1. 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.

2. Is
Competition
Good ?
For consumers?
For businesses?

3. 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

4. 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

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

6. RECAP: Market Structures

7. 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?

9. 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

11. 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?

13. 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

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

16. How do businesses respond to changes in the competitive environment?
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?

17. 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.