1. Taking Account of the Environment

　　When comparing the performance of two or more organisations that operate in different markets or countries, a simple comparison may not be valid. Instead, account needs to be taken of the factors that are different in the two environments, as these will clearly influence the relative performance of the two organisations. For example, a multinational company comparing the performance of its subsidiaries in different countries will need to take these influences into account.

　　2. Market Conditions

　　The nature of the market within which the organisation operates will influence its performance. Markets are often analysed using the Porter's five forces model, which you should be familiar with from other ACCA papers. The five forces that influence the competitive environment of an industry are given as:

　　Threat of new entrants

　　Bargaining power of buyers

　　Bargaining power of suppliers

　　The threat of substitutes

　　Competitive rivalry.

　　2.1 Threat of New Entrants

　　If an industry is experiencing high returns, new entrants will be attracted into the industry. This reduces the attractiveness of the market, as new entrants will lead to lower profits.

　　2.2 Power of Buyers

　　Where buyers are powerful they can exert influence on the market (e.g. demanding favourable prices or special service). This reduces the profit of companies operating in the market. Factors which influence the power of buyers include:

　　2.3 Power of Suppliers

　　Similar to the power of buyers, but where suppliers exert influence on the market. Factors include:

　　A large number of customers relative to the number of suppliers in the market.

　　Costs of switching suppliers are high (e.g. switching software suppliers).

　　Opportunity for the supplier of forward integration.

　　Customers are fragmented, so there is little bargaining power.

　　2.4 Competitive Rivalry

　　This relates to the behaviour of other competitors in an industry. In a highly competitive industry, companies continually fight for customers (e.g. by offering lower prices). Factors that affect how competitive a particular industry is include:

　　Number of competitors and relative size

　　Rate of market growth

　　Differences in the products

　　Exit barriers