Chapter -3:- Analysis of Strategic Environment
What is environment?
Managers must have a clear understanding about
the situation of company so that the company can decide the
direction and alter the strategy.
The managers must think strategically about the two facets of
the company’s situation i.e.,
1. The industry and competitive environment
wherein the company operates and the forces that helps in
reshaping this environment, and
2. Market position and competitiveness of the company
along with its resources and capabilities, its strengths and
weaknesses in relation to rivals.
It is very essential for managers to diagnose the internal and
external environment of the company to craft the strategy
1successfully.
CON’T...
Generally, refers to the surroundings, external
objects, influences or circumstances in which
someone or something occurs.
As the environment affects an organization in
many different ways, it is very essential for the
firms to understand it.
organizational environment
is sum of all the conditions, events and
influences that surround and influence it.
Classified into two, as
1. Internal environment
2 2. External environment
Characteristics of environment
Some of the significant characteristics of environment are
:
Environment is complex
Environment is Dynamic
Environment is multifaceted
Environment has a far-reaching impact
Group work
Why analyze internal Environment?
3 Why analyze external Environment?
Outcomes From External & Internal Environmental
Analyses
By Studying the External By Studying the
Environment, firms identify: Internal Environment,
firms identify:
•What they might
• What they can do?
choose to do?
Examine unique
Examine resources, capabilities &
opportunities & competencies –
threats
sustainable
competitive advantage
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1.The Internal Environment Internal Analysis of the Organization
As Shown in the previous diagram an analysis of the
internal environment enables an organization determine
what it can do- that is, the actions permitted by its
unique resources,
capabilities and
core competencies.
The proper matching of what a firm can do with what it
might do allows the development of strategic intent, the
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pursuit of strategic mission and formulation of strategies.
cont’d …
1. Strengths:
Strength is a resource, skill, or other advantage relative
to competitors and the needs of the markets a firm
serves or expects to serve.
It is a distinctive competence that gives the firm a
comparative advantage in the market place.
Strengths may exist with regard to financial resources,
image, market leadership, buyer/supplier relations etc.
6
cont’d …
2. Weaknesses:
Weakness is a limitation or deficiency in
resource, and capabilities that seriously impedes a
firm’s effective performance.
Lack of facilities, financial resources,
management capabilities, marketing skills, and
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brand image can be source of weaknesses.
Competitive Advantage
When a firm sustains profits that exceed the average for its
industry, the firm is said to possess a competitive
advantage over its rivals. The goal of much of business
strategy is to achieve a sustainable competitive advantage.
Michael Porter identified two basic types of competitive
advantage:
1. Cost advantage
2. Differentiation advantage
8
Con’T …
A competitive advantage exists when the firm is
able to deliver the same benefits as competitors
but at a lower cost (cost advantage), or deliver
benefits that exceed those of competing products
(differentiation advantage). Thus, a competitive
advantage enables the firm to create superior value
for its customers and superior profits for itself.
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1. Resources
Resources are the firm-specific assets useful for creating a
cost or differentiation advantage and that few competitors can
acquire easily. The following are some examples of such
resources:
Patents and trademarks
Proprietary know-how
Installed customer base
Reputation of the firm
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Brand equity
2. Capabilities
Capabilities refer to the firm's ability to utilize its
resources effectively.
An example of a capability is the ability to bring a
product to market faster than competitors .
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3. Core Competencies
The firm's resources and capabilities together form its core
competencies. These competencies enable innovation,
efficiency, quality, and customer responsiveness, all of which
can be leveraged to create a cost advantage or a differentiation
advantage i.e. core competencies serve as sources of
competitive advantage.
Resources & Capabilities: four criteria
Not all of a firm’s resources & capabilities have the potential to
be the basis for competitive advantage. This potential can be
12 realized when resources & capabilities are:
con’t …
Valuable: Allow the firm to exploit opportunities or
neutralize threats in its external environment
Rare: Possessed by few, if any, current & potential
competitors
Costly to imitate: When other firms cannot obtain
them or must obtain them at a much higher cost
Non-substitutable: The firm is organized appropriately
to obtain the full benefit of the resources in order to
realize a competitive advantage
13
cont’d …
When the four criteria are met, resources & capabilities
become core competencies.
Core competencies can become core rigidities
For building core competencies two conceptual tools or
frameworks might be available as firms search for
competitive advantage:
1. Value chain analysis, which is a framework for determining
which value creating competencies should be maintained,
upgraded, & developed and which should be outsourced.
14
cont’d …
2. Determining which of the firm’s resources & capabilities are core
competencies using the four criteria: valuable, rare, inimitable, non-
substitutable
The Generic Building Blocks of Competitive Advantage
Superior efficiency - the quantity of inputs that it takes to produce a given
output
Superior quality - customer-perceived value in the attributes of
products/services, reliability etc.
Superior innovation - anything new or novel, uniqueness
Superior customer responsiveness - identifying & satisfying the needs of
15 customers, customization
The Process of Internal Analysis
The process of internal analysis of an organization
involves four basic steps:
1. Developing a profile of financial, physical,
organizational, human, & technological etc
resources
2. Determining the key success requirement of the
product/market segments in which the organization
competes or might compete
3. Comparing the resource profile to the key success
requirements to determine the strengths &
weaknesses
4. Comparing the strengths & weaknesses of the
organization with those of its major competitor’s
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2.THE EXTERNAL ENVIRONMENT
A firm’s External environment is broken down into three parts:
● General
● Industry
● Competitor
A firm’s strategic actions are influenced by the conditions in all
three parts.
The Process of Performing an External Analysis
Gather relevant information
Identify the most important opportunities and threats
17 Rank them from the most important to the least important
1. OPPORTUNITIES:
An opportunity is a major favorable situation in a firm’s
environment.
Identification of
A previously overlooked market segment,
Changes in competitive or regulatory circumstances,
Technological changes, and
Improved buyer or supplier relationships could
18 represent opportunities for the firm.
2. THREATS:
A threat is a major unfavorable situation in a firm’s environment.
Threats are key ingredients to the firm’s current or desired
opposition.
Identification of
The entrance of new competitors,
Slow market growth,
Increased bargaining power of key buyers or suppliers,
Technological changes, and new or revised regulations
19 could represent threats to a firm’s success .
A. The General Environment (PESTE – Analysis)
Analysis of the general environment is focused on its future
impacts on firm’s performance.
In this respect, the awareness & understanding of an increasingly
turbulent, complex & global general environment is critical.
The general environment influences the firm’s strategic options
& the decisions made in light of this.
A scan of the external general environment in which the firm
operates can be expressed in terms of the following factors:
Political; Economic; Social; Technological, Ecology
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1. Political Factors
Political factors define the legal and regulatory parameters of
organizations’ operation.
Some key Political (Gov’al & legal) variables
Tax laws
Environmental protection laws
Level of government subsidies
Antitrust legislation
Terrorist activities
Import/Export regulations
Fiscal & monetary policies
Size of Government budget
Local, state & national elections
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2. Economic Factors:
Economic assessment must address:
The overall economic forecast and the likely funding stream that will be available.
The international and national forces that can affect the economic well being of the
organization should be analyzed.
Some key economic variables:
Availability of credit -Level of disposable income
Interest rates -Inflation rates
Unemployment trends -Consumption patterns
Stock market trends -Import/Export factors
Demand shifts -Price fluctuations
Fiscal policies -Tax rates
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3. Social Factors
These factors include the beliefs, values, attitudes, opinions,
and life style of persons depending up on cultural,
demographic, religious, and ethnic conditioning.
Some key socio-cultural variables:
Changing work values -Ethical standards
Growth rate of population -Life expectancies
Rate of family formation -Consumer activism
Geographic shifts in population -Attitudes towards business
Average level of education -Attitudes towards leisure time
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4.Technological Factors:
Organizations must strive to understand the existing scientific or
technological advances:
To avoid obsolescence and promote innovation, the organization must be
conscious of technological changes that could affect its operation
It should understand that new technologies might require new operation
systems and bring about sudden and dramatic effect on an organization’s
environment.
Intelligible technological adaptations can suggest possibilities for new
products, improvements in existing products, or in manufacturing and
marketing techniques
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Con’t …
Some key technological variables
R&D activity
Automation
Technology incentives
Rate of technological change
5. Ecological Factors
Reading Assignment
Ecological/environment factors
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b. Industry Analysis
Analysis of the industry environment is focused on the factors &
conditions influencing the firm’s profitability in the industry.
Compared to the general environment, the industry environment has a
more direct effect on the firm’s strategic competitiveness & capability
of earning above-average returns
It refers to the analysis of:
Industry trends as a whole;
Competition within the industry;
Technologies employed;
What it takes to succeed – the key success factors (KSF);
Comparing the firm, its products, its systems, its technology etc., with
26 other firms in the industry.
Nature and Degree of Competition
The nature and degree of competition in an industry
hinge on five forces: (Michael Porter’s)
1. The threat of new entrants
2. The bargaining power of suppliers
3. The bargaining power of buyers
4. The threat from substitute products
5. Rivalry (competition) among existing firms
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1. The threat of new entrants
There are six major sources of barriers to entry:
1. Economies of scale (saving the cost of
production through mass production)
2. Product differentiation
3. Capital requirements
4. Cost disadvantages
5. Access to distribution channels
6. Government policy
28
cont’d …
1. Economies of scale:
Deter entry by forcing the aspirant either to come
in on large scale or accept a cost disadvantage.
Scale of economies in production, research,
marketing, and service are probably the key
barriers to entry in the industry.
29
cont’d …
2. Product differentiation:
Brand identification creates a barrier by forcing entrants
to spend heavily to overcome customer loyalty.
Factors fostering brand identification are being first in
the industry, advertising, customer service, and product
differences.
Product differentiation is perhaps the most important
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barrier in soft drinks, cosmetics, and investment banking.
cont’d …
3. Capital requirements:
The need to invest large financial resources in order to
compete creates a barrier to entry.
Capital is necessary not only for fixed facilities but also for
customer credit, inventories, and absorbing start-up loses.
The huge capital requirements in certain fields, such as
computer manufacturing and mineral extraction, limit other
entrants.
31
cont’d …
4. Cost disadvantages independent of scale:
Entrenched companies may have cost advantages not available to
potential rivals, no matter what their size and economies of scale.
These advantages can stem from the effects of:
the learning curve, and proprietary technology,
access to the best raw material sources,
assets purchased at pre-inflation prices,
government subsidies, favorable location, and official rights
(patents)
32
cont’d …
5. Access to distribution channels:
Affects new entrants since the new product must displace others via
price breaks, promotions, and intense selling efforts.
When there are limited wholesale or retail channels and the existing
competitors occupied them, entry into the industry will be tougher.
6. Government policy:
The government can limit or even foreclose entry to industries with
such controls as license requirements and limits on access to raw
materials.
The government also can play a major indirect role by effecting entry
barriers through controls such as air and water pollution standards and
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2. The bargaining power of suppliers
Suppliers can exert bargaining power on participants in an
industry by raising prices or reducing the quality of purchased
goods and services affecting the profitability of the industry.
3. The bargaining power of buyers
Customers can force down prices, demand higher quality or
more service, and play competitors off against each other – all
at the expense of industry profits.
The product buyers’ purchase from the industry is standard or
undifferentiated.
In this situation, the buyers are always sure that they can find
34 alternative suppliers, may play one company against another.
4. Threat of Substitute Products
The threat of substitute products increases when:
The substitute product’s price is lower
Substitute product’s quality and performance are equal to or greater than the
existing product
5. Rivalry among Competing Firms
Industry rivalry increases when:
There are numerous or equally balanced competitors
Industry growth slows or declines
There are high fixed costs or high storage costs
There is a lack of differentiation opportunities or
35 When high exit barriers prevent competitors from leaving the industry
Interpreting Industry Analyses
Low entry barriers
Suppliers & buyers Unattractive
have strong positions
industry
Strong threats from
substitute products
Intense rivalry Low profit
among competitors potential
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cont’d …
High entry barriers
Suppliers & buyers Attractive
have weak positions
industry
Few threats from
substitute products
Moderate rivalry High profit
among competitors
potential
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C. Competitor Analysis
Competitor analysis focuses on each company against
which a firm directly competes.
Analysis of competitors is focused on predicting the
dynamics of competitors' actions, responses & intentions
Competing firms are eagerly interested in understanding
each other’s objectives, strategies, assumptions and
capabilities
Furthermore, intense rivalry creates a strong need to
understand competitors
38
cont’d …
In a competitor analysis, the firm seeks to understand:
What drives the competitor, as shown by its future
objectives.
What the competitor is doing and can do, as revealed
by its current strategy.
What the competitor believes about its own firm and
the industry, as shown by its assumptions.
What the competitor’s capabilities are, as shown by
its strengths and weaknesses.
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cont’d …
Competitor intelligence is used to get data and
information about competing firms.
Competitor intelligence is the set of data and information
the firm gathers to better understand and better
anticipate competitor’s objectives, strategies, assumptions
and capabilities.
Information about these different dimensions helps the
firm to prepare an anticipated response profile for each
competitor
Thus, the result of an effective competitor analysis helps a
firm to understand, interpret and predict its competitors’
actions and responses
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Competitor Array
One common and useful technique is constructing a competitor array.
The steps include:
1. Define your industry - scope and nature of the industry
2. Determine who your competitors are
3.Determine who your customers are and what benefits they expect
4. Determine what the key success factors are in your industry
5. Rank the key success factors by giving each one a
weighting – The sum of all the weightings must add up to one.
6. Rate each competitor on each of the key success factors
7. Multiply each cell in the matrix by the factor weighting.
8. Sum columns for a weighted assessment of the overall strength
of each competitor relative to each other
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Thank you
Questions and Comments
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