The external environment of an industry is the factors that affect its ability to fulfill its aims and function in the right manner. It is also called the operating environment. These are the conditions that influence the activities and choices of an industry and it determines the available opportunities and risks.
Some examples of factors in the external environment are the customer satisfaction, laws and regulations, competition and the public opinion. For an industry to maintain its presence, it must be well versed in its external environment. This discussion provides a background for the analysis of a case study in the gaming industry.
Macro Environment
The macro environment entails the industries, companies, competitors and the clients of a particular industry. The factors that affect the macro environment are technology, economic conditions, legislation and regulation, population demographics and societal values.
Firstly, technology in the video game industry is very vital. There are always new developments in the gaming industry. The key competitors develop new games with better features. These features are the graphics and rendering capabilities and processing abilities. The new modifications have a greater computing power and this provides new experiences to the consumers.
The industries which pay a lot of attention to improving their technology are better placed in greater strategic positions. This increases their sales and elevates them in comparison to their competitors. There is a high demand for products that embrace technological changes. Because of the increase in demand, the consumers increase and this, in turn, increases the profitability margins. The companies in this industry have a competitive edge.
The Economy
Secondly, the economy also affects the performance of the industry. The economy of the country as a whole depends on how consumers react to different products. For instance is the economy is dwindling, the consumers of the video games will decrease. This will have negative effects on the industry. The industry needs to elevate itself despite the cyclical turns of the economy.
Inflation is the increase of money supply in the hands of the people and this leads to the increase of prices of the products in the video game industry. Inflation and a dwindling economy reduce the demand for games. This decreases the profitability of the representative companies and the competitive rivalry.
Legislation
The third factor in the macro environment is legislation. Legislation and regulations are the laws that govern this industry. Every industry has its code of conduct and business ethics within which it operates. This determines the framework within which the company operates. If the companies in this industry are limited by laws this will reduce their activities. This will limit their innovation and creativity.
An industry must have its codes of conducts readily available to reduce losses brought by lawsuits. Lawsuits may emerge due to wars between two companies and they normally involve billions of dollars. This will reduce the demand for the products of the company which is being sued and reduce profitability and its competitive rivalry.
Population Demographics
The fourth factor which is population demographics determines the success of a certain industry. For example, video games are targeted to gamers who are mostly boys and men. If the population has more men this will increase sales and profitability.
Porters 5 Force Analysis
This represents the forces that affect strategic decisions of an industry. The forces range from weak, moderate, strong and intense. The weak forces or threats give the companies in the industry more freedom of operation. This gives them more power and they dominate the industry and they can all make decisions without interference.
Moderate forces also give freedom to the companies which comprise the industry. Strong forces and threats affect the operations of the companies that are represented in the industry. The companies can’t make all the decisions of how the industry will operate. The intense forces and threats limit the business operations. They limit the decision making power of the industry. This makes their freedom of choice very narrow.
There are many competitors in the video game industry. They all battle in having a market share of the consumers. The companies must, in turn, be engaged in competitive market strategies and product differentiation in order to stay above the park in this business.
The geographical coverage determines the strategic choices of trade. Firms that operate locally have consumers with key preferences. It is easy to cater for these markets. The firms that operate regionally and nationally have to each improve their strategies because they are dealing with different classes of people. The decision making has to involve research of these groups of people. The firms of the industries that cater to the global market have different strategies. This is because people from different countries have different characteristics and specifications.
It is important for industries to differentiate their products from developed, developing and less developed countries. For example, video games for developed countries might differ with those of less developed countries. The industries also need to come up with strategies of erecting headquarters in these countries. Firms that occupy the same location are in the same strategic group.
The choice of distribution channel affects the strategic choices. Industries can market their products through retail, wholesale, multiple channels or the internet. Each industry makes different strategic decisions depending on these factors. The video game industry sells using multiple channels and so these firms that are in the industry have to put this into consideration when making their decisions and strategies. The price range also matters. Highly priced services and products require well planned out strategies
