Impact Of Changes In The External Environment
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Published: Wed, 10 May 2017
Strategy Formulation begins with an analysis of the forces that shape competition in the industry in which a company is based. The goal is to understand the opportunities and threats confronting the firm and to use this understanding to identify strategies that will enable a company to outperform its rivals. Opportunities arise when a company can take advantage of conditions in its environment to formulate and implement strategies that enable it to perform more profitable. Threats arise when conditions in the external environment endanger the integrity and profitability of the company’s business.
Components of Marketing Environment
There are two types of marketing environment or we can say two such components in which a company operates i.e. the external environment and the internal environment. As required in the question , the external environment is explained in detail below:
The external environment is the environment that poses a direct influence on the company. Though the components of this environment are not a framed part of the company, but their existence in itself is either a boon or a threat to the company. The components of such environment are customers , suppliers, shareholders, competitors , political environment , social environment, marketing environment, cultural environment in which the company operates. All these components can be divided into micro and macro components depending on the overall affect they have on the company. So , we can say that external environment can be classified into micro and macro environment, precisely.
SWOT analysis is one of the tools of analyzing the assessing the strengths and weaknesses along with threats and opportunities of a company. Swot analysis is done by a company so that it can plan its strategies in accordance with the internal strengths and weaknesses and deeply analyzing the external environment of opportunities available in the market and the threats posed to the company by external forces in action. Swot analysis takes information from different sources, all which affect a company is a positive or a negative way and consolidate all the forces so as easy to comprehend. Once swot is done , a company can easily take guidance and information from the analysis and proceed in framing its own strategies that are on the lines of its strengths and opportunities available.
External Elements of SWOT analysis that impact the marketing strategy of a company
Opportunities and Threats
An efficient and a thoughtful company executive does not only concentrate on building the strengths and analyzing the weaknesses of the company , but has a third eye view for what kind of external environment encaptures the company externally , affecting it internally. Any company must focus on its external boundaries while it goes on strengthening itself internally. There can be instances that while the company is internally sound and efficient , the externa environment poses a serious threat to the operations and profitability of the company and takes a toll on it.
Just as the decisions and actions of strategic managers can often change an industry’s competitive structure, so too can changing conditions or forces in the wider macro environment – that is broader economic, global, technological, demographic, social and political context in which companies and industries are embedded.
Economic forces affect the general health and well being of the nation or the regional economy of an organization, which in turn affects the company’s or industries ability to earn an adequate rate of return. The four most important factors in the macro environment are the growth rate of the economy, interest rates, currency exchange rates, inflation or deflation rates.
Over the last half century there have been enormous changes in the world economic system. The important points to note are that barriers to international trade and investment have tumbled, and more and more countries are enjoying sustained economic growth. Economic growth in places like Brazil, China and India is creating a large new market for companies goods and services and is giving companies an opportunity to grow their profits faster by entering these nations.
Since world war -2 the pace of technological change has accelerated. This has unleashed a process that has been called a “perennial gale of creative destruction”. Technological change can make an established product obsolete overnight and simultaneously create a host of new product possibilities. Thus, technological change is both creative and destructive – both an opportunity and a threat.
Demographic forces are an outcome of changes in the characteristics of population, such as age , gender, ethnic origin, race , sexual orientation and social class. Like the other forces in the general environment, demographic forces present managers with opportunities and threats and can have major implications for the organization. Over the past 30 years, for example, women have entered the workforce in increasing numbers. This dramatic increase has brought issues such as equal pay for equal work and sexual harassment at work to the forefront of issues that managers must address if they are to attract and make full use of talent of female workers.
Social forces refer to the way in which changing social values affect any industry. Like the other macro environmental forces discussed in this report, social change creates opportunities and threats. One of the major social movements of recent decades has been the trend towards greater health consciousness. Its impact has been immense and the companies that recognized this opportunity early have often reaped significant gains. PepsiCo was able to gain market share from the rival company Coca Cola by being the first to introduce diet Pepsi and fruit based soft drinks.
Political And Legal Forces
Political and legal forces are changes in laws and regulations. They result from political and legal developments within society and significantly affect managers and companies. In most countries, the interplay between political and legal forces, on the one hand , and industry competitive structure, on the other, is a two way process in which the govt sets regulations that influence competitive structure, and firms in an industry often seek to influence the regulations that government enacts by a number of means.
While doing taking an advantage over competitive industry in an external environment , a firm can take various strategies like that of changing prices , using product differentiation, creatively using channels of distribution, making pivot gains over supplier side etc etc. All this again depends upon the internal strength and vision of the company.
Question 2. Conduct an internal analysis to identify current strengths and weaknesses in a marketing strategy?
Answer: Why within a particular industry do some companies outperform others? What is the basis of their sustained competitive advantage? Let us see an example; the competitive advantage of Dell computers comes from its direct selling business model, which lowers costs and enables the company to respond to customers demands, and also from its focus on efficient supply chain management. Efficiency and Customer Responsiveness are two of the four main building blocks of competitive advantage. The other two are innovation and the quality of product or service offering. Internal Analysis is concerned with identifying the strengths and weaknesses of the company. Internal Analysis is a three step process.
Managers must understand the process by which companies create value for customers and profit themselves, and they need to understand the role of resources, capabilities & distinctive competencies in this process.
They need to understand how important superior efficiency, innovation, quality & responsiveness to customers are in creating value & high profitability.
They must be able to analyze the sources of their company’s competitive advantage to identify what is driving the profitability of their enterprise and where opportunities for improvement might lie.
The Internal Factors
The environment in which an industry operates consists of external and internal environment. The internal environment is framed of 5 M’s.
The internal environment is easier to control as compared to the external environment. Changes in the internal environment can be made easily in the organization as and when required by the maanger.
Internal Elements of SWOT Analysis that impact the marketing strategy
A company has competitive advantage over its rivals when its profitability is greater than the average profitability of all the companies in the industry. It has a sustained competitive advantage when it is able to maintain above average profitability over a number of years. Following are the sources of competitive advantage for a company:
Strategy, Distinctive competency & Competitive Advantage
The primary objective of a strategy is to attain competitive advantage which in turn will result in superior profitability and profit growth. All the levels of strategy – functional, business, global and corporate – are involved in creating a competitive advantage. Distinctive Competencies arise from two complementary sources: resources and capabilities.
Resources are financial, physical, social or human, technological, and organizational factors that allow a company to create value for its customers. Company’s resources can be divided into two types – tangible and intangible resources. The more firm specific and difficult to imitate is a resource, the more likely is a company to have a distinctive competency.
Capabilities refer to a company’s skill at coordinating its resources and putting them to productive use. These skills reside in an organizations rules, routines and procedures. More generally, a company’s capabilities are a product of its organization structure, processes and control systems. They specify how and where decision are made within a company. The kind of behaviors the company rewards and the company’s cultural norms and values.
At most basic level, how a company becomes depends on threefactors::
1) the value customers place on the company’s products
2) the price that a company charges for its products
3) the cost of creating those products
The value customers place on a product reflects the utility they get from a product, the happiness or satisfaction gained from consuming or owing the product. Utility must be distinguished from a price. Utility is something that customers get from a product. It is a function of the attributes of the product, such as its performance, its design, quality and point of sale and after sale services.
Once the competitive advantage has been built , it’s the first problem of the company to have a sustained advantage. The durability of competitive advantage depends upon three factors:
1) Barriers to imitation
2)The capability of competitors
3) The general dynamism of the industry environment.
Barriers to imitation
A company with a competitive advantage will earn higher than average profits. These profits send a signal to the rivals that the company has some valuable distinctive competency that allows it to create superior value. Naturally, its competitors will try to identify and imitate that competency and insofar as they are successful, ultimately their increased success may whittle away the company’s superior profits.
Barriers to imitation are a primary determinant of the speed of the imitation. Barriers to imitation are the factors that make it difficult for a competitor to copy a company’s distinctive competencies, the greater the barriers to imitation, the more sustainable is a company’s competitive advantage. Barriers to imitation differ depending on whether a competitor is trying to imitate resources or capabilities.
In general, the easiest distinctive competencies for prospective rivals to imitate tend to be those based on possession of firm specific and valuable tangible resources, such as buildings, plant and equipment. Such resources are visible to competitors and can often be purchased on the open market. For example , if a company’s competitive advantage is based on the sole possession of efficient manufacturing facilities, competitors my move fairly up to establish similar facilities.
Intangible resources can be more difficult to imitate. This is particularly true of brand names which are important because they symbolize a company’s reputation. In the heavy earthmoving equipment industry, the caterpillar name is synonymous with high quality and superior after sales services and support. Marketing and technological know how are also important intangible resources and can be relatively easy to imitate. The movement of skilled marketing personnel between companies may facilitate the general dissemination of marketing know how. With regards to technical know how, the patent system in theory should make technological know how relatively immune to imitation. Patents give the inventor of a new product a 20year exclusive production agreement.
Imitating a company’s capabilities tends to be more difficult than imitating its tangible and intangible resources, chiefly because capabilities are based on the way in which decisions are made and processes managed deep within a company. It is hard for outsiders to discern them. On its own the invisible nature of capabilities would not be to halt imitation, competitors could still gain an insight into how a company operates by hiring people away from that company. However, a company’s capabilities rarely reside in a single individual. Rather they are the product of numerous individuals interact within a unique organizational setting.
It is possible that no one individual within a company may be familiar with the totality of a company’ internal operating routines and procedures. In such cases hiring people away from a successful company in order to imitate its key capabilities may not be helpful.
Capability of Competitors
A major determinant of a capability of the competitors to imitate a company’s advantage rapidly is the nature of competitor’s strategic commitments. By strategic commitment, it means a company’s commitment to a particular way of doing business. When competitors have long established commitments to a particular way of doing business, they may be slow to imitate an innovating company’s competitive advantage. Its competitive advantage will therefore be relatively durable.
Another determinant of the ability of competitors to respond to a companys competitive advantage is the absorptive capacity of competitors. Absorptive capacity refers to the ability of an enterprise to identify, value , assimilate and use new knowledge. Internal inertia forces can make it difficult for established competitors to respond to a rival whose competitive advantage is based on new products or internal process- that is , on innovation.
Taken together, factors such as existing strategic commitments and low absorptive capacity limit the ability of established competitors to imitate the competitive advantage of a rival, particularly when it is based on its innovative products and processed. This is why when innovation reshape the rules of competition in an industry, value often migrates away from established competitors and toward new enterprises that are operating with new business models.
Question3. Propose strategic marketing responses to key emerging themes in a marketing strategy?
The Most Important strategic marketing responses to key emerging themes in a marketing strategy are as follows:
1) Efficiency: For any business, transforming inputs into outputs. Inputs are basic factors of production such as labor, land, capital, management, and technological know-how. Outputs are goods and services that the business produces. Efficiency is measured in terms of quantity of inputs to produce a given output. The more the efficient a company is, the fewer the inputs required to produce a given output.
2) Quality and Reliability: A product can be thought of many physical products include their form, features, performance, durability, reliability, style and design.
3) Innovation: The act of creating new products or processes.
4) Responsiveness to Customers: A company must be able to do a better job than competitors of identifying and satisfying its customer needs. A company must have to reduce the customer waiting time, by providing a better services and thereby reducing the time for waiting for customers.
5) Business models, Value chain, and Distinctive Competencies: A business model is a way in which managers configure the value chain of the firm through strategy, so that they can build the distinctive capabilities necessary to attain efficiency, quality, innovation, and customer responsiveness required to support the firm’s low cost or differentiated position, thereby achieving a competitive advantage and generating profitability.
The marketing strategy a company adopts can have a major impact on efficiency and cost structure. Marketing strategy refers to the position that a company takes with the regard to pricing, promotion, advertising, product design, and distribution. Some of the steps leading to greater efficiency are fairly obvious. Riding down the experience curve to achieve lower cost structure can be facilitated by aggressive pricing, promotions, and advertising, all of which are the task of the marketing function. Other aspects of marketing strategy have a less relationship of customer defection rates, cost structure, and unit costs.
The economic benefit of long time customer loyalty is the free advertising that customers provide for a company. Loyal customers can dramatically increase the volume of business through referrals. The key message is that reducing customer defection rates and building customer loyalty can be major sources of a lower cost structure.
The central component of developing a strategy to reduce defection rates is to identify customers who have defected, find out why they defected and act on that information so that other customers do not defect for similar reasons in the future. To take these measures, the marketing function must have information systems capable of tracking customer defection.
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