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Retail Business Environment

Notes The Economic Environment

The Market size/age: Is the market relatively small or large, and can it be broadly characterized
by its stage of development (start-up, emerging, growth, maturing, declining)?
Industry attractiveness: The overall attractiveness of an industry is determined by the interaction
of these key structural forces.
Industry structure analysis: The initial analysis of industry structure provides a snap of the
competitive environment.

The Competitive Environment

There are five basic competitive forces, which influence the state of competition in an industry.
Porter calls it the ‘structural determinants of the intensity of competition’, which collectively
determine the profit potential of the industry as a whole. Some industries have a bigger profit
potential than others, since keener competition means lower profits. These five competitive
forces re shown in the figure 2.1 below.

Figure 2.1: Five Competitive Forces

The Threat of New Entrants: The strength of the threat from new entrants depends on two factors:

1. The strength of the barriers of entry.
2. The likely response of existing competitors to the new entrants.
The Threat from Substitute Products: The products or services that are produced in one industry are
likely to have substitutes that are produced by another industry, which satisfy the same customer’s
need. Which firms in an industry are faced with threats from substitute products, they are likely
to find that demand for their products is relatively sensitive to price. An important threat they
must watch out for is any improvement in the price-performance characteristics of these substitutes.
The Bargaining Power of Customers: The profitability of an industry depends on the customers’
bargaining power. Just how strong the position of customers will depend on a number of
factors:

1. If the customers’ purchase represent a substantial proportion of total sales by the producer,
the customer will be in a strong position relative to the seller.

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