This Essay Outlines and Evaluates the Main Weaknesses When Understanding the Business Environment

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Nowadays, analysing competition is crucial for managers in order to understand the environment in which the business evolves, its competitors (their goals, plans etc) as well as implement strategies and position their companies. They can use a wide variety of techniques, each having its strengths and weaknesses. According to Prescott and Grant (1988), to select the appropriate techniques, managers have to know the different techniques available, how they are related to each other, the focus and scope of the area and the constraints limiting the extent of analysis. To analyse competition efficiently, they have to combine some of the different techniques available as they all have a specific aim. However, there are limitations that managers have to take into consideration in order to provide a clear and effective work.

This essay outlines and evaluates the main weaknesses when understanding the business environment. They vary by nature. They can come from the interpretation of the managers and from the models themselves. However, they are in relation to each other, one flaw leading to another one.

When analysing competition, the starting point is to precisely define the industry the firm belongs to and its boundaries. Managers may focus on the market of their company, narrowing their definition of the industry. They then forget or less consider other segments that can change quickly and have impact on the whole industry. According to Zahra and Chaples( 1993) "an effective definition of industry boundaries requires consideration of four interrelated issues: domain (where does the industry begin and end), customer group (sector to be served and their specific needs), customer functions (customer need and specific patterns) and critical technology (production, marketing and administrative system)". Each point enables to define the competition more and more precisely. In addition to these issues, managers have to take time into consideration. Reviewing their business' definition, the shape of the industry and the market over the time is crucial as industries change. Prahalad (1995) states that "many industries are undergoing massive transformation. Deregulation, global excess capacity, global competition, mergers and acquisitions, changing customer expectations, technological discontinuities […] are changing industries, creating new industries and opening up new and large growth markets for existing businesses." For instance, chemical companies enter the pharmaceutical industry by making alliances with young biotechnology companies, not considered as a threat by the pharmaceutical companies. This change in the industry led the pharmaceutical companies to redefine the industry and its boundaries as well as their strategy.

Managers need to be vigilant in identifying its competitors. A poor identification leads to a wrong positioning and a possible long time response to the different actions coming from those undetected rivals. This identification is dependent on the managers' perceptions and how they define the industry and its boundaries. Clark and Montgomery (1999) say that "an understanding on how managers construe their competitive environment is highly relevant to any understanding of competitor interaction." The problem with most competitive analysis is that they tend to focus on well-established companies while ignoring potential competition from other companies and thereby limiting the scope of the analysis. Competitors are not only companies with same goals, structure and/or resources. They can be smaller and ‘invisible' but viable companies, possibly coming from abroad as well. With globalisation and industry changes, the number of potential competitors is consequently growing. An example illustrating this weakness is Apple which did not consider IBM as a potential threat when IBM made its entrance in the PC market. This was a fatal mistake on the part of Apple as IBM went on to rule the market in the...
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