CHAPTER FOUR

ENVIRONMENTAL ANALYSIS

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 Content
1. Internal Environmental Analysis
◦ Strength-Weakness Analysis
2. Value Chain Analysis
3. External Environmental Analysis
◦ General (PESTEL/STEPEL)
◦ Opportunity- Threats Analysis

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 Outcomes From External & Internal Environmental
Analyses

By Studying the External By Studying the

Environment, firms identify: Internal Environment,
firms identify:
•What they might
choose to do? • What they can do?

Examine unique
Examine resources, capabilities &
opportunities & competencies –
threats
sustainable
competitive advantage
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The Internal Environment

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 Internal Analysis of the Organization
As shown 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.
The proper 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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 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.

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 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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 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
The firm'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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 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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 Cont’d …

When the four criteria are met, resources &

capabilities become core competencies.
Core competencies can become core rigidities

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 cont’d …
For building core competencies two conceptual
tools or frameworks might be available as firms
search for competitive advantage:
Value chain 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 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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 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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 cont’d …
Categories of value:
Value is low price
Value is what is wanted
Value is the quality received for the price paid

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 cont’d …
The Generic Building Blocks of Competitive
Advantage
Superior efficiency - the quantity of inputs that it
takes to produce a given output
Superior quality - customer-perceived value in
the attributes of products/services, reliability etc.
Superior innovation - anything new or novel,
uniqueness
Superior customer responsiveness - identifying &
satisfying the needs of customers, customization

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 4.2. 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.
It allows the firm to understand the parts of its
operations that create value & those that do not.

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 cont’d …
Itis 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.
They include: inbound logistics, production,
outbound logistics, sales and marketing, and after
sales service
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 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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 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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2.The External Environment

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 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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 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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 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 Environment
(PESTE – Analysis)

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 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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 Cont’d…
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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 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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 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
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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, etc.
 Other political actions aimed at protecting
employees, customers, the general public, and
the environment.

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 cont’d …
There are also political actions that are designed
to benefit and protect organizations: patent laws,
government subsidies, and product research
grants.
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.
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 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.

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 cont’d …
Some key Political (Gov’tal & 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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 Social Factors:
These factors include the beliefs, values,
attitudes, opinions, and life style of persons
depending up on cultural, demographic,
religious, and ethnic conditioning.

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 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
It should understand that new technologies might
require new operation systems and bring about
sudden and dramatic effect on an organization’s
environment.

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 cont’d …
Intelligible technological adaptations can suggest
possibilities for new products, improvements in
existing products, or in manufacturing and
marketing techniques

Some key technological variables

 R&D activity
 automation
 technology incentives
 rate of technological change

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 Ecological Factors
Reading Assignment
Refer books and discuss the Ecological/
environment factors with your colleagues.

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 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.
In some cases, the firm can overcome a weakness
in order to prepare itself to pursue a compelling
opportunity.
To develop 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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 cont’d …

Strengths Weaknesses

Opportunities
S-O W-O
strategies strategies

Threats S-T W-T

strategies strategies
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 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-T strategies 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.

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