Topic 3.

Business Environment
 Learning Outcomes
i. The concept of business environment
ii. Difference between Internal and External business
environment
iii. Methods of conducting situational analysis i.e. SWOT
(SWOC), PEST(EL) in business environment
iv. Analyze competitive environment of a business i.e.
Michael porters five-forces model
v. Internal Environment i.e. Value chain (primary and
support activities), Resource-based view of the firm,
vi. Methods of valuating firm performance
 Strategic Management Vs Business
Environment
• Strategic Management; Is that set of
managerial decisions and actions that
determines the long-run performance of an
organization.
• It includes environmental scanning (internal and
external), strategy formulation (strategic or long-
range planning) strategy implementation, and
evaluation and control.
 STRATEGIC MANAGEMENT MODEL

Environmental Strategy Evaluation &

Scanning Strategy
Formulation Control

Mission
External: Opp.& Programs
Threats Objectives
Budgets &
Internal: strengh. Strategies
& Policies Action Performance
Weakness Plans

Feedback 4
 Environmental Scanning of Business
•Recognize aspects of business's environment that can influence its
long-term decisions
•Identify those aspects of an organization's environment that are
most strategically significant
•Understanding the environment is important that surrounds
business is important to the CEO because; an environment
provides resources that an organization needs in order to create
goods and services; and the environment is a source of
opportunities and threats for an organization.
•Similarly, it is accurate to say that no Enterprise is self sufficient,
rather must depend on the environment.
•Environmental scanning is the monitoring, evaluation, and
dissemination of information from the external and internal
environments to key people within the corporation.
 Environmental Scanning…
• Before strategy formulation the environment must be scanned.

Methods or Techniques of conducting Situational Analysis

• general environment includes; PESTL, SWOC, and Industrial analysis.
1. External Environment (PESTL Analysis)
• The external environment includes general forces that do not directly
touch on the short-run activities of the organization but can, and often
do, influence its long-term decisions.
• PESTEL analysis is one important tool that executives can rely on
to organize factors within the general environment and to identify
how these factors influence industries and the firms within them.
• An acronym “PESTEL” stands for Political, Economical, Social,
Technological and Legal factors
• Before strategy formulation the external environment must be
scanned
•Political forces; centers on the role of government in shaping the
business.
•Economic forces; centers on the economic conditions within which the
business operates. It regulate the exchange of materials, money,
energy, and information.
•Technological forces centers on improvements in products and
services that are provided by science. Relevant factors include, for
example, changes in the rate of new product development, increases
in automation, and advancements in service industry delivery, etc.
•Legal forces focuses on how the courts influence business activity.
Examples of important legal factors include employment laws, health
and safety regulations, discrimination laws, and antitrust laws, etc.,
factors that allocate power and provide constraining and protective
laws and regulations
•Socio-cultural forces that regulate the values, morals and customs of
society.
Economic Technological Political-legal Social-cultural
(Factors) (Factors) (Factors) (Factors)
GDP trends Govt. spending on Anti-trust Lifestyle changes
R&D regulations
Interest rates Industry spending Environment Career
in R&D protection laws expectations
Money supply Focus of tech. Tax laws Consumer
efforts activism
Inflation rates Patent protection Special incentives Growth rate of
population
Unemployment New products Foreign trade Age distribution of
levels regulations population
Wage/price Productivity Attitude on foreign Regional shifts in
control improvements companies Pop.
Deval/revalu. Telecommunication Laws on hiring Life expectancy
infrastructure and promotion
Energy Computer hacking Stability of Govt. Birth rates
availability &cost
Income Internet availability Outsourcing Pension plans
regulations
Currency rates Health care
Level of education
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Identifying External Strategic Factors: Scanning External
environment

Analysis of external environment

Interest Group Community Market Competitor

Supplier Government
Selection of Strategic
Factors:
Opp. &Threats

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• No firm can successfully monitor all
external factors
• Choices must be made regarding which
factors are important and which are not.
• What is important can be biased by:
personal values, functional experience,
and success of current strategies.
• Willingness to reject unfamiliar as well as
negative information is called Strategic
myopia. Appropriate information need to be
gathered to influence change in strategy.
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 2. SWOT Analysis
• The simplest way to undertake environmental
scanning is through SWOT.
• The central purpose of SWOT analysis is to identify
strategies that align an organization’s resources and
capabilities to the demand of the environment in which the
enterprise competes.
• It should be build on organizations strength in order to
exploit opportunities and counter threats and to correct
organizational weaknesses.
• SWOT is an acronym which stands for Strength,
Weaknesses, Opportunities, and Challenges.
• SWOT analysis should result in the identification of
an organization's distinctive competencies – the
particular capabilities and resources that a firm
possess and the superior way in which they are
used.
• The opportunities that are not currently used due to
resources constraints.
• In determining internal environment strength and
weaknesses the following has to be also assessed:
Corporate structure, corporate culture, corporate
resources: marketing, Finance, R&D, operations
and logistics, Human resources management,
Information Systems, etc.

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Strength (features);
i. Core competencies in key areas
ii. Adequate financial resources
iii. Well-thought out of buyers
iv. Proprietary technology
v. Better advertising campaign
vi. Cost advantages
vii. Product innovation skills
viii.An acknowledged market leader
Weaknesses (features)
i. No clear strategic direction
ii. Obsolete facilities
iii. Lack of management depth and talents
iv. Falling behind in R & D
v. Too narrow product line
vi. Weak distribution network
vii. Poor track records in implementing problems
viii.Below average marketing skills
Opportunities (features)
i. Ability to serve additional customer groups or to expand into
new market or segments
ii. Ways to expand product line to meet broader range of
customer needs
iii. Ability to transfer technological know-how to new product or
business
iv. Emerging new technologies
v. Ability to grow rapidly because of strong increase in market
demand
vi. Falling trade barriers in attractive foreign markets
Threats (features)
i. Entry of lower-cost foreign competitors
ii. Raising sales of substitute products
iii. Slower market growth
iv. Costly regulatory requirements
v. Changing buyer needs and tastes
vi. Adverse demographic changes
vii. Growing bargaining power of customers or
suppliers.
 SWOT FOR HAAGEN DAZ –KEY ISSUES OF THE
ORGANISATION AND ENVIRONMENT
Strength
Strong product identity Weaknesses
Limited market
Product quality Not seasonal
Exclusivity Poor profitability

Innovative outlets Interdepartmental tension

Luxury niche market Advertising

effectiveness
Opportunities
High competition Threats
Product
Rising
diversification Supply of raw materials
market
Dilution of
Life style changes brand
Low fat ice cream exclusivity

Health regulation Legal actions

Collaboration, joint venture

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 3. Industry Analysis
• An industry is a group of firms that produce a similar
product or service, such as soft drinks or financial
services, higher education.
• Michael Porter, contends that an organization is most
concerned with intensity of competition within
industry.
• The level of this intensity is determined by basic
competitive forces.
• The collective strength of these forces determines the
ultimate profit potential in the industry, where profit
potential is measured in terms of long-run return on
invested capital.

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FORCES DRIVING INDUSTRY
COMPETITION Potential
Entrants
Threat of new entrants

Relative power of
Unions
Industry
Other stakeholders Competitors
Bargaining
Buyers
Power of
Buyers
Suppliers Rivalry Among
existing firms
Bargaining power
of Threat of Substitute
suppliers Product or service

Substitutes
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• Porter mentioned five forces. Other stakeholders as a
force is added by Wheelen &Hunger 2008.
• When the presence of a force is high is regarded as a
threat because it is likely to reduce profits.
• A low force is an opportunity because it can allow
greater profit.
• Over the short run the forces can be constraining but
through choice of strategy forces strength can be
changed to advantage.
• An industry can be analyzed by rating each force as
either high, medium or low.
• The explanation on each competitive forces is as
discussed;

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 3. Industry Competitors
i. Threats of potential new entrants.
• Potential new entrants to an industry are firms that
currently do not compete in the industry but may in the
future.
• New entrants tend to reduce the profit potential of an
industry by increasing its competitiveness.
• It includes factors including; capital requirements,
product differentiation, switching costs, access to
distribution channel, brand identity, etc.
ii. Bargaining Power of Buyers
• The relative bargaining power between an industry’s
competitors and its buyers help shape the profit potential of
the industry.
• If buyers have greater leverage over the competitors than
the competitors have over the buyers, then the competitors
may be forced to lower their prices over time.
• This weakens competitors’ profit margins and makes them
less likely to be prosperous.
• Buyer’s power is high when; concentration of Buyers, there’s
alternative sources of supply, the cost of switching to
another supplier is too low, etc.
iii. Bargaining power of Suppliers
• The relative bargaining power between an industry’s
competitors and its suppliers helps shape the profit potential
of the industry.
• If suppliers have greater leverage over the competitors than
the competitors have over the suppliers, then suppliers can
increase their prices over time.
• This cuts into competitors’ profit margins and makes them
less likely to be prosperous.
• Supplier power is likely to be high when; there are few
suppliers, the brand of the supplier is powerful, the cost of
switching to another suppliers is high, etc.
iv. Threats of Substitute Products
Substitute products are the products which serves similar
purpose.
• Threats of substitute product is important because
they can de-stabilize the current industry structure by
offering customers better valued or more useful
product.
• Example; product-for-product distribution, substitution
of needs, etc.
• Relative power of Trade Union
v. Rivalry among Competing firms;
• The intensity of competition depends on number of
factors whether or not strong industry leader exists, the
number of competitors, the presence of exit barriers,
the importance of fixed costs in determining capacity,
and the growth rate of an industry.
• Rivalry is more fierce and intense when; no industry
leader, large number of competitors, high fixed costs,
high exist barriers, slow rate of growth, little
opportunity to practice product differentiation, and like.
• It’s therefore important to note that each industry will have its
own unique interrelationship of five forces and that the relative
bargaining power of each of five forces together determines the
overall attractiveness or profitability in the industry.
Internal Environmental Analysis
(The Value Chain)
• Internal organization can affect the cost and even the feasibility
of some strategies. There must be a fit between a strategy and
the elements of the organization.
• If the strategy does not fit well, it might be expensive or even
expensive to make it work.
• The value chain; refers to the framework to differentiate the
value-adding activities in an organization.
• Value chain chart is the path by which products and services
are created and eventually sold to customers.
• Is reflects the fact that as each step of this path is completed,
the product becomes more valuable than it was at the
previous step.
• It includes both primary activities and secondary activities.
• Primary activities; are actions that are directly involved in
creating and distributing goods or services.
• Secondary activities; are actions which are not directly
involved in the evolution of a product but instead provide
important underlying support for primary activities.
 The value chain can best be described with the use of
below diagram as follows;

support Firm Infrastructure

Activities Human Resources Management

Technology Development
Procurement
Margins
Inbound Operations Outbound Marketing Services
Logistics Logistic and Sales

Primary Activities
• Value Chain comprises of primary and support activities.
• Support activities includes;
a. frim infrastructures; a broad term for activities such as
finance, accounting, legal, government relations.
b. Human Resources Management; concerns with hiring,
training, compensation, development and relation with
the firm’s people.
c. Technology and Development; focused on improving
processes in primary values-adding activities.
d. Procurement; the firm’s purchasing of raw materials and supplies for its
activities.

Primary activities includes;

a. Inbound logistics; deals with the delivery, movement and handling raw
materials from suppliers.
b. Operations; transformational activities which creates end product from
raw materials, inputs,
c. outbound activities; refers to processes which transfer product to
distribution channels.
d. Marketing and sales; includes such activities as advertising, promotion,
product mix, pricing, etc.
e. Services; customer service issues include warranty, repair, installation,
customer supports, product adjustment and modification.
• Margin; defines the differences between the cost of
operations, and the income from sales.
Organization’s Performance;
• Organizational performance; refers to how well an
organization is doing to fulfill its vision, mission and goals.
• Evaluating organizational performance is a vital aspect
strategic management.
• Executives or CEO’s must know how well their
organizations are performing to figure out what strategic
changes, if any to undertake.
• Performance is a very complex concept, however more
attention is required to be considered by firms on how to
asses.
• In performance evaluation, two aspects are considered. These
includes; performance measures and performance referents.
• Performance measures, is the metric along which the firm can
gauged. Measures such as; profits, stock price, and sales in an
attempt to understand how well the organization is doing on
the market.
• Performance referents; are also needed to assess whether an
organization is doing well. It is a benchmark used to make
sense of an organization’s standing along a performance
measures.
 Methods of Evaluating Organizational Performance
i. The balanced Scorecard; the idea behind the framework is to provide a
balance between financial measures and other measures that are important
for understanding organizational activities that lead to sustained, long-term
performance.
• It recommends that managers gain an overview of the organization’s
performance by tracking a small number of key measures that collectively
reflect four dimensions, and their KPI’s;
• Financial (ROI, expenses, Revenue), customer (satisfaction & retention),
internal processes (Inventory, quality control), and learning and growth
(employee skills, employee training, retention, and satisfaction).
• It looks as financial and non financial performance measures to gauge
business performance for long-term success of any business.
• It aligns business activities to the vision of the business, and monitor business
performance against strategic goals.
• It starts at the highest level of business with overall mission and vision of the
business, and focuses on the key performance indicators (KPIs)
ii. Financial Measures of Performance.
• This relates to organizational effectiveness and profits.
For example; financial ratios such as return on assets,
return on equity, and Return on Investment (ROI).
• This measure is commonly applied and emphasized
within an organization’s annual report to shareholders.
• To be context, such measures should be objective and
be coupled with meaningful referents, such as the firm’s
past performance.
iii. Customer Measures. This measure of
performance relate to customer attraction,
satisfaction and retention.
• This measure provide insight to the key
question “How do customers see us?”
example might include the number of new
customers and the percentage of repeated
customers.
iv. Internal Business Process Measures;
This relates to organizational efficiency. The
measure helps to answer the key question “what
must we excel at?
• Example the time it takes to manufacture the
organization’s good or deliver a service.
• The time it takes to create a new product and
bring it to market is another example of this type
of measures.
V. Learning and Growth Measure;
The evaluation focus on innovation and proceed with
an understanding that strategies change over time.
• Thus, developing new ways to add value will be
needed as the organization continues to adapt to
an evolving environment.
• An example is the number of a learning and
growth measures is the number of new skills
learned by employees every year.
 Individual Assignment
• Use all the strategic management tools you
have learned in class to assess the efficacy of
the different elements of a strategic plan of
your choice. The answer should not be less
than five pages. Make sure the work you
submit is your own.
• Deadline of submission before 7th January
2020.
 Group Assignment
The practice of Strategic Management has in
some cases not been fruitful in most corporations
and other emerging businesses due to its
uniqueness in applicability and its related
strategic aspects.
As a business analyst, discuss at least seven
challenges of Strategic Management and six ways
to address the problem.
• Submission Deadline-11th