STRATEGIC ENVIRONMENTAL ANALVSIS TOOLS AND TECHNIQUES

CHAPTER 6

Learning Objectives
At the end of this chapter, the student should be able to;
1. Identify the different strategic management tools used to analyze business environments; and
2. Use a specific strategic environmental analysis tool.

The three major method of gathering reliable and relevant information from a company’s
environment are environmental scanning, environmental monitoring, and competitive intelligence.
Environmental scanning focuses on external events that may influence the present position of a business;
environmental monitoring is primarily concerned with the trends of events; and competitive intelligence
gives preferential importance on information about competitors. These three approaches have only one
objective which is to collect reliable information so a company can strategically forecast its position in an
industry and gain competitive advantage.

Prominent scholars and researchers of strategic management have come up with different tools
and models that can be used when conducting an environmental analysis. Each strategic management
tool has its own advantages and disadvantages.

Some of the commonly used strategic tools are discussed in this chapter. They are categorized
based on the kind of environment being analyzed, such as the physical, societal, industry, or internal
environments.

STRATEGIC MANAGEMENT TOOLS USED TO ANALYZE THE PHYSICAL ENVIRONMENT

Strategic Factors of the Physical Environment

One of the best procedures to analyze a company's environment is to determine the key elements
existing in that environment. These elements help in determining strategic factors that influence the
direction, growth, and success of a company. The following are the key elements of the physical
environment:

1. Physical resources (e.g., Raw materials, arable land, and availability of fresh water)
2. Climate (e.g., Temperature and weather-related events such as floods and storms)
3. Wildlife

Objective of the Analysis

The objective of a physical environment analysis is to determine the possible strategic factors that
can reduce the negative or unfavorable impacts of the expected changes on the physical environment of
a company. At the same time, the analysis aims to evaluate the impact of a company's activities on the
physical environment.
Strategic Tool, Approach, or Model to Use in the Analysis

The strategic approach that is used to analyze the physical environment is environmental
scanning. Information or data needed in the analysis are collected from secondary sources. Good sources
of information about physical environment strategic factors are reports from weather bureaus and
environmental agencies of the government and environment forecasts of private companies. The analysis
should include information about the global and local environments.

To analyze the physical or natural environment, the following steps are to be performed:
1. Identify likely elements under a strategic factor (e.g., shortage of raw materials under physical
resources).
2. Collect relevant information or data from reliable sources.
3. Assess the likely impact on the company (e.g., low, moderate, or high).
4. Classify the likely elements as opportunities or threats if the impact is judged as moderate or
high.
5. Define the strategies to be adopted at various levels.

A template for the physical environment analysis is shown in Table 6.1.

Table 6.1 Physical Environment Analysis Matrix

Probable
Data and Impact of
Likely Their the Classification
Variables Sources Elements of Risk Key External
Major under the (Estimated on the (Regulatory, Strategic
Elements Major Revenue, Company Litigation, Factors Remarks
Elements Cost, and (Low, and Supply (Opportunities
Losses) Moderate, Chain) or Threats)
or High)

(A) (B) (C) (D) (E) (F) (G)

Physical
Resources
Climate
Wildlife

An element that is rated as having a moderate or high impact on a company shall be considered a
key external strategic factor. Such factors shall be treated as opportunities for or threats to a company.
The result of this analysis can be used in making a SWOT analysis or other types of strategic environmental
analyses.
STRATEGIC MANAGEMENT TOOLS USED TO ANALYZE THE SOCIETAL ENVIRONMENT

Strategic Factors of the Societal Environment

The following are the strategic factors of the societal or general environment:
1. Political or legal segment
2. Economic segment
3. Sociocultural segment
4. Technological segment

Objective of the Analysis

The objective of conducting a societal environment analysis is to determine the trends of the
strategic factors that are relevant to the growth of an industry. Businesses tend to join a growing and
promising industry where the strategic factors considerably contribute to its moderate or high growth.

Strategic Tool, Approach, or Model to Use in the Analysis

To gather, evaluate, and disseminate reliable and relevant information about the societal
environment the approach used is an environmental scanning, and the specific strategic tool used to scan
the societal environment is the PESTEL or STEEP analysis. This approach is supported by environmental
monitoring. The data in the analysis come from secondary sources.

PESTEL or STEEP Analysis

A PESTEL or STEEP analysis is not a mere identification and listing of variables, which are commonly
done, under a particular segment or strategic factor. This procedure alone will not provide meaningful
information to a management in making a strategic decision. Rather, it involves a deeper analysis of the
collected data.

To conduct an effective PESTEL analysis, the following steps should be performed:

1. Identify likely trends under each strategic factor.
2. Gather relevant data from reliable sources.
3. Assess the probability of occurrence (e.g., low, moderate, or high).
4. Measure the likely impact and risk to the company (e.g., low, moderate, or high).
5. Identify possible opportunities and threats brought by strategic factors.
6. Formulate strategies.
7. Incorporate any proposed action to the business plan.

A template for the PESTEL analysis is shown in Table 6.2.

 Table 6.2 PESTEL Analysis Matrix

Data and Impact on

Likely Their Probability and Risk to Key External
Segments of Trends of Sources of the company Strategic
the Social the (Estimated Occurrence (Favorable or Factors Remarks
Forces Elements Revenue, (Low, Unfavorable) (Opportunities
Under the Costs, and Moderate, )High, or Threats)
Segment Losses) or High) Moderate, or
Low)

(A) (B) (C) (D) (E) (F) (G)

Political
segment
Economic
segment
Sociocultural
segment
Technological
segment

It is highly emphasized that only those elements that are considered both moderate and high in the
probability of occurrence (Column D) and impact on the company (Column E) are considered key external
strategic factors. They are, then, classified as opportunities or threats and included in the formulation of
strategies in different levels (e.g., corporate, business, and functional). On the other hand, the elements
that are not considered moderate or high in the probability of occurrence and impact on the company are
not opportunities or threats. They will only be scanned but no longer monitored.

STRATEGIC MANAGEMENT TOOLS USED TO ANALYZE THE INDUSTRY ENVIRONMENT

Strategic Factors of the Industry Environment

The industry or task environment is the immediate environment surrounding a business. The
strategic factors of the industry environment are as follows:

1. Customers 4. Employees
2. Suppliers 5. The government
3. Creditors 6. Competitors
Objective of the Analysis

When conducting an industry environment analysis, the objective is to determine the different forces
that drive competition and the extent of the competition so a company can position itself in an industry.
A company that knows where it stands in an industry and where it wants to go has a greater chance to
withstand competition and become successful.

Strategic Tool, Approach, or Model to Use in the Analysis

The analysis of the industry environment requires the use of the three methods of collecting data
for strategic analyses. In this case, there is a need to scan, monitor, and conduct competitive intelligence
on the different forces that influence competition in an industry. Data used in the analysis come mainly
from secondary sources. The commonly used tool to analyze the industry environment is Porter's five
forces of competition model.

Porter's Five Forces of Competition Model

Porter’s five forces of competition model evaluates the level of competition and assess the attractiveness
of an industry itself. The model consists of the following strategic factors:
1. Rivalry among competing companies
2. Threats of new entrants
3. Bargaining power of buyers
4. Threats of substitute products
5. Bargaining power of suppliers

To effectively use this model, the following steps should be performed:

1. Identify the barriers to the forces of competition.
2. Gather information about the barriers from reliable sources.
3. Assess the barriers as low, moderate, or high in terms of strength.
4. Rate the force whether it is a threat or not.
1. 5. Assess the entire industry.

A template to analyze Porter's five forces of competition model is presented in Table 6.3.
Table 6.3 Porter's Five Forces of Competition Matrix

Data and Threat to

Their Level of the
Barriers Sources the Company Industry
Key Forces under (Estimated Barriers (Yes or No) Competitiveness
of each Revenue, (Low, (Low, (Low, Moderate, Remarks
Competition Forces Costs, and Moderate, Moderate., or High)
Losses or High) or High

(A) (B) (C) (D) (E) (F) (G)

Rivalry
among
competing
companies
New
entrants
Power of
buyers
Substitute
products
Power of
seller

It is highly emphasized that this model assesses the intensity of the competition of an entire industry.
The basic concept contends that when an industry's level of competition appears very high, the existing
companies tend to generate modest profits and new companies may not join the industry. The analysis
must be supported by reliable quantitative data. For example, one of the barriers to competition is
switching cost. It is not an acceptable strategic analysis to simply state that the switching cost is high.
Rather, the amount of the switching cost or its composition must be quantitatively stated.

STRATEGIC MANAGEMENT TOOLS USED TO ANALYZE THE INTERNAL ENVIRONMENT

Strategic Factors of the Internal Environment

The strategic factors of the internal environment of a company are as follows:
1. Corporate culture
2. Organizational structure
3. Business resources
Objective of the Analysis

The objective of conducting an internal environment analysis is influenced by the type of strategic
factor being analyzed and the strategic tool used in the analysis. Table 6.4 presents the objective of
analyzing each internal strategic factor.

Table 6.4 Internal Environment Strategic Factors and the Objective of the Analysis

Strategic Factors Objective of the Analysis

Corporate culture To determine how culture influences strategy
formulation
Organizational culture To determine what structure can effectively and
efficiently achieve organizational goals
Business resources To determine which business resource contributes
to the achievement of competitive advantage

Strategic Tool, Approach, or Model to Use in the Analysis

Most strategic management tools used in analyzing the internal environment are intended to
evaluate the business resource strategic factor of a company. The commonly used tools and their primary
concerns to analyze a business resource are presented in Table 6.5.

Table 6.5 Internal Environment Strategic Management Tools and Their Objectives

Internal Environment Strategic Objective of the tool Strategic Factor Being

Management Tools Analyze
SWOT Analysis To assess a company's strengths and The strengths and
weaknesses. so that opportunities are weaknesses of a company
exploited and threats are avoided or
minimized
VRIO framework To identify a company's resource that is The resources of a
considered valuable, rare, and difficult company
to imitate company and to assess if the
company is organized to use it to sustain
a competitive advantage.
Value chain analysis model To determine which activities create Business activities
value and which create cost so that the
profit margin is improved and
competitive advantage is achieved
 BCG growth-share matrix To determine the status of a company's The product portfolio
model unit of product portfolio in terms of
market share and growth

SWOT ANALYSIS MODEL

The SWOT (strengths, weaknesses, opportunities, and threats) analysis model evaluates the internal
strengths and weaknesses of a company against what the external opportunities and threats offer. The
objective of a SWOT analysis is to assess a company's strengths and weaknesses to exploit external
opportunities and avoid possible threats. It is highly emphasized that this model is more useful if applied
together with the PESTEL analysis and Porter's five forces of competition mode because most of the data
needed in a SWOT analysis come from the PESTEL analysis. Some people classify the SWOT analysis model
as a tool to analyze the external environment because of the presence of external factors.

When using the SWOT analysis model, only the most important SWOT factors are included. They are
ranked according to their importance, impact, and risk based on data and pieces of evidence. One or two
important SWOT factors will already suffice. The analysis starts with the identification of the external
factors (e.g., opportunities and threats), followed by the assessment of the internal factors (e.g., strengths
and weaknesses).

The following steps are to be observed when conducting a SWOT analysis:

1. Identify external opportunities and threats.
2. Assess the internal strengths and weaknesses of a company.
3. Rank them according to their importance, impact on, and risk to the company.
4. Select the factors that are ranked first and second.
5. Define the most appropriate strategies.

A mere listing of SWOT elements does not usually provide meaningful information in making a strategic
management decision. It will be helpful to use the TOWS matrix. This matrix, which was developed by
Heinz Welrich, is a variant of the SWOT model. Table 6.6 presents the template for the TOWS matrix.

Internal Factors Strengths (S) Weaknesses (W)

S1 W1
S2 W2
External Factors
Opportunities (O) S–O W–O

O1 (How to use strengths to exploit or (How to overcome weaknesses by

02 benefit from opportunities) taking advantage of opportunities
Threats (T) S-T T–W
T1 (How to use strengths to avoid or (How to minimize weaknesses to
T2 minimize threats) avoid threats)
The different possible SWOT factors are listed as follows:

1. Strength
a. Resources d. Managerial and employee skill
b. Core competencies e. Product and service quality
c. Strong market position

2. Weaknesses
a. Weak finances d. Poor managerial skills
b. Poor quality reputation e. Undifferentiated product or
c. Employee skill gap service

3. Opportunities
a. High economic growth
b. Weak competitors
c. Positive change in the political environment
d. New technological developments
e. New markets

4. Threats
a. Economic slowdown
b. Intense competition
c. Negative change in the environment
d. Global warming
e. Technological threat

VRIO FRAMEWORK

The VRIO (value, rareness, imitability, and organization) framework is a strategic managements tool
that asses the resources of a company to achieve competitive advantage. A resource is valuable if it can
add value for the customer and if it provides a company the capability to exploit opportunities or defend
against threats. A resource becomes rare when only a few companies possess it. When a resources can
hardly be imitated or is costly to imitate, the resources is considered not imitable. A company is
considered organized when the activities of different functional units, systems, processes, and structures
are coordinated, planned, and arranged properly.

The objective of the VRIO framework is to determine a company’s resources that are valuable, rare, and
not imitable and if the company is organized to use them to achieve competitive advantage. However, it
is not easy to identify a resource that is within the VRIO requirements. It is helpful to complement this
tool with the SWOT analysis model and value chain analysis to easily identify a company’s resources that
meet the criteria of the framework. The VRIO framework uses data obtained mostly from internal sources.
 The analysis starts by assessing whether a resources is valuable. If it is not, it will no longer be tested
against the other criteria. However, when the resources is judged valuable, it will be assessed according
to its rareness. If it is not rare, it will no longer be tested against the other criteria. This evaluation process
continues until the resource has been tested against the last criterion.

A template to analyze resources using the VRIO framework is shown in Table 6.7

Table 6.7 VRIO Analysis Template

Resources Data and Their Sources Valuable Rare Not Imitable Organized Effect on the Firm

Physical Competitive
resources No disadvantage
Human Competitive
resources Yes No parity
Financial Temporary
resources Yes Yes No competitive
advantage
Technological Unused
resources Yes Yes Yes No competitive
advantage
Organizational Sustained
resources Yes Yes Yes Yes competitive
advantage

VALUE CHAIN ANALYSIS MODEL

The value chain analysis model, which was developed by Michael Porter, is a strategic management
tool that evaluates the internal activities of a company when producing goods or delivering services. This
model groups business activities into primary and support activities. Primary activities include inbound
logistics, operations, outbound logistics, marketing, and service. Support activities include company
infrastructure, human resource management, technology development, and procurement. All these
activities are directed toward improving a company's profit margin and attaining competitive advantage.

The objective of the value chain analysis is to assess which of a company's activities create value
and which create cost in order for the company to improve its profit margin and achieve competitive
advantage. Value represents the benefits that are derived from a product or service. The benefits should
be higher than the cost. It is measured from the perspective of the customers. Creating value can be
attained by adopting an efficient manufacturing process. An activity that does not create value has to be
improved or, if not important, be eliminated.
 The approach to analyze the primary and support activities is highly influenced by the type of
competitive advantage that a company wants to achieve. A company may aim to achieve cost advantage
or differentiation advantage. If a company aims to achieve cost advantage, the focus of the analysis is on
the activities that create cost to the company and how they can be reduced. However, if the aim is to
achieve differentiation advantage, the focus of the analysis is on the activities that create value for the
customers and how they can be improved. The data used in making an analytic assessment come from
the records of a company.

To use the value chain analysis model, the following steps are to be performed:
1. Identify the different business activities.
a. For a company that aims to achieve cost advantage - the primary and support activities
b. For a company that plans to attain differentiation advantage - the activities that create
customer value

2. Assess the importance of the activities to the cost or value of a product.

3. Define the links between the activities.
4. Identify the means to reduce cost or differentiate the product.

A template to analyze business activities using the value chain analysis model is presented in Table
6.8.

Table 6.8 Value Chain Analysis Matrix

Importance of Adding Value or Possible Ways to

Business Data and Their the Activity Differentiating Reduce Cost or
Activities as Sources (Total (Not, Less, Activities (Yes or Differentiate then Remarks
Strategic Factors Cost Involved) Important, or No) (Low, Product
Very) Medium, or High)
(A)
(B) (C) (D) (E) (F)
Inbound logistics
Operations
Outbound
logistics
Marketing
Service
Infrastructure
Human resource
management
Technology
development
Procurement
 Business activities indicated in Column A vary among companies. When evaluating the importance of
an activity, it must be linked with other activities compromising the entire value chain. The suggestion to
reduce cost or differentiated a product in Column E must be specific (e.g. eliminate warehousing cost of
finished products). The bottom line of the value chain analysis in strategy directed to reduce the cost or
differentiate a product or services.

BCG GROWTH-SHARE MATRIX MODEL

The BCG growth share matrix model, developed by Bruce Herderson of the Boston Consulting
Group (BCC) in 1970, is a strategic management model that assesses a company's business unit or
products in terms of market share and market growth. The market share acts as the proxy to
competitive advantage, and the market growth serves as the proxy for industry attractiveness. The
Objective of the analysis is to classify a business unit or product portfolio in an industry in terms market
share and growth rate relative to the largest competitor.

In the BCG growth-share matrix model, the product portfolio can be classified into four categories,
namely, dogs, question marks, stars, and cash cows. The schematic diagram of the mode is presented in
Figure 6.1.

High Market Share (Cash Generation) Low

Stars Question Marks
High

Characteristics: These are products that have Characteristics: These are products that have low
high market shares and growth rates in high- market shares but consume large amout of cash
growth industries. They are cash generators and
cash users
Market Share (Cash Generation)

Strategic Choices: vertical integration, horizontal Strategic alternatives: market penetration,

integration, market penetration, and market product development, and divesture
development
Cash Cows Dogs

Characteristics: These are leaders in the mature Characteristics: These are products that have low
market that generate steady cash flow but utilize market share and growth rates. They generally
small amount only. Excess cash are flowed to consume large amount of cash.
question marks.

Strategic alternative: product development and Strategic alternative: divesture, liquidation, and
Low

diversification retrenchment
Figure 6.1 Schematic diagram of the BC growth-share matrix model
 The data needed for the analysis come from both the records of a company and secondary sources
such as industry reports and competitors' reports.

When conducting an analysis using the BCG growth-share matrix model, the following steps are to
be observed:
1. Define the market where the products of a strategic business unit (SBU) belong.
2. Gather information about business revenue, business market share, competitor's market share,
and market or industry growth rate.
3. Compute for the relative market share.
4. Define the possible strategic alternatives.

The relative market share is computed based on the market share of the largest competitor as follows:

Company’s market share or revenue

Relative market share =
Competitor’s market share or revenue

A template to analyze the market share and growth rate of a product portfolio or strategic
business unit (SBU) using the BCG growth-share matrix model is shown in Table 6.9.

Table 6.9 BCG Growth-Share Matrix Model

Product Product
Revenues Largest Company’s Relative Market Category
Product and Their Competitor’s Market Market Growth (Dog, Star,
Portfolio % to the Market Share Share of Share (in Rate (in Cash Cow, Strategic
or SBU Total (in percent) the Product Percent) percent) or Alternatives
Revenue (in percent) Question
Mark

(A) (B) (C) (D) (E) (F) (G) (H)

Product/
Brand A or
SBU 1
Product/
Brand A or
SBU 2
Product/
Brand A or
SBU 3
Product/
Brand A or
SBU 4

When presenting the results of the analysis graphically using the BCG. Growth-share matrix model (Table
6.9), the following steps are to be observed:

1. The product portfolio or SBU being analyzed should be represented in the form of a circle. The size of
the circle depends on the percentage of revenue of a particular product over the total revenue. For
example, a company's revenue for Product A is F800,000 and that of Product B is P250,000. If the total
revenue of the company for all its products in a particular industry is P2 million, then Product A has
40%, while Product B has 12.5%. Product A should be represented with a bigger circle than Product B.

2. The three x-axes of the model should be labeled as follows (starting from the right side): the first x-
axis as 0% (right side), second x-axis as 50% (middle), and third x-axis as 100% (left side).

3. The three y-axes are labeled depending on the growth rate of the market or industry. The first y-axis
(bottom) should represent the lowest growth rate; the second y-axis (middle) should represent the
average growth rate, and the third y-axis (top) should represent the highest growth rate. For example,
if the lowest growth rate is 5% and the highest is 25% , then the average rate is 15% . Hence, the first
y-axis (bottom) is equal to 5%, the second y-axis (middle) is labeled as 15%, and the third y-axis (top)
is equal to 25%.

4. Present the product, brand, or SBU in the form of a circle based on their classification (i.e., dogs, cash
cows, stars, or question marks).

A deeper and more critical analysis should be made when using the BCG growth-share matrix model
because an industry is affected by several strategic factors. For example, a product classifier as a star is
expected to become a cash cow and generate cash flows, however, when an industry rapidly changes
because of new technological advancements, the product may possibly change to a dog. It will be helpful
if this strategic management tool is used together with Porter's five forces of competition model.