The Micro Environment

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CHAPTER 3: THE MICRO ENVIRONMENT
MGMT 488 – STRATEGY AND POLICY

OVERVIEW
The micro environmental analysis is the second step in creating the Environmental Analysis. The micro environment examines the general business climate as it relates to the organization within its industry. The micro environment is also known as Porter’s Five Forces of Competition. The macro environment is primarily concerned with major issues and upcoming changes in the environment. The analysis looks at five areas of interest, which are 1) Power of the Buyers; 2) Power of the Suppliers; 3) Threat of Substitute Products; 4) Threat of New Entrants; and 5) Intensity of Rivalry. Notice in the following diagram, how these interact and influence each other.

MGMT 488

Chapter 3 – Macro Environment

Page 2

POWER OF BUYERS
STRONGER WHEN
• • • • • • • • • • Buyers have low switching costs Buyers are large; large volume sales are important Large number of small buyers can band together Buyer demand is weak or declining Buyer demand dramatically slows (aka “a buyer’s market”) Buyer identity is important Quality and quantity of information to buyers is high Buyers can postpone purchase until a later date Product is a commodity Threat of substitute products is high

WEAKER WHEN
• • • • • • • Buyers purchase infrequently or in small quantities Many buyers Buyer switching costs are high Buyer demand surges (aka “a seller’s market”) Brand reputation is important Highly differentiated product Threat of substitute products is low

POWER OF SUPPLIERS
STRONGER WHEN
• • • • • Industry members have high switching costs Input in short supply Specialized or highly differentiated input Very few suppliers Threat of forward integration by suppliers

WEAKER WHEN
• • • • • • Commodity input Many suppliers Industry members have low switching costs Good substitute inputs exist or are emerging Specific industry member makes up a large portion of a suppliers total sales Threat of backward integration by industry members

COMMENT
• Remember that inputs include ALL types of resources including human!

MGMT 488

Chapter 3 – Macro Environment

Page 3

THREAT OF SUBSTITUTE PRODUCTS
STRONGER WHEN
• • • • • Good substitutes are available Substitutes are attractively priced Substitutes have comparable or better features Buyers have low switching costs Buyers are comfortable with substitutes

WEAKER WHEN
• • Good substitutes are not available or too expensive High switching costs for buyers

COMMENTS
• • Remember this is not substitute BRAND!!!! A product almost always has a substitute – the key question is “Is it a GOOD substitute?”

THREAT OF NEW ENTRANTS
STRONGER WHEN
• • • • • • • • • Number of possible new entrants is high and some have important resources that could make them contenders in the market Entry barriers are low Current rivals have gaps in product segments or geographic coverage Industry has attractive profits Current rivals are unwilling or unable to defend Buyer power is low Supplier power is low Intensity of rivalry is low Threat of substitute products is low

WEAKER WHEN
• • • • • • • • • Not many want to enter the market Entry barriers are high Current rivals are struggling to make a profit Buyer demand is slow growth or stagnant Current rivals in a good position to defend Buyer power is high Supplier power is high Intensity of rivalry is high Threat of substitute products is high

MGMT 488

Chapter 3 – Macro Environment

Page 4

INTENSITY OF RIVALRY
STRONGER WHEN
• • • • • • • • • • • Sellers are actively and aggressively seeking to increase market share Buyer demand is growing slowly Buyer demand is fallings and sellers have excess inventory or capacity Number of rivals increase and rivals are the “same” size Products are commodities One or two strong rivals – smaller rivals are trying to remain in business Rivals have diverse objectives and tactics Outsiders buy smaller rivals and try to make them into...
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