in the industry?
- What are the market positions of industry competitors and how strongly positioned are they?
- Are competitors likely to make strategic moves and if so, what are they?
- What comprise key success factors in the industry?
- Is the outlook for the industry one of profitability?
Porter’s Five Forces Framework
This framework is the most widely used for macro examination of industries and strategy. It considers five forces that bring pressure to an organisation, which are:
- Competition between sellers in the market
- Potential entry of new players
- What substitute products could enter the market
- The bargaining power of suppliers
- Bargaining power of customers
The framework demonstrates the way in which these five forces interact with each other. Thompson et al. (2022)^1 suggests that this interaction is the result of a combination of competitive pressures which can affect the profitability of an industry. In addition, Bruijl (2018)[^3] contends that the framework is based on the concept that the opportunities and threats in the external environment should inform organisational strategy.
Five Forces, Competition and Industry
Rivalry
Rivalry between the different players in the market is possibly the most common form of competition. The more intense the competition, the more downward pressure is placed on prices thus reducing profitability and the attraction of that market.
New Entrants
New entrants to a market increase the level of competition but some industries are harder to enter than others due to regulatory or capital imposts. Where it is easy to enter a market, competition can increase, prices can be driven down and profitability may be lower as a result.
Product Substitutes
Substitutes in a market can affect competition. These can be in the form of generic brand names at a lower price than popular brands for example. Substitutes are not as straightforward in the case of rival technology such as Apple vs Samsung phones as there are learning curves in adapting to different technology despite the operational result of the product being the same.
Suppliers
Suppliers are always concerned with the success of their customers in a market and some have the ability to exert pressure on their customers with terms of trade. Where supplier power is high, it can leave an organisation exposed to pressure which can make an industry unattractive. The lower the supplier power, the better for the organisation.
Customer Power
Customers have power in the market to influence an organisation’s behaviour in terms of the products they sell, the quality with which they are produced and the price of those products. The stronger the power of the customer, the less attractive the market as the customers are dictating more strongly on the terms of their purchase of the product.
Assessing an Organisation’s Industry and Competitive Environment
According to Thompson et al. (2022 p. 52)^1, there are seven questions to ask about an organisation’s industry and competitive environment:
- Do macro-environmental factors and industry characteristics offer sellers opportunities for growth and attractive profits?
- What kinds of competitive forces are industry members facing, and how strong is each force?
- What forces are driving industry change, and what impact will these changes have on competitive intensity and industry profitability?
- What market positions do industry rivals occupy—who is strongly positioned and who is not?
- What strategic moves are rivals likely to make next?
- What are the key factors of competitive success?
- Does the industry outlook offer good prospects for profitability?
These questions, in similar form, have been covered earlier in this module under The Environment of the Industry.
The image below, demonstrates the interaction of Porter’s Five Forces framework and PESTEL analysis framework for considering the industry environment.
Using Porter’s Five Forces
There are three steps in considering the factors of competition in an industry according to Thompson et al. (2022 p. 57)^1:
- Step 1: For each of the five forces, identify the different parties involved, along with the specific factors that bring about competitive pressures.
- Step 2: Evaluate how strong the pressures stemming from each of the five forces are (strong, moderate, or weak).
- Step 3: Determine whether the five forces, overall, are supportive of high industry profitability.
The combined level from each of the five forces will determine the level of attraction of the industry. High levels of competition generally mean lower profitability and therefore less attraction (Thompson et al. 2022)^1.
Developing a Strategic Group Map
A strategic group consists of industry members that are similar in terms of their competitive advantage and position in the market. Group members may resemble each other in many ways, but developing the group map encourages the seeking of points of difference where a new section of the market can be strategically addressed.
The first step is to develop the Strategic Group Map which involves the following according to Thompson et al. (2022 p. 79)^1:
- Identify the competitive characteristics that delineate strategic approaches used in the industry. Typical variables used in creating strategic group maps are price/quality range (high, medium, low), geographic coverage (local, regional, national, global), product-line breadth (wide, narrow), degree of service offered (no frills, limited, full), use of distribution channels (retail, wholesale, Internet, multiple), degree of vertical integration (none, partial, full), and degree of diversification into other industries (none, some, considerable).
- Plot the firms on a two-variable map using pairs of these variables.
- Assign firms occupying about the same map location to the same strategic group.
- Draw circles around each strategic group, making the circles proportional to the size of the group’s share of total industry sales revenues.
Example Strategic Group Map
Key Success Factors
These factors are based on the competitive nature of the industry that allow an organisation to operate successfully in that market. Key success factors vary between industries and can change dependent on circumstances in the market at the time. However, Thompson et al. (2022 p. 83)^1 claim that the key success factors can always be established by asking the following questions:
- On what basis do buyers of the industry’s product choose between the competing brands of sellers? That is, what product attributes and service characteristics are crucial?
- Given the nature of competitive rivalry prevailing in the marketplace, what resources and competitive capabilities must a company have to be competitively successful?
- What shortcomings are almost certain to put a company at a significant competitive disadvantage?
Conclusion
This module has been particularly useful in demonstrating the interaction between several tools, but in particular, Porter’s Five Forces Framework and the PESTEL Analysis framework. There has been a clear explanation of the considerable number of factors that can affect an organisation in a market and they need to be addressed critically in order to honestly assess an organisation’s position. Combining this with the identification of an organisation’s critical success factors will allow the development of strategy to compete effectively within a market, withdraw from a market or possibly to not enter it at all.
References
[^1]: Thompson, A, Peteraf, M, Gamble, J & Strickland, A 2022, Crafting and executing strategy: The quest for competitive advantage, concepts and cases, 23rd edn, McGraw-Hill, New York.
[^2]: Sammut-Bonnici, T & Galea, D 2015, ‘SWOT analysis’, in Wiley Encyclopedia of Management, 3rd edn, Wiley, Hoboken.
[^3]: Bruijl, G 2018, ‘The relevance of Porter’s five forces in today’s innovative and changing business environment’, Available at SSRN 3192207, 24 November 2022, http://dx.doi.org/10.2139/ssrn.3192207.
