Analyzing the strategic

environment
Chap-3
As the starting point in the development of both prescriptive and emergent strategy, it is
useful to begin by exploring the nine basic analytical tools of the environment that will
influence the organization's strategy . Elements of the environment can change so the
organization needs to adjust its strategy accordingly.

In recent years, the term ‘environment’ has taken on a rather specialised meaning: it
involves ‘green’ issues and the poisoning of our planet by human activity.

Prescriptive strategies will want to anticipate how the environment will change
in the future in order to meet future needs ahead of competing organizations.
Emergent strategies will be content with an understanding of the environment.
 Environment
Basics
Degree of
Turbulence
Customer
Analysis

PESTEL
Competitor Analysis
Analysis Company

Industry
Four Links Lifecycles
Analysis

Five Forces Key factor for

Analysis Success
 Why studying the competitive environment is
important
The environment means everything and everyone outside the organization:
competitors, customers, suppliers plus other influential institutions such as local
and national governments. It is important to study the environment surrounding
the organization for three main reasons.
• First, most organizations compete against others .
• Second, most organizations will perceive opportunities that might be
explored and threats that need to be contained.
• Third, there are opportunities for networks and other linkages, which lead
to sustainable co-operation.
 There are three difficulties in determining the connection between the
organization's strategic management and its environment.

1. The prescriptive versus emergent debate

2. The uncertainty .
3. The range of influences

When analyzing the environment, it is useful to draw a distinction between two

types of results from the analysis-

1. Proactive Outcomes
2. Reactive Outcomes

See Table 3.1

 STRATEGIC ENVIRONMENT – THE BASICS
1. Market definition and size
2. Market growth
3. Market share

• Market definition is important because it will determine the size and scope of
the strategic opportunity. Market definition will be defined by a consideration of
customers and the availability of substitute products.
• Market growth is commonly estimated early in any strategic analysis because
of its importance with regard to the growth objectives of an organization.
• A basic estimate of market share can be used to estimate whether an
organization has a significant share of a market as a starting point in exploring
the strategic implications.
 DEGREE OF TURBULENCE IN THE
ENVIRONMENT
Special attention needs to be directed to the nature and strength of the forces driving strategic
change – the dynamics of the environment. One reason for this consideration is that, if the forces
are exceptionally turbulent, they may make it difficult to use some of the analytical techniques –
like Porter’s ‘Five Forces’. Another reason is that the nature of the environment may influence the
way that the organization is structured to cope with such changes.
1.Changeability – the degree to which the environment is likely to change.
• Complexity – the degree to which the organization's environment is
affected by factors such as internationalisation and technological, social and political
complications.
• Novelty – the degree to which the environment presents the organization
with new situations.

2 Predictability – the degree to which such changes can be predicted.

• Rate of change of the environment (from slow to fast);
• Visibility of the future in terms of the availability and usefulness of the information
 Environmental Repetitive Expending Changing Discontinuou Surprising
Turbulence s
Complexity National National Regional Regional Global
Changeability Technologic Socio political Economic
al
Familiarity of Familiar Extrapolable Discontinuous Discontinuous
Events Familiar Novel
Rapidity of change Slower than Comparable Faster than
Response to response Response
Predictability

Visibility of Recurring Forecastable Predictable Partially Unpredictable

Future Predictable Surprise
1 2 3 4 5

Turbulence Level Low High

 ANALYSING THE GENERAL ENVIRONMENT
PESTEL checklist:

The PESTEL checklist, which consists of the Political, Economic, Socio-cultural,

Technological, Environmental and Legal aspects of the environment.
• Prescriptive and emergent strategists take different views on the merits of projecting forward
the main elements of the PESTEL checklist. The prescriptive approach favors the development
of projections because they are often implied in major strategic decisions in any event.
Emergent strategists believe the turbulence of the environment makes projections of limited
value.

• A scenario is a picture of a possible future environment for the organization, whose strategic
implications can then be investigated. It is less concerned with prediction and more involved
with developing different perspectives on the future.
• In analyzing the role and influence of government on strategy, the ESP Paradigm
– Environment, System, Policies – can form a useful structure for this purpose.
Influencing government policy may form an important element of strategy.

Environment( Background
System (Country’s System
Characteristics of a Policies
of Government)
Country)
 ANALYSING THE STAGES OF MARKET
GROWTH
Industry life cycle:

1. Introduction
2. Growth
3. Maturity
4. Decline
 Introduction Growth Maturity Decline
Customer  Early customers may  Growing group of • Mass market • Know the product
strategy experiment with product customers • Little new trial of well
and will accept some  Quality and reliability product or service • •Select on basis of
unreliability important for growth • Brand switching price rather than
 Need to explain nature of innovation
innovation

R&D High Seek extensions before Low

Strategy competition
Company • Seek to dominate market • React to competition • Expensive to increase • Cost control
Strategy • R&D and production with marketing market share if not particularly important
particularly important to ensure expenditure and initiatives already market leader
product quality • Seek cost reductions

Impact on • High price, but probably • Profits should emerge • Profits under pressure • Price competition and
Profitability making a loss due to here, but prices may well from need for low growth may lead to
investment in new category decline as competitors continuing investment losses or need to cut
enter market coupled with continued costs drastically to
distributor and maintain profitability
competitive pressure
Competitor • Keen interest in new category • Market entry • Competition largely • Competition based
strategy • Attempt to replicate new • Attempt to innovate and on advertising and primarily on price •
product invest in category quality • Lower product Some companies may
differentiation • Lower seek to exit the industry
product change
 It is important to note in the development of strategy the two consequences of the
industry life cycle that can have a significant impact on industries:

1. Advantage of early entry

2. Industry market share fragmentation

Criticisms of the industry life cycle:

1. It is difficult to determine the duration of some life cycles and to identify
the precise stage an industry has reached.

2. Some industries miss stages or cannot be clearly identified in their

stages, particularly as a result of technological change.

3. Companies themselves can instigate change in their products and can, as

a result, alter the shape of the curve. For example, new life has been
brought into the camera industry by the introduction of miniaturization
and, more recently, by the use of electronic storage in place of film.
 KEY FACTORS FOR SUCCESS IN AN INDUSTRY
Key factors for success in an industry are those resources, skills and attributes of
the organizations in an industry that are essential to deliver success in the
market place.
Critical comment on the concept :
Identifying the key factors for
success in the industry : 1 Identification .
1. Customer 2 Causality of relationships
2. Competition 3 Dangers of generalizing .
3. Corporation 4 Disregard of emergent
perspectives .
Exhibit 3.4 PG 84
 ANALYSING THE COMPETITIVE INDUSTRY
ENVIRONMENT
1 the bargaining power of suppliers;
2 the bargaining power of buyers;
3 the threat of potential new entrants;
4 the threat of substitutes;
5 the extent of competitive rivalry.

The bargaining power of suppliers:

• If there are only a few suppliers .
• If there are no substitutes for the supplies they off er .
• If suppliers’ prices form a large part of the total costs of
the organization .
• If a supplier can potentially undertake the value-added
process of the organization
The bargaining power of buyers:

• If buyers are concentrated and there are few of them .

• If the product from the organization is undifferentiated .
• If backward integration is possible .
• If the selling price from the organization is unimportant to the total costs
of the buyer.

The threat of potential new entrants:

1 Economies of scale .
2 Product differentiation .
3 Capital requirements .
4 Switching costs .
5 Access to distribution channels .
6 Cost disadvantages independent of scale .
7 Government policy .
 The threat of substitutes:

• the possible threat of obsolescence;

• the ability of customers to switch to the substitute;
• the costs of providing some extra aspect of the service that will prevent
switching;
• the likely reduction in profit margin if prices come down or are held.
The extent of competitive rivalry:
• When competitors are roughly of equal size and one competitor decides to gain
share over the others .
• If a market is growing slowly and a company wishes to gain dominance
• Where fixed costs or the costs of storing finished products in an industry are high
• If extra production capacity in an industry comes in large increments
• If it is difficult to differentiate products or services
• When it is difficult to exit from an industry
• If entrants have expressed a determination to achieve a strategic stake in that
market
 ANALYSING THE CO-OPERATIVE
ENVIRONMENT
The four links model :
As well as competing with rivals, most organizations also co-operate with others.
The basic co-operative linkages between the organization and its environment can
usefully be explored under four headings:
1 informal co-operative links and networks
2 formal co-operative links
3 complementors
4 government links and networks.

 Informal co-operative links and networks are the occasions when organizations
link together for a mutual or common purpose without a legally binding
contractual relationship.
  Formal co-operative linkages can take
many business forms but are usually bound
together by some form of legal contract.
They are shown in alliances, joint ventures,
joint shareholdings and many other deals
that exist to provide competitive
advantage and mutual support over many
years.
 Complementors are those companies whose
products add more value to the products of
the base organization than they would derive
from their own products by themselves.
 Government links and networks concern the relationships that many
organisations have with a country’s national parliament, regional assemblies
and the associated government administrations.
All such links are often less structured and formalized than those involving competitor
analysis but may represent significant areas of long-term competitive advantage.
 ANALYSING ONE OR MORE IMMEDIATE
COMPETITORS IN DEPTH
Competitor profiling:
The basic analysis of a leading competitor, covering its objectives, resources, market
strength and current strategies. the following aspects of the competitor’s organisation
need to be explored:
• Objectives .
• Resources .
• Past record of performance .
• Current products and services .
• Links with other organizations .
• Present strategies .
Competitor profiling should be regarded as an ongoing task. Its emergent
nature is particularly important in fast-moving markets.
 ANALYSING THE CUSTOMER AND MARKET
SEGMENTATION
There are three useful dimensions to an analysis of the
customer:
1 identification of the customer and the market;
2 market segmentation and its strategic implications;
3 market positioning usually within a segment.

Identification of the customer and the market:

• immediate customer base

• wider customer franchise
 Market segmentation:

The three prescriptive stages are:

1 Identify market segment(s) .
2 Evaluate segment(s) .
3 Position within market segment .

The advantages of identifying a market segment include:

• Strength in (and possibly dominance of ) a group, even though the overall market
is large. It may be more profitable to have a large share of a group than a small
share of the main market. Thus competitive advantage may be stronger in a
segment than in the broader market.
• Closer matching of customer needs and the organization's resources through
targeting the segment. This will enhance sustainable competitive advantage.
• Concentration of eff ort on a smaller area, so that the company’s resources can
be employed more effectively.
Consumer products Industrial products
• Geographic • Area or region of country
• Demographic (age, sex, • End-use
education, etc.) • Customer business
• Socio-economic and income • Buying situation
• Ethnic group • Market served
• Benefits sought • Value added by customer
• Usage rate and brand loyalty • Source of competitive
• Attitudes advantage (price, service, etc.)
• Lifestyle • Emphasis on R&D and
• Situation (where the innovation
consumption takes place) • Professional membership

Typical Bases for Segmentation

 It is not enough for a segment to be different. There are four important characteristics
of any segment if it is to be useful in strategic customer analysis. It must be:
1 Distinguishable . Customers must be distinguishable so that they can be
isolated in some way.
2 Relevant to purchasing . The distinguishing criteria must relate to differences
in market demand. For example, they may pay higher prices for higher quality.
3 Sufficiently large . If the segment is too small, then it will not justify the
resources needed to reach it.
4 Reachable . It must be possible to direct the strategy to that segment.

• Market segmentation is the identification of specific groups of customers who respond

differently from other groups to competitive strategies. They can be important in
strategy development because they provide the opportunity to dominate part of the
market.

• Identification of gaps in segment provision may provide the basis of new strategic
opportunities.
 Competitive positioning:

Competitive positioning is the choice of differential advantage possessed by an

organization that allows it to compete and survive in a market place or in a segment
of a market place. the choice of differential advantage that the product or service
will possess against its competitors. To develop positioning, it is useful to follow a
two-stage process – first identify the segment gaps, second identify positioning
within segments.

The starting point for finding gap is to map out the current segmentation position and
then place companies and their products into the segments: it should then become
clear where segments exist that are not served or are poorly served by current
products.

Some gaps may possess a clear advantage in terms of competitive positioning. Others
may not.
The sequence for developing competitive positioning has four main steps:

1 Perceptual mapping – in-depth qualitative research on actual and

prospective customers on the way that they make their decisions in
the market place.
2 Positioning . Brands or products are then placed on the map using
the research dimensions.
3 Options development . Take existing and new products and use
their existing strengths and weaknesses to devise possible new
positions on the map.
4 Testing – first with simple statements with customers, then at a
later stage in the market place.

The process is essentially emergent rather than prespective.

Thank You