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Unit-III: Environmental Scanning - Strategic Analysis of Internal and External Variables
Unit-III: Environmental Scanning - Strategic Analysis of Internal and External Variables
Structure
3.1 External environment
3.2 Macro Environment Analysis
3.2.1 The PESTLE Factors
3.3 Micro Environment Analysis
3.3.1 Elements of Micro Environment
3.4 Industry Analysis, Using 5 Forces Model
3.5 Internal Environment
3.6 Internal Analysis using VRIO Framework: A Resource Based View of the Firm
3.7 Value Chain Analysis
3.8 Profiling Environmental Factors
3.9 Environmental Threat and Opportunity Profile (ETOP)
3.10 Organizational Capability Profile (OCP)
3.11 SWOT Analysis
Objectives
• To provide an insight into different types of environment , an organizations works in
Introduction
Each business organization operates in its unique environment. Environment
influence businesses and also get influenced by it. No business can function without
interacting and influencing forces that are outside its periphery
The environment can affect your start-up in dramatic ways. You can have the
best business idea with a great technology but it might still fail miserably if factors
like changes in the policies of the host government, new regulations or an economic
crisis in the host country come along. Therefore, it is imperative that you keep a close
Notes watch over environmental factors that affect your start-up and prepare adequately to
face the emerging challenges. Environmental scanning involves External and Internal
environmental Analysis.
It is not the strongest of the species that survive, nor the most intelligent, but
the one most responsive to change
Charles Darwin
The Macro environment includes Political and Legal forces, Macroeconomic forces,
Socio-Cultural forces, Technological forces, Ecological and at times International forces.
The Macro or General environment impacts the firm through its influence on the Micro
(also referred as Task /Industry environment)
When managers analyze the External environment they typically look for
Opportunities and Threats. Opportunities arise from circumstances or developments
in the external environment that, if exploited through strategies, enable managers
to better attain the goals of their Organization. Threats arise from circumstances or
• Economic factor- represent the wider economy so may include economic growth
rates, levels of employment and unemployment, costs of raw materials such as
energy, petrol and steel, interest rates and monetary policies, exchange rates and
Notes inflation rates. These may also vary from one country to another.
• Technological factor refer to the rate of new inventions and development, changes
in information and mobile technology, changes in internet and e-commerce or
even mobile commerce, and government spending on research. There is often a
tendency to focus Technological developments on digital and internet-related areas,
but it should also include materials development and new methods of manufacture,
distribution and logistics.
• Ecological factor impacts can include issues such as limited natural resources,
waste disposal and recycling procedures.
Micro environment factors are factors close to a business that have a direct impact
on its business operations and success. Before deciding corporate strategy businesses
should carry out a full analysis of their micro environment. At this point we discuss
common micro environment factors.
This is also known as the task environment and affects business and marketing
at the daily operating level. While the changes in the macro environment affect
business in the long run, the effect of micro environmental changes is noticed almost
immediately. Organizations have to closely analyse and monitor all the elements of
microenvironment in order to adapt to rapid change and stay competitive.
When carrying out a Macro environment analyses you will be seeking to answer the
questions “What will affect the growth of our Industry as a whole?” and “What is the
likely impact of all of the things that affect the growth of your industry?”
Hence, organizations must closely analyze and monitor all the elements of the
micro-environment on a regular basis. The elements of micro- environment are as
follows:
1. Consumers/Customers:
2. Organization:
However, they differ in beliefs, education, attitudes, and capabilities. When the
management and employees work towards different goals, everyone suffers.
3. Market:
Market refers to the system of contact between an organization and its customers.
The firm should study the trends and development and the key success factors of the
market, which are as follows:
a) The existing and the potential demand in market
b) Market growth rate
c) Cost structure
d) Price sensitivity
e) Technological structure
f) Distribution system, etc
4. Suppliers:
The suppliers refer to the providers of inputs, like raw materials, equipment and
services, to an organization. Large companies have to deal with hundreds of suppliers
to maintain their production.
Suppliers with their own bargaining power affect working and cost structure of the
industry. Hence it is important for an organization to carry out a study of the following:
5. Intermediaries:
Intermediaries include agents and brokers who facilitate the contact between
buyers and sellers for a commission. They may exert a considerable influence on
the business organizations as, in many cases, the consumers are not aware of the
manufacturers and their products. Hence, manufacturers use intermediaries to reach
out to consumers.
Porter’s Five Competitive Forces model is used by businesses when thinking about
business strategy and the impact of Information technology. This model can help a
business decide whether to, enter an industry or expand your business in the industry
you are already working on.
The more powerful these forces in an industry, the lower its profit potential.
The strength of each force differs by industry and changes over time. Porter’s Five
Competitive Forces model is used for industry analysis in several ways, to guide your
strategic decisions. Benefit from industry analysis by:
Industry Rivalry/Competitors
Rivalries naturally develop between companies competing in the same market.
Competitors use means such as advertising, introducing new products, more attractive
customer service and warranties, and price competition to enhance their standing and
market share in a specific industry. To Porter, the intensity of this rivalry is the result
of factors like equally balanced companies, slow growth within an industry, high
fixed costs, lack of product differentiation, overcapacity and price-cutting, diverse
competitors, high-stakes investment, and the high risk of industry exit. There are also
market entry barriers.
• Capital requirements for entry; the investment of large capital, after all,
presents a significant risk.
Notes
• Switching costs or the cost the buyer has to absorb to switch from one supplier
to another.
• Access to distribution channels. New entrants have to establish their
distribution in a market with established distribution channels to secure a
space for their product.
• Cost disadvantages independent of scale, whereby established companies
already have product technology, access to raw materials, favorable sites,
advantages in the form of government subsidies, and experience.
New entrants can also expect a barrier in the form of government policy through
federal and state regulations and licensing. New firms can expect retaliation from
existing companies and also face changing barriers related to technology, strategic
planning within the industry, and manpower and expertise problems. The entry deterring
price or the existence of a prevailing price structure presents an additional challenge to
a firm entering an established industry.
When managers analyze the internal environment of their own firm, they often do
so by identifying its strengths and weaknesses. This inward focus complements the
identification of opportunities and threats in the external environment.
The VRIO framework, in a wider scope, is part of a much larger strategic scheme
of a firm. The basic strategic process that any firm goes through begins with a vision
statement, and continues on through objectives, internal & external analysis, strategic
choices (both business-level and corporate-level), and strategic implementation. The
firm will hope that this process results in a competitive advantage in the marketplace
they operate in. VRIO falls into the internal analysis step of these procedures, but is
used as a framework in evaluating just about all resources and capabilities of a firm,
regardless of what phase of the strategic model it falls under. VRIO is an acronym
for the four question framework you ask about a resource or capability to determine
its competitive potential: the question of Value, the question of Rarity, the question of
Imitability (Ease/Difficulty to Imitate), and the question of Organization (ability to exploit
the resource or capability).
• The Question of Value: “Is the firm able to exploit an opportunity or neutralize
an external threat with the resource/capability?”
• The Question of Rarity: “Is control of the resource/capability in the hands of a
relative few?”
• The Question of Imitability: “Is it difficult to imitate, and will there be significant
cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/
capability?”
• The Question of Organization: “Is the firm organized, ready, and able to exploit
the resource/capability?”
Valuable? Rare? Costly to Exploited by the Competitive implication
imitate? organization?
No Competitive disadvantage
Yes No Competitive parity
Yes Yes No Temporary competitive
advantage
Yes Yes Yes No Unexploited competitive
advantage
Yes Yes Yes Yes Sustained competitive advantage
Value Chain Analysis is a strategy tool used to analyze internal firm activities. Its
goal is to recognize, which activities are the most valuable (i.e. are the source of cost
or differentiation advantage) to the firm and which ones could be improved to provide
competitive advantage. In other words, by looking into internal activities, the analysis
reveals where a firm’s competitive advantages or disadvantages are.
Value chain analysis is a powerful tool for managers to identify the key activities
within the firm which form the value chain for that organization, and have the potential
of a sustainable competitive advantage for a company. Therein, competitive advantage
of an organization lies in its ability to perform crucial activities along the value chain
better than its competitors.
Firstly, the value chain links the value of the organizations’ activities with its main
functional parts. Then the assessment of the contribution of each part in the overall added
value of the business is made. In order to conduct the value chain analysis, the company
is split into primary and support activities. Primary activities are those that are related with
production, while support activities are those that provide the background necessary for
the effectiveness and efficiency of the firm, such as human resource management. The
primary and secondary activities of the firm are discussed in detail below.
• Inbound logistics: These are the activities concerned with receiving the
materials from suppliers, storing these externally sourced materials, and
handling them within the firm.
• Operations: These are the activities related to the production of products and
services. This area can be split into more departments in certain companies.
For example, the operations in case of a hotel would include reception, room
service etc.
• Outbound Logistics: These are all the activities concerned with distributing
the final product and/or service to the customers. For example, in case of a
hotel this activity would entail the ways of bringing customers to the hotel.
• Marketing and Sales: This functional area essentially analyses the needs and
wants of customers and is responsible for creating awareness among the target
audience of the company about the firm’s products and services. Companies
make use of marketing communications tools like advertising, sales promotions
etc. to attract customers to their products.
Support activities
The support activities of a company include the following:
• Procurement: This function is responsible for purchasing the materials that are
necessary for the company’s operations. An efficient procurement department
should be able to obtain the highest quality goods at the lowest prices.
There are many strategy considering parameters which can be classified under
two broad categories viz., internal factors and external factors to the organization. In
order to access the importance and effect of change in such factor on the operation
and strategy of the business various model, such as Strategic Advantage Profile
(SAP), Environmental Threat and Opportunity Profile(ETOP), Organizational Capability
Profile(OCP) are developed by experts.
After the preparation of OCP, the organization is in a position to assess its relative
strength and weaknesses vis-a-vis its competitors. If there is any gap in area, suitable
action may be taken to overcome that.OCP shows the company’s capacity. OCP tells
about company’s potential and capability. OCP tells what company can do.
1. The organization should identify the factors which are relevant for determining
success in the industry concerned. These factors are known as KSF.
3. After identifying advantage, the next step is to measure their sustainability because
any advantage may turn into disadvantage due to change in environmental factors.
Factors Advantage/Disadvantage Sustainability
High Medium Low High Medium Low
±3 ±2 ±1 (3) (2) (1)
1. Product related
a. Appearance
b. Style
c. Functionality
d. Range
e. Cost structure
2. Market related
Notes a. Pricing
b. Distribution channel
c. Customer service
d. Customer relationship
e. Customer satisfaction
f. Brand loyalty
g. Market share
• What are the strengths and weaknesses of each competitor? (Think Competitive
Advantage)
• What does it take to be successful in this market? (List the strengths all companies
need to compete successfully in this market.)
• What are our company resources – assets, intellectual property, and people?
Competitor analysis
The following area analysis is used to look at all internal factors affecting a company:
The External Analysis examines opportunities and threats that exist in the
environment. Both opportunities and threats exist independently of the firm. The way
to differentiate between a strength or weakness from an opportunity or threat is to
ask: Would this issue exist if the company did not exist? If the answer is yes, it should
be considered external to the firm. Opportunities refer to favorable conditions in the
environment that could produce rewards for the organization if acted upon properly.
That is, opportunities are situations that exist but must be acted on if the firm is to
benefit from them. Threats refer to conditions or barriers that may prevent the firms
from reaching its objectives.
The following area analysis is used to look at all external factors affecting a
company:
• Market analysis: Overall size, projected growth, profitability, entry barriers, cost
Notes structure, distribution system, trends, key success factors
The SWOT Matrix helps visualize the analysis. Also, when executing this analysis
it is important to understand how these elements work together. When an organization
matched internal strengths to external opportunities, it creates core competencies in
meeting the needs of its customers. In addition, an organization should act to convert
internal weaknesses into strengths and external threats into opportunities.
Iternal External
Strengths Opportunities
Weaknesses Threats
Exhibit 3.6 – SWOT Analysis
Identify
• Can these competitors be grouped into strategic groups on the basis of assets,
competencies, or strategies?
• Who are potential competitive entrants? What are their barriers to entry?
Evaluate
• Tangible resources are the easiest to identify and evaluate: financial resources
and physical assets are identifies and valued in the firm’s financial statements.
Human resources or human capital are the productive services human beings offer
the firm in terms of their skills, knowledge, reasoning, and decision-making abilities.
Capabilities
Resources are not productive on their own. The most productive tasks require
that resources collaborate closely together within teams. The term organizational
capabilities are used to refer to a firm’s capacity for undertaking a particular productive
activity. Our interest is not in capabilities per se, but in capabilities relative to other
firms. To identify the firm’s capabilities we will use the functional classification approach.
A functional classification identifies organizational capabilities in relation to each of the
principal functional areas.
Notes
Summary
• Two types of Business environment exists
a. External or Macro level Environment
b. Internal or Micro level Environment
• Porters Five forces Model
a. Potential Entrants
b. Buyer’s
c. Substitutes
d. Suppliers
e. Competition
Porter’s Five Competitive Forces model is used by businesses when thinking about
business strategy and the impact of Information technology. This model can help a
business decide whether to, enter an industry or expand your business in the industry
you are already working on
VRIO is an acronym for the four question framework you ask about a resource or
capability to determine its competitive potential: the question of Value, the question
of Rarity, the question of Imitability (Ease/Difficulty to Imitate), and the question of
Organization (ability to exploit the resource or capability).
ETOP is summarized depiction of the environmental actors and their impact on the
organization. SAP describes the organization’s competitive position in the market place.
A comparison of SAP and OCP shows that, OCP indicates what the organizations do
base on its capability. SWOT is an acronym used to describe the particular Strengths,
Weaknesses, Opportunities, and Threats that are strategic factors for a specific
company. A SWOT analysis should not only result in the identification of a corporation’s
core competencies, but also in the identification of opportunities.
a) Consumer
b) Suppliers
c) Society
d) Competitors
d) None
a) Society
b) Technology
c) Competitors
d) Competitors
a) Intellectual, Operational
b) Operational, Intellectual
c) Intelligent, Interim
Notes
d) Interim, Intellectual
a) Threat
b) Weakness
c) Loophole
d) Deviation
a) Avoid;Neutralize,Correct
b) Exploit,Neutralize,Correct
c) Avoid,Capitalize,Neutralize
d) Exploit,Avoid,Ignore
7. Expand KSF--
ii. Various environmental constituents exist in isolation and do not interact with
each other
Competitive Rivalry
As described above three dominant players operate in this oligopolistic global
industry. The industry is capital intensive and there is a requirement for high investment
in advanced technology and research and development. No single manufacturer
dominates the industry, so balance fuels the rivalry. Competition in the primary market
for aero-engines is intensified by the link to the secondary market for engine part sales
and services. Access to the secondary market is dependent on achieving the original
sale of new engines. In recent years the intensity of competition has increased as
each manufacturer has tried to improve its volumes and market share. Rivalry has also
intensified because gas turbine engines are now essentially a mature product and the
potential for technological differential advantage has been reduced.
Power of Buyers
The numbers of potential buyers of new aircraft are low. Buyers of aircraft engines
are therefore essentially price makers, with the market price for new engines being
largely set by the buyer. The power of buyers has further increased in recent years
as many airlines have become ‘global carriers’. The decision to purchase a particular
aircraft or engine combination is a long-term one. This means that failure to secure an
order may prevent an engine manufacturer trading with a particular airline for more
than a decade. The selection of one engine type can lead to a domino effect, with
other competing buyers following the same selection. Airlines are increasingly seeking
lifetime cost of ownership guarantees, and reduced repair costs.
Power of Supplier
The suppliers to the aero-engine manufacturer have limited power. There are many
hundreds of different suppliers to the aero-engine industry. They supply all nature of
components, from nuts and bolts to state-of-the-art electronic control systems costing
Notes hundreds of thousands of pounds. The power of many of the smaller companies,
which represent most of the supplier base, has been reduced. This is due to engine
manufacturers adopting dual sourcing strategies, using a range of alternative sources
of supply. The most powerful suppliers are those involved in the supply of high
specification electronic control equipment.
Threats of Entry
Although not unknown, entry to the aero-engine industry is extremely difficult. The
highly specialized advanced nature of aero-engine design combined with the costs of
research and development as well as the confidence of customers represent significant
barriers to entry. New engines also need extensive testing before gaining airworthiness
approval from the authorities. The market is also sensitive to the reputation of the
engine manufacturer, where names such as Rolls-Royce represent a range of proven
high-technology products.
Threats of Substitutes
There is no substitute for an aero engine and the threat of substitutes for air
transport itself is minor. However, it is thought that the development of video
conferencing capability will reduce some business travel and the growth of high speed
train travel (e.g. Eurostar) will affect some travel decisions. However, both of these
developments are taking place at a time when the demand for air travel is increasing.
This analysis shows that the commercial aero-engine business is highly competitive,
with the buyer possessing and exerting a very powerful influence upon organizations.
The high barriers to entry and the low threat of substitutes indicate that existing
competitors will continue to share the business between them. However, a slowdown
in industry growth and the increasing maturity of products will intensify the degree of
rivalry between the engine manufacturers.
Conclusion
In response to changes within its business environment, Rolls-Royce has developed
its orientation from that of engineering to become more business- and service-focused.
The organization has had to become much more proactive, dealing with new ideas to
create more services and customer focus. In the past, change was rare and slow, the
company tended to follow the market trend. The structure of the organization has been
realigned to meet the needs of the new way of operating. Organizational structures
define important relationships within the business and create a mechanism for meeting
business objectives. At the same time, it has been important to create a new business
culture within Rolls-Royce. A culture exists within the minds and hearts of the people of
an organization and contributes to the way they make decisions and develop business
strategies. As an organization changes from a product-focused organization towards
becoming a service-orientated culture, this requires more involvement of its people, with
greater empowerment and rapid decision-taking. The corporate identity is the sum of
the culture and its expression in behaviour and physical terms. Rolls-Royce has defined
the identity that it needs to encourage, building on its past reputation and achievements
for continuing success. As these changes take place, the organization is also realigning
its financial reporting framework and corporate governance. This will change how the
whole business shapes its purposes and priorities.