Strategic Plan Mr Myers: I Am Writing

Strategic Plan

Mr Myers:

I am writing today to impress upon you the value of conducting an analysis of the industry environment when developing a strategic plan, and offering a recommendation for a methodology that can make the strategic planning process simpler.

Environmental scanning is the second step of the strategic planning process (QuickMBA, 2010). The first step, as you know, is setting the organization's mission and objectives. Before the company can proceed from there with formulating and implementing a strategy, the organization will benefit from having a sense of the industry and macroenvironment in which the company operates. This is what is known as environmental scanning. This scanning includes an analysis of areas such as the political environment, technology, the economy, and other broad frameworks such as international trade. The competitive environment is also subject to considerable analysis during this process. It is important, if we are to outperform our competitors, that we understand as much as possible about them, and what makes them succeed.

The industry environmental conditions are governed by a lot of different factors, and when each of these factors is understood, the strategic plan will be better. The strategic plan should factor in what the competitors are doing and why. It should also factor in potential future competitors, as these can affect the strategic plan (Business Link, 2012).

One of the most tried and true methodologies for understanding the industry environment is Michael Porter's Five Forces model. What the Five Forces model does is it allows the organization to explore its industry environment from the perspective of profitability. The idea is that whatever we do, we want to earn profits. Porter has distilled the industry environment into five key factors that influence profitability. In undertaking a Five Forces analysis, each factor will be analyzed in terms of whether it is favorable or unfavorable, within the context of our firm. Other competitors may have more favorable or less favorable conditions than us, depending on the way that our company interacts with the external competitive environment. Porter intended this model to be used in the formulation of strategy, because the industry conditions will show how the firm can best achieve profitability.

The five forces are the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, the threat of substitutes and the intensity of rivalry within the industry. The more bargaining power the firm has, the more control it has over prices. An example of this can be seen with Wal-Mart -- they control the prices they pay, which allows them to set prices in a way that delivers profit for the company and simultaneously value for the consumer. In the reverse, airlines have little control over the price of jet fuel, and they undertake substantial hedging programs in order to achieve some cost certainty that allows them to set competitive prices.

The threat of new entrants is critical, because new companies can undercut existing players. The more firms that are in an industry, the harder it will be to differentiate and derive profits. For example, Blackberry was profitable before Apple and Google entered the smartphone market and took all of its customers away. The threat of substitutes is also a threat to one's ability to make profits. Where new competitors can cause a firm to lower prices to compete, substitutes can eliminate the market for your product entirely. This helps with strategy, because the firm needs to understand what pocket of the market it can operate in over the long run, and should build its strategy around where the opportunities lie, positioning itself to take full advantage of those opportunities.

The intensity of rivalry can also dictate how much price competition there is, or how much of a company's profits must be expended on competing. For example, the intense rivalry between Coke and Pepsi has not hindered these companies' ability to charge premium prices for their drinks, but it has caused them to spend hundreds of millions more than they would if the rivalry was not so intense.