This post is summarized from chapter 3 of the book “Strategies for E-business: Creating Value through Electronic and Mobile Commerce by Tawfik Jelassi and Albrecht Enders” combined with various sources from the internet.
The macro-environment takes a broad perspective of the factors that influence a firm’s strategy and performance. Evolving trends in the macro-environment can present significant opportunities and threats to a firm’s strategy. Therefore, at the outset of any strategy formulation, it is useful to analyze the trends that characterize the macro-environment in its different dimensions: political, legal, economic, social and technological.
The political and legal environment
The political and legal environment relates to issues on different organizational levels. At country and industry levels, it includes issues such as governmental subsidies, taxation, monopoly legislation and environmental laws.
The economic environment
The economic environment refers to broader economic developments within the context of a country, a regional dimension or a global dimension. Important factors in the economic environment are interest and exchange rates, evolution of stock markets and, more generally, economic growth rates. One example of how this dimension impacts the business was the rise and fall of dotcom industries. The favourable economic environment of the 1990s and the resulting cheap availability of capital contributed strongly to the quick rise of Internet companies. This rise found its abrupt halt in the burst of the bubble in March 2000 and the subsequent demise of most of these Internet start-ups.
The social environment
The social environment considers factors such as population demographics, income distribution between different sectors of society, social mobility of people, and differing attitudes to work and leisure. Social developments were the main driver behind the development of numerous e-business applications. For instance, if, due to their careers, members of a developed society increasingly become cash-rich but time-poor, then businesses that address this problem for the individual consumer can create substantial benefit. The online retailer Tesco.com, for example, primarily targets customers who do not have the time or the desire to systematically shop in a physical grocery store.
The technological environment
The technological environment is of significant importance in the context of e-business. Technological innovations (such as the Internet or wireless devices) led to the emergence of new market opportunities and business models. After most of the technological standards have become more common-place in wireline e-business applications, much attention has been paid to the evolution of new technology standards for wireless devices..
Five-forces framework
Porter proposes a five-forces framework, which outlines the main factors determining a firm’s ability to capture the value it creates. In essence, this ability is determined largely by the attractiveness of the industry in which a firm competes. The five structural features that determine industry attractiveness are: (1) industry rivalry, (2) barriers to entry, (3) substitute products, (4) bargaining power of suppliers and (5) bargaining power of buyers.
Industry rivalry
Industry rivalry occurs when firms within an industry feel the pressure or the opportunity to enhance their existing market position. High intensity of rivalry within an industry results from the following structural factors:
- Large number of competitors.
- High fixed costs..
- High strategic relevance.
- Little differentiation between products.
- Low growth rate of the industry.
- Excess capacity.
Barriers to entry
Barriers to entry determine the threat of new competitors to enter the market of a specific industry. New entrants, bringing new capacity and the desire to gain market share, have two negative effects on the attractiveness of an industry. First, new entrants take away market share from existing incumbents. Second, they bid down prices, which in turn reduces the profitability of the incumbent companies. Consequently, profitability of any given industry tends to decrease as barriers to entry are lowered, and vice versa. In general, high barriers to entry result mainly from the following factors:
- High fixed costs
- Trust and brand loyalty
- A steep learning curve
- High switching costs and strong network effects
- Strong intellectual property protection
Substitute products
The intensity of pressure from substitute products depends on the availability of similar products that serve essentially the same or a similar purpose as the products from within the industry. As the availability and quality of substitute products increase, so profits generated within the industry tend to decrease. This is due to the fact that substitutes place a ceiling on prices that firms within the industry can charge for their products. The Internet has helped to increase the pressure from substitute products, as it tends to increase the variety of products available to customers.
Bargaining powers of buyers and suppliers
The bargaining power of buyers tends to be high (and that of suppliers low) if the industry displays the following characteristics:
- High concentration of buyers
- Strong fragmentation of suppliers
- A high degree of market transparency
- Products are increasingly becoming commodities
- Low switching costs and weak network effect
The perspective offered by the five forces framework might seem to be too static in a rapidly changing business world, where industries are in constant flux. It is, indeed, increasingly difficult to define industry boundaries, which are becoming more and more blurred due to, among others, mergers and acquisitions. However, this does not mean that the five forces framework has become irrelevant, since it still helps to pinpoint competitive and industry conditions that are subject to change. With the rising importance of the Internet, it has become more important to think about its business impact.
