Thursday, May 25, 2017

External and Global Environment

Anytime you are considering developing and starting a new business you must take a number of factors into consideration. A very helpful way of beginning the process is through the Five Forces Method of analyzing industry competition. The Five Forces Method discusses five major factors to consider; Threat of New Entrants, Bargaining Power of Suppliers, Bargaining Power of Buyers, Threat of Substitutes and Industry Rivalry (Pearce & Robinson, pg. 98, 2016). All of these factors must be carefully examined against the ability of the business to operate, turn a profit and serves its customers or clients accordingly.
One industry I have always been interested in is Facility Management mainly because I have been working in the industry for over 10 years and understand what works or doesn’t work very well. This is an industry full of local and national vendors that supply maintenance and construction services to various businesses across the country. There are a lot of vendor options out there but most of them fail because they try to undercut costs to gain business and lose sight of the customer service aspect of the relationship. When looking at the five forces method and applying it to this industry you would get the following results:
    • Threat of New Entrants - New businesses are always looking to gain entry into this segment. At the minimum, entry into the market can be gained on a very small capital investment. Utilizing a support call center and small office resources, a new company can begin operations. There are insurance requirements and of course much more detail in getting it off the ground but from an investment standpoint it is manageable for a single investor.
    • Bargaining Power of Suppliers When operating a national facility management company, subcontractors (suppliers) can drive up the cost of work depending on the demand of a particular city. The lower the demand for work, the lower the costs typically are and the national facility management firm stands to gain more profit margin. In high demand cities such as New York City, profit margins are smaller. Newer facility management firms typically start businesses in a region with a healthy mix of high demand work and low demand work.
    • Bargaining Power of Buyers - Within the Facility Management industry, buyers have the most bargaining power out of all players in the process. As corporations scale back on preventative maintenance programs to reduce costs, facility management companies lose revenue but must maintain less business from their clients at a more efficient rate. With a solid company model geared toward working with clients to save repair and maintenance costs, a company can succeed and hold business for a long time.
    • Threat of Substitutes - Demand for repair and maintenance needs will always exists for businesses. They might scale back on preventative programs or look for ways to extend them as long as they can but leaks, floods, store damages, security issues, etc. will continue to happen. 
    • Industry Rivalry - The Facility Maintenance Industry has a very intense rivalry amongst each potential supplier. Suppliers are always contacting businesses that perform work for competitors trying to pry away a piece of the market share. In the long run, a good company with competitive pricing and a great customer service program will always win out over the lowest cost.
References
Pearce, J., Robinson, R. (2016-01-02). Strategic Management, 13th Edition. [Kaplan]. Retrieved fromhttps://kaplan.vitalsource.com/#/books/0077807634/

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