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The external environment: Part 2

In part 1 we looked at the PESTLE model to understand the wider environment in which an organisation operates. In this article we’ll consider the near  or competitive environment, in which the organisation has to compete for business. This environment includes  present and potential competitors, suppliers and collaborators. These cannot be controlled directly by you, but they can usually be influenced.

Porter’s five forces model provides a useful structure for thinking about a business’s strategic position in the marketplace, taking account of a broad range of competitors beyond the obvious or immediate. The model identifies five main forces affecting the profitability of an industry:

  1. the intensity of competition between current competitors (industry structure)
  2. the threat of new entrants to the market
  3. the bargaining power of customers
  4. the bargaining power of suppliers
  5. the threat of substitute products or services.

So, what does that mean for small businesses?

In my view, it simply provides some powerful questions to consider, some of which will be more relevant to your business than others. For example:

  • How many players are you competing against? Are they all of similar size, or is there a big market leader?
  • Is the market growing or shrinking? Do you have to win market share from your competitors in order to grow your business or can you attract new customers?
  • How easy is it for someone to enter the market and start competing with you? What can you do to make that difficult for them?
  • Are there potential economies of scale? Do these put you at an advantage or a disadvantage?
  • How much influence do buyers have on issues such as price and quality? Do you have to tender for projects or secure preferred supplier status?  Do you have to meet certain quality standards?
  • How much influence do suppliers have on issues such as price and quality? How many suppliers are there? How critical are their products to your product or service? Can you control quality and influence price? Can you take your business elsewhere?
  • What is the risk that something new will replace the need for your products or services?

Thinking about these questions should help you to be more aware of what to look out for in the near environment, and help you to think about your organisation’s relationship with its competitors, suppliers, collaborators and customers.

The answers to these questions should be useful when you come to do your SWOT analysis – look out for the article on this coming soon.