CHAPTER THREE

ENVIRONMENTAL
ANALYSIS

Chapter 3 Envt'al Analysis 1

Content
1. Internal Environmental Analysis
a) SWOT Analysis
b) Value chain analysis

2. External Environmental Analysis

a) General (PESTEL/STEPEL)

Chapter 3 Envt'al Analysis 2

Chapter 3 Envt'al Analysis 3
The
Internal
Environme
nt
Chapter 3 Envt'al Analysis 4
Internal Analysis of the
Organization
 AsShown 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.

 Theproper matching of what a firm

can do with what it might do allows
the development of strategic intent,
the pursuit of strategic mission and
formulation of strategies.

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Internal Analysis cont’d …
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.
 Itis 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.

Chapter 3 Envt'al Analysis 6

Internal Analysis cont’d …
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 brand image can be source of
weaknesses.

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 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.

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 Competitive Advantage cont’d
…
 Michael Porter identified two basic
types of competitive advantage:
 cost advantage
 differentiation advantage
 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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 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
 Brand equity

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 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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 Core Competencies
 Thefirm'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.

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 Core Competencies cont’d …
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 realized when
resources & capabilities are:
 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
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Core Competencies cont’d
…
When the four criteria are
met, resources &
capabilities become core
competencies.
Core competencies can
become core rigidities

Chapter 3 Envt'al Analysis 14

 Core Competencies cont’d
…
For building core competencies two
conceptual tools or frameworks might be
available as firms search for competitive
advantage:
 Valuechain analysis, which is a framework
for determining which value creating
competencies should be maintained,
upgraded, & developed and which should be
outsourced.
 Determining which of the firm’s resources &
capabilities are core competencies using the
four criteria: valuable, rare, inimitable, non-
substitutable
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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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 The Functional Approach for
Internal Analysis
The simplest way to begin an analysis of
a corporation’s value chain is by
carefully examining its traditional
functional areas for potential
strengths and weaknesses.

Functional resources include not only

the financial, physical, and human
assets in each area, but also the ability
of the people in each area to formulate
and implement the necessary functional
objectives, strategies, and policies.

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 The Functional Approach for
Internal Analysis cont’d …

The resources include the

knowledge of analytical
concepts and procedural
techniques common to each
area as well as the ability of the
people in each area to use them
effectively.
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 Value Creation
 Value consists of the performance
characteristics and attributes provided by
companies in the form of goods or services
for which customers are willing to pay.

 The firm creates value by performing a

series of activities that Porter identified as
the value chain. In addition to the firm's
own value-creating activities, the firm
operates in a value system of vertical
activities including those of upstream
suppliers and downstream channel
members.

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 Value Chain Analysis
 The value chain was described and
popularized by Michael Porter in his
1985 in Competitive Advantage:
Creating and Sustaining Superior
Performance.
A value chain is a systematic way of
viewing the series of activities a firm
performs to provide a product to its
customers.
 Itallows the firm to understand the
parts of its operations that create
value & those that do not.
Chapter 3 Envt'al Analysis 20
 Value Chain Analysis cont’d
…
 It is a template that firms use to
understand their cost position & identify
multiple means of implementation for a
chosen business-level strategy.
 The value chain categorizes the generic
value-adding activities of an organization.

 The "primary activities" Represent the

sequence of bringing materials into the
business, converting them into final
products, making it available to the
customers and proving after sale support to
the consumer.

I.e. they include: inbound logistics,

production, outbound logistics, sales and
marketing, and after sales service
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 The Value Chain

Firm Infrastructure (e.g., Finance, Planning)

Support Human Resource Management

Activities
Technology Development
Support primary M
activities Procurement A
R Value
G Creation
I
N
Inbound Operations Outbound Marketing & After-Sale
Logistics (Manufacturing) Logistics Sales Service

Primary Activities

Flow of product to the customer

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 Value Chain Analysis
cont’d …
The "support activities" include:
firm infrastructure management,
HRM, R&D, and procurement.

The most important thing is that

the cost & value drivers should be
identified for each value activity.

Thus, the ultimate goal is to

maximize value creation while
minimizing costs.
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 Value Chain Analysis
cont’d …
 Each of an organization’s product lines has
its own distinctive value chain. Because
most organizations make several different
products or services, an internal analysis
of the firm involves analyzing a series of
different value chains.
 The systematic examination of individual
value activities can lead to a better
understanding of an organization’s
strengths and weaknesses.

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 The
External
Environmen
t
Chapter 3 Envt'al Analysis 25
 External Environmental
Analysis
The Process of Performing an
External Analysis
 Gather relevant information

 Identify the most important

opportunities and threats
 Rank them from the most important
to the least important

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External Environmental
cont’d …
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 represent opportunities for the firm.
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External Environmental
cont’d …
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
could represent threats to a firm’s success.

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The General
Environmen
t
(PESTE – Analysis)
Chapter 3 Envt'al Analysis 29
The General
Environment
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.
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 The General Envir
(Cont…)
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

 The acronym PEST (or sometimes

rearranged as "STEP") is used to
describe a framework for the analysis of
these external general environmental
factors.
 Firms also add one more E to the PEST
analysis and conduct PESTE analysis to
address the growing interest on
Ecological factors.

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 Political Factors:
Political
factors define the legal and
regulatory parameters of
organizations’ operation.

 There are laws that could restrict

the potential profits of
businesses: fair trade decisions,
anti-trust laws, tax programs,
minimum wage legislation,
pollution & pricing policies.

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Political Factors:
cont’d …
Other political actions aimed at
protecting employees, customers,
the general public, and the
environment.

There are also political actions that

are designed to benefit and protect
organizations: patent laws,
government subsidies, and product
research grants

Chapter 3 Envt'al Analysis 33

 Political Factors:
cont’d …
Political action can bring about substantial
impact on three governmental functions
that influence the external environment of
firms:

 Supplier function: government

decision regarding the accessibility of
private businesses to government-
owned natural resources and
stockpiles of agricultural products will
profoundly affect the viability of the
strategies of the firms.
Chapter 3 Envt'al Analysis 34
 Political Factors:
cont’d …
 Customer function: government
demand for products and services can
create, sustain, enhance, or eliminate
many market opportunities.

Competitive function: the government

can operate as an almost unbeatable
competitor in the market place.
 Thus, knowing of government’s
strategies can help a firm avoid
unfavorable confrontation with the
government as a competitor.
Chapter 3 Envt'al Analysis 35
Political Factors:
cont’d …
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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 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.

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 Economic Factors:
cont’d …
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
Chapter 3 Envt'al Analysis 38
Social Factors:
These factors include the
beliefs, values, attitudes,
opinions, and life style of
persons depending up on
cultural, demographic,
religious, and ethnic
conditioning.

Chapter 3 Envt'al Analysis 39

 Social Factors: cont’d
…
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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 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
 Itshould 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

Chapter 3 Envt'al Analysis 41

Technological Factors:
cont’d …
Some key technological
variables
 R&D activity
 automation
 technology incentives
 rate of technological change

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Ecological Factors
Reading Assignment

Ecological/environment
factors

Chapter 3 Envt'al Analysis 43

The SWOT Matrix
A firm should not necessarily pursue
the more lucrative opportunities.
Rather, it may have a better chance
at developing a competitive
advantage by identifying a fit
between the firm's strengths and
upcoming opportunities.
 Insome cases, the firm can overcome
a weakness in order to prepare itself
to pursue a compelling opportunity.
 Todevelop strategies that take into
account the SWOT profile, a matrix of
these factors can be constructed. The
SWOT matrix is shown below:
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The SWOT Matrix cont’d
…
Strength Weaknesse
s s

Opportunitie
S-O W-O
s strategi strategies
es
Threats S-T W-T
strategi strategies
es Chapter 3 Envt'al Analysis 45
The SWOT Matrix cont’d
…
 S-O strategies pursue opportunities that
are a good fit to the company's strengths.
 W-O strategies overcome weaknesses to
pursue opportunities.
 S-Tstrategies identify ways that the firm
can use its strengths to reduce its
vulnerability to external threats.
 W-T strategies establish a defensive plan
to prevent the firm's weaknesses from
making it highly susceptible to external
threats.
Chapter 3 Envt'al Analysis 46
THANK YOU!

Chapter 3 Envt'al Analysis 47