Strategic

Environmental
Analysis
“Developing a sound and healthy organization requires understanding the
environment as much as understanding the organization.”
Environment - Gary Hamel
& its Classifications:
‣ Factors or forces those have the potentiality to influence over the
firms’ operations & or profitability.
Classifications of Environment :
o Internal Environment refers to the culture, employees, events
and factors within an organization that has the ability to influence
the decisions of the organization.
o External Environment is composed of all the outside factors or
influences that impact the operation of business.
‣ General or Remote environment
‣ Industrial environment
‣ Specific or Operational environment
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S W O T Analysis
S trengths are resources, skills & or other favorable advantages relative to
other competitors and needs of the markets a firm serve or expect to
serve. Examples of Strengths are: Firm’s technical skill, Valuable physical
assets, Fruitful alliances etc.
Thus Strengths are:
o Something that a company is good in doing.
o It gives the company increased competitiveness.
 Preconditions of an “asset” to be the S t r e n g t h ”
o Should be better than competitors;
o Must have the market demand or marketability;
o Organization should have the capability to use that ‘assets’ as resource.

is limitation or deficiency in resource, skill and capability

relative to other competitor that seriously impeded firm’s performances.
Hence Weakness is something that a firm lacks or does poorly or a
condition that puts the company at a disadvantage.
Examples of Weaknesses are: deficiencies in competitively important skill; a lack
of competitively important physical or intangible assets, weak or missing
competitive capabilities in key areas etc.
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 is major favorable situation in a firm’s environment
that a company may grab for its market growth and profitability
using its strengths. Thus opportunities offer important avenues for
profitable growth and indicate potential for competitive advantage.

is major unfavorable situation in a firm’s

external environment that may cause suffering in growth,
profitability or operation of the firm. Examples of threat can be:
Entry of low cost competitors; New regulations that are more
burdensome for the company; Raise in bank interest rates etc.

: Limitations of S W O T :
: S W O T Diagram :
o Mostly manager does their
organizational SWOT superficially Numerous Opportunities
and subjectively;
Weaknesses Turnaround Aggressive

Substantial
o SWOT is mostly qualitative

Strengths
strategy strategy
Critical

analysis rather quantitative

therefore, it is not possible to Defensive Diversification
compare the organization with their strategy strategy
rivals.
Major Threats
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 Value Chain Model

 Value is the total amount that the buyers are willing to pay for a firm’s
products. And the difference between the total value and the total cost of
performing all of the firm’s activities provides the margin.
 Prof. Michael Porter suggests that activities within an organization add value
to the service and products that the company produces, and that all of these
activities should be run at optimum level if the organization is to gain any
real competitive advantage.
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 General or Remote Environment
Distant forces those are common for all types of the businesses.

� Political factors: The direction and stability of national

& or international politics including legal and regulatory
parameters within which an industry operates or, wants to
operate also include the political system, government
agencies and pressure groups etc.
� Economic Factors: National and international nature and
direction of the economy – such as, economic boom or
recession or depression, purchasing power of customers,
availability of credit, interest rate, inflation, trends of growth –
in which a industry operates.
� Social Factors: Changes in the values, beliefs, attitude, education,
distribution of the population, geographic distribution etc. in the social
culture where a firm targeted its business.
Recent trends in the social changes as changes in the labor market,
population demography, lifestyle of the people etc. all these have a
primary effect on social character and health.

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 General or Remote Environment

�Technological factors: changes that might influence the

whole industry & or society.
Creative technological adaptations can suggest
possibilities for new products or for improvements in
existing products or in manufacturing and marketing
techniques.

Ecological factors : Water pollution, air pollution, land

pollution etc. that is the relationships among human and
others living things that might be affected by the goods
and services of the industry.

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 Industrial Environmental Analysis
Industrial environment shape the competition in an industry and, help the
analyst to link the impact of remote factors to the firm’s operating
environment.
Analysis of industrial Five forces determine the intensity of competition,
attractiveness of an industry and, level of profitability.
1. Entry threats of new firm
2. Suppliers’ powerfulness
3. Buyers’ powerfulness
4. Substitute products or services
5. Rivalry among competitors
o Attractive industry means profitable industry and,
o Unattractive industry is one in which the combination of above five
forces acts to drive down overall profitability.
A t t r a c t i v e industry: U n a t t r a c t i v e industry
o High entry barriers o Low entry barriers
o Weak suppliers bargaining power o Strong suppliers bargaining power
o Weak buyers bargaining power o Strong buyers bargaining power
o Few substitute products or services o Many substitute products or services
o Low competition o Intense competition
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 Entry threats
Entry threats: Existing competitors discourage the
potential new entrance entering into the industry by
creating some barriers to entry that become very costly for
new competitors to adopt.
Thus existing business can preserve a favourable position
and take fair advantage of it.

Entry threats faced by a potential new firm while:

o Industry has economic of scale of production
o Product has the lack of product differentiation
o Higher start-up capital requirements
o Product has the cost disadvantages
o Difficulties in access to the distribution channels
o Government policies …..etc.

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 Suppliers powerfulness is how easy or difficult it is for the suppliers to
drive up the supply price.
In general fewer the supplier means more powerful the suppliers are.
Thus powerful suppliers are threat to the firm who have to buy at the
price that asked by the suppliers.
Suppliers become powerful when:
o Supply-side dominated by few suppliers
o Supply a unique or least differentiated products
o If the buyers are not that important for the suppliers
o Suppliers side integrations, etc.

 Powerfulness of the Buyers has been measured by how easy it is for

buyers to drive prices down of the business.
If company deal with few, powerful buyers, they (buyers) are often able to
dictate buying terms & conditions to the company.
Buyers of an industry become powerful while:
o Buyers purchase a large volume
o Available substitute products
o Quality of life style of the buyers has change
o Possibilities of buyer side integration
o When product does not save the buyers money, etc.
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  Substitute products can limit the potential of the firm and its profits
& growth too. Power of substitute products has been measured by
analysing the ability of firm’s customers.
Factors that determine the strength of substitutes are:
o attractiveness of the prices of substitutes products
o buyer’s satisfaction with the substitutes in terms of quality and
others features
o the easiness to switch to substitutes.

 Higher Rivalry Among Competitors

Degree of Rivalry increases while number of competitors increases.
Among the rivals competition is become stronger when:
o Demand for the product grow slowly
o Industry conditions force competitors to cut prices
o Customers’ cost to switch brands are low
o Equal size of the firm and, one or more competitors are
dissatisfied with their market position and undertake other
measures to win the battle for market share.

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  High Exit barrier:
Barriers to exit are obstacles in the path
of a firm who wants to leave a given
market or industry. These obstacles often
cost the firm financially to leave the market
and may prohibit it doing so.
Typical barriers to exit include highly
specialized assets, which may be difficult to
sell or relocate, and high exit costs, such
as asset write-offs and closure costs.

If the barriers of exit are

significant, a firm may be
forced to continue competing in
a market, as the costs of leaving
may be higher than those
incurred if they continue
competing in the market.

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 Industry Environment …..cont
 STEPS of Industry Analysis
1. Define the boundary of an industry
2. Define who are the competitors
3. Major determinants or factors of the
competition

 Why defining the boundary is important?

o Identify the areas where firm should
compete Factors that significantly
o Identify the competitors of the firm KSF affect the overall
o KISF - Key Industrial Success factors competitive position of
companies within an industry
o KSF - Key Success Factors for the firm
3-5 major determinants of
 Mistakes in Industry Analysis financial and competitive
o Over emphasis the firm strengths success factors
o Over looking the environmental changes
o Under estimate the competitors
o Misreading the competitors and assuming
that the competitors and environment will
behave in a same manners
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 SPECIFIC or OPERATING
ENVIRONMENTAL FACTORS
Global & or Domestic factors those are in the immediate
competitive situation and, affect a firm’s success in
acquiring needed resources. These are as:
o Firm’s Competitors
o Public pressure group
o Government pressure & relationship
o Relationship with the creditors of the firm
o Firm’s Customers i.e., composition of its customers
o Sources of labor i.e., ability to attract capable
employees
o Reputation with raw material Suppliers of the firm, etc.
Operating environment also known as: Competitive or
Business or Task environment.
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 Analysis of OPERATING Environment help to Determine
o The competitive position of a firm
o ‘Relationship that should be’ with customers
o Firms relationship with suppliers & creditors

 How to Identify Competitors? …..through investigating…..

o How the other firms are defining their market scope?
o How similar services customers are getting from the products
that offered by the rival firms
o How the other firms are committed with their customer &
industry

 Common Mistakes in Identifying Competitors

o Over emphasizing current & known competitors
o Over emphasizing large competitors ignoring the small one
o Assuming – “competitors will continue to behave in a same
manners”
o Over looking the potentials competitors etc.

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 Common Environmental Factors that
a Firm Must Analyze

o Existing size of the market

o Future growth rate of the firm’s
market
o Calculate market capacity, surplus & or
shortages
o Trends in technology changes
o Current & future capital
requirements
o Customers loyalty towards the firm’s
product
o Possibilities of business integration
o Innovations etc.

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 Ways of Environmental Management
 Strategic Maneuvering
Firm’s conscious effort to change the boundaries of its task &/or
industry environment.
Aggressive firm continuously change their boundaries of tasks through
introducing new product, re-modeling of existing products, also go for
market development, diversification, acquisitions etc.
» Different level of Strategic Maneuvering:
o Corporate Level: Moving in or out of certain task & or industry.
o Business level: Properly positioning the firm in the market niches
by creating a new task environment.
» Strategic Maneuvering could be done though….
o Independent strategies: Individual firm act on its own to change
some aspect of its current environment.
o Cooperative strategies: Two or more firm work together to change
their own or industrial environment. This happen when,
o Taking joint actions reduce cost and risks
o Mutual cooperation increases their power

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 What to do to Manage Environment Strategically
o Reactive: Positioning firm in the changed environment so that it is
capable to provide the best defense against the environment.
o Proactive: Taking the offensive by attempting to change the
environments i.e., challenging strategy.
Note: Strategic environmental management refers to the proactive
strategies aimed at challenging the environmental context in which the
organization operates its’ business.

 What to Do to Choose Environmental Management Strategy

o Find out and attempt to change appropriate elements of the firm’s
environmental forces those:-
 Causes the firm’s operational or business problems
 Provide business or operational best opportunities and
 Forces that the firm can change successfully
o Choose appropriate strategies that focus on related elements of the
environment and the firms operations
o Implement strategies that offer the most benefits for the firm at the
lowest cost

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