ENVIRONMENTAL ANALYSIS

TOPIC 2
 Environmental Scanning
• Monitoring, evaluating and disseminating
information from the environment to key people
within the corporation
• Scan via SWOT/ SWOC ANALYSIS
• The top management scans both the external
environment for opportunities and threats, and
the internal environment for strengths and
weaknesses.
• Those factors which are most important to the
corporation’s future are referred to as strategic
 Environmental Scanning
• External: Societal Environment
• External: Task Environment (industry analysis)
• Internal environment
 Environment Scanning
Political-Legal
Economic TASK ENVIRONMENT
Forces
Forces Shareholders
Suppliers

Customers Employees/
ORGANIZATION Labor Unions

Government Structure
Culture Competitors
Resources
Creditors
Socio-Cultural Technological
Special Interest
Forces Communities Groups Forces
Trade Associations
 Societal environment
• The societal environment includes the more
general forces that do not directly touch on the
short-run activities of the organization but which
often influences its long-run decisions
• PESTMODEL: (PESTLE)
– POLITICAL-LEGAL
– ECONOMICAL
– SOCIAL-CULTURAL
– TECHNOLOGICAL
 POLITICAL –LEGAL FACTORS
• Forces which allocate/give power and provide
constraining and protection laws and regulations
• These refer to government policies such as the
degree of intervention in the economy.
– What goods and services does a government want to
provide?
– To what extent does it believe in subsidising firms?
– What are its priorities in terms of business support?
• Political Decisions and their impact on business
– Education, Health, Infrastructure
 Economical factors
• Economic forces, which regulate the exchange of
materials, money, energy and information.
• These include interest rates, taxation changes,
money supply, inflation rates, unemployment
levels, exchange rates
• How can these factors affect business
environment?
 Socio-cultural factors
• Sociocultural forces, which regulate the values,
morals and customs of society.
• Changes in social trends can impact on the demand
for a firm's products and the availability and
willingness of individuals to work.
– Demographic changes
- Social values
- Lifestyles
 Technological forces
• Technological forces, which generate
problem-solving inventions.
• New technologies create new products and
new processes
– E.g.
• Online shopping
• What is the impact technological changes on
business?
 Environmental forces
• Environmental factors: environmental factors
include the weather and climate change.
• Changes in temperature can impact on many
industries including farming, tourism and
insurance.
• Climate changes occurring due to global
warming
INTERNAL ANALYSIS
Internal Environment

ORGANIZATION

Structure
Culture
Resources
 Why Internal Analysis?
• Enables a firm to identify its strengths and
weaknesses.
• Enables a firm to make good strategic
decisions.
• Information from internal environment
provides basis for developing strategic
alternatives.
• Determine if resources and capabilities are
likely sources of competitive advantage
 Organizational Resources
• Organizational resources are assets an organization
has for carrying out work activities and processes
• They can be tangible or intangible.
• They can be specific and non-specific:
• Specific resources can only be used for highly
specialized purposes and are very important to the
organization in adding value to goods and services.
• Assets that are less specific are less important in
adding value, but are more flexible.
 Organizational Resources
• Financial resources
– Current debt, credit lines, equity, cash reserves, etc.
• Physical resources
– Plant & equipment, inventories, supplies, fixtures, etc.
• Human resources
– Management & employee skills, training, experiences,
etc
• Intangible resources
• Brand names, patents, trademarks, copyrights, etc.
• Structural-cultural resources
• Culture, history, work systems policies, formal reporting
structures, etc
 Question
• Which resources can be a source of
competitive advantage?
 Capabilities and Competences
• A firm’s capacity to deploy its resources using
processes to affect a desired end.
• Competences and capabilities will often be
internally generated, but may be obtained by
collaboration with other organizations.
• Involves complex pattern of coordination between
people and resources.
• It’s an internal activity that a company performs
better than others internal activities
 Core Competencies
• A well-performed internal activity that is
central, not peripheral, to a company’s strategy,
competitiveness, and profitability
• Major value-creating skills and capabilities that
– are shared across multiple product lines or multiple
businesses
– Results from the collaboration among different parts
of an organization
• Gives a company a potentially valuable
competitive capability
 Core Competencies
Four potential sources of Core competences:
• Reputation,
• Architecture (i.e., internal and external relationship),
• Innovation,
• Strategic assets
 Types of Capabilities/Core Competencies

• Skills in manufacturing a high quality product

• System to fill customer orders accurately and swiftly
• Fast development of new products
• Better after-sale service capability
• Superior know-how in selecting good retail locations
• Innovativeness in developing popular product
features
• Merchandising and product display skills
• Expertise in an important technology
• Expertise in integrating multiple technologies to
create whole families of new products
 Distinctive Capabilities
• Special and unique capabilities that distinguish
the organization from its competitors
• A competitively valuable activity that a company
performs better than its rivals
• Allow a company to develop a sustainable
competitive advantage and outperform its
competition
• Sustainable Competitive Advantage (SCA):
• The prolonged maintenance of competitive advantage
 Resources: Capabilities: Core competence
human, financial, Industry-specific Distinctive and superior
physical, skills, relationships, skills, technology Perceived
technological, + organizational = relationships, customer
legal, informational knowledge knowledge and benefits/value
Intangible reputation of the firm added
Tangible and and invisible Unique, and
visible assets assets difficult to copy

Inputs to Integration of
the firm’s resources into
processes value-adding
activities
Not all capabilities are core Denotes feedback
competences – only those loop
that add greater value than denotes core competence
those of competitors development

The relationships between resources, capabilities and core competence

 Strengths and Weaknesses
• Strengths
– Resources that an organization possesses and
capabilities that the organization has developed
– Both can be exploited and developed into a
sustainable competitive advantage
• Weaknesses
– Resources and capabilities that are lacking or
deficient; and that
– Prevents an organization from developing a
sustainable competitive advantage
Other Approaches to Internal Analysis
(1) Value Chain Analysis
(2) Competitive Strength Assessment
(3) An Internal Audit
(4) Internal Environmental Analysis Process
(5) Capabilities Assessment Profile
 Value Chain Analysis
• Value chain analysis is a technique developed by
Porter (1985) for understanding an organization’s
value-adding activities and relationship between
them
• Competitive advantage depends on the ability of
the organization to organize its resources and
value-adding activities in a way that is superior to
its competitors
 The Value Chain
The value chain is the chain of activities which
results in the final value of a business’s products.
Value added, or margin is indicated by sales
revenue minus costs.
Porter divided internal parts of organization into
primary and support activities
Primary activities are those that directly contribute
to production of good or services and
organization’s provision to customer
Support activities are those that aid primary
activities, but do not themselves add value
A typical Value Chain

27
 Value Chain Analysis
• Value can be added by three ways:
• By producing products at a lower cost than
competitors
• By producing products of greater perceived
value than those of competitors
• Quick response to specific or distinctive
customer needs
 Core Activities
 Certain activities or combinations of activities are
likely to relate closely to the organization’s core
competences, termed core activities. They:
Add the greatest value
Add more value than the same activities in
competitors’ value chains
Relate to and reinforce core competences
 The Value Chain Analysis
• Examine each product line’s value chain in terms of
the various activities involved in producing the
product or service
– Core competencies & core deficiencies
• Examine the linkages within each product line’s
value chain
– Connections between the way one value activity is
performed and the cost of performance of another
activity
• Examine the potential synergies among the value
chains of different product lines or business units
 The Value chain Analysis
• Identify factors that determine costs of different
activities
• Understand why a firm’s costs or a industry’s costs
differs from its competitors
• Understand why large differences in profitability
exist within the same industry
• Identify which activities are performed efficiently
or inefficiently
• Show how costs in one activity influence another
• Identify competitor’s cost positions
 The Value Chain System
• A company’s cost competitiveness depends
on how well it manages its value chain
relative to competitors
• Three areas contribute to cost differences
1. Suppliers’ activities
2. The company’s own internal activities
3. Forward channel activities
 Discussion Questions
• How is value chain analysis used in
organizations?
• What knowledge can strategic managers gain
by using value chain analysis?
Approaches to internal analysis
(1) Value Chain Analysis…..√
(2) Competitive Strength Assessment
(3) An Internal Audit
(4) Internal Environmental Analysis Process
(5) Capabilities Assessment Profile
 Assessing Organization’s
Competitive Strength
• How does the firm rank relative to key rivals on each
industry KSF and relevant measure of competitive
strength (capabilities or core competencies)?
• Does the firm have a sustainable competitive advantage
or disadvantage
• What is the ability of the firm to defend its position in
light of
– Industry driving forces
– Competitive pressures
– Anticipated moves of rivals
 Assessing Organization’s Competitive
Strength
1. List industry key success factors and other relevant
measures of competitive strength
2. Rate firm and key rivals on each factor using rating
scale of 1 - 10 (1 = weak; 10 = strong)
3. Decide whether to use a weighted or unweighted
rating system
4. Sum individual ratings to get overall measure of
competitive strength for each rival
5. Determine whether the firm enjoys a competitive
advantage or suffers from competitive disadvantage
 Assessing Organization’s Competitive
Strength
• A weighted competitive strength analysis is
conceptually stronger than an unweighted
competitive strength analysis because
– All the strength measures are not equally important.
– E.g., in an industry with strong product differentiation,
the significant strength measures may be
• Brand awareness
• Reputation for quality
• Amount of advertising
• Distribution capability, etc.
 Some KSF/Strength Measures

• Quality/product performance
• Reputation/image
• Manufacturing capability
• Technological skills
• Dealer network/Distribution channels
• New product innovation
• Financial resources
• Relative cost position
• Customer service capability
 Assessing Organization’s Competitive
Strength
• What does a high competitive strength rating relative to
rivals mean?
– Strong competitive position & possession of competitive
advantages
– Opportunity for company to improve its long-term market
position
• Good strategy entails
– Looking for opportunities to leverage company strengths into
competitive advantage
– Using company strengths to attack the competitive
weaknesses of rivals
 Why Do a Competitive Strength
Assessment?

• Reveals strength of firm’s competitive position

• Shows how firm stacks up against rivals, measure-
by-measure -- pinpoints the company’s
competitive strengths and competitive
weaknesses
• Indicates whether firm is at a competitive
advantage / disadvantage against each rival
• Identifies possible offensive attacks (pit company
strengths against rivals’ weaknesses)
• Identifies possible defensive actions (a need to
correct competitive weaknesses)
 (3) Internal Audit
• Internal Audit
– A thorough assessment of an organization’s
various internal functional areas
– Strategic decision makers use the internal audit to
assess the organization’s resources and
capabilities from the perspectives of its different
functions
 Using an Internal Audit
• Six primary functional areas
– Production-operations
– Marketing
– Research & development
– Financial and accounting
– Management, including HRM
– Information System
• Depending on products, markets, and industries,
individual organizational structures may vary and,
therefore, may emphasize different sets of functional
areas
 (4) Internal Environmental Analysis
Process

• Assesses an organization’s internal activities

– Step 1: Survey strengths and weaknesses
– Step 2: Categorize these strengths & weaknesses
(S&W) in terms of resources & capabilities
– Step 3: Investigate the potential of strengths to lead
to competitive advantage
– Step 4: Evaluate the ability of these competitively
resources & capabilities to serve as the basis for an
appropriate competitive strategy
 (5) Capabilities Assessment Profile

• Resembles the internal environmental analysis

– Similarity: Focuses on deeper evaluation of S&W
– Difference: Focuses only on firm’s capabilities
• Analysis of capabilities is complex
– Not as easily identified as organization’s function or
even the value creating primary & support activities
– Complex nature of capabilities makes it hard for
competitors to imitate
 Capabilities Assessment Profile

• Analysis Consists of two phases:

– Phase I: Identify distinctive capabilities
– Phase II: Develop and leverage distinctive capabilities
• Identifying Distinctive Organizational Capabilities
– Step 1: Prepare current product-market profile
• Emphasize organization-customer interactions
• What is the organization selling?
• Who are the organization selling to?
• Is the organization providing superior customer value &
desirable benefits?
Capabilities Assessment Profile
– Step 2: Identify sources of competitive advantage
& disadvantage in the main product-market
segment
• Determine why customers choose the organization’s
products vs. those of competitors
• Involves information on cost, product, and service
attributes
– When customers purchase
– What they’re actually purchasing
– What bundle of attributes satisfies their needs
 Capabilities Assessment Profile
– Step 3: Describe all organizational capabilities &
competencies
• Examine resources, skills, & abilities of the various divisions
• Determine which resources, skills, & abilities lead to a
competitive advantage
– Step 4: Sort the core capabilities/competencies
according to strategic importance
• Can capability provide wide access to a number of different
markets?
• Does the capability provide tangible customer benefits?
• Is the capability difficult for competitors to imitate?
 Capabilities Assessment Profile
– Step 5: Identify and agree on the key capabilities or
competencies
• Provide basis for resource allocation
• Classifying an Organization’s S&W
– Past performance trends
• Measures such as financial ratios, operations efficiency, etc,
– Specific goal or targets
• Organization’s goals are statements of desired outcomes
– Comparison against competitors
• How are competitors doing?
– Personal opinions of decision makers & consultants
 Discussion Questions
• How is value chain analysis used in
organizations?
• What knowledge can strategic managers gain
by using value chain analysis?