ENVIRONMENTAL ANALYSIS

Having articulated its vision and mission, a firm needs to scan and analyze the environment in which it
is operating. The environment comprises of the firm’s internal environment, its industry environment and the
general/remote environment, the macro-environment in which it operates. The analysis exercise entails looking
at the organization’s strengths, weaknesses, opportunities and threats. This is referred to as the SWOT
ANALYSIS.

SWOT ANALYSIS

External Environment

Industry environment that the company competes in:

1. Industry Environment consists of the competitors, customers and suppliers

2. Macro-economic consists of broader economic, social, political, legal, technological and demographic
environments.

A good fit is needed between strategy and the environment.

An Industry is a group of companies offering products or services that are close substitutes for each other.

Porter’s Five Forces Model is used in analyzing competition within an industry

Porter’s Five Forces Model

Risk of Entry by
Potential
Competitors

Rivalry
Bargaining Among Bargaining
Power of Established Power of
Suppliers Firms Buyers

Threat of Substitute
Products
1. Potential Competitors

Established companies try to discourage potential competitors from entering the industry through some
barriers to new entry such as:

 Brand Loyalty refers to the preference of buyers for the products of established companies. Brand
Loyalty can be created through continuous advertising of brand and company names. Patents protection
of products, product innovation through R& D, emphasis on high product quality and good after sales
service.
  Absolute Cost Advantage
 Can arise from superior production techniques
 Control of particular inputs such as labour, materials
 Discounts on bulk purchases

 Economies of Scale – associated with large company size hence mass production
 Scale economies in advertising

In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation,
and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output
enables an increase in scale.

2. Rivalry among Established Companies

If this competitive force is weak companies have the opportunity to raise prices and earn greater profits.
 Price wars may also result

Extent of rivalry among established companies is a function of:

(a) Industry competitive structure – the number and size of the distribution of companies. Structure
can either be fragmented or consolidated

(b) Demand conditions (i) in situations where there is demand, a company can increase revenue
without taking market share away from other companies (ii) where demand is declining companies
fight to maintain revenue and market share.

Exit barriers – are economic, strategic and emotional factors that keep companies competing in an industry
even when returns are low. Examples are
a. Investments in plant and equipment that have no alternative uses and cannot be sold off. If the
company wishes to leave the industry, it has to write off the book value of these assets.
b. High fixed costs of exit, such as severance pay to workers who are being made redundant
c. Emotional attachments to an industry, such as when a company is unwilling to exit from its original
industry for sentimental reasons.
d. Strategic relationships between business units
e. Economic dependence on the industry, as when a company is not diversified and so relies on the
industry for its income.

3. The Bargaining Power of Buyers

Buyers can be viewed as a competitive threat when they

 Force down prices
 Demand higher quality and better service
 When the supply industry is composed of many small companies, and the buyers are few in number
and large
 When they purchase in large quantities
 When they can switch orders between supply companies at a low cost
 When it is economically feasible for them to purchase the input from several companies at once
 When they can use the threat to supply their own needs through vertical integration as a device for
forcing down prices.
4. The Bargaining Power of Supplies, Suppliers are most powerful
 When the product that they sell has few substitutes and is important to the company
 When the company’s industry is not an important customer to the suppliers
 When their respective products are differentiated such an extent it is costly for a company to switch
from one supplier to another. In this case the company is dependent on its suppliers and unable to
play them off against each other.
 When they can use the threat of vertically integrating forward into the industry and competing
directly with the company as a device for raising prices
 When buying companies are unable to use the threat of vertically integrated backward and
supplying their own needs as a device for reducing input prices.

5. Substitute Products
These are products serving similar consumer needs

Macro Environment

Economic Growth – rate of growth in the economy has a direct impact on the level of opportunities and
threats that companies face – Business Cycles

1. Interest rates – level of interest rates can determine the levels of demand for a company’s product, if
money is borrowed. They influence the demand for funds and they determine the cost of capital.
2. Currency exchange rates – the value of the dollar relative to the currencies of other countries.
3. Inflation rates – results into slower economic growth, higher interest rates and volatile currency
movements. It affects investment negatively. It makes the future less predictable.

 Technological Environment
-Technological change can make established products obsolete overnight.
-It can also create a host of new possibilities.

 Social Environment – can create opportunities and threats. For example, the trend-toward
greater health consciousness. Mineral waters diet drinks and fruit drinks. Threat to the
tobacco industry.

 The Demographic Environment refers to the changing composition of the population and
can create both opportunities and threats. The AIDS pandemic is a threat to human beings
and an opportunity to the pharmacies.

 The Political and Legal Environment

- Deregulation opened up a number of industries to intense competition.
- Privatization as well is a government tool for empowering the indigenous people.

 The Global Environment

- Globalization can create both opportunities and threats.

INTERNAL ANALYSIS

Strengths which emanate from a company’s distinctive competencies that competitors cannot easily
match.
THE INTERNAL ENVIRONMENT

It includes the following: - STRUCTURE, CULTURE & RESOURCES

STRUCTURE:
- Often defined in terms of communication authority and work- flow.
- Corporation’s pattern of relationships, i.e.“its anatomy”,
- A formal arrangement of roles and relationships of people, so as to facilitate the achievement of goals and
the accomplishing of the mission of the corporation
- Also referred to as the chain of command

CULTURE
- the collection of beliefs expectations, and values shared by the corporation’s members and passed on from
one generation of employees to another.
- these create norms (rules of conduct) that define acceptable behavior of people from top management to the
low-level employees.
- Corporate culture shapes the behavior of people in the organization.

Culture has a powerful influence on the behavior of leadership and can strongly affect a corporation’s ability to
shift its strategic direction.

IMPORTANCE OF CULTURE IN AN ORGANIZATION

1. Culture conveys a sense of identity for employees.
2. Culture helps generate employees` commitment to something greater than themselves.
3. Culture adds to the stability of the organization as a social system.
4. Culture serves as a frame of reference for employees to use to make sense out of organizational
activities and to use as a guide for appropriate behavior.
[Wheeler and Hunger 1989 p.137]

Corporate culture generally is embedded in the mission statement of the organization. It gives a corporation a
sense of identity
- who we are
- what we do
- what we stand for

RESOURCES:
Besides the structure and the culture, a corporation also does an internal analysis of its resources so as to
identify its strengths and weaknesses and examine functional level strategies that it can build and exploit the
strengths and correct the weaknesses.

From its strengths a company can end up having a distinctive competence. This refers to a company’s
strengths that competitors cannot easily match or imitate [Hill and Jones 1989 p.91]. Distinctive competences
represent the unique strengths of a company and from distinctive competences a company can build a
sustainable competitive advantage, which form the bedrock of a company’s strategy.

In company distinctive competences are found within individual functions such as:
Marketing
Finance
Research and Development
Operations (Manufacture/Services)
Human Resources
Information Systems