The Micro Environment
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
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