UNIT- 3 ENVIRONMENTAL ANALYSIS

Need, Characteristics, and Categorization of Environmental Factors

Environmental Analysis is described as the process which examines all the components,
internal or external, that has an influence on the performance of the organization. The internal
components indicate the strengths and weakness of the business entity whereas the external
components represent the opportunities and threats outside the organization.

To perform environmental analysis, a constant stream of relevant information is required to

find out the best course of action. Strategic Planners use the information gathered from the
environmental analysis for forecasting trends for future in advance. The information can also
be used to assess operating environment and set up organizational goals.

It ascertains whether the goals defined by the organization are achievable or not, with the
present strategies. If is not possible to reach those goals with the existing strategies, then new
strategies are devised or old ones are modified accordingly.

Advantages of Environmental Analysis

The internal insights provided by the environmental analysis are used to assess employee’s
performance, customer satisfaction, maintenance cost, etc. to take corrective action wherever
required. Further, the external metrics help in responding to the environment in a positive
manner and also aligning the strategies according to the objectives of the organization.

Environmental analysis helps in the detection of threats at an early stage, that assist the
organization in developing strategies for its survival. Add to that, it identifies opportunities,
such as prospective customers, new product, segment and technology, to occupy a maximum
share of the market than its competitors.

Steps Involved in Environmental Analysis

1. Identifying: First of all, the factors which influence the business entity are to be
identified, to improve its position in the market. The identification is performed at various
levels, i.e. company level, market level, national level and global level.
2. Scanning: Scanning implies the process of critically examining the factors that highly
influence the business, as all the factors identified in the previous step effects the entity with
the same intensity. Once the important factors are identified, strategies can be made for its
improvement.
3. Analysing: In this step, a careful analysis of all the environmental factors is made to
determine their effect on different business levels and on the business as a whole. Different
tools available for the analysis include benchmarking, Delphi technique and scenario
building.
4. Forecasting: After identification, examination and analysis, lastly the impact of the
variables is to be forecasted.
Environmental analysis is an ongoing process and follows a holistic approach, that
continuously scans the forces effecting the business environment and covers 360 degrees of
the horizon, rather than a specific segment.

Internal Environment:

Survival of a business depends upon its strengths and adaptability to the environment. The
internal strengths represent its internal environment. It consists of financial, physical, human
and technological resources. Financial resources represent financial strength of the company.
Funds are allocated over activities that maximise output at minimum cost, that is, optimum
allocation of financial resources.

Physical resources represent physical assets such as plant, machinery, building etc. that
convert inputs into outputs. Human resources represent the manpower with specialised
knowledge that performs the business activities.

The operative and managerial decisions are taken by the human resources. Technological
resources represent the technical know-how used to manufacture goods and services. Internal
environment consists of controllable factors that can be modified according to needs of the
external environment.

External Environment:

The external environment consists of legal, political, socio-cultural, demographic factors etc.
These are uncontrollable factors and firms adapt to this environment. They adjust internal
environment with the external environment to take advantage of the environmental
opportunities and strive against environmental threats. Business decisions are affected by
both internal and external environment.

The external environment consists of the micro environment and macro environment

1. Micro Environment:

“The micro environment consists of factors in the company’s immediate environment”. These
factors affect the performance of a company and its ability to serve the customers. Micro
environment consists of customers, suppliers, competitors, public and market intermediaries.

A brief discussion of the firm’s micro environment is as follows:

(i) Customers:

Customers constitute important segment of the micro environment. Business exists to serve
its customers. Unless there are customers, business has no meaning. A company can have
different types of customers like, households, producers, retailers, Government and foreign
buyers.

(ii) Suppliers:

They supply inputs (money, raw material, fuel, power and other factors of production) and
help in smooth conduct of the business. Firms should remain aware of the policies of
suppliers as increase in prices of inputs will affect their sales and profits. Shortage of supplies
also affects the production schedules. Firms should have more than one supplier so that
change in policies of one supplier does not affect their production schedules.

(iii) Competitors:

Competitors form important part of the micro environment. Firms compete to capture big
share of the market. They constantly watch competitors’ policies and adjust their policies to
gain customer confidence.

(iv) Public:

“A public is any group that has an actual or potential interest in or impact on an

organisation’s ability to achieve its interest”. Public can promote or demote company’s
efforts to serve the market. The term ‘public’ consists of financial public (banks, financial
institutions etc.), media public (newspapers, radio, television etc.), Government public,
customer organisations, internal public (workers and managers), local public (neighbourhood
or community residents) and general public (buyers at large). Companies observe the
behaviour of these groups to make functional policies.

(v) Market intermediaries:

They are the links that help to promote, sell and distribute the products to final consumers.
They are the physical distribution firms (transport firm), service agencies (media firms),
financial intermediaries (banks, insurance companies) etc. that help in producing, marketing
and insuring the goods against loss of theft, fire etc. Firms maintain good relations with them
to carry their activities smoothly. All these factors are largely controllable by the firms but
they operate in the larger macro environment beyond their control.

2. Macro Environment:

The macro environment consists of the economic and non- economic variables that provide
opportunities and threats to firms. This is largely uncontrollable and, therefore, firms adjust
their operations to these environmental factors.

The macro-environment consists of the following:

The Macro Environment Analysis is the first step of a strategic analysis which in turn kicks
off the traditional; strategic planning cycle; it is sometimes referred to as an external analysis,
a pest analysis or a pestle analysis.

The purpose of the Macro Environment Analysis is to identify possible opportunities and
threats that will impact on your industry as a whole and that are outside the control of your
industry.

The following are the factors of macro environmental strategy

Social/Cultural Trends: The macro social/cultural environment analysis will identify trends

in societies beliefs, behaviours, values and norms.
Such as the number of part time workers, attitudes towards global warming, make up of the
family structure as well as trends in population growth at relevant ages for your industry. The
population may also shift from rural to cities or visa versa.

Technological Trends: The macro technological environment analysis will identify changes

in the application of technology and uptake of technology. A current example is a shift
towards online transactions and in some areas a shift away from online transactions.

Environmental and Economic: The macro environment analysis will identify how changes
in the environment will impact on your industry. The macro economic environment analysis
will identify trends such as changes in personal disposable income, interest rates, inflation,
exchange rates and unemployment rates.

Political and Legal: The macro political environment analysis will identify changes in the
position politicians take on issues. A current example is a shift towards greener policies in the
developed world.
If an election is approaching you may look at the variation in policies from each party and
assess the impacts on your industry of each parties viewpoint.

The macro legal environment analysis is closely linked to the political environment
(politicians tend to make the laws), but also includes trends in court decisions such as liability
compensation. Most organisations need to be constantly aware of changes in labour laws.

An Example: Legal changes that resulted from the rise of uber has seen the value of taxi
plates decline significantly in some countries.

International Environment- The environment consists of those forces which have an impact
on foreign trade of a country

Natural: it consist of all the ecological and climatic conditions that effects business.
For example: topography of the region, climatic conditions, humidity, weather, influence
business directly or indirectly.
Demographic forces: Different market segments are typically impacted by common
demographic forces, including country/region; age; ethnicity; education level; household
lifestyle; cultural characteristics and movements.

The final step of the macro environmental analysis is to summarize the identified
opportunities and threats and determine if you should expect growth, stability or decline in
the size of your industry.

Approaches to the Environmental Scanning Process

The external environment in which an organization exists consists of a bewildering variety of
factors. These factors are events, trends, issues and expectations of different interested
groups. Events are important and specific occurrences taking place in different environmental
sectors.

Trends are the general tendencies or the courses of action along which events take place.
Issues are the current concerns that arise in response to events and trends. Expectations are
the demands made by interested groups in the light of their concern for issues.

By monitoring the environment through environmental scanning, an organization can

consider the impact of the different eve trends, issues and expectations on its strategic
management process. Similarly any organization-facing environment as a complex the
scanning is absolutely essential, and strategists have to deal cautiously with process
environmental scanning.

The effort has to be to deal with it is such a manner that unnecessary time and effort is not
expended, while important facts are not ignored. For this to take place, it is important to
devise an approach or a combination of different approaches, to environmental scanning.

Approaches to Environmental Scanning:

The experts have suggested three approaches, which could be adopted for, sort out
information for environmental scanning.

1. Systematic Approach:

Under this approach, information for environmental scanning is collected systematically.

Information related to markets and customers, changes in legislation and regulations that
have a direct impact on an organization’s activities, government policy statements pertaining
the organization’s business and industry, etc, could be collected continuous updating such
information is necessary not only for strategic management but also for operational activities.
 2. Ad hoc Approach:

Using this approach, an organization may conduct special surveys and studies to deal with
specific environmental issues from time to time. Such studies may be conducted, for instance,
when organization has to undertake special projects, evaluate existing strategy or devise new
strategies. Changes and unforeseen developments may be investigated with regard to their
impact on the organization.

3. Processed-form Approach:

For adopting this approach, the organization uses information in a processed form available
from different sources both inside and outside the organization. When an organization uses
information supplied by government agencies or private institutions, it uses secondary
sources of data and the information is available in processed form.

Sources of Information:

A company can obtain information from different sources, but it should be ensured that the
information is correct. The correct source should be tapped for specific information for more
accuracy. Information received form secondary sources may sometimes even misguide
strategy managers.

Hence it is important that information should be verified for correctness before it is processed
and decisions are taken based on it.

The various sources from where information can be gathered include:

1. An internal document viz, files, records, management information system, employees,

standards, drawings, charts, etc.
2. Trade directories, journals, magazines, newspapers, books, newsletters, government
publications, annual reports of companies, case studies, etc.
3. Internet, television, radio news etc.
4. External agencies like customers, suppliers, inspection agencies, marketing
intermediaries, dealers, advertisers, associations, unions, government agencies, share holders,
competitors, etc.
5. Market research reports, consultants, educational institutions, testing laboratories etc.
6. Spying considered as a powerful way of extracting information from other companies.

It is found that chronological order of information is also quite important for strategy
managers. Usually information received from government agencies is quite complex since
processing takes more time. The information received from competitors is quite expensive
but it is usually fresh and is quite useful.

Techniques Used for Environmental Scanning:

The techniques used for environmental scanning may be either very systematic to intuitive.
Selection of a technique depends on data required, source of data, timelines of information,
relevance, cost of information, quantity, quality and availability of information, etc.
 Some of the methods widely used can be categorized as follows: Scenario Writing,
Simulation, Single Variable Extrapolation, Morphological Analysis, Cross Impact Analysis,
Field Force Analysis, Game Theory, etc. The techniques are either statistical or mathematical
in nature. However, judgmental and institutive techniques are also widely used.

The entire process consists of following steps:

1. Major events and trends in environment are studied.

2. A cause and effect relationship established with regard to events and trends for long
and short term. This is done through brain storming in a group.
3. Diagrams showing interrelationships amongst various factors are prepared and an
attempt is made to quantify the results.
4. The study is reviewed by a group of experts who deliberate on each aspect and on the
possible strategies that may be decided.

Structural Analysis of Competitive Environment/ Porter’s Five Forces

Porter's Five Forces is a simple but powerful tool for understanding the competitiveness
of your business environment, and for identifying your strategy's potential profitability.

This is useful, because, when you understand the forces in your environment or industry that
can affect your profitability, you'll be able to adjust your strategy accordingly. For example,
you could take fair advantage of a strong position or improve a weak one, and avoid taking
wrong steps in future.

The Five Forces model is widely used to analyze the industry structure of a company as well
as its corporate strategy. Porter identified five undeniable forces that play a part in shaping
every market and industry in the world, with some caveats. The five forces are frequently
used to measure competition intensity, attractiveness, and profitability of an industry or
market.

Porter's five forces are:

Industrial rivalry:
The first of the five forces refers to the number of competitors and their ability to undercut a
company. The larger the number of competitors, along with the number of equivalent
products and services they offer, the lesser the power of a company.
Suppliers and buyers seek out a company's competition if they are able to offer a better deal
or lower prices. Conversely, when competitive rivalry is low, a company has greater power to
charge higher prices and set the terms of deals to achieve higher sales and profits.
Threat of new entry:
A company's power is also affected by the force of new entrants into its market. The less time
and money it costs for a competitor to enter a company's market and be an effective
competitor, the more an established company's position could be significantly weakened. An
industry with strong barriers to entry is ideal for existing companies within that industry since
the company would be able to charge higher prices and negotiate better terms.
Threat of new substitutes:
Substitute goods or services that can be used in place of a company's products or services
pose a threat. Companies that produce goods or services for which there are no close
substitutes will have more power to increase prices and lock in favourable terms. When close
substitutes are available, customers will have the option to forgo buying a company's product,
and a company's power can be weakened.
Bargaining power of consumers:
The ability that customers have to drive prices lower or their level of power is one of the five
forces. It is affected by how many buyers or customers a company has, how significant each
customer is, and how much it would cost a company to find new customers or markets for its
output. A smaller and more powerful client base means that each customer has more power to
negotiate for lower prices and better deals. A company that has many, smaller, independent
customers will have an easier time charging higher prices to increase profitability.
Bargaining power of suppliers:
The last of the five forces focuses on bargaining power of suppliers. The next factor in the
five forces model addresses how easily suppliers can drive up the cost of inputs. It is affected
by the number of suppliers of key inputs of a good or service, how unique these inputs are,
and how much it would cost a company to switch to another supplier.
The fewer suppliers to an industry, the more a company would depend on a supplier. As a
result, the supplier has more power and can drive up input costs and push for other
advantages in trade. On the other hand, when there are many suppliers or low switching costs
between rival suppliers, a company can keep its input costs lower and enhance its profits.

ETOP a Diagnosis tool

Environmental Threat and Opportunity Profile (ЕТОР)

The Environmental factors are quite complex and it may be difficult for strategy managers to
classify them into neat categories to interpret them as opportunities and threats. A matrix of
comparison is drawn where one item or factor is compared with other items after which the
scores arrived at are added and ranked for each factor and total weight age score calculated
for prioritizing each of the factors.

This is achieved by brainstorming. And finally the strategy manger uses his judgment to
place various environmental issues in clear perspective to create the environmental threat and
opportunity profile.

Although the technique of dividing various environmental factors into specific sectors and
evaluating them as opportunities and threats is suggested by some authors, it must be
carefully noted that each sector is not exclusive of the other.

Each of the major factors pertaining to a particular sector of environment may be divided into
sub-sectors and their effects studied. The field force analysis goes hand in glove with ETOP,
as here also the contribution with regard to opportunities and threats posed by the
environment is also a necessary part of study.

ETOP Preparation:

The preparation of ETOP involves dividing the environment into different sectors and then
analyzing the impact of each sector on the organization. A comprehensive ETOP requires
subdividing each environmental sector into sub factors and then the impact of each sub factor
on the organization is described in the form of a statement.

A summary ETOP may only show the major factors for the sake of simplicity. The table 1
provides an example of an ETOP prepared for an established company, which is in the Two
Wheeler industry.
The main business of the company is in Motor Bike manufacturing for the domestic and
exports markets. This example relates to a hypothetical company but the illustration is
realistic based on the current Indian business environment.

The strategic managers should keep focus on the following dimensions:

1. Issue Selection:

Focus on issues, which have been selected, should not be missed since there is a likelihood of
arriving at incorrect priorities. Some of the impotent issues may be those related to market
share, competitive pricing, customer preferences, technological changes, economic policies,
competitive trends, etc.

2. Accuracy of Data:

Data should be collected from good sources otherwise the entire process of environmental
scanning may go waste. The relevance, importance, manageability, variability and low cost of
data are some of the important factors, Which must be kept in focus.

3. Impact Studies:

Impact studies should be conducted focusing on the various opportunities and threats and the
critical issues selected. It may include study of probable effects on the company’s strengths
and weaknesses, operating and remote environment, competitive position, accomplishment of
mission and vision etc. Efforts should be taken to make assessments more objective wherever
possible.
4. Flexibility in Operations:

There are number of uncertainties exist in a business situation and so a company can be
greatly benefited buy devising proactive and flexible strategies in their plans, structures,
strategy etc. The optimum level of flexibility should be maintained.

Analysis of Internal and External Resource:

Understanding the environment your business operates in is a key part of planning, and will
allow you to discern the threats and opportunities associated with your area of business.

An external analysis looks at the wider business environment that affects your business.

An internal analysis looks at factors within your business such as your strengths and
weaknesses.

Examining your internal and external analyses together gives you a complete picture of your
current situation and the steps you can take to plan your marketing.

SWOT internal analysis 

You also need to understand your own internal strengths and weaknesses. 

A SWOT analysis combines external and internal analysis to summarise your Strengths,

Weaknesses, Opportunities and Threats. For example, a new business may note the
following:

 Strength: enthusiastic employees or a unique product

 Weakness: no existing customer base and limited finances
 Opportunity: potential customers with problem the product solves, interested
investors
 Threat: competition from established businesses with a bigger budget
You need to look for opportunities that play to your strengths. You also need to decide what
to do about threats to your business and how you can overcome important weaknesses.

For example, your SWOT analysis might help you identify the most promising customers to
target. You might decide to look at ways of using the internet to reach customers. And you
might start to investigate ways of raising additional investment to overcome your financial
weakness.

MICRO-MACRO EXTERNAL ANALYSIS

There are two elements within the external marketing environment; micro and macro. These
environmental factors are beyond the control of marketers but they still influence the
decisions made when creating a strategic marketing plan.

Micro Environment Factors

 Suppliers: Suppliers can control the success of the business when they hold power.
The supplier holds the power when they are the only or the largest supplier of their
 goods; the buyer is not vital to the supplier’s business; the supplier’s product is a core
part of the buyer’s finished product and/or business.

 Resellers: If the product the organisation produces is taken to market by 3rd party

resellers or market intermediaries such as retailers, wholesalers, etc. then the
marketing success is impacted by those 3rd party resellers. For example, if a retail
seller is a reputable name then this reputation can be leveraged in the marketing of the
product.

 Customers: Who the customers are (B2B or B2C, local or international, etc.) and
their reasons for buying the product will play a large role in how you approach the
marketing of your products and services to them.

 The competition: Those who sell the same or similar products and services as your
organisation is your market competition, and the way they sell needs to be taken into
account. How do their prices and product differentiation impact you? How can you
leverage this to reap better results and get ahead of them?

 The general public: Your organisation has a duty to satisfy the public. Any actions
of your company must be considered from the angle of the general public and how
they are affected. The public has the power to help you reach your goals; just as they
can also prevent you from achieving them.

Macro Environment Factors (STEPIN-D)

Social and cultural forces: The macro social/cultural environment analysis will identify
trends in societies beliefs, behaviours, values and norms. Such as the number of part time
workers, attitudes towards global warming, make-up of the family structure as well as trends
in population growth at relevant ages for your industry. The population may also shift from
rural to cities or visa-versa.

The impact the products and services your organisations brings to market have on society
must be considered. Any elements of the production process or any products/services that are
harmful to society should be eliminated to show your organisation is taking social
responsibility. A recent example of this is the environment and how many sectors are being
forced to review their products and services in order to become more environmentally
friendly.

Technological: The macro technological environment analysis will identify changes in the

application of technology and uptake of technology. A current example is a shift towards
online transactions and in some areas a shift away from online transactions.

Environmental and Economic: The macro environment analysis will identify how changes
in the environment will impact on your industry. The macro economic environment analysis
will identify trends such as changes in personal disposable income, interest rates, inflation,
exchange rates and unemployment rates.
Political and Legal: The macro political environment analysis will identify changes in the
position politicians take on issues. A current example is a shift towards greener policies in the
developed world.
If an election is approaching you may look at the variation in policies from each party and
assess the impacts on your industry of each parties viewpoint.

The macro legal environment analysis is closely linked to the political environment
(politicians tend to make the laws), but also includes trends in court decisions such as liability
compensation. Most organisations need to be constantly aware of changes in labour laws.

An Example: Legal changes that resulted from the rise of uber has seen the value of taxi
plates decline significantly in some countries.

International Environment- The environment consists of those forces which have an impact
on foreign trade of a country

Natural: it consist of all the ecological and climatic conditions that effects business.
For example: topography of the region, climatic conditions, humidity, weather, influence
business directly or indirectly.

Demographic forces: Different market segments are typically impacted by common

demographic forces, including country/region; age; ethnicity; education level; household
lifestyle; cultural characteristics and movements.

The final step of the macro environmental analysis is to summarize the identified
opportunities and threats and determine if you should expect growth, stability or decline in
the size of your industry.

Resource Audit

The word “audit” is a very generic word, it essentially means to examine something thoroughly.
Audit which is conducted to understand the strength or weakness of the resource base of firm
is called resource audit. In other words, the quality of resource available to implement this
strategy can be known the through resource audit. Strategic capability can be better
understood through resource audit.

The resource base includes

1. Physical resources,
2. Human resources,
3. Financial resources and
4. Audit of intangibles
 1. Audit of Physical Resources

The audit of the physical resources includes listing of physical resources like machines,
building, equipment etc, their age, condition of work, life span, capabilities, location etc.

2. Audit of Human Resources

Human resource audit includes assessing, verifying and listing out the number of employers,
their skill inventory, age inventory, qualification-wise inventory, knowledge wise inventory
and capability-wise inventory.

3. Audit of Financial Resource

Financial resource audit includes analysis and listing out sources and uses of financial
resources, capital structure, working capital, accounts receivables, control of
debtors and creditors, relationship among shareholders, bankers, debenture holders etc.

4. Audit of Intangibles

The resource audit exercise should not forget the intangibles. Intangibles have value
like goodwill. Goodwill plays vital role in service-oriented organizations, retail organizations
etc. Good will is represented by the brand image, customer loyalty, congenial contacts and
relations, public image about the firm, quality and reliable service etc.

General Guidelines on Resource Audit

1. The Resource audit should take into considerations all resources necessary for the
implementation of the strategy.
2. The audit should not restrict to the legally recognized assets.
3. The Resource audit should also consider the resources/assets outside the organization.
These assets include networks, contacts with the customers, dealers, suppliers etc.
4. The Resource audit should also point out the organization’s distinctive capabilities in
addition to the resources necessary for strategy implementation.

Strategic Advantage Analysis

Strategic advantage analysis looks at positive points that differentiate our business from
competitors. This may be brand, a particular blue-chip supplier locked into long-term contract
with us, geographic location, intellectual property and so on.

Strategic advantage analysis would look what unique strengths the company has, and
whether these strength are likely to be sustainable, that is long-term.

For example, ownership of more sophisticated equipment than competitors have is not a
STRATEGIC advantage, because competitors can buy this equipment tomorrow.
 Whereas unique brand message or a patented technology is something that is difficult to
replicate and therefore constitutes not only short-term, but also strategic competitive
advantage.

Strategic analysis is about looking at what is happening outside your organisation now and in
the future. It asks two questions:

 How might what’s happening affect you?

 What would be your response to likely changes?

It’s called strategic because it’s high level, about the longer term, and about your whole
organisation.

It’s called analysis because it’s about breaking something that’s big and complex down into
more manageable chunks.

The focus is external because factors outside your organisation have a powerful influence on
it. Increasingly organisations appreciate that they can learn to manage their response to those
influences, rather than assume there is nothing they can do.

It’s part of the overarching process of strategic planning.  Strategic analysis boosts
organisational effectiveness Strategic analysis helps to:

 Anticipate what might happen

 Evaluate how likely it is to happen
 Prepare for it happening

Strategic analysis will lead to clearer more relevant goals, better quality decisions, and a more
secure future as you are better prepared for what will happen.

Otherwise known as “external environmental analysis” it is a key step in strategic planning. It

is the link between getting your overall direction right and making the right decisions. You
will make better decisions if you understand the influences from the outside world to which
you might have to respond in the future.

Many funders are reassured by strategic analysis because they know that organisations that
are well prepared for their future are more likely to use grants, donations and loans to greatest
advantage and to maximise the difference their organisation makes.

The cost of not doing at least a small amount of strategic analysis means missed opportunities
(some call this ‘opportunity cost’ – the cost of not doing something). If you don’t do strategic
analysis you risk being left behind, missing opportunities for beneficiaries.

Concept of Value Chain

Manufacturing companies create value by acquiring raw materials and using them to
produce something useful. Retailers bring together a range of products and present them in a
way that’s convenient to customers, sometimes supported by services such as fitting rooms or
personal shopper advice. And insurance companies offer policies to customers that are
underwritten by larger re-insurance policies. Here, they’re packaging these larger policies in a
customer-friendly way, and distributing them to a mass audience.

The value that’s created and captured by a company is the profit margin:

Value Created and Captured – Cost of Creating that Value = Margin

The more value an organization creates, the more profitable it is likely to be. And when you
provide more value to your customers, you build competitive advantage.

Understanding how your company creates value, and looking for ways to add more value, are
critical elements in developing a competitive strategy. Michael Porter discussed this in his
influential 1985 book “Competitive Advantage,” in which he first introduced the concept of
the value chain.

A value chain is a set of activities that an organization carries out to create value for its
customers. Porter proposed a general-purpose value chain that companies can use to examine
all of their activities, and see how they’re connected. The way in which value chain activities
are performed determines costs and affects profits, so this tool can help you understand the
sources of value for your organization.

Elements in Porter’s Value Chain

Rather than looking at departments or accounting cost types, Porter’s Value Chain focuses on
systems, and how inputs are changed into the outputs purchased by consumers. Using this
viewpoint, Porter described a chain of activities common to all businesses, and he divided
them into primary and support activities, as shown below.
 Primary Activities

Primary activities relate directly to the physical creation, sale, maintenance and support of a
product or service. They consist of the following:

 Inbound logistics– These are all the processes related to receiving, storing, and
distributing inputs internally. Your supplier relationships are a key factor in creating value
here.
 Operations– These are the transformation activities that change inputs into outputs
that are sold to customers. Here, your operational systems create value.
 Outbound logistics– These activities deliver your product or service to your
customer. These are things like collection, storage, and distribution systems, and they may be
internal or external to your organization.
 Marketing and sales– These are the processes you use to persuade clients to
purchase from you instead of your competitors. The benefits you offer, and how well you
communicate them, are sources of value here.
 Service– These are the activities related to maintaining the value of your product or
service to your customers, once it’s been purchased.

Support Activities

These activities support the primary functions above. In our diagram, the dotted lines show
that each support, or secondary, activity can play a role in each primary activity. For
example, procurement supports operations with certain activities, but it also supports
marketing and sales with other activities.

 Procurement (purchasing)– This is what the organization does to get the resources it
needs to operate. This includes finding vendors and negotiating best prices.
 Human resource management– This is how well a company recruits, hires, trains,
motivates, rewards, and retains its workers. People are a significant source of value, so
businesses can create a clear advantage with good HR practices.
 Technological development– These activities relate to managing and processing
information, as well as protecting a company’s knowledge base. Minimizing information
technology costs, staying current with technological advances, and maintaining technical
excellence are sources of value creation.
 Infrastructure– These are a company’s support systems, and the functions that allow
it to maintain daily operations. Accounting, legal, administrative, and general management
are examples of necessary infrastructure that businesses can use to their advantage.

Companies use these primary and support activities as “building blocks” to create a valuable
product or service.

Using Porter’s Value Chain

To identify and understand your company’s value chain, follow these steps.
 Step 1 – Identify sub-activities for each primary activity

For each primary activity, determine which specific sub-activities create value. There are
three different types of sub-activities:

 Direct activities create value by themselves. For example, in a book publisher’s

marketing and sales activity, direct sub-activities include making sales calls to bookstores,
advertising, and selling online.
 Indirect activities allow direct activities to run smoothly. For the book publisher’s
sales and marketing activity, indirect sub-activities include managing the sales force and
keeping customer records.
 Quality assurance activities ensure that direct and indirect activities meet the
necessary standards. For the book publisher’s sales and marketing activity, this might include
proofreading and editing advertisements.

Step 2 – Identify sub-activities for each support activity.

For each of the Human Resource Management, Technology Development and Procurement
support activities, determine the sub-activities that create value within each primary activity.
For example, consider how human resource management adds value to inbound logistics,
operations, outbound logistics, and so on. As in Step 1, look for direct, indirect, and quality
assurance sub-activities.

Then identify the various value-creating subactivities in your company’s infrastructure. These
will generally be cross-functional in nature, rather than specific to each primary activity.
Again, look for direct, indirect, and quality assurance activities.

Step 3 – Identify links

Find the connections between all of the value activities you’ve identified. This will take time,
but the links are key to increasing competitive advantage from the value chain framework.
For example, there’s a link between developing the sales force (an HR investment) and sales
volumes. There’s another link between order turnaround times, and service phone calls from
frustrated customers waiting for deliveries.

Method of Analysis and Diagnosing Corporate Capabilities: Functional

Area Profile and Resource Deployment Matrix, Strategic Advantage Profile
Hofer matrix is one of the tools used to determine the assessment of the Competitive position
of the company, as determined by its internal and external factors.

15 squares matrix was created by Ch.W. Hofer. It is a development of the ADL and
McKinsey matrices and is especially useful when analysing strategically diversified entity.

Rules of Design

Matrix is created on the basis of two criteria: the maturity of the sector, divided into 5 phases
and the competitive position of companies in the sector. In this way circles are created, which
represent different areas of activity in the company, and the size of the circle is proportional
 to size of the sector. Sometimes segments could be added to the circle, which reflect the
market share of company in the sector.

Below is a sample matrix constructed according to the principles set out by Hofer. In its
interpretation attention should be paid to possible strategies for products, their life cycle
phases and the markets in different sectors.

Interpretation of fields

In Hofer matrix, we can characterize groups of products:

 Products A – Dilemmas that have chance of success with appropriate marketing
strategies and financial aid
 Products B – Winners, require appropriate marketing strategies and financial aid, if
company has limited resources for advertising managers must make a choice between
products A and B
 Products C – Potential losers, the weak position, the sector in the growth phase –
managers should make additional analyses to rule out the possibility of going through the
shock phase
 Products D – despite the current difficulties can become market leaders or profitable
producers
 Products E and F are profitable, so it is possible to introduce other products in the
phase of shock and generate considerable profits
 Products G and H are the losers are in the exit phase of the market, ahead of the full
withdrawal managers should use strategies for “gathering the harvest”

The Hofer’s matrix considered the following variables:

Variable – A- Market and Consumer Behaviour Variables Like:
 Buyer needs
 Purchase frequency
 Buyer concentration
 Market segmentation
 Market size
 Elasticity of demand
 Buyer loyalty
 Seasonality and cyclicality

Variable – B - Industry Structure Variables Like:

 Uniqueness of the product
 Rate of technological change in product design
 Type of product
 Number of equal products
 Barriers to entry
 Degree of product differentiation
 Transportation and distribution costs
 Price/cost structure
 Experience curve
 Degree of integration
 Economy of scale etc.

Variable – C- Competitor Variables Like:

 Degree of specialization within the industry
 Degree of capacity utilization
 Degree of seller concentration
 Aggressiveness of competition

Variable – D -Supplier Variables Like:

 Degree of supplier concentration
 Major changes in availability of raw materials

Variable – E - Broader Environment Variables:

 Interest rates
 Money supply
 GNP trend
  Growth of population
 Age distribution of population
 Life cycle changes

Variable – F - Organizations Variables Like:

 Quality of products
 Market share
 Marketing intensity
 Value added
 Degree of customer concentration etc.

Hofer developed descriptive propositions for each stage of product life cycle.

For example- in the maturity stage of the product life cycle, Hofer identified the
following major determinants of business strategy:

 Nature of buyer needs

 Degree of product differentiation
 Rate of technological change in the process design
 Ratio of market segmentation
 Ratio of distribution costs to manufacturing
 Value added
 Frequency with which the product is purchased

Hofer, thereafter formulated normative contingency hypothesis using the above major
determinants.
An example for the maturity stage is when:

 Degree of product differentiation is low.

 The rate of buyer needs is primarily economic.
 Rate of technological change in process design is high.
 Purchase frequency is high.
 Buyer concentration is high.
 Degree of capacity utilization is low.
Then the business firms should:
 Allocate most of their R&D funds to improvements in process design rather than to
new product development.
 Allocate most of their plant and equipment expenditures to new equipment purchases.
  Seek to integrate forward or backward in order to increase the value they added to the
product.
 Attempt to improve their production scheduling and inventory control procedures in
order to increase their capacity utilization.
 Attempt to segment the market.
 Attempt to reduce their raw material unit costs by standardizing their product design
and using interchangeable components throughout their product line in order to
qualify for volume discount.

SWOT Analysis
A successful business is founded on a series of sound decisions, so the way you analyze
situations and choose to react is essential. When trying to assess the lay of the land, few tools
are more useful than the SWOT analysis. It stands for strengths, weaknesses, opportunities,
and threats; the SWOT analysis is a planning process that allows your company to overcome
challenges and determine what new leads to pursue.

The primary objective of a SWOT analysis is to help organizations develop a full awareness
of all the factors involved in a decision. 

“It is impossible to accurately map out a small business’s future without first evaluating it
from all angles, which includes an exhaustive look at all internal and external resources and
threats,” said Bonnie Taylor, chief marketing strategist at CCS Innovations. “A SWOT
accomplishes this in four straightforward steps that even rookie business owners can
understand and embrace.”

When should you use SWOT?

You could employ SWOT before you commit to any sort of company action, whether you’re
exploring new initiatives, revamping internal policies, considering opportunities to pivot, or
altering a plan midway through its execution. Sometimes it’s wise to perform a general
SWOT analysis just to check on the current landscape in which your business finds itself.
Performing a SWOT analysis is also a great way to improve business operations, said
Andrew Schrage, partner and editor-in-chief of Money Crashers.

“It allowed me to identify the key areas where my organization was performing at a high
level, as well as areas that needed work,” said Schrage, who expanded on his thoughts about
business decision making in a blog post. “Some small business owners make the mistake of
thinking about these sorts of things informally, but by taking the time to put together a
formalized SWOT analysis, you can come up with ways to better capitalize on your
company’s strengths and improve or eliminate weaknesses.”

While the business owner should certainly be involved in creating a SWOT analysis, it could
be much more helpful to include other team members in the process. Shawn Walsh, founder
and CEO of Paradigm Computer Consulting, said his management team conducts a quarterly
SWOT analysis together.

“The collective knowledge removes blind spots that, if left undiscovered, could be
detrimental to our business or our relationship with our clients,” Walsh said.

The elements of a SWOT analysis

A SWOT analysis focuses on the four elements comprising the acronym, allowing companies
to identify the forces influencing a strategy, action or initiative. Knowing these positive and
negative elements can help companies more effectively communicate what parts of a plan
need to be recognized.

When drafting a SWOT analysis, individuals typically create a table split into four columns
to list each impacting element side-by-side for comparison. Strengths and weaknesses won’t
 typically match listed opportunities and threats, though they should correlate somewhat since
they’re tied together in some way. Billy Bauer, managing director of Royce Leather, noted
that pairing external threats with internal weaknesses can highlight the most serious issues
faced by a company.

“Once you’ve identified your risks, you can then decide whether it is most appropriate to
eliminate the internal weakness by assigning company resources to fix the problems, or
reduce the external threat by abandoning the threatened area of business and meeting it after
strengthening your business,” Bauer said.

Internal factors

The first two letters in the acronym, S (strengths) and W (weaknesses), refer to internal
factors, which means the resources and experience readily available to you. Examples of
areas typically considered include:

 Financial resources (funding, sources of income, investment opportunities)

 Physical resources (location, facilities, equipment)
 Human resources (employees, volunteers, target audiences)
 Access to natural resources, trademarks, patents and copyrights
 Current processes (employee programs, department hierarchies, software systems)

External factors

External forces influence and affect every company, organization and individual. Whether
these factors are connected directly or indirectly to an opportunity or threat, it is important to
take note of and document each one. External factors typically reference things you or your
company do not control, such as:

 Market trends (new products and technology, shifts in audience needs)

 Economic trends (local, national and international financial trends)
 Funding (donations, legislature and other sources)
 Demographics
 Relationships with suppliers and partners
 Political, environmental and economic regulations

The SWOT analysis is a simple, albeit comprehensive strategy for identifying not only the
weaknesses and threats of a plan but also the strengths and opportunities it makes possible.
However, a SWOT analysis is just one tool in the strategy toolbox. Additional analytic tools
to consider include PEST (political, economic, social and technological), MOST (mission,
objective, strategies and tactics) and SCRS (strategy, current state, requirements and solution)
analyses.

SWOT can also prompt businesses to examine and execute strategies in a more balanced, in-
depth way.

McKinney’s 7s Framework
 McKinsey 7s model is a tool that analyzes firm’s organizational design by looking at 7 key
internal elements: strategy, structure, systems, shared values, style, staff and skills, in order to
identify if they are effectively aligned and allow organization to achieve its objectives.

McKinsey 7s model was developed in 1980s by McKinsey consultants Tom Peters, Robert
Waterman and Julien Philips with a help from Richard Pascale and Anthony G. Athos. Since
the introduction, the model has been widely used by academics and practitioners and remains
one of the most popular strategic planning tools. It sought to present an emphasis on human
resources (Soft S), rather than the traditional mass production tangibles of capital,
infrastructure and equipment, as a key to higher organizational performance.

The goal of the model was to show how 7 elements of the company: Structure, Strategy,
Skills, Staff, Style, Systems, and Shared values, can be aligned together to achieve
effectiveness in a company. The key point of the model is that all the seven areas are
interconnected and a change in one area requires change in the rest of a firm for it to function
effectively.

Below you can find the McKinsey model, which represents the connections between seven
areas and divides them into ‘Soft Ss’ and ‘Hard Ss’. The shape of the model emphasizes
interconnectedness of the elements.

The model can be applied to many situations and is a valuable tool when organizational
design is at question. The most common uses of the framework are:

 To facilitate organizational change.

 To help implement new strategy.
 To identify how each area may change in a future.
 To facilitate the merger of organizations.
 7s factors

In McKinsey model, the seven areas of organization are divided into the ‘soft’ and ‘hard’
areas. Strategy, structure and systems are hard elements that are much easier to identify and
manage when compared to soft elements. On the other hand, soft areas, although harder to
manage, are the foundation of the organization and are more likely to create the sustained
competitive advantage.

HARD S SOFT S

Strategy Style

Structure Staff

Systems Skills

1. Strategy is a plan developed by a firm to achieve sustained competitive advantage

and successfully compete in the market. What does a well-aligned strategy mean in 7s
McKinsey model? In general, a sound strategy is the one that’s clearly articulated, is long-
term, helps to achieve competitive advantage and is reinforced by strong vision, mission and
values. But it’s hard to tell if such strategy is well-aligned with other elements when analyzed
alone. So the key in 7s model is not to look at your company to find the great strategy,
structure, systems and etc. but to look if its aligned with other elements. For example, short-
term strategy is usually a poor choice for a company but if its aligned with other 6 elements,
then it may provide strong results.

2. Structure represents the way business divisions and units are organized and includes
the information of who is accountable to whom. In other words, structure is the
organizational chart of the firm. It is also one of the most visible and easy to change elements
of the framework.

3. Systems are the processes and procedures of the company, which reveal business’
daily activities and how decisions are made. Systems are the area of the firm that determines
how business is done and it should be the main focus for managers during organizational
change.

4. Skills are the abilities that firm’s employees perform very well. They also include
capabilities and competences. During organizational change, the question often arises of what
skills the company will really need to reinforce its new strategy or new structure.

5. Staff element is concerned with what type and how many employees an organization
will need and how they will be recruited, trained, motivated and rewarded.
6. Style represents the way the company is managed by top-level managers, how they
interact, what actions do they take and their symbolic value. In other words, it is the
management style of company’s leaders.

7. Shared Values are at the core of McKinsey 7s model. They are the norms and
standards that guide employee behavior and company actions and thus, are the foundation of
every organization.