 Environmental analysis for a

business looks at the factors

inherent in a business's
environment that may have
some impact on the growth or
profitability of the business.
 In order to perform an
environmental analysis, you
must thoroughly understand
how organizational or business
environments are structured.
 For purposes of environmental
analysis, you can divide the
environment of your organization
into three distinct levels:
 Internal environment,
 Operating (industry) environment,
and
 General (macro) environment.
Nature and purpose:
 Basis for Objectives & Strategies

 Internal strengths/weaknesses

 External opportunities/threats

 Clear statement of mission

• Management
• Marketing
• Finance/Accounting
• Production/Operations
• Research & Development
• Management Information Systems
1. Functional/Business Areas:
▪ Vary by organization
▪ Functional areas, Business units, and
Divisions have differing strengths &
weaknesses
▪ Firms have to identify strengths that
cannot be easily matched or imitated
by competitors
2. Distinctive Competencies
Refer to some characteristic of a
business that it does better than its
competitors. Competency unique to a
business organization
3. Competitive Advantage
Building competitive advantage
involves taking advantage of
distinctive competencies
• SWOT ANALYSIS
• VALUE CHAIN ANALYSIS
• RESOURCE-BASED VIEW
Most often, managers would start
analysing their firm’s internal
environment by firstly seeking answers
to the following questions:
 How well is our current strategy
working?
 What is our firm’s current situation?
 What are our firm’s strengths and
weaknesses?
 The SWOT analysis is used to create an
overview of their firm’s strategic situation
 It is used to asses the firm’s internal
capabilities, and the results used to shape the
firm’s strategic options.
 It provides an organized basis for insightful
discussion and information sharing which may
improve the quality of choices and decisions
that managers subsequently make.
 SWOT is based on the assumption that an
effective strategy derives from a sound “fit”
between a firm’s
 Internal Resources (strengths and
weaknesses), and its
 External Situation (opportunities and threats).
 Information needed to identify opportunities and
threats in a firm’s environment is obtained by
carrying out both an environmental and industry
analyses.
 A good fit maximises a firm’s strengths and
opportunities, and minimizes its weaknesses
and threats.
Opportunities
 This is signified by a major favourable
situation in a firm’s environment, i.e. key
trends are sources of opportunities
 Changes in competitive or regulatory
circumstances.
 Identification of a previously overlooked
market segment.
 Technological changes

 Improved relationships with buyers and/or

suppliers.
Threats

 This is signified by a major unfavourable situation

in a firm’s environment.
 Threats are key impediments to a firm’s current or
desired position.
 A threat to a firm’s success could be presented by;
 Slow market growth,
 Entrance of new competitor
 Increased bargaining power of key buyers or
suppliers
 Technological changes
 New or revised regulations
Strengths
 This is a resource or capability that is
controlled or available to a firm
 that gives it an advantage relative to
its competitors in meeting the needs
of the customers it serves
 Strengths arise from the resources and
competencies available to the firm.
 A skill or important expertise – for instance a proven track record in defect-free
manufacture, expertise in providing consistently goods customer service or unique
advertising and promotional talents etc
 Valuable physical assets - state-of-the-art plants and equipment, distribution
facilities, ownership of valuable natural resource deposits or sizable amounts of cash
and marketable securities.
 Valuable human assets – an experienced and capable workforce, talented
employees, motivated and energetic employees, astute entrepreneurship and
managerial know-how etc
 Valuable intangible assets – brand name, company reputation, buyer goodwill,
or a motivated and energized workforce etc
 Valuable organizational assets – proven quality control systems, key patents, a
base of loyal customers, well defined functioning company intranet, a system for
accessing and exchanging information with suppliers and key customers etc
 An achievement or attribute that puts the company in a position of market
advantage – low overall costs, market share leadership, a superior product, a wide
product selection, strong name recognition or exceptional customer service.
• Good and varied academic programmes
• Good reputation/good will
• Congenial campus
• Structures for socialisation available to
both faculty and students
• Highly qualified and experienced and
competent academic staff
Weaknesses
▪ These are limitations or deficiencies in
one or more of a firm’s resources or
capabilities relative to its competitors
 that create a disadvantage for the
firm in its ability to effectively meet
customer needs.
• Deficiencies in competitively important skills or expertise
or intellectual capital of one kind or another
• A lack of competitively important physical, organizational
or intangible assets
• Missing or weak competitive capabilities in key areas.
 Examples of UG’S WEAKNESSES
• Limited financial resources
• Over centralized and bureaucratic Decision making
• No maintenance of building and assets
• Overloaded infrastructure
• Lack of infrastructure for the disabled
 This is an analytical diagram that
illustrates how SWOT analysis might
take the managerial planning discussion
into a slightly more structured approach
to aid strategic analysis.
 The objective is to identify one of four
distinct patterns in the match between a
firm’s INTERNAL RESOURCES and
EXTERNAL SITUATION.
Numerous Environmental
Opportunities

Cell 3 Cell 1
Supports a turnaround- Supports an aggressive
oriented strategy strategy
Critical Substantial
Internal Internal
Weakness Strength
Cell 4 Cell 2
Supports a defensive Supports a diversification
strategy strategy

Major Environmental
Threats
CELL 1

▪ This represents the firm’s

most favourable situation.
Numerous Environmental
Opportunities
▪ The firm faces several
Cell 3 Cell 1
environmental opportunities
and has numerous strengths
Supports a turnaround- Supports an aggressive
oriented strategy strategy
Critical Substantial

that encourage the pursuit of

Internal Internal
Weakness Strength
Cell 4 Cell 2

those opportunities
Supports a defensive Supports a diversification
strategy strategy

Major Environmental

 This situation suggests

Threats

that the firm should use

growth-oriented
strategies to exploit the
favourable match
CELL 2
▪ Here, a firm that has
identified several key
Numerous Environmental
strengths also faces an
Opportunities
unfavourable
Cell 3 Cell 1
environment.
Supports a turnaround- Supports an aggressive

 In this situation, a
oriented strategy strategy
Critical Substantial

firm’s strategies would

Internal Internal
Weakness Strength
Cell 4 Cell 2
Supports a defensive
strategy
Supports a diversification
strategy seek to redeploy those
strong resources and
Major Environmental
competencies to build
Threats
long-term
opportunities in more
opportunistic product
markets.
CELL 3
▪ Here, a firm faces
impressive market
opportunities, but is Numerous Environmental

constrained by weak Opportunities

internal resources.
Cell 3 Cell 1
Supports a turnaround- Supports an aggressive
oriented strategy strategy

 The focus of the

Critical Substantial
Internal Internal
Weakness Strength

firm’s strategy is to
Cell 4 Cell 2
Supports a defensive Supports a diversification
strategy strategy

eliminate the
internal weaknesses
so that it can pursue
Major Environmental
Threats

the market
opportunity more
effectively.
CELL 4
▪ This represents the
least favourable
situation for a firm Numerous Environmental
Opportunities

 The Firm faces major

environmental threats Cell 3 Cell 1

from a weak position. Supports a turnaround-

oriented strategy
Supports an aggressive
strategy
Critical Substantial
Internal Internal
 The situation clearly Weakness
Cell 4 Cell 2
Strength

calls for strategies that

Supports a defensive Supports a diversification
strategy strategy

can reduce or redirect

the firm’s involvement Major Environmental
in the products or Threats

markets it examined by
means of SWOT
analysis
1. A SWOT analysis can overemphasize
internal strengths and downplay external
threats.

Strategists have to remain vigilant against

building strategies around what the firm
does well now (i.e. its strengths) without
giving due consideration to the impact of
the external environment on those
strengths.
2. A SWOT analysis can be static and can
risk ignoring changing circumstances.
Critics of SWOT analysis warn that it is a
one time view of a changing, or moving,
situation.

3. A SWOT analysis can overemphasise a

single strength or element of strategy.

4. A strength is not necessarily a source of

competitive advantage.
It is an analysis that attempts to
understand how a business creates
customer value by examining the
contributions of different
activities within the business to
the value
It focuses on analyzing the
internal activities of a business in
an effort to:
 Understand costs
 Locate the activities that:
 Add the most value, and
 Differentiate from the
competition
 Identification of primary business
functions

 Identification of the discrete tasks

found in the important support
activities of the firm
1. Inbound Logistics - the receiving and
warehousing of raw materials, and their
distribution to manufacturing as they are
required:
 Real-time inbound inventory data

 Location of distribution facilities

 Trucks

 Materials handling

 Warehousing
2. Operations – the process of
transforming inputs into finished
products and services
 Standardized model
 Access to real-time sales and inventory
system
 Outbound Logistics – the warehousing
and distribution of finished goods
 Order processing
 Full delivery trucks
3. Marketing and Sales – the identification
of customer needs and the generation of
sales
 Pricing
 Communication
 Promotion
 Product based on community need
 Low prices
4. Service – the support of
customers after the products
and services are sold to them
 Delivery
 Installation
 Repair
 Customer service focus
1. Firm Infrastructure
 Organisational structure

 Control systems

 Company culture

 Management

 Legal

 Planning
2. Human Resources Management
 Professional development

 Employee relations

 Performance appraisals

 Employee recruitment

 Compensation

 Training programmes
3. Technology Development –
technologies to support value-creating
activities

 Integrated supply chain system

 Real-time sales information
4. Procurement – purchasing inputs
such as materials, supplies, and
equipment

 Real-time inventory
 Communication with suppliers
 Purchase supplies and materials
 Margin of profit depends on its effectiveness
in performing the activities efficiently so that
the amount the customer is willing to pay for
the product exceeds the cost of the activities
in the value chain

 A competitive advantage may be achieved by

reconfiguring the value chain to provide
lower cost or better differentiation
 A firm may create a cost advantage by:
 Reducing the cost of individual value chain
activities, or
 Reconfiguring the value chain
 Cost analysis is performed by assigning costs
to the value chain activities
 Cost obtained from the accounting report
may need to be modified in order to allocate
them properly to the value-creating activities
1. Approaches that focus on discovering cost
advantages and disadvantages:
 Identifying primary and supporting activities

 Rating the importance of each activity in

providing value to the product or service
 Identifying the cost drivers that cause a change
in the activity cost
 Identifying linkages and dependencies

 Identifying cost reduction and value

improvement opportunities
2. Approaches with a focus on finding
differentiation include:
 Identifying activities that create value
for your customers
 Identifying differentiation activities
that improve customer value
 Identifying the best opportunity for
differentiation
 Finding and utilizing the right people,
 Motivating the team,
 Remaining relevant,
 Incorporating technology, and
 Listening to customer feedback.
1. One can easily identify those activities where you
can quickly reduce cost, optimize effort, eliminate
waste, and increase profitability.
2. Analyzing activities also gives insights into
elements that bring greater value to the end user,
e.g.
 Negotiating with suppliers on raw material cost,

 Focusing on end-user experiences that are

enhanced by new communication or customer
service experiences, and
 Identifying activities that are better served by
outsourcing
VCA is no simple feat. Some of the difficulties
involve:
 Gathering data - which can be labor- and
time-intensive,
 Identifying the tasks or functions that can
add perceived or real value, and developing
and deploying the plan.
 It is not always easy to find appropriate
information in order to break your value
chain down into primary and supporting
activities.
 The resource-based view explains how some businesses are able to
achieve extraordinarily profits or returns compared with others.
 This profit is made because the organization has resources or
competences that permit them to produce at lower cost or generate
a superior product or service at standard cost in relation to other
businesses with inferior resources or capabilities (Johnson et al,
2005).
 RBV theory asserts that resources are what help a firm exploit opportunities and
neutralize threats.
 Resource types:
 Physical (plant and equipment, location, technology, raw
material, HR (training, experience, skill, abilities))
 Organisational resources (structure, information systems, patents,
trademarks, copyrights, etc)
 Rare (it must be uncommon to competitors. )
 Inimitability (If a resource is not easily imitated, then any profits
generated are more likely to be sustainable because one that can easily be imitated
only generates temporary value. (Dess and Lumpkin, 2003). )

 Not easily substitutable (According to Dess and Lumpkin, (2003)

“though it may be impossible for a firm to imitate exactly another firm’s resource,
it may be able to substitute a similar resource that enables it to develop and
implement the same strategy”.)

 Proponents of the RBV theory assert that the more a resource is rare, valuable,
inimitable and non substitutable, the stronger a firm’s competitive advantage will
be and the more sustainable (David, 2013).
EXTERNAL ANALYSIS
External Analysis

It consists of 2 main activities:

Macro-Environmental
Analysis
Industry Analysis
External Analysis
Identify & evaluate factors beyond the
control of a single firm, e.g.
 Increased foreign competition
 Population shifts
 Aging society
 Fear of traveling
 Stock market volatility
Purpose of External Analysis

Identify

Opportunities

Threats

Constraints
External Analysis
Gather competitive intelligence
Social
Cultural
Demographic
Environmental
Governmental
Legal
Technological
Sources of Information
• Internet
• Libraries
• Suppliers
• Distributors
• Salespersons
• Customers
• Competition
Key Economic Variables to be Monitored
 Shifts in economy, i.e. to service economy
 Availability of credits
 Levels of disposable incomes
 Interest rates
 Inflation rates
 Exchange rates
 Budget deficits levels
 GDP trends
 Consumption patterns
Key Economic Variables to be Monitored

 Unemployment trends
 Stock market trends
 Trends in foreign economies, especially USA
 Import/Export factors
 Monetary policies
 Fiscal policies
 Tax rates
 OPEC decisions
 Demand shifts
Social Factors
▪ The social factors that affect a firm
include BELIEFS, ATTITUDES, OPINIONS,
and LIFESTYLES of persons in the firm’s
external environment, as developed from
• Cultural,
• Ecological
• Demographic,
• Religious,
• Educational, and
• Ethnic conditioning.
Social Factors
▪ As social attitudes change, so too does the
demand for various types of consumables,
such as clothing, books as well as leisure
activities, among others.
▪ Social forces are also dynamic.

They respond to the constant changes

that emanate from individuals’ controlling
and adapting to environmental factors in
efforts to satisfy their desires and needs.
Political Factors
 Trade decisions
 Patent Laws
 Antitrust laws
 Tax programmes
 Minimum wage legislation
 Pollution and
 Pricing policies, i.e. subsidies and many
other actions aimed at protecting
employees, consumers, the general public,
and the environment
Technological Factors
▪ To avoid obsolescence and promote
innovation, a firm must beware of technological
changes that might influence its industry.

Creative technological adaptations can

suggest possibilities for new products or
for improvements in existing products or
in manufacturing and marketing
techniques
Technological Factors

▪ A technological breakthrough can have a sudden

and dramatic effect on a firm’s environment.

It may spawn sophisticated new market and

products or significantly shorten the
anticipated life of a manufacturing facility.

▪ Thus all firms, especially, those in the turbulent

growth industries, must strive for an understanding
of both the existing technological advances and
the probable future advances that can affect their
products and services.
Technological Factors
▪ This attempt to foresee advancements and
estimate their impact on an organization’s
operations is known as TECHNOLOGICAL
FORECASTING:

▪ Technological forecasting can help protect

and improve the profitability of firms in growing
industries. It alerts strategic managers to both
impending challenges and promising
opportunities.
Ecological Factors
 ECOLOGY is the relationships among human
beings and other living things and the water, air,
and soil that supports them.

 Threats to the life-supporting ecology caused

principally by human activities in an industrial
society are commonly referred to as Pollution.

Specific threats to the life-supporting

ecology include global warming, loss of
habitat and biodiversity, as well as air, water,
and land pollution
Ecological Factors
▪ As major contributors to ecological pollution,
business is now being held responsible for
eliminating toxic by-products of their current
manufacturing processes, and for cleaning up
the environmental damages they previously
caused

Now, managers are increasingly being

required by governments or are being
expected by the public to incorporate
ecological concerns in their decision-
making
Ecological Factors
 Environmental legislations impacts
corporate strategies worldwide.

Many companies fear the consequences

of highly restrictive and costly
environmental regulations.

However, some manufacturers view such

new controls as an opportunity, capturing
markets with products that help customers
satisfy their own regulatory standards.
The International Environment
▪ Monitoring the international environment
involves assessing each non-domestic
market on the same factors that are used in
a domestic assessment.

 While the importance of factors will

differ, the same set of considerations
can be used for each country
The International Environment
▪ Global Strategy in Action list the following
factors as being used to assess
international environments.
• Economic

• Political

• Legal

• Social
The International Environment
▪ One complication to the assessment
process of the international
environment and which must be
considered is the interplay among
international markets.

 For example, in recent years,

conflicts in the Middle East have
made collaborative business
strategies among firms in traditionally
antagonistic countries difficult to
implement.
The Industry Analysis
How do Competitive Forces Shape
Strategy?

 The essence of strategy formulation

is to cope with competition

 Therefore, the collection &

evaluation of data on competitors
is essential for successful strategy
formulation
Key Questions Concerning Competitors
 Their strength
 Their weaknesses
 Their objectives and strategies
 Their responses to external variables
 Their vulnerability to our alternative
strategies
 Our vulnerability to their strategic counter-
attack
 Our product/service positioning
Key Questions Concerning Competitors
 Entry and exit of firms into the industry
 Key factors for our current position in
industry
 Sales/profit rankings of competitors
 Nature of supplier and distributor
relationships
 Threat of substitute products/service
 Should we keep our strategy secret from
employees and stakeholders?
How do Competitive Forces Shape
Strategy
 The state of competition in an
industry depends on five basic
forces.
 The threat of new entrants
 The threat of substitutes
 The bargaining power of buyers
 The bargaining power of suppliers
 Competitive rivalry
Threat of Entry
 New entrants to an industry bring:
a) New capacity
b) The desire to gain market share, and
c) Often, substantial resources.

 Seriousness of the threat of entry depends on the

barriers that are present and on the reaction from
existing competitors that the entrant can expect.

 If barriers to entry are high, and a newcomer

foresee a sharp retaliation from entrenched
competitors, such newcomer will obviously not
pose a serious threat of entering.
Threat of Entry
There are six major sources of barriers to
entry:
1. Scale and experience
2. Differentiation (brand identification)
3. Capital requirements
4. Expected retaliation
5. Access to supply or distribution
channels
6. Legislation or government policies
Threat of Substitute Products
Substitute products or services can limit the potential
of an industry by placing a ceiling on the prices it can
charge. The critical factors to substitution threats are:
 The price/performance ratio of a substitute is still an
effective threat even if more expensive, so long as it
offers performance advantages that customers
value, e.g. aluminium and steel.
 Extra-industry effects – substitutes come from outside
the incumbents’ industry and should not be
confused with competitors’ threat from within the
industry.
 Substitute products that deserve the most attention
strategically are those that are produced by industries
earning high profits
Bargaining Power of Buyers
Buyers can:
 force down prices,
 demand higher quality or more service, and
 Play competitors against each other -
all at the expense of industry profits

Buyer power is likely to be high when

some of the following conditions prevail:
 Few concentrated buyers (Cocoa)
 Low switching costs (Aluminium extrusion)
 Buyer competition threat (Backward
integration)
Bargaining Power of Buyers
Conditions where consumers gain
bargaining power
 If they can inexpensively switch
 If they are particularly important
 If sellers are struggling in the face of
falling consumer demand
 If they are informed about sellers’
products, prices, and costs
 If they have discretion in whether and
when they purchase the product
Bargaining Power of Suppliers
Suppliers can be powerful by raising prices or
reducing the quality of the goods and services.
They can therefore squeeze profits out of the
industry
Thus supplier power is likely to be high where there
are:
 Concentrated suppliers (Iron ore industry)
 High switching cost (Microsoft)
 Supplier competition threat (Airlines and forward
vertical integration)
Rivalry Among Competing Firms
 Jockeying for positions is a type of intense rivalry among
existing competitors related to the presence of a number of
factors, as listed below:
1. Competitors are numerous or are roughly equal in
size and power.
2. Industry growth is slow, precipitating fights for market
share that involve expansion-minded members.
3. The product or service lacks differentiation or
switching costs, which lock in buyers and protect one
combatant from raids on its customers by another.
4. Fixed costs are high or the products are perishable,
creating strong temptation to cut prices.
5. Exit barriers are high
The Five-Force Model of Competition
Firm’s Competitive Position
▪ By assessing its competitive position, a firm can
improve its chances of designing strategies
that optimise its environmental opportunities.
▪ Development of competitors profiles enables a
firm to more accurately forecast both its short-
term and long-term growth and its profit
potentials.
▪ Although the exact criteria used in constructing
a competitor’s profile are largely determined
by situational factors, the following criteria are
often included:
Firm’s Competitive Position
 Market share
 Breadth of product line
 Effectiveness of sales distribution
 Propriety and key account advantages
 Price competitiveness
 Advertising and promotion effectiveness
 Location and age of facility
 Capacity and productivity
 Experience
 Raw materials
 Financial position
 Relative product quality
The Global Environment
 Globalization
refers to the strategy of
approaching worldwide markets with
standardized products
 Suchmarkets are created by end
consumers that prefer low-priced,
standardized products over high-priced,
customized products and by global
corporations that use their worldwide
operations to compete in local markets
Development of Global Corporation
 1stLevel: Export-Import activity – it has
minimal effect on the existing
management orientation or on existing
product lines
 2nd Level: Foreign licensing and technology
transfer – requires little change in
management or operation
 3rd Level: Direct investment in overseas
operations, including manufacturing plants
– requires large capital outlays and the
development of global management skills
Complexity of the Global Environment
 Globals face multiple political, economic,
legal, social, and cultural environment as well
as various rates of change within each of them
 Interactions between the national and foreign
environments are complex, because of
national sovereignty issues and widely differing
economic and social conditions
 Geographic separation, cultural and national
differences, and variations in business practices
all tend to make communication and control
efforts between headquarters and the
overseas affiliates difficult
Complexity of the Global Environment

 Globals face extreme competition,

because of differences in industry
structures within countries
 Globals are restricted in their
selection of competitive strategies by
various regional blocs and economic
integrations, such as EU, EFTA, and
the LAFTA
Control problems of a Global Firm
 Financial goals pay minimal attention to
goals of the host countries. This creates
conflicts in different parts of global firm,
between the whole firm and its home
and host countries, and between the
home country and the host country
themselves
 Major difference in measurement and
control systems often exist.
THANKS

FOR

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ATTENTION