CHAPTER TWO

ENVIRONMENT AND RESOURCE

ANALYSIS

BY :
G/micael W. (Ass. Professor)
 CHAPTER OUTLINE
 Introduction to Business Environment
External Environmental Analysis
 Components of External Environment
Importance and Framework of Industrial Analysis
Competitive Analysis
Porter’s Five Forces model
Internal Environmental Analysis
Techniques of Internal Analysis
SWOT Analysis
Value chain Analysis
• As Waterman has noted:
“In today’s business environment, more than in
any preceding era, the only constant is change.
Successful organizations effectively manage
change, continuously adapting their
bureaucracies, strategies, systems, products, and
cultures to survive the shocks and prosper from
the forces that decimate (destroy) the
competition.”

Ch 1 -3
 Introduction to Business Environment
Business Environment refers to those aspects of the
surroundings of business enterprises which affect
or influence its operations and determine its
effectiveness.
Business Environment consists of all those factors
have a bearing on the business, such as the
strengths, weakness, opportunity, treaty and internal
power relationships of the organization.
Government policies and regulations, nature of the
economy and economic conditions, socio-cultural
factors, demographic trends, natural factors and
global trends and cross-border developments
 THE IMPORTANCE OF STUDY OF BUSINESS
ENVIRONMENT
 Business Environment which affect or influence its
operations and determine its effectiveness".
 According to Hicks "the firm can
(1) adjust to the environment, or
(2) if it has the ability, change the environment.
 The firm receives the necessary, "resources and
opportunities" from the environment for its
existence, future growth and survival.
 A business always requires land and raw materials, it
needs people and capital. All these resources come
from the environment. The business in turn must
supply satisfactory returns to the environment. These
returns are usually in the form of goods and services.
 What is an External Analysis?
The process of scanning and evaluating an
organization’s various external factors impacting
on performance
Environmental scanning
– Monitoring & interpreting sweep of social,
political, economic, environmental, &
technological events to spot budding trends that
could eventually impact the industry
– Allow decision makers to know what’s
happening in the external environment
– Recognize and anticipate external environmental
changes
 What is an External Analysis?
• Evaluating external factors:
– Evaluating various data trends & information and what
they mean to the organization
– Assessing the impact on organization by determining
the opportunities and threats facing the organization
Evaluating external factors involves looking for:
(1) Opportunities: Positive external environmental
trends that improve the organization’s
performance
(2) Threats: Negative external environmental trends
that hinder the organization’s performance
 Perspectives on Organizational Environments
(1) Environment as Source of Information
– The environment is viewed as a source of
information for decision-making
(a) Environmental uncertainty
The amount of change & complexity of an
organization’s environment
(2) Environment as Source of Resource
– Environment viewed as a source of scarce and
necessary resource, sought for by competing
organizations
– The scarcer a resource, the harder it is to maintain
control over resources
 How Do You Do An External Analysis
External environmental sectors
– External vs. Internal Environment
• External environment affects all competitors
• Internal environment affects only the decision
maker’s firm
– Specific or Task Environment
• External sectors that directly impact decisions and
actions by opening up opportunities or threats
– General Environment
• External sectors that indirectly affect decisions and
actions and may present opportunities or threats
Environmental forces

6
 General Environment forces
• Five main key external forces
Economic
All macroeconomic data, current statistics, trends & changes
Interest rates; exchange rates; inflation rates; budget deficit-surplus;
trade deficits-surplus; consumer income, spending, & debt levels;
employment-unemployment rates, workforce productivity, etc.
Demographic, Current statistical data and trends in population
characteristics. Gender; Age; Income levels; Ethnic makeup;
Education; Family composition; Geographic location; Birthrates;
Employment status
Technological
• Improvements, advancements, and innovations that create
opportunities & threats
• Communications; computing; transportation; robotics;
manufacturing; telecom; consumer electronics, etc.
 Con’t
Socio-Cultural
• Nature of the country’s culture and how it’s changing
• Society’s traditions, values, attitudes, beliefs, tastes,
patterns of behavior, and how they are changing
Political-Legal
• The various laws, regulations, judicial decisions, and
political forces that are currently in effect at the
federal, state, and local levels of government
• Potential legal, regulatory, & political changes, or
pending judicial decisions that might take place &
could impact firms
 Competitive Forces
Collecting and evaluating information on
competitors is essential for successful strategy
formulation.
Competitive Intelligence Programs
Competitive intelligence (CI), is a systematic and
ethical process for gathering and analyzing
information about the competition’s activities and
general business trends to further a business’s own
goals .
 Industry’s dominant economic characteristics
• Market size & growth rate
Small markets don’t tend to attract big/new competitors as
large markets; Faster growth breads new entry
• Scope of competitive rivalry
• Local, regional, national, or global?
• Number of competitors & their relative sizes
• Prevalence of backward or forward integration
• Raises capital requirements; create differences in costs
• Entry/exit barriers & resource requirements
• High barriers protect positions & profits of existing
firms
• Big resource requirements make investment decisions
critical
 Con.t
• Nature & pace/speed of technology
• Raises risk because investments in tech. facilities may
become obsolete before they wear out
• Product & customer characteristics
• Scale economies & experience curve effects
• Increases volume & market share needed to be cost
competitive
• Capacity utilization
• Surpluses push prices & profit margins down;
shortages pull them up
• Industry Profitability
• High profit industries attract new entrants; depressed
conditions encourage exit.
 External Strategic Management Audit
Identify & Evaluate factors beyond the control of a
single firm
– Increased foreign competition
– Population shifts
– Information technology
 The Nature of an External Audit
The purpose of an external audit is to develop a
finite list of opportunities that could benefit a firm
and threats that should be avoided.
Finite refers that the audit is aimed at identifying
key variables that offer actionable responses.
Firms should be able to respond either offensively
or defensively to the factors by formulating
strategies
 that take advantage of external opportunities or
that minimize the impact of potential threats.
 Porter’s Five Forces Model
• Assess strength of each competitive force (Strong?
Moderate? Weak?)
– Rivalry among existing competitors
– Substitute products
– Threat of potential entrants
– Bargaining power of suppliers
– Bargaining power of buyers
• Explain how each force acts to create competitive
pressure
• Decide whether overall competition is brutal, fierce,
strong, moderate, or weak
 Porter’s Five Forces Model

Potential development
of substitute products

Bargaining power
of suppliers Rivalry among Bargaining power
competing firms of consumers

Potential entry of new

competitors
(1) Rivalry among existing competitors
– Existing firms in an industry are organization's current
& direct competitors
– Usually the most powerful of the five forces
– Check for weapons of competition used by rivals in
jockeying for position
• Price
• Quality and/or product innovation
• Customer service
• Performance features offered
• Advertising/promotions
• Dealer networks and/or distribution channels
• Warranties/guarantees
What causes rivalry to be stronger?
– Lots of firms, more equal in size & capability
– Slow growth in market
– Industry conditions tempt rivals to use price cuts
and other offensive(disgusting) weapons to boost
volume & market shares
– Customers have low switching costs
– One or more firms initiate moves to bolster their
position position at the expense of rivals
– A successful strategic move carries a big payoff
– Costs more to get out of business than to stay in
– Firms have diverse strategies, corporate priorities,
resources and countries of origin
 Con’t
• Strategic group is a set of firms competing within
an industry the have similar strategies and resources
• Firms in same strategic group have two or more
competitive characteristics in common:
– Sell in same price/quality range
– Cover same geographic areas
– Be vertically integrated to the same degree
– Have comparable product line breath
– Emphasize same types of distribution channels
– Offer buyers similar services
– Use identical technological approaches
 (2) Threat of Potential Entrants
– Seriousness of threat depends on
• Barriers to entry
• Reactions of existing firms to new entrants
– Barriers exist in an industry when
• Newcomers confront obstacles
• Economic factors put potential entrants at a
disadvantage relative to established firms in an
industry
 Con’t
• Common Barriers to Entry
– Economies of scale
– Inability to gain access to specialized technology &
know-how
– Existence of learning/experience curve effects
– Strong brand preferences and customer loyalty
– High capital and/or specialized resource requirements
– Costs disadvantages independent of size
– Access to distribution channels
– Regulatory policies, tariffs, trade restrictions
Threat of potential entry is stronger when:
– Entry barriers are low
– Sizeable pool of potential entrants exists
– Established firms are unwilling or unable to
contest a newcomer's entry efforts
– Newcomers can expect to earn attractive profits
 3) Bargaining Power of Buyers
• Buyers are a strong competitive force when:
– They are large and purchase a sizeable %age of
industry’s product
– They buy in bulk
– They can integrate backwards
– Industry’s product is standardized
– Switching costs to substitutes or other brands are low
– They can purchase from several suppliers
– The product purchased does not save the buyer money
 Con’t
• Buyers are a stronger competitive force the more
they have leverage to bargain over:
– Price
– Quality
– Service
– Other terms and conditions of sales (e.g.,
warranties/guarantees)
 (4) Bargaining Power of Suppliers
• Suppliers are a strong competitive force when:
– Items makes up large portion of product costs,
is crucial to production process, and/or
significantly affects product quality
– It is costly for buyers to switch suppliers
– They have good reputations & growing demand
– They can supply a component cheaper than
industry members can make it themselves
– They do not have to contend with substitutes
– Buying firms are not important customers
 Con’t
• Suppliers are a stronger competitive force the more they
can exercise power over:
– Prices charged
– Quality and/or performance of items supplied
– Amounts and delivery times
5. Substitute Products
• Substitutes matter when customers are attracted to the
products of firms in other industries - satisfy the same
need
• Limit potential returns (profitability) of an industry
– Place ceiling on prices firms can charge
 When are substitutes a stronger force?
– Sale of substitute are growing rapidly
– Producers of substitutes are planning to add new
capacity
– Profits of substitute producers are increasing
• The competitive threat of substitutes is stronger
when they are:
– Readily available
– Attractively priced
– Believed to have comparable or better
performance features
– Customer switching costs are low
Strategic Implications of Porter’s Five Forces
Model
• An industry environment is unattractive when
– Rivalry is strong
– Entry barriers are low
– Competition from substitutes are strong
– Suppliers and buyers have considerable
bargaining power
 Con’t
• Industry environment is attractive when:
– Rivalry is moderate or low
– Entry barriers are high
– Good substitutes do not exist
– Suppliers and buyers are in a weak bargaining
position
 Drivers of Change in an Industry
• Industries change because forces are driving industry
participants to alter their actions
What are driving forces
– The major underlying causes of changing industry and
competitive conditions
• Analyzing Driving Forces
– Identify forces likely to exert greatest influence over
next 1-3 years – usually not more than 3-4 factors
– Assess their impact – difference they make
– Environmental scanning a pre-requisite
 Common Types of Driving Forces
• Changes in long-term industry growth rate
• Changes in buyers of the product & how they use it
• Product innovation
• Technological change/process innovation
• Marketing innovation
• Entry or exit of major firms
• Diffusion of technical knowledge
• Changes in costs and efficiency
• Increasing globalization of industry
• Market shift from standardized to differentiated
 Key Success Factors (KSFs) in an Industry
• What are industry KSFs?
– The competitive elements that every industry
member must be competent at doing or
concentrate on achieving in order to be
competitive and financially successful in the
marketplace
• Specific strategy elements
• Product attributes
• Resources, Competencies & Competitive
capabilities
 Identifying Industry KSFs
• KSF’s in an industry spell difference between
– Profits and loss
– Competitive success or failure
• Answers to three questions pinpoint KSF’s
(1) On what basis do customers choose between competing
brands or sellers?
(2) What must a seller do to be competitively successful –
what resources and competitive capabilities does it need?
(3) What does it take for sellers to achieve a sustainable
competitive advantage?
– KSFs consist of 3-5 major determinants of financial &
competitive success in an industry
 Common Types of KSFs
• Technology-related
– Scientific research expertise; product innovation
capability; expertise in a given technology; etc.
• Manufacturing-related
– Low-cost production efficiency; low cost plant location;
Quality of manufacture, low-cost product design &
engineering, etc
• Distribution-related
– Strong network of wholesaler distributors/dealers;
ability to gain ample space on retail shelves; accurate
filling of customer orders; short delivery times, etc.
 Con’t
• Marketing-related
– Customer service; merchandising skills; clever
advertising; attractive styling or packaging, Guarantees &
warrantees
• Skills-related
– Superior workforce talent; quality control know-how;
design expertise; technological expertise, etc.
• Organizational capability
– Superior information systems; ability to employ internet
to conduct business; managerial expertise
 Responsibilities for External Analysis
• Lower level or supervisory managers
– Encourage workers to observe and interact with external
parties (customers & supplier reps)
– Collect & consolidate information from workers
• Middle managers
– Coordinate external information
– Share information with other organizational units
– Act as information gatherer & disseminator
– Monitor general information
– Make neede strategic changes
• Upper Management
– Evaluate opportunities & threats
 Benefits of Doing an External Analysis
• Proactive Managers anticipate changes and plan
accordingly
– Provide information for
• Planning
• Decision making
• Strategy formulation
– Acquire and control needed resources
– Cope effectively with increasingly dynamic
environment
– Make a difference with higher performance
 Challenges of Doing an External Analysis
• Rapid environmental changes are difficult to keep
up with
• Amount of time that the analysis can consume
• Identifying accurate forecasts and trends
• Availability of data and information
 Strengths
A firm's strengths are its resources and capabilities
that can be used as a basis for developing a basis
for competitive advantage .
Examples of such strengths include:
• patents
• strong brand names
• good reputation among customers
• cost advantages from proprietary know-how
• exclusive access to high grade natural resources
• favorable access to distribution networks
 Weaknesses
The absence of certain strengths may be viewed as a weakness
For example, the following may be considered weaknesses:
• lack of patent protection
• a weak brand name
• poor reputation among customers
• high cost structure
• lack of access to the best natural resources
• lack of access to key distribution channels
In some cases, a weakness may be the flip side of strength. Take the case
in which a firm has a large amount of manufacturing capacity. While
this capacity may be considered a strength that competitors do not
share, it also may be a considered a weakness if the large investment
in manufacturing capacity prevents the firm from reacting quickly to
changes in the strategic environment.
 The Value Chain Analysis
Value Chain Analysis is a useful tool for working
out how you can create the greatest possible value
for your customers. In business, we're paid to take
raw inputs, and to "add value" to them by turning
them into something of worth to other people.
To analyze the specific activities through which
firms can create a competitive advantage, it is useful
to model the firm as a chain of value-creating
activities.
 Michael Porter identified a set of interrelated
generic activities common to a wide range of firms.
Primary and supportive activities
 Primary activities
• Inbound logistics include the receiving, warehousing, and
inventory control of input materials.
• Operations are the value-creating activities that transform
the inputs into the final product.
• Outbound logistics are the activities required to get the
finished product to the customer, including warehousing,
order fulfillment, etc.
• Marketing & Sales are those activities associated with
getting buyers to purchase the product, including channel
selection, advertising, pricing, etc.
• Service activities are those that maintain and enhance the
product's value including customer support, repair services,
etc.
 Support Activities
• The primary value chain activities described above are
facilitated by support activities. Porter identified four
generic categories of support activities,
• Procurement - the function of purchasing the raw materials
and other inputs used in the value-creating activities.
• Technology Development - includes research and
development, process automation, and other technology
development used to support the value-chain activities.
• Human Resource Management - the activities associated
with recruiting, development, and compensation of
employees.
• Firm Infrastructure - includes activities such as finance,
legal, quality management, etc.
Great spirits have always encountered violent
opposition from mediocre minds.
-- Albert Einstein