BUSS 4: Assessing Changes in the Business Environment This section examines the relationships between organisations and their external environment. Candidates should understand the opportunities and threats created by changes in the contemporary business environment. The importance of acquiring and managing information and of communicating effectively should be considered throughout. Specification section The Relationship between Businesses and the Competitive Environment Contents • assessing the effects of changes in competitive structure • evaluating responses of businesses to a changing competitive environment. Amplification Changes in the competitive structure might include: new competitors, dominant businesses (e.g. through takeover or merger), changes in the buying power of customers and/or changes in the selling power of suppliers.

Is Competition Good ? For consumers? For businesses?

Have a go at the following grid: Differences Hairdressing Petrol Retailing Number of firms in the industry Product differentiation Price differences Ease of entry into the market

Competitive structure Impacts the amount of choice for consumers Changes the level of competition in terms of price, promotion, new product developments Determines the profitability of businesses in the industry Increases likelihood of collusion

To determine how a firm might cope with its competitors: apply… PORTERS 5 FORCES

RECAP: Market Structures

British Airways: Read through the article and answer the questions below What has happened to the airline industry? Why has this occurred? Who has the power now? What impact has this had on BA? What have BA done in response? Why did it not work? How has the merger with Iberia helped? Why does Porter think that the airline industry is less profitable than the soft drinks market?

https://www.youtube.com/watch?v=mYF2_FBCvXw

Michael Porter’s Five Forces Model High industry profits Low industry profits Weak suppliers Weak customers High entry barriers Few opportunities for substitutes Little rivalry Strong suppliers Strong customers Low entry barriers Many opportunities for substitutes Intense rivalry

Why do airlines make so little profit (and such big losses) Why do airlines make so little profit (and such big losses)? There are several factors, including: Very intensive competitor rivalry – mainly on price Low barriers to entry – lots of new airlines who want to set up Suppliers of aircraft & equipment are powerful – can charge high margins Customers have lots of substitute options – e.g. rail, car High fixed costs – airline losses rise significantly if revenues fall only slightly since it costs roughly the same to fly half-empty planes as full ones By contrast, why are profits so high in the soft drinks market? The answer is mainly that: Customers and suppliers have little power – Pepsi has many millions of individual consumers, and thousands of retail distributors none of whom has much influence over the business There is high brand awareness & loyalty = less consumer desire for substitutes High barriers to entry – how do you enter a market dominated by Coca-Cola and Pepsi?

http://www.tutor2u.net/business/quiz/porterfiveforces/quiz.html

Example: Car manufacturing Huge capital investment costs Compliance with safety rules and regulations Access to parts suppliers Development of car dealerships Huge marketing campaign High barriers to entry

http://www.tutor2u.net/business/blog/lack-of-bargaining-power-is- squeezing-small-business-suppliers

How do businesses respond to changes in the competitive environment? http://www.telegraph.co.uk/finance/2915574/Cadbury-gobbles-up-Green-and-Blacks.html http://www.bbc.co.uk/news/business-34957525 http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11987810/Profits-fall-at-Sainsburys-amid-stiff-competition.html What are the different strategies that firms have adopted above in response to changing environments? Which one do you think is the best? Can you evaluate any of the strategies – what is the issue with them?

The competitive structure of industries can differ significantly due to factors such as the number of competitors and the degree of buyer and supplier power. Companies in the pharmaceutical industry, such as GlaxoSmithKline tend to be relatively profitable, whereas airlines, such as American Airlines tend to have lower profitability. To what extent do you think that the profits of a business are determined by the competitive structure of the industry in which it operates? Justify your answer with reference to GlaxoSmithKline, American Airlines, and/or any other businesses or industries that you know. TASK Complete an analysis of both industries using Porter’s 5 forces and in what way each force influences the profitability of the firms in that industry.