Welcome to "Analysing the Industry Environment"!
Hi there! Welcome to one of the most important parts of your Business studies. Think of a business like a ship at sea. To reach its destination (profit and success), the captain needs to understand the weather, the height of the waves, and where the other ships are. In business, we call this analysing the industry environment.
By the end of these notes, you’ll understand how market conditions and the world around a business can change its fortunes. Don't worry if some of the economic terms seem tricky at first—we'll break them down step-by-step!
1. Understanding Market Conditions
The "market" is simply where buyers and sellers meet. The conditions of that market determine how hard a business has to work to make a profit.
The Degree of Competition
This refers to how many other businesses are trying to sell the same thing to the same customers.
• High Competition: Many businesses (like coffee shops in a city). This usually leads to lower prices and more choice for customers.
• Low Competition: Few businesses (like a single train company). This gives the business more power to set higher prices.
Barriers to Entry
Imagine a market is a room. Barriers to entry are the "locks on the door" that make it hard for new businesses to join.
Example: To start a new airline, you need millions of dollars for planes and legal permits. That is a high barrier to entry. To start a dog-walking business, you just need a leash. That is a low barrier to entry.
Quick Review:
• More competition usually means lower prices.
• High barriers to entry protect existing businesses from new rivals.
2. Measuring the Market (The Math Part)
To understand an industry, we need to look at the numbers. There are three key calculations you need to know for your exam. Don't panic—the formulas are quite simple!
Market Size
This is the total value or volume of sales in the whole market.
Example: If the total value of all smartphones sold in a country is \$10 billion, that is the market size by value.
Market Growth and Decline
This shows if the market is getting bigger or smaller. We calculate the percentage change:
\( \text{Percentage Change} = \frac{\text{New Level} - \text{Old Level}}{\text{Old Level}} \times 100 \)
Concentration Ratio
This measures how much "power" the biggest businesses have. It is the combined market share of the top few firms (usually the top 3 or 5).
Formula: Just add the market shares of the biggest companies together!
Example: If Firm A has 30%, Firm B has 25%, and Firm C has 20%, the 3-firm concentration ratio is \(30 + 25 + 20 = 75\%\).
Common Mistake to Avoid: When calculating percentage growth, always make sure you divide by the old (original) number, not the new one!
3. The External Environment
The external environment includes things happening outside the business that the manager cannot control. They can only react to them. You can think of these as "The Big Six" factors from your syllabus:
1. Incomes
When people earn more money, they have more disposable income to spend.
• Impact: Luxury goods (like designer watches) see a big increase in demand. Basic goods (like cheap bread) might actually see a decrease as people "trade up."
2. Interest Rates
This is the cost of borrowing money or the reward for saving it.
• High Interest Rates: Borrowing is expensive. Customers spend less (especially on expensive items like cars), and businesses find it harder to take out loans to grow.
3. Exchange Rates
This is the price of one currency in terms of another.
Memory Aid: Remember SPICED!
Strong Pound (or currency) Imports Cheap Exports Dear.
Explanation: If your currency is strong, it's cheaper to buy materials from abroad, but your products look more expensive to foreign customers.
4. Costs of Inputs
This refers to the price of raw materials, electricity, or rent. If the price of oil goes up, it costs more to deliver goods, which might lower a business's profit.
5. Government Policies
Governments can change the rules at any time!
• Examples: Increasing taxes, changing the minimum wage, or introducing new environmental laws.
6. Competition (Including from Abroad)
In a global world, a small business isn't just competing with the shop next door; they are competing with websites in other countries. This international competition forces businesses to be more efficient.
Did you know?
A change in the exchange rate can be "good news" for one business (an importer) but "bad news" for another (an exporter) at the exact same time!
4. Summary and Key Takeaways
Understanding the industry environment is all about spotting opportunities and threats.
Key Takeaways:
• Market Conditions: Competition and barriers to entry define how "crowded" or "locked" a market is.
• Market Data: Use formulas for size, growth, and concentration to get a factual picture of the industry.
• External Factors: Incomes, interest rates, exchange rates, costs, government policy, and competition are the "weather conditions" that a business must navigate.
Encouragement: You've just covered a major chunk of the syllabus! If the formulas or exchange rates still feel a bit "fuzzy," try practicing one calculation today. You've got this!