8 The competitive, technological, political and sociocultural environments

Learning outcomes By studying this section students will be able to: describe and analyse an organization’s competitive environment describe and analyse an organization’s technological environment describe and analyse an organization’s political environment describe and analyse an organization’s sociocultural environment

The external environment Environment scanning = monitoring of operating environment. Strategic drift = failure of business strategy to keep abreast of environment change. Operating environment = competitive and PEST environment. PEST = political, economic, sociocultural, and technical environment.

The competitive environment In his book Competitive Strategy (1980), Porter proposes the following model (‘the five forces’) for investigating the competitive environment: 1 the threat of entrants 2 the power of suppliers 3 the power of consumers 4 the threat of substitutes 5 competitive rivalry

The threat of entrants The extent of the threat of new entrants will depend upon barriers to entry such as: economies of scale (next OHT) capital and experience barriers to entry advertising barriers to entry availability of distribution channels (vertical integration) anticipated entry wars natural monopoly conditions product differentiation barriers

Economies of scale

How does Coca-cola co attempt to reduce the threat of entrants? economies of scale capital and experience barriers to entry advertising barriers to entry availability of distribution channels (vertical integration) product differentiation barriers

The power of suppliers Supplier power is another important aspect of the competitive environment. Suppliers of an organisation’s inputs have a key impact on prices and quality and the greater the power of suppliers, the lower margins will be. Supplier power is increased by the degree of monopoly or oligopoly in the supplying industry, and whether there are high costs of switching suppliers. Because of this airport operators are often able to exert considerable supplier power when negotiating with airlines. Supplier power is diminished where the organization buying inputs has large purchasing power.

The power of suppliers Assess the power of suppliers to Emirates Airways Aircraft suppliers Airport owners Fuel suppliers

The power of buyers Where the buyer is a monopsonist (single buyer) or a near monopsonist, considerable power can be exerted over the selling organization. Competition between suppliers is a key factor that increases buyer power. The level of buyer knowledge is another important factor.

The power of buyers First choice? But how much power do buyers have in the holiday industry? What factors affect this?

The threat of substitutes Organizations faced with the threat of substitutes may react in several ways. These include: price leadership strategies differentiation strategies withdrawal or diversification strategies creating switching costs to prevent loss of customers

The degree of competitive rivalry Competitive rivalry within an industry is increased by the threat of new entrants and the threat of substitutes, but it is also influenced by current conditions in the industry. These include: whether competitors can cross-subsidize degree of market leadership and number of competitors changes in capacity high storage costs/perishability

The technological environment Technological change offers two key opportunities for leisure and tourism organizations. First it can lead to cost reductions (next OHT) Second, technology can provide new products and markets However, technological change also poses threats where existing products become obsolete in the face of new developments.

Effect of technology on LRAC

The technological environment What are the opportunities and threats in the technological environment for airlines?

The political environment Left wing (e.g. Labour / Democrat parties) Right wing (e.g. Conservative / Republican parties) need to control the free market pro trade unions some state ownership of industry progressive taxation regulation of industry higher government spending and taxes reduce inequality of incomes provision of jobs a priority comprehensive welfare state belief in supremacy of the free market anti trade unions private ownership of industry proportional taxation minimal state interference low taxes and government spending inequality of income as incentive control of inflation a priority minimal welfare state

The sociocultural environment Sociocultural factors include the make-up of society, for example in terms of its population structure levels of education social class attitudes

Review of key terms Environment scanning = Strategic drift = monitoring of operating environment. Strategic drift = failure of business strategy to keep abreast of environment change. Operating environment = competitive and PEST environment. PEST = political, economic, sociocultural, and technical environment. Barriers to entry = factors making entry into industry difficult. Monopsonist = single buyer.

Review of key terms Cross-subsidization = Political power = using profits from one division to subsidize prices in another division Political power = the ability to influence events. Scenario planning = developing plans to cope with different views of future. Crude birth rate = number of births per thousand population. Ageing population = average age of population increasing.

8 The competitive, technological, political and sociocultural environments: The End