Chapter 2. The External Environment: Opportunities, Threats, Competition, and Competitor Analysis
This chapter explained about the external environment that affects firms in doing or planning their strategic actions. To be understood of the external environment, firms should find information about competitors, customers, and other stakeholders in order to build their own base of knowledge and capabilities. External environment can be divided into three parts: general environment, industry environment, and competitor environment. More specific, general environment are grouped into seven segments: demographic, economic, political/legal, sociocultural, technological, global, and physical. Firms could not directly control various parts of their external environment, so they should comprehended information from all segments and their implications for selecting and implementing the firm’s strategies. Industry environment can be analyzed based on these factors: the threat of new entrants, the power of suppliers, the power of buyers, the threat of product substitutes, and the intensity of rivalry among competitors. The interactions among these factors determine the profit potential of an industry and it will influence the options op tions each firm makes about its strategic actions. Competitor environment is essential to be analyzed in order to know the position of your own firm in the same sector industry. By knowing that, you can manage the proper action strategy to gain the above average return. In doing analysis of external environment, there are four steps to be done: scanning, monitoring, forecasting, and assessing. Through scanning firms can identify early signals of potential changes in the general environment and detect changes that are already under way. In monitoring, analysts observe environmental changes to see if an important trend is emerging from among those spotted through scanning. Scanning and monitoring are concerned with events and trends in the general environment at a point in time. When forecasting, analysts develop feasible projections of what might happen, and how quickly, as a result of the changes and trends detected through scanning and monitoring. The objective of assessing is to determine the timing and significance of the effects of environmental changes and trends that have been identified.
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The intent of assessment is to specify the implications of understanding as result of scanning, monitoring, and forecasting. Without assessment, the firm is left with data that may be interesting but are if unknown competitive relevance. In terms of analyzing the external environment, firms should gather information and data. Along with it, every action the firms take should relevant with laws and regulations as well as ethical guidelines.
Reading Material 5. Sustaining Competitive Advantage in the Global Petrochemical Industry: a Saudi Arabian perspective
Saudi Arabia is well known as a leading producers and exporter of oil. The key strength of the Saudi petrochemical industry lies in the low-cost of feed-stocks as well as low cost of utilities. Other competitive advantages are the capital cost comparatively lower due to the initial cost and efficient infrastructure. In other side, the major competitive disadvantages are the lack of technological know-how and skills of personnel. The activities of research and development are in an inferior position. Moreover, many organizations lack of management expertise. Using Porter’s model, the writer was tried to analyze Saudi petrochemical industry (SABIC) and its business environment. Porter’s five forces model is an outside-in business unit strategy tool that is used to analyze the attractiveness of an industry structure. The competitive forces analysis is made by the identification of five fundamental competitive forces: the entry of competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers and the rivalry among the existing player. 1. The intensity of rivalry among existing competitors within the petrochemical industry Saudi petrochemical organizations are facing number of competitor such as Exxon Chemicals, Shell Chemicals, BASF Chemical Company, Dow Chemical, Mitsubishi, among others. These competitors are about equal in size and market power, which makes the competition too severe to survive. As there are no definite differences in terms of quality of the basic product, customers easily switch from one supplier to another. This situation can cause a war price among the rivals. Page 2 of 4
2. Bargaining power of supplier The suppliers in petrochemical industry are dominated by a large number scattered around the globe. So, the bargaining power of supplier is weak; in fact, SABIC can gain advantage of better bargain in terms of reasonable price from their suppliers. However, there are some critical materials which have no substitutes and absent of those materials will shut down the production. In this case, the threat from supplier is high. 3. Bargaining power of customers SABIC has numerous customers from within the nation as well as around the world. The industry has also been making efforts to open new markets in order to increase the market share. Thing that should be concerned is that some products are marketed heavily in one country. It is such dependence on a single country which gives more bargaining power of customer for them. It is suggested that SABIC should find alternative markets to maintain the flow of production and achieve profitability. 4. Threat of entry of new competitors Industries that require large investment is difficult to entry. For large firms whose dominate many sectors of the market, the threat of new competitor entry the business is low. 5. Threat of substitutes The existing demand for petrochemical products is still huge but as environmental concerns, it may force a shift back to more widespread use of carbon in the coming decades. Due to environment concerns, many biochemical products are developed to be used as substitutes of petrochemical products. These pose a major threat of substitution for petrochemical industries. In response to the changes, SABIC restructure its business activities and developed a new business model by creating six Strategic Business Unit (basic chemicals, intermediates, polyelefins, petrochemicals divisions, global business, and shared services organization) to nd
reflect its global expansion strategy. In early 2000, SABIC moved from 22 to 11 position in a few years in the global petrochemical industry. Petrochemical industry in Saudi Arabia enjoys strategic advantages mainly through an increasing demand, prevailing prices and forecast for oil and petrochemical prices.
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Some challenges that still faced by petrochemical industry in Saudi Arabia are high dependence on a skilled expatriate work-force, high costs of technology transfer, low levels of productivity of the Saudi workforce, and so on. Most of the challenge is related to the ability and capability of human resource. From this case, we learn that by doing analysis of external environment firms can understand the opportunities and threats they have. By knowing their strengths and weaknesses, firms can makes strategy actions in facing their challenge in business. To be more comprehensive in knowing their strength and weaknesses; not only from external environment, firms should analyze the internal environment such as resources, capabilities, core competencies, and value chain analysis.
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