MNGT – ED32 (STRATEGIC MANAGEMENT) Nine basic stages in environmental analysis:

1. Environment basics – an opening evaluation

to define and explore basic characteristics of
CHAPTER 3 the environment.
2. Consideration of the degree of turbulence in
“Analysing the Strategic Environment” the environment.
The nine basic analytical tools: 3. Background factors that influence the
competitive environment
1. Environment basic 4. Analysis of stages of market growth
2. Degree of turbulence 5. Factors specific to the industry: what delivers
3. PESTEL analysis success?
4. Industry lifecycle 6. Factors specific to the competitive balance of
5. Key factors for success power in the industry
6. Five forces analysis 7. Factors specific to co-operation in the
7. Four links analysis industry
8. Competitor analysis 8. Factors specific to immediate competitors
9. Customer analysis 9. Customer analysis

STRATEGIC ENVIRONMENT – THE BASICS

EXPLORING THE COMPETITIVE ENVIRONMENT
In strategy, the environment means
everything and everyone outside the
organisation: competitors, customers, suppliers
plus other influential institutions such as local
and national governments.
 Sustainable competitive advantage - is an
advantage over competitors that cannot easily
be imitated.
There are three difficulties in determining the
connection between the organisation’s strategic
management and its environment:
1. The prescriptive versus emergent debate.
2. The uncertainty.
3. The range of influences.
Two types of results from the analysis:
1. Proactive outcomes - The environmental
analysis will identify positive opportunities or
negative threats.
2. Reactive outcomes - The environmental
analysis will highlight important strategic
changes over which the organisation has no
control but to which, if they happen, it will
need to be able to react.
Basic factors that contribute to the strategic analysis
of the environment:
I. Market definition and size - Markets are
usually described in terms of annual sales.
From a strategy perspective, a ‘large’ market
may be more attractive than a ‘small’ market.
The words ‘large’ and ‘small’ need to be
defined carefully.
II. Market growth - In establishing the size of
the market, it is also common practice to
estimate how much the market has grown
over the previous period – usually the
previous year. From a strategy perspective,
the importance of growth relates to the
organisation’s objectives.
III. Market share - Although some strategists
disagree, a large share of a market is usually
regarded as being strategically beneficial. 6
The reason is that a large share may make it
possible to influence prices and may also
reduce costs through scope for economies of
scale, thereby increasing profitability.
 DEGREE OF TURBULENCE IN THE
ENVIRONMENT
The environmental forces surrounding the
organisation can be assessed according to two main
measures:
1. Changeability – the degree to which the
environment is likely to change.
Changeability comprises:
A. Complexity – the degree to which the
organisation’s environment is affected by
factors such as internationalisation and
technological, social and political
complications.
B. Novelty – the degree to which the
environment presents the organisation with
new situations.
2. Predictability – the degree to which such
changes can be predicted.
Predictability can be further subdivided into:
A. Rate of change - of the environment (from
slow to fast);
B. Visibility of the future - in terms of the
availability and usefulness of the information
used to predict the future.
 Hypercompetition - the level of turbulence is
high.
ANALYSING THE GENERAL ENVIRONMENT
a. In any consideration of the factors
surrounding the organisation, two techniques
can be used to explore the general
environment: PESTEL checklist and
scenarios.
I. PESTEL checklist - which consists of the
Political, Economic, Socio-cultural,
Technological, Environmental, and Legal
aspects of the environment.
- PESTEL is purely a reminder checklist and should
be used selectively.
- PESTEL analysis rely on past events and
experience, the analysis can be used as a forecast
of the future.
- when used wisely, the PESTEL checklist has a role
in strategic management.
Checklist for a PESTEL analysis:
 Political future
 Socio-cultural future
 Economic future
 Technological future
 Environmental future
 Legal future
E–S–P Paradigm: Analysing the Role of
Government:
 E-nvironment – background characteristics
of a country.
 S-ystem – a county’s system of government.
 P-olicies – the main government policies.
II. SCENARIO - is a picture of a possible future
environment for the organisation, whose
strategic implications can then be
investigated. It is less concerned with
prediction and more involved with developing
different perspectives on the future. The aim
is to stimulate new strategic thought about
the possible consequences of events, rather
than make an accurate prediction of the
future.
 scenario-based analysis - a scenario is a
model of a possible future environment for
the organisation, whose strategic implications
can then be investigated.
Market can be divided into four distinct segments:
1. Superpremium segment
2. Premium segment
3. Regular segment
4. Economy segments
 ANALYSING THE STAGES OF MARKET
GROWTH
 Industry Life Cycle – “the grandfather of
concepts for predicting industry evolution.”
- The basic hypothesis is that an industry – or a
market segment within an industry – goes
through four basic phases of development, each
of which has implications for strategy.
- the reason for such an analysis is to identify the
dynamic factors that are shaping the industry’s
evolution.
- charting the development of a market from
introduction, through growth and maturity to
decline – is useful to identify the dynamic factors
shaping the industry’s evolution, although there
are criticisms of its use.
- Aspects of life cycle analysis that are worthy of
special consideration include the advantages of
early entry, the fragmentation of market share as
markets mature, the incidence of cyclicality, and
its effect on demand in mature markets.
The four main phases of the industry life cycle are
usually identified as:
 Introduction - In the introductory phase,
organisations attempt to develop an interest
in the product.
 Growth - As the industry moves towards
growth, competitors are attracted by its
potential and enter the market: from a
strategic perspective, competition increases.
 Maturity - As all the available customers are
satisfied by the product, growth slows down,
and the market becomes mature.
 Decline - Sales enter a period of decline.
Introduction phase - will be used to present the
product or service to new customers – perhaps a
premium ice cream flavour to those who have never
tasted it.
Maturity phase - assumes that most customers are
aware of the product and little new trial is required –
perhaps a small tub of traditional chocolate ice
cream.
Two consequences of the industry life cycle that can
have a significant impact on industries:
1. Advantages of early entry - there is
substantial empirical evidence that the
first company into a new market has the
most substantial strategic advantage.
2. Industry market share fragmentation -
In the early years, markets that are
growing fast attract new entrants. This is
both natural and inevitable.
KEY FACTORS FOR SUCCESS IN AN INDUSTRY
Key Factors for Success (KFS) – Key factors for
success in an industry are those resources, skills,
and attributes of the organisations in an industry
that are essential to deliver success in the
marketplace.
- Ohmae argued that, when resources of capital,
labour and time are scarce, it is important that
they should be concentrated on the key activities
of the business – that is, those most important to
the delivery of whatever the organisation regards
as success.
- can be used to focus the analysis on particularly
important industry matters.
There are three principal areas that need to be
analysed – Ohmae’s three Cs:
1. Customers
2. Competition
3. Corporation
Criticism of the key factors for success has
concentrated on four issues:
1. Identification - It is difficult to pick out the
important factors.
2. Causality of relationships - Even though they
have been identified, it may not be clear how
they operate or interact.
3. Dangers of generalising - The competitive
advantage of a single organisation, by
definition, cannot be obtained by seeking
what is commonly accepted as bringing
success to all organisations in an industry.
4. Disregard of emergent perspectives -
Success may come from change in an industry,
rather than the identification of the current
key factors for success.
 Identifying key factors for success in an 2. If there are no substitutes for the supplies,
industry: they offer. This is especially the case if the
supplies are important for technical reasons –
1. Customers perhaps they form a crucial ingredient in a
 Price production process or the service they offer is
 Service vital to smooth production.
 Product or service reliability
 Quality 3. If suppliers’ prices form a large part of the
 Technical specifications total costs of the organisation. Any increase
 Branding in price would hit value added unless the
organisation was able to raise its own prices
2. Competition in compensation.
 Cost comparisons
 Price comparisons 4. If a supplier can potentially undertake the
 Quality issues value-added process of the organisation.
 Market dominance Occasionally a supplier will have power if it is
 Service able to integrate forward and undertake the
 Distributors value-added process undertaken by the
organisation; this could pose a real threat to
3. Corporation the survival of the organisation.
 Low-cost operations
 Economies of scale The bargaining power of buyers
 Labour costs
 Production output levels Porter used the term buyers to describe what might
 Quality operations also be called the customers of the organisation:
 Innovative ability 1. If buyers are concentrated and there are
 Labour/management relations few of them.
 Technologies and copyright 2. If the product from the organisation is
 Skills undifferentiated.
3. If backward integration is possible.
4. If the selling price from the organisation is
ANALYSING THE COMPETITIVE INDUSTRY unimportant to the total costs of the buyer.
ENVIRONMENT – THE CONTRIBUTION OF
PORTER
The threat of potential new entrants
 Porter’s Five Forces Model - identifies five Porter argued that there were seven 25 major
basic forces that can act on the organisation: sources of barriers to entry:
a. the bargaining power of suppliers
b. the bargaining power of buyers 1. Economies of scale. Unit costs of production
c. the threat of potential new entrants may be reduced as the absolute volume per
d. 4 the threat of substitutes period is increased.
e. the extent of competitive rivalry 2. Product differentiation. Branding, customer
knowledge, special levels of service and many
The bargaining power of suppliers other aspects may create barriers by forcing
Porter suggested that suppliers are more powerful new entrants to spend extra funds or simply
under the following conditions: take longer to become established in the
market.
1. If there are only a few suppliers. This means 3. Capital requirements. Entry into some
that it is difficult to switch from one to markets may involve major investment in
another if a supplier starts to exert its power. technology, plant, distribution, service outlets
and other areas.
 4. Switching costs. When a buyer is satisfied
with the existing product or service, it is
naturally difficult to switch that buyer to a
new entrant.
5. Access to distribution channels. It is not
enough to produce a quality product; it must
be distributed to the customer through
channels that may be controlled by
companies already in the market.
6. Cost disadvantages independent of scale.
Where an established company knows the
market well, has the confidence of major
buyers, has invested heavily in infrastructure
to service the market, and has specialist
expertise, it becomes a daunting task for new
entrants to gain a foothold in the market.
7. Government policy. For many years,
governments have enacted legislation to
protect companies and industries:
monopolies in telecommunications, health
authorities, utilities such as gas and electricity
are examples where entry has been difficult if
not impossible.
ANALYSING THE CO-OPERATIVE
ENVIRONMENT
The Four Links Model:
1. Government links and networks - concern
the relationships that many organisations
have with a country’s national parliament,
regional assemblies, and the associated
government administrations.
2. Informal co-operative links and networks -
are the occasions when organisations link
together for a mutual or common purpose
without a legally binding contractual
relationship.
3. Complementors - are those companies
whose products add more value to the
products of the base organisation than
they would derive from their own products
by themselves.
4. Formal co-operative links - can take many
business forms but are usually bound
together by some form of legal contract. They
diff er from the networks described above in
the higher degree of formality and
permanence of the link with the organisation.
ANALYSING ONE OR MORE IMMEDIATE
COMPETITORS IN DEPTH
 Sustainable competitive advantage - is an
advantage over competitors that cannot
easily be imitated.
 Competitor profiling - the basic analysis of a
leading competitor, covering its objectives,
resources, market strength and current
strategies.
The following aspects of the competitor’s
organisation need to be explored:
A. Objectives - If the competitor is seeking sales
growth or market share growth, this may
involve an aggressive stance in the
marketplace. If the company is seeking profit
growth, it may choose to achieve this by
investing in new plant or by some other
means that might take time to implement.
B. Resources - The scale and size of the
company’s resources are an important
indicator of its competitive threat – perhaps it
has superior or inferior technology, perhaps
over-manning at its plants, perhaps financial
problems.
C. Past record of performance - Although this
may be a poor guide to the future, it is direct
evidence that is publicly available through
financial statements and stockbrokers’
reports.
D. Current products and services - Many
companies buy competing products or
services for the sole purpose of tearing them
apart. They analyse customers, quality,
performance, after-sales service, promotional
material, and some will even interview
former employees – unethical perhaps, but it
does happen.
E. Links with other organisations - Joint
members, alliances and other forms of co-
operation may deliver significant competitive
advantage.
F. Present strategies - Attitudes to subjects
such as innovation, leading customers,
finance and investment, human resource
management, market share, cost reduction,
product range, pricing and branding all
deserve investigation.
 ANALYSING THE CUSTOMER AND MARKET
SEGMENTATION
There are three useful dimensions to an analysis of
the customer:
1. Identification of the customer and the market
2. market segmentation and its strategic
implications
3. market positioning usually within a segment
Identification of the customer and the market:
 Immediate customer base – for example,
those travelling on railways.
 Wider customer franchise – for example,
those travelling by public transport, including
railways, aircraft and buses.
 Market segmentation - is the identification
of specific groups (or segments) of
customers who respond to competitive
strategies differently from other groups.
- It employs a prescriptive approach as a
first step in order to explore the elements.
1. Identify market segment(s). Identification of
specialist needs of segments will lead to
customer profiles of those in the segments.
2. Evaluate segment(s). Some segments are
likely to be more attractive than others. They
need to be identified and targeted.
3. Position within market segment. Within the
segment, companies will then need to develop
a differential advantage over competitors.
 Competitive positioning - is the choice of
differential advantage possessed by an
organisation that allows it to compete and
survive in a marketplace or in a segment of
a marketplace.
The process of developing positioning of chocolate
count lines runs as follows:
1. Perceptual mapping
2. Positioning
3. Options development
4. Testing
A Five Forces Analysis - This will involve an
examination of buyers, suppliers, new entrants,
substitutes and the competition in the industry. The
aim is to analyse the balance of power between each
force and the organisation in the industry.
A Four Links Analysis - of those outside bodies
cooperating with the organisation. This will include a
study of the complementors, networks, and legal links
that the organisation has with its environment. The
purpose is to analyse the relative strengths of such
links and their ability to enhance the competitive
advantages of the organisation.
A study of selected direct competitors - An
environmental analysis needs to identify the
competitive advantages of rival companies. This is
undertaken using competitor profiling. It will seek to
identify the competitive advantages by focusing on
one or two rival companies in depth.

There are four important characteristics of any

segment if it is to be useful in strategic customer
analysis:
1. Distinguishable. Customers must be
distinguishable so that they can be isolated in
some way.
2. Relevant to purchasing. The distinguishing
criteria must relate to differences in market
demand. For example, they may pay higher
prices for higher quality.
3. Sufficiently large. If the segment is too small,
then it will not justify the resources needed to
reach it.
4. Reachable. It must be possible to direct the
strategy to that segment.