Unit-III: Environmental Scanning - Strategic Analysis of Internal and External Variables

Business Policy & Strategic Management 53
Unit-III : Environmental Scanning - Strategic Analysis

of Internal and External Variables Notes
Structure
3.1 External environment
3.2 Macro Environment Analysis
3.2.1 The PESTLE Factors
3.3 Micro Environment Analysis
3.3.1 Elements of Micro Environment
3.4 Industry Analysis, Using 5 Forces Model
3.5 Internal Environment
3.6 Internal Analysis using VRIO Framework: A Resource Based View of the Firm
3.7 Value Chain Analysis
3.8 Profiling Environmental Factors
3.9 Environmental Threat and Opportunity Profile (ETOP)
3.10 Organizational Capability Profile (OCP)
3.11 SWOT Analysis
Objectives
• To provide an insight into different types of environment , an organizations works in
• To make students understand importance of environmental scanning
• To make students understand PESTLE model, Porters five forces model,VRIO

model ,VALUE CHAIN analysis, SWOT models
Introduction
Each business organization operates in its unique environment. Environment
influence businesses and also get influenced by it. No business can function without
interacting and influencing forces that are outside its periphery
A successful business has to not only recognize different elements of the

environment but also respect, adapt, or manage and influence them. The business
must continuously monitor and adapt to the environment if it is to survive and prosper.
Successful business identify, appraise and respond to the various opportunities and
threats in and around its playfield environment.
Environmental scanning can also be referred to environmental monitoring which

includes process of accumulation of information, analyzing it and forecasting the
impact of all predictable environmental changes. It is all about synchronization between
marketing strategies and business environment.
“Environmental scanning can be defined as ‘the study and interpretation of the

political, economic, social and technological events and trends which influence a
business, an industry or even a total market”
The environment can affect your start-up in dramatic ways. You can have the
best business idea with a great technology but it might still fail miserably if factors
like changes in the policies of the host government, new regulations or an economic
Amity Directorate of Distance & Online Education

54 Business Policy & Strategic Management
crisis in the host country come along. Therefore, it is imperative that you keep a close
Notes watch over environmental factors that affect your start-up and prepare adequately to
face the emerging challenges. Environmental scanning involves External and Internal
environmental Analysis.
It is not the strongest of the species that survive, nor the most intelligent, but
the one most responsive to change
Charles Darwin
Environmental scanning is the acquisition and use of information about events,

trends, and relationships in an organization’s external environment. It is used to assist
management in planning the organization’s future course of action. Organizations scan
the environment in order to understand the external forces of change so that they may
develop effective responses which secure or improve their position in the future, in
order to avoid surprises, identify threats and opportunities, gain competitive advantage,
and improve long-term and short-term planning.
Exhibit 3.1 – Types of environments and its constituents
3.1 External Environment

The external environment constitutes everything outside a firm that might affect
the ability of the organization to attain its goals. The external environment itself can be
subdivided into two main components.
There is the Micro Environment (also referred as industry or task environment)

confronting the organization, which typically includes actual and potential competitors,
suppliers, and buyers (customers or distributors); firms that provide substitute products
to those sold in the industry; and firms that provide complements. Then there is the
more encompassing Macro Environment (also referred as General environment/
Societal Environment) within which the task environment is embedded.
The Macro environment includes Political and Legal forces, Macroeconomic forces,
Socio-Cultural forces, Technological forces, Ecological and at times International forces.
The Macro or General environment impacts the firm through its influence on the Micro
(also referred as Task /Industry environment)
When managers analyze the External environment they typically look for
Opportunities and Threats. Opportunities arise from circumstances or developments
in the external environment that, if exploited through strategies, enable managers
to better attain the goals of their Organization. Threats arise from circumstances or

developments in the external environment that may adversely affect the ability of
managers to attain the goals of their enterprise. Notes
Exhibit 3.2 – Societal Environment and its constituents
3.2 Macro Environment Analysis

It is traditionally the first step of a Strategic Analysis; it is sometimes referred to as
an external analysis, a PEST analysis or a PESTLE analysis. The purpose of the Macro
Environment Analysis is to identify possible opportunities and threats to your industry as
a whole that are outside the control of your industry.
The PESTLE Analysis is a framework used to scan the organization’s external

macro environment. The letters stand for Political, Economic Socio-cultural,
Technological, Legal and Environmental.
Some approaches will add in extra factors, such as International, or remove

some to reduce it to PEST. However, these are all merely variations on a theme. The
important principle is identifying the key factors from the wider, Uncontrollable External
Environment that might affect the organization.
3.2.1 The PESTLE Factors

• Political factor- First of all, political factors refer to the stability of the political
environment and the attitudes of political parties or movements. This may manifest
in government influence on tax policies, or government involvement in trading
agreements. Political factors are inevitably entwined with Legal factors such
as national employment laws, international trade regulations and restrictions,
monopolies and mergers’ rules, and consumer protection. The difference between
Political and Legal factors is that Political refers to attitudes and approaches,
whereas Legal factors are those which have become law and regulations. Legal
needs to be complied with whereas Political may represent influences, restrictions
or opportunities, but they are not mandatory.
• Economic factor- represent the wider economy so may include economic growth
rates, levels of employment and unemployment, costs of raw materials such as

energy, petrol and steel, interest rates and monetary policies, exchange rates and
Notes inflation rates. These may also vary from one country to another.
• Socio-cultural factor- represents the culture of the society that an organization

operates within. They may include demographics, age distribution, population
growth rates, level of education, distribution of wealth and social classes, living
conditions and lifestyle.
• Technological factor refer to the rate of new inventions and development, changes
in information and mobile technology, changes in internet and e-commerce or
even mobile commerce, and government spending on research. There is often a
tendency to focus Technological developments on digital and internet-related areas,
but it should also include materials development and new methods of manufacture,
distribution and logistics.
• Ecological factor impacts can include issues such as limited natural resources,
waste disposal and recycling procedures.
3.3 Micro Environment Analysis

Micro-environment is the specific or the task environment of a business which
affects its working or operations directly on a regular basis. While the changes in the
macro-environment affect business in the long run, the effects of changes in the micro-
environment are noticed immediately.
Micro environment factors are factors close to a business that have a direct impact
on its business operations and success. Before deciding corporate strategy businesses
should carry out a full analysis of their micro environment. At this point we discuss
common micro environment factors.
This is also known as the task environment and affects business and marketing
at the daily operating level. While the changes in the macro environment affect
business in the long run, the effect of micro environmental changes is noticed almost
immediately. Organizations have to closely analyse and monitor all the elements of
microenvironment in order to adapt to rapid change and stay competitive.
When carrying out a Macro environment analyses you will be seeking to answer the
questions “What will affect the growth of our Industry as a whole?” and “What is the
likely impact of all of the things that affect the growth of your industry?”
Hence, organizations must closely analyze and monitor all the elements of the
micro-environment on a regular basis. The elements of micro- environment are as
follows:
3.3.1 Elements of Micro-environment
1. Consumers/Customers:
No organization can survive without customers and consumers. A customer is the

one who buys a product or service for the consumer who ultimately consumes or uses
the product or service of the organization.Hence, the consumer occupies the central
position; therefore an organization must closely monitor and analyze the following:
a) Who are the customers/consumers?
b) What features or benefits are they looking for?

c) What are their income levels?
d) What are their tastes, preferences? Notes
e) What are their buying patterns, etc?
2. Organization:
An organization refers to a group of all individuals working in different capacities

and the practices and culture they follow. In micro-environment analysis, nothing is as
important as self-analysis, which is done by the organization itself.
Understanding one’s own strengths and weaknesses in a particular business is of

vital importance. Organizations consist of specific groups of people who are likely to
influence an organization, which are as follows:
a) Owners-Proprietor, partners, shareholders, etc., who invest resources and also

make major decisions for the business.
b) Board of directors-Elected by share holders, the board is responsible for day-to-

day and general management of the organization to ensure that it is being run
in a way that best serves the shareholders’ interests.
c) Employees-People who actually do the work in an organization. Employees

are the major force within an organization. It is important for an organization to
have its employees embrace the same values and goals as the organization.
However, they differ in beliefs, education, attitudes, and capabilities. When the
management and employees work towards different goals, everyone suffers.
3. Market:
Market refers to the system of contact between an organization and its customers.
The firm should study the trends and development and the key success factors of the
market, which are as follows:
a) The existing and the potential demand in market
b) Market growth rate
c) Cost structure
d) Price sensitivity
e) Technological structure
f) Distribution system, etc
4. Suppliers:
The suppliers refer to the providers of inputs, like raw materials, equipment and
services, to an organization. Large companies have to deal with hundreds of suppliers
to maintain their production.
Suppliers with their own bargaining power affect working and cost structure of the
industry. Hence it is important for an organization to carry out a study of the following:
a) Who are the suppliers?
b) What are their products, prices and terms and conditions?

c) Whether to “Outsource” production or get it done “in-house” depending on this

Notes supplier environment, and so on.
5. Intermediaries:
Intermediaries include agents and brokers who facilitate the contact between
buyers and sellers for a commission. They may exert a considerable influence on
the business organizations as, in many cases, the consumers are not aware of the
manufacturers and their products. Hence, manufacturers use intermediaries to reach
out to consumers.
3.4 Industry Analysis: Using 5 Forces Model

According to Michael E. Porter these are the same thing. He developed Porters
Five forces analysis which is a framework for industry analysis and Business Strategy
Development. He referred to these five forces as Micro environment. The five forces
being;
1) The threat of the entry of new competitors
2) The threat of substitute products or services
3) The bargaining power of customers (buyers)
4) The bargaining power of suppliers
5) The intensity of competitive rivalry
Exhibit 3.3 – Porters 5 forces model
Porter’s Five Competitive Forces model is used by businesses when thinking about
business strategy and the impact of Information technology. This model can help a
business decide whether to, enter an industry or expand your business in the industry
you are already working on.
The more powerful these forces in an industry, the lower its profit potential.
The strength of each force differs by industry and changes over time. Porter’s Five
Competitive Forces model is used for industry analysis in several ways, to guide your
strategic decisions. Benefit from industry analysis by:

• Understanding the competitive forces in your industry.
• Assessing the attractiveness of, and growth opportunities within, a new Notes
industry.
• Developing effective strategies to raise your profitability, power, and
competitive position in an industry.
Industry Rivalry/Competitors
Rivalries naturally develop between companies competing in the same market.
Competitors use means such as advertising, introducing new products, more attractive
customer service and warranties, and price competition to enhance their standing and
market share in a specific industry. To Porter, the intensity of this rivalry is the result
of factors like equally balanced companies, slow growth within an industry, high
fixed costs, lack of product differentiation, overcapacity and price-cutting, diverse
competitors, high-stakes investment, and the high risk of industry exit. There are also
market entry barriers.
Threat from Substitute Products

Substitute products are the natural result of industry competition, but they place a
limit on profitability within the industry. A substitute product involves the search for a
product that can do the same function as the product the industry already produces.
Porter uses the example of security brokers, who increasingly face substitutes in the
form of real estate, money-market funds, and insurance. Substitute products take on
added importance as their availability increases.
Bargaining Power of Suppliers

Suppliers have a great deal of influence over an industry as they affect price
increases and product quality. A supplier group exerts even more power over an
industry if it is dominated by a few companies, there are no substitute products, the
industry is not an important consumer for the suppliers, their product is essential to
the industry, the supplier differs costs, and forward integration potential of the supplier
group exists. Labor supply can also influence the position of the suppliers. These
factors are generally out of the control of the industry or company but strategy can alter
the power of suppliers.
Bargaining Power of Buyers

The buyer’s power is significant in that buyers can force prices down, demand
higher quality products or services, and, in essence, play competitors against one
another, all resulting in potential loss of industry profits. Buyers exercise more
power when they are large-volume buyers, the product is a significant aspect of the
buyer’s costs or purchases, the products are standard within an industry, there are
few changing or switching costs, the buyers earn low profits, potential for backward
integration of the buyer group exists, the product is not essential to the buyer’s
product, and the buyer has full disclosure about supply, demand, prices, and costs.
The bargaining position of buyers changes with time and a companies (and industry’s)
competitive strategy.
Threat from Potential Entrants

Threats of new entrants into an industry depend largely on Barriers to Entry. Porter
identifies six major barriers to entry:
• Economies of scale, or decline in unit costs of the product, which force the
entrant to enter on a large scale and risk a strong reaction from firms already
in the industry, or accepting a disadvantage of costs if entering on a small
scale.
• Product differentiation, or brand identification and customer loyalty.

• Capital requirements for entry; the investment of large capital, after all,
presents a significant risk.
Notes
• Switching costs or the cost the buyer has to absorb to switch from one supplier
to another.
• Access to distribution channels. New entrants have to establish their
distribution in a market with established distribution channels to secure a
space for their product.
• Cost disadvantages independent of scale, whereby established companies
already have product technology, access to raw materials, favorable sites,
advantages in the form of government subsidies, and experience.
New entrants can also expect a barrier in the form of government policy through
federal and state regulations and licensing. New firms can expect retaliation from
existing companies and also face changing barriers related to technology, strategic
planning within the industry, and manpower and expertise problems. The entry deterring
price or the existence of a prevailing price structure presents an additional challenge to
a firm entering an established industry.
In summary, Porter’s five-forces model concentrates on five structural industry

features that comprise the competitive environment, and hence profitability, of an
industry. Applying the model means, to be profitable, the firm has to find and establish
itself in an industry so that the company can react to the forces of competition in a
favorable manner.
3.5 Internal Environment

An organization’s internal environment comprises its structures and processes,
which are influenced by the dominant culture of the organization. Internal and
external environments are inextricably linked, because the effectiveness of an
organization’s structures and processes can help or hinder the task of responding
to environmental change. Where employees share the vision of management,
they may be more likely to embrace external change, rather than fear it and
become reactive rather than proactive. Strong leadership can provide a focused
effort at marshalling the resources of an organization to meet the challenges
and opportunities posed by the external environment. Employees usually make
up a critical element of the internal environment. There are several methods by
which organizations seek to gain the moral involvement of employees to share
the challenges and opportunities of external change. The internal environment
constitutes everything inside the firm that might affect the ability of managers to
pursue certain actions or strategies. The internal environment includes
• The organization of the firm (its structure, culture, controls, and incentives),
• The employees of the firm(its human capital), and
• The resources of the firm (its tangible and intangible assets).
Each of these elements can be strength or a weakness. A Strength is an activity the

organization is good at; it is a potential source of competitive advantage. A Weakness
is an activity that the organization does not excel at; it may be a source of competitive
disadvantage.
When managers analyze the internal environment of their own firm, they often do
so by identifying its strengths and weaknesses. This inward focus complements the
identification of opportunities and threats in the external environment.
Taken together, an inventory of internal strengths and weaknesses and external

opportunities and threats can help managers develop strategy. This methodology,

which is often referred to by the acronym of SWOT analysis (strengths, weaknesses,
opportunities, and threats), is a standard part of strategic planning and decision making; Notes
we will discuss it in more detail later.
3.6 Internal Analysis using VRIO Framework: A Resource Based

View of the Firm
“VRIO” stand for:
• Value (the question of value)
• Rarity (the question of rarity)
• Imitability (the question of imitability)
• Organization (the question of organization)
The company/firm need to ask themselves about the resources or capability to

determine its competitive potential. VRIO is a mechanism that integrates two existing
theoretical frameworks: the positioning perspective and the resource-based view. It is
the primary tool for accomplishing internal analysis.
The VRIO framework, in a wider scope, is part of a much larger strategic scheme
of a firm. The basic strategic process that any firm goes through begins with a vision
statement, and continues on through objectives, internal & external analysis, strategic
choices (both business-level and corporate-level), and strategic implementation. The
firm will hope that this process results in a competitive advantage in the marketplace
they operate in. VRIO falls into the internal analysis step of these procedures, but is
used as a framework in evaluating just about all resources and capabilities of a firm,
regardless of what phase of the strategic model it falls under. VRIO is an acronym
for the four question framework you ask about a resource or capability to determine
its competitive potential: the question of Value, the question of Rarity, the question of
Imitability (Ease/Difficulty to Imitate), and the question of Organization (ability to exploit
the resource or capability).
• The Question of Value: “Is the firm able to exploit an opportunity or neutralize
an external threat with the resource/capability?”
• The Question of Rarity: “Is control of the resource/capability in the hands of a
relative few?”
• The Question of Imitability: “Is it difficult to imitate, and will there be significant
cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/
capability?”
• The Question of Organization: “Is the firm organized, ready, and able to exploit
the resource/capability?”
Valuable? Rare? Costly to Exploited by the Competitive implication
imitate? organization?
No Competitive disadvantage
Yes No Competitive parity
Yes Yes No Temporary competitive
advantage
Yes Yes Yes No Unexploited competitive
advantage
Yes Yes Yes Yes Sustained competitive advantage

The resource-based view (RBV) as a basis for a competitive advantage of a firm

Notes lies primarily in the application of the bundle of valuable interchangeable and intangible
tangible resources at the firm’s disposal. To transform a short-run competitive
advantage into a sustained competitive advantage requires that these resources
are heterogeneous in nature and not perfectly mobile. Effectively, this translates into
valuable resources that are neither perfectly imitable nor substitutable without great
effort). If these conditions hold, the bundle of resources can sustain the firm’s above
average returns. The VRIO model also constitutes a part of Resource Based View of
the Firm
3.7 Value Chain Analysis

Value Chain Analysis describes the activities that take place in a business and
relates them to an analysis of the competitive strength of the business
Value Chain Analysis is a strategy tool used to analyze internal firm activities. Its
goal is to recognize, which activities are the most valuable (i.e. are the source of cost
or differentiation advantage) to the firm and which ones could be improved to provide
competitive advantage. In other words, by looking into internal activities, the analysis
reveals where a firm’s competitive advantages or disadvantages are.
Value chain analysis is a powerful tool for managers to identify the key activities
within the firm which form the value chain for that organization, and have the potential
of a sustainable competitive advantage for a company. Therein, competitive advantage
of an organization lies in its ability to perform crucial activities along the value chain
better than its competitors.
The Value Chain framework developed by Michael E Porter is “An Interdependent

system or network of activities, connected by linkages”. When the system is managed
carefully, the linkages can be a vital source of competitive advantage. The value chain
analysis essentially entails the linkage of two areas.
Firstly, the value chain links the value of the organizations’ activities with its main
functional parts. Then the assessment of the contribution of each part in the overall added
value of the business is made. In order to conduct the value chain analysis, the company
is split into primary and support activities. Primary activities are those that are related with
production, while support activities are those that provide the background necessary for
the effectiveness and efficiency of the firm, such as human resource management. The
primary and secondary activities of the firm are discussed in detail below.

Exhibit 3.4 – Value Chain Analysis
Notes
Primary activities
The primary activities (Porter, 1985) of the company include the following:
• Inbound logistics: These are the activities concerned with receiving the
materials from suppliers, storing these externally sourced materials, and
handling them within the firm.
• Operations: These are the activities related to the production of products and
services. This area can be split into more departments in certain companies.
For example, the operations in case of a hotel would include reception, room
service etc.
• Outbound Logistics: These are all the activities concerned with distributing
the final product and/or service to the customers. For example, in case of a
hotel this activity would entail the ways of bringing customers to the hotel.
• Marketing and Sales: This functional area essentially analyses the needs and
wants of customers and is responsible for creating awareness among the target
audience of the company about the firm’s products and services. Companies
make use of marketing communications tools like advertising, sales promotions
etc. to attract customers to their products.
• Customer Service: There is often a need to provide services like pre-

installation or after-sales service before or after the sale of the product or
service.
Support activities
The support activities of a company include the following:
• Procurement: This function is responsible for purchasing the materials that are
necessary for the company’s operations. An efficient procurement department
should be able to obtain the highest quality goods at the lowest prices.
• Management: This is a function concerned with recruiting, training, motivating

and rewarding the workforce of the company. Human resources are
increasingly becoming an important way of attaining sustainable competitive
advantage.
• Technology Development: This is an area that is concerned with

technological innovation, training and knowledge that is crucial for most
companies today in order to survive.
• Firm Infrastructure: This includes planning and control systems, such as

finance, accounting, and corporate strategy etc.

Notes 3.8 Profiling Environmental Factors
Exhibit 3.5 – What constitutes Strategy
There are many strategy considering parameters which can be classified under
two broad categories viz., internal factors and external factors to the organization. In
order to access the importance and effect of change in such factor on the operation
and strategy of the business various model, such as Strategic Advantage Profile
(SAP), Environmental Threat and Opportunity Profile(ETOP), Organizational Capability
Profile(OCP) are developed by experts.
3.9 Environmental Threat and Opportunity Profile (ETOP):

ETOP is summarized depiction of the environmental actors and their impact on the
organization. The preparation of ETOP involves dividing the environment into different
sectors and then analyzing the impact of each factor of the organization. A derailed
ETOP subdivides each environment sector into sub factor and then the impact of each
sub factor on the organization and is described in a form of statement. A summary of
ETOP shows only the major factors. ETOP is the most useful way of structuring the
result of environmental analysis.
Environmental Factors Degree of Importance Degree of Impact

High Medium Low High Medium Low
(3) (2) (1) ±3 ±2 ±1
Economic
Political – Legal
Technological
Socio-cultural
Competitive

3.10 Organizational Capability Profile (OCP)

OCP is summarized statement which provides overview of strength and weakness
in key result areas likely to affect future operation of the organization. Information in this
profile may be presented in qualitative terms or quantitative terms.
After the preparation of OCP, the organization is in a position to assess its relative
strength and weaknesses vis-a-vis its competitors. If there is any gap in area, suitable
action may be taken to overcome that.OCP shows the company’s capacity. OCP tells
about company’s potential and capability. OCP tells what company can do.

Capability Factors Degree of strength and weakness
1. Financial capability factors Notes
a. Source of fund and cost
b. Usage of funds
c. Management of funds
2. Marketing capability factor
a. Product related
b. Price related
c. Promotion related
d. Distribution related
3. Operation capability factor
a. Plant location
b. Production system
c. Operation and control system
d. R & D system
4. Personal capability factor
a. Personnel system
b. Organizational and employee characteristics
c. Industrial relations
d. Quality and motivation of personnel
5. General management capability factor
a. General management system
b. External relations
c. Organizational climate
Strategic Advantage Profile (SAP):

SAP describes the organization’s competitive position in the market place. A
comparison of SAP and OCP shows that, OCP indicates what the organization do
base on its capability; SAP indicates what the organization has done or is doing in
comparison to its competitors to generate competitive advantage for itself. Thus, OCP
is internal-oriented, while SAP is external-oriented. In preparing SAP 3 factors are
important:
1. The organization should identify the factors which are relevant for determining
success in the industry concerned. These factors are known as KSF.
2. Organization should measure its performance on these factors in comparison to

its competitors. Based on comparison, the organization can find out whether it has
advantage or disadvantage in terms of various factors.
3. After identifying advantage, the next step is to measure their sustainability because
any advantage may turn into disadvantage due to change in environmental factors.
Factors Advantage/Disadvantage Sustainability
High Medium Low High Medium Low
±3 ±2 ±1 (3) (2) (1)
1. Product related
a. Appearance
b. Style
c. Functionality
d. Range
e. Cost structure

2. Market related
Notes a. Pricing
b. Distribution channel
c. Customer service
d. Customer relationship
e. Customer satisfaction
f. Brand loyalty
g. Market share

3.11 SWOT Analysis

SWOT is an acronym used to describe the particular Strengths, Weaknesses,
Opportunities, and Threats that are strategic factors for a specific company. A SWOT
analysis should not only result in the identification of a corporation’s core competencies,
but also in the identification of opportunities that the firm is not currently able to take
advantage of due to a lack of appropriate resources.
The SWOT Analysis framework has gained widespread acceptance because it is

both simple and powerful for strategy development. However, like any planning tool,
SWOT is only as good as the information it contains. Thorough market research and
accurate information systems are essential for the SWOT analysis to identify key issues
in the environment.
Assess your market:

• What is happening externally and internally that will affect our company?
• Who are our customers?
• What are the strengths and weaknesses of each competitor? (Think Competitive
Advantage)
• What are the driving forces behind sales trends?
• What are important and potentially important markets?
• What is happening in the world that might affect our company?
• What does it take to be successful in this market? (List the strengths all companies
need to compete successfully in this market.)
Assess your company:

• What do we do best?
• What are our company resources – assets, intellectual property, and people?
• What are our company capabilities (functions)?
Assess your competition:

• How are we different from the competition?
• What are the general market conditions of our business?
• What needs are there for our products and services?

• What are the customer-market-technology opportunities?
Notes
• What are the customer’s problems and complains with the current products and
services in the industry?
• What “If only….” statement does a customer make?
Competitor analysis
• Identify the actual competitors as well as substitutes.

• Assess competitors’ objectives, strategies, strengths & weaknesses, and reaction
patterns.
• Select which competitors to attack or avoid.
The Internal Analysis of strengths and weaknesses focuses on internal factors that
give an organization certain advantages and disadvantages in meeting the needs of
its target market. Strengths refer to core competencies that give the firm an advantage
in meeting the needs of its target markets. Any analysis of company strengths should
be market oriented/customer focused because strengths are only meaningful when
they assist the firm in meeting customer needs. Weaknesses refer to any limitations
a company faces in developing or implementing a strategy (?). Weaknesses should
also be examined from a customer perspective because customers often perceive
weaknesses that a company cannot see. Being market focused when analyzing
strengths and weaknesses does not mean that non-market oriented strengths and
weaknesses should be forgotten. Rather, it suggests that all firms should tie their
strengths and weaknesses to customer requirements. Only those strengths that relate
to satisfying a customer need should be considered true core competencies.
The following area analysis is used to look at all internal factors affecting a company:
• Resources: Profitability, sales, product quality brand associations, existing

overall brand, relative cost of this new product, employee capability, product
portfolio analysis
• Capabilities: To identify internal strategic strengths, weaknesses, problems,

constraints and uncertainties
The External Analysis examines opportunities and threats that exist in the
environment. Both opportunities and threats exist independently of the firm. The way
to differentiate between a strength or weakness from an opportunity or threat is to
ask: Would this issue exist if the company did not exist? If the answer is yes, it should
be considered external to the firm. Opportunities refer to favorable conditions in the
environment that could produce rewards for the organization if acted upon properly.
That is, opportunities are situations that exist but must be acted on if the firm is to
benefit from them. Threats refer to conditions or barriers that may prevent the firms
from reaching its objectives.
The following area analysis is used to look at all external factors affecting a
company:
• Customer analysis: Segments, motivations, unmet needs
• Competitive analysis: Identify completely, put in strategic groups, evaluate

performance, image, their objectives, strategies, culture, cost structure,
strengths, weakness

• Market analysis: Overall size, projected growth, profitability, entry barriers, cost
Notes structure, distribution system, trends, key success factors
• Environmental analysis: Technological, Governmental, Economic, Cultural,

Demographic, Scenarios, Information-need areas
The SWOT Matrix helps visualize the analysis. Also, when executing this analysis
it is important to understand how these elements work together. When an organization
matched internal strengths to external opportunities, it creates core competencies in
meeting the needs of its customers. In addition, an organization should act to convert
internal weaknesses into strengths and external threats into opportunities.
Iternal External
Strengths Opportunities
Weaknesses Threats
Exhibit 3.6 – SWOT Analysis
SWOT: Focus on your strengths. Shore up your weaknesses. Capitalize on your

opportunities. Recognize your threats.
Identify
• Against whom do we compete?
• Who are our most intense competitors? Less intense?
• Makers of substitute products?
• Can these competitors be grouped into strategic groups on the basis of assets,
competencies, or strategies?
• Who are potential competitive entrants? What are their barriers to entry?
Evaluate
• What are their objectives and strategies?
• What is their cost structure? Do they have a cost advantage or disadvantage?
• What is their image and positioning strategy?
• Which are the most successful/unsuccessful competitors over time? Why?
• What are the strengths and weaknesses of each competitor?
• Evaluate competitors with respect to their assets and competencies.
Resources A good starting point to identify company resources is to look at tangible,

intangible and human resources.
• Tangible resources are the easiest to identify and evaluate: financial resources
and physical assets are identifies and valued in the firm’s financial statements.

• Intangible resources are largely invisible, but over time become more important
to the firm than tangible assets because they can be a main source for a Notes
competitive advantage. Such intangible recourses include reputational assets
(brands, image, etc.) and technological assets (proprietary technology and
know-how).
Human resources or human capital are the productive services human beings offer
the firm in terms of their skills, knowledge, reasoning, and decision-making abilities.
Capabilities
Resources are not productive on their own. The most productive tasks require
that resources collaborate closely together within teams. The term organizational
capabilities are used to refer to a firm’s capacity for undertaking a particular productive
activity. Our interest is not in capabilities per se, but in capabilities relative to other
firms. To identify the firm’s capabilities we will use the functional classification approach.
A functional classification identifies organizational capabilities in relation to each of the
principal functional areas.

Notes
Summary
• Two types of Business environment exists
a. External or Macro level Environment
b. Internal or Micro level Environment
• Porters Five forces Model
a. Potential Entrants
b. Buyer’s
c. Substitutes
d. Suppliers
e. Competition
Porter’s Five Competitive Forces model is used by businesses when thinking about
business strategy and the impact of Information technology. This model can help a
business decide whether to, enter an industry or expand your business in the industry
you are already working on
• Internal Environment Using VRIO Model

VRIO : Value-Rarity-Imitability-Organization
VRIO is an acronym for the four question framework you ask about a resource or
capability to determine its competitive potential: the question of Value, the question
of Rarity, the question of Imitability (Ease/Difficulty to Imitate), and the question of
Organization (ability to exploit the resource or capability).
• Value Chain Analysis:

Value Chain Analysis is a strategy tool used to analyze internal firm activities. Its
goal is to recognize, which activities are the most valuable (i.e. are the source of cost Notes
or differentiation advantage) to the firm and which ones could be improved to provide
competitive advantage. In other words, by looking into internal activities, the analysis
reveals where a firm’s competitive advantages or disadvantages are
• ETOP , OCP, SAP , SWOT Analysis
ETOP is summarized depiction of the environmental actors and their impact on the
organization. SAP describes the organization’s competitive position in the market place.
A comparison of SAP and OCP shows that, OCP indicates what the organizations do
base on its capability. SWOT is an acronym used to describe the particular Strengths,
Weaknesses, Opportunities, and Threats that are strategic factors for a specific
company. A SWOT analysis should not only result in the identification of a corporation’s
core competencies, but also in the identification of opportunities.
Check your progress:

1. All are elements of micro environment except--
a) Consumer
b) Suppliers
c) Society
d) Competitors
2. Select the correct statement--
a) Environmental factors are totally beyond the control of a single industrial

enterprise.
b) Environmental factors are largely beyond the control of a single industrial

enterprise.
c) Environmental factors are totally within the control of a single industrial

enterprise.
d) None
3. All are elements of macro environment except--
a) Society
b) Technology
c) Competitors
d) Competitors
4. Strategy formulation is primarily an _____________ process and strategy

implementation is primarily an _____________ process.
a) Intellectual, Operational
b) Operational, Intellectual

c) Intelligent, Interim
Notes
d) Interim, Intellectual
5. An inherit limitation or constraint which creates disadvantages--
a) Threat
b) Weakness
c) Loophole
d) Deviation
6. Goal of SWOT analysis is to ____________ the organization’s oppurtunities and

strengths while ___________ its threats and _____________ its weakness.
a) Avoid;Neutralize,Correct
b) Exploit,Neutralize,Correct
c) Avoid,Capitalize,Neutralize
d) Exploit,Avoid,Ignore
7. Expand KSF--
a) Key Strategic Factors
b) Key Success Factors
c) Key Sources Facilitators
d) Key Secondary Facilitators
8. Strike out the correct combinations
i. The environment is constantly changing
ii. Various environmental constituents exist in isolation and do not interact with
each other
iii. The environment has a far reaching impact on organizations

a) i and ii
b) ii and iii
c) i and iii
d) All
Questions & Exercises

1. What is Demographic environment of business?
2. Write a short note on macro and micro environment
3. Discuss Porter 5 forces model with suitable examples.
4. Explain the concept of backward linkages
5. Explain Value Chain Analysis

For Further Readings
1. Exploring Corporate Strategy: Gerry Jhonson, Kevan Scholes Notes
2. Pearce John A & Robinson R B, 1977, Strategic Management : Strategy
Formulation and Implementation, 3rd Ed., A.I.T.B.S. Publishers & Distributors.
3. Aaker David Strategic Market Management, 5th Ed., John Wiley and sons
4. Regular reading of all latest Business Journals : HBR, Strategist, Busienss World,
Business India, Business Today.
5. Porter Michael, Competitive Advantage: Creating and sustaining superior
performance, Free press.
6. Thomson & Strickla d, Business policy and Strategic management, 12th Ed., PHI.
7. Munjal, A. Cases and readings in Strategic Management, ABS Handbook
A case study on Rolls Royce: Porters Five Forces Model

One way in which staff within Rolls- Royce have focused their actions for responding
to the changing role of the business, has been to use Porter’s ‘Five Forces’ model of
industry competition. Five Forces analysis gives an improved understanding of the
degree of competition within the business environment. It has helped them to develop a
better understanding of the business environment so that business opportunities could
be analyzed. The model identifies one force within the industry – competitive rivalry - as
well as four forces outside the industry:
8. Potential entrants and the threat of entrants
9. Power of Buyers
10. Power of Suppliers
11. Threats of Substitutes
Competitive Rivalry
As described above three dominant players operate in this oligopolistic global
industry. The industry is capital intensive and there is a requirement for high investment
in advanced technology and research and development. No single manufacturer
dominates the industry, so balance fuels the rivalry. Competition in the primary market
for aero-engines is intensified by the link to the secondary market for engine part sales
and services. Access to the secondary market is dependent on achieving the original
sale of new engines. In recent years the intensity of competition has increased as
each manufacturer has tried to improve its volumes and market share. Rivalry has also
intensified because gas turbine engines are now essentially a mature product and the
potential for technological differential advantage has been reduced.
Power of Buyers
The numbers of potential buyers of new aircraft are low. Buyers of aircraft engines
are therefore essentially price makers, with the market price for new engines being
largely set by the buyer. The power of buyers has further increased in recent years
as many airlines have become ‘global carriers’. The decision to purchase a particular
aircraft or engine combination is a long-term one. This means that failure to secure an
order may prevent an engine manufacturer trading with a particular airline for more
than a decade. The selection of one engine type can lead to a domino effect, with
other competing buyers following the same selection. Airlines are increasingly seeking
lifetime cost of ownership guarantees, and reduced repair costs.
Power of Supplier
The suppliers to the aero-engine manufacturer have limited power. There are many
hundreds of different suppliers to the aero-engine industry. They supply all nature of
components, from nuts and bolts to state-of-the-art electronic control systems costing

Notes hundreds of thousands of pounds. The power of many of the smaller companies,
which represent most of the supplier base, has been reduced. This is due to engine
manufacturers adopting dual sourcing strategies, using a range of alternative sources
of supply. The most powerful suppliers are those involved in the supply of high
specification electronic control equipment.
Threats of Entry
Although not unknown, entry to the aero-engine industry is extremely difficult. The
highly specialized advanced nature of aero-engine design combined with the costs of
research and development as well as the confidence of customers represent significant
barriers to entry. New engines also need extensive testing before gaining airworthiness
approval from the authorities. The market is also sensitive to the reputation of the
engine manufacturer, where names such as Rolls-Royce represent a range of proven
high-technology products.
Threats of Substitutes
There is no substitute for an aero engine and the threat of substitutes for air
transport itself is minor. However, it is thought that the development of video
conferencing capability will reduce some business travel and the growth of high speed
train travel (e.g. Eurostar) will affect some travel decisions. However, both of these
developments are taking place at a time when the demand for air travel is increasing.
This analysis shows that the commercial aero-engine business is highly competitive,
with the buyer possessing and exerting a very powerful influence upon organizations.
The high barriers to entry and the low threat of substitutes indicate that existing
competitors will continue to share the business between them. However, a slowdown
in industry growth and the increasing maturity of products will intensify the degree of
rivalry between the engine manufacturers.
Conclusion
In response to changes within its business environment, Rolls-Royce has developed
its orientation from that of engineering to become more business- and service-focused.
The organization has had to become much more proactive, dealing with new ideas to
create more services and customer focus. In the past, change was rare and slow, the
company tended to follow the market trend. The structure of the organization has been
realigned to meet the needs of the new way of operating. Organizational structures
define important relationships within the business and create a mechanism for meeting
business objectives. At the same time, it has been important to create a new business
culture within Rolls-Royce. A culture exists within the minds and hearts of the people of
an organization and contributes to the way they make decisions and develop business
strategies. As an organization changes from a product-focused organization towards
becoming a service-orientated culture, this requires more involvement of its people, with
greater empowerment and rapid decision-taking. The corporate identity is the sum of
the culture and its expression in behaviour and physical terms. Rolls-Royce has defined
the identity that it needs to encourage, building on its past reputation and achievements
for continuing success. As these changes take place, the organization is also realigning
its financial reporting framework and corporate governance. This will change how the
whole business shapes its purposes and priorities.

Unit-III: Environmental Scanning - Strategic Analysis of Internal and External Variables

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Business Policy & Strategic Management 53

Unit-III : Environmental Scanning - Strategic Analysis

• To make students understand importance of environmental scanning

• To make students understand PESTLE model, Porters five forces model,VRIO

A successful business has to not only recognize different elements of the

Environmental scanning can also be referred to environmental monitoring which

“Environmental scanning can be defined as ‘the study and interpretation of the

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Environmental scanning is the acquisition and use of information about events,

Exhibit 3.1 – Types of environments and its constituents

3.1 External Environment

There is the Micro Environment (also referred as industry or task environment)

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Exhibit 3.2 – Societal Environment and its constituents

3.2 Macro Environment Analysis

The PESTLE Analysis is a framework used to scan the organization’s external

Some approaches will add in extra factors, such as International, or remove

3.2.1 The PESTLE Factors

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• Socio-cultural factor- represents the culture of the society that an organization

3.3 Micro Environment Analysis

3.3.1 Elements of Micro-environment

No organization can survive without customers and consumers. A customer is the

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An organization refers to a group of all individuals working in different capacities

Understanding one’s own strengths and weaknesses in a particular business is of

a) Owners-Proprietor, partners, shareholders, etc., who invest resources and also

b) Board of directors-Elected by share holders, the board is responsible for day-to-

c) Employees-People who actually do the work in an organization. Employees

a) Who are the suppliers?

b) What are their products, prices and terms and conditions?

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c) Whether to “Outsource” production or get it done “in-house” depending on this

3.4 Industry Analysis: Using 5 Forces Model

Exhibit 3.3 – Porters 5 forces model

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Threat from Substitute Products

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat from Potential Entrants

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In summary, Porter’s five-forces model concentrates on five structural industry

3.5 Internal Environment

Each of these elements can be strength or a weakness. A Strength is an activity the

Taken together, an inventory of internal strengths and weaknesses and external

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3.6 Internal Analysis using VRIO Framework: A Resource Based

The company/firm need to ask themselves about the resources or capability to

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The resource-based view (RBV) as a basis for a competitive advantage of a firm

3.7 Value Chain Analysis

The Value Chain framework developed by Michael E Porter is “An Interdependent

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• Customer Service: There is often a need to provide services like pre-

• Management: This is a function concerned with recruiting, training, motivating

• Technology Development: This is an area that is concerned with

• Firm Infrastructure: This includes planning and control systems, such as

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Notes 3.8 Profiling Environmental Factors

Exhibit 3.5 – What constitutes Strategy

3.9 Environmental Threat and Opportunity Profile (ETOP):

Environmental Factors Degree of Importance Degree of Impact

3.10 Organizational Capability Profile (OCP)