Chapter # 3

Environmental
Analysis
 References
 Strategic Management Concepts & Cases 10th edition Fred R. David
 Wikipedia.com
 Internet

Resource Person: Furqan-ul-haq Siddiqui

Strategy Formulation

Vision & Mission

Opportunities & Threats

Strengths & Weaknesses

Long-Term Objectives

Alternative Strategies

Strategy Selection
 External Assessment
External Strategic-Management Audit
• Industry analysis
• Environmental scanning
External audit:
Focuses on identifying & evaluating events beyond
the Immediate control of the firm
External audit focuses on:
on
 Increased competition
 Legislation
 Demographics (e.g., aging population)
 Information technology
3
External audit reveals:
reveals
• Key opportunities
• Key threats
Managers then formulate strategies:
• Take advantage of opportunities
• Avoid/reduce impact of threats
External Audit
Aimed at identifying key variables that offer
actionable responses
4
 Key External Forces
Five (5) broad categories:
1. Economic forces
2. Social, cultural, demographic & natural
environmental forces
3. Political, governmental, & legal forces
4. Technological forces
5. Competitive forces
5
 Competitors
Suppliers
Distributors
Key Creditors Opportunities
External Customers &
Forces Employees Threats
Communities
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
6
1. External environment: everything outside
an organization’s boundaries that might
affect it. Its mostly uncontrollable or may be
control up to a limit.
I. General environment of organization is a set of
broad dimensions & forces in its surroundings—
economic, legal, political, socio-cultural,
international, and technical forces.
ii. Task environment is composed of specific
groups and organizations that affect the firm.
2. Internal environment: the conditions and
forces within an organization.
 Economic Environment
 The overall strength & vitality of the
economic system in which organization
operates. Factors that affect buying power
and spending patterns of organization &
its customers/suppliers.
 Trends of interest:
 Inflation
 Interest Rates (12.5 %)
 Employment ratios (estimated: 15.20 % in 2010)
 Per Capital Income
 Purchasing power of customers
 Stage of Business/Economic Cycle (prosperity,
recession, depression and recovery)
List of countries by GDP (PPP) per capita
International Monetary Fund (2009) Report
1. Qatar US $ 83,841
2. Luxembourg 78,395  
3. Norway 52,561  
4. Singapore 50,523
5. Brunei 49,110
6. United States 46,381  
7. Switzerland 43,007
8. Hong Kong 42,748
9. Netherlands 39,938
10. Ireland 39,468
11. Australia 38,911
38. Saudi Arabia 23,221
128.  India 2,941
132.  Pakistan 2,661
169.  Afghanistan 935
 Technological Environment: GE

 The methods available for converting/processing

resources into products or services. Changes in
technology may make business obsolete
 New technology creates new methods and
opportunities
 Replaces existing products/services & methods
 Rates of obsolescence
 Although technology is applied internally but it
comes from general environment.
 Cultural environment:
Set of society's basic values,
perceptions, norms,
regulations, preferences,
traditions etc.
 Core beliefs passed on through
family, reinforced by institutions
 Changing cultural standards
 What is the dominant religion?
 Impact of languages/tribes/
personal freedom?
 What are the roles of men and
women within society?
 Political environment
• The Government regulation of business and
the relationship between business &
government.
• Social legislation & regulation
• Taxation policy
• Employment laws
• Interest rates
 Laws and Regulations
• for safety
• for consumer protection
• to protect special interests
 How stable is the political environment?
 What is the government's policy about
business?
 What is the government's policy on the
economy?
•Demographic
Environment
The study of human population
in terms of size, density,
location, age, gender, race,
occupation, education etc.
 Changing age structures
 Changing households
 Literacy Rate
 Geographic shifts/Immigrants
 Male/female/infants
 Increased diversity
Natural Environment
 Natural resources that are
needed as inputs. It
encompasses all living and
non-living things occurring
naturally on Earth or some
region thereof.
 Growing shortages of raw
materials
 Increased energy costs
 Changing role of governments
 Anti-pollution pressures
 International Dimension/ Globalization
 The extent to which an
organization is involved in
or affected by business with
other countries.
 The internationalization of
products and services of a
firm.
ii. Task Environment- is composed of specific
groups and organizations that affect the firm.
The main actors are competitors, customers,
suppliers, strategic partners, regulators.
 a. Suppliers
 Firms and individuals that provide the resources needed
by the company and its competitors to produce goods and
services. MMs must watch supply availability, shortage
or delays, labor strikes, price trends etc.
b. Marketing Intermediaries
 Firms that help the company to promote, sell and
distribute its goods to final buyer; they include
 Resellers,
 Physical distribution firms,
 Marketing-service agencies
 Financial intermediaries.
 c. Customers/Markets
 The company must study its customer
markets closely, keep up to date with
changing customer requirements and satisfy
their needs/wants according to their
purchasing power.

 Consumer Market, Business Market,

Government, International, International Market
etc.
 d. Competitors
 To be successful, a company must provide greater
customer value and satisfaction than its
competitors. They must also gain strategic
advantage by positioning their offerings strongly
against competitors’ offerings in the minds of
consumers. They must strive to anticipate
competitor activity and strategy.
 Brand Competition-
 Industry Competition
 Form Competition/ Substitute Competition
 Generic Competition
 e. Regulator
A unit that has the potential to
control, legislate, or influence an
organization’s policies and
practices.

f. Strategic partner
Two or more separate companies
combine efforts together to
develop and operate a specific
business.
 The Internal Environment
The Company: In designing
policies, a marketing manager
must take other company
groups, such as top
management, finance,
research and development
(R&D), purchasing,
manufacturing and accounting,
into consideration.
  PSO is the market leader in
Pakistan’s energy sector. The
company has the largest network of
retail outlets to serve the automotive
sector and is the major fuel supplier
to aviation, railways, power projects,
armed forces and agriculture sector.
 The company’s current market share of 82.3% in the black
oil market and 59.4% share in the white oil market.
 The company is the only public sector entity in Pakistan that
has been competing effectively with three foreign
multinationals, Shell, Caltex and Total.
 The Pakistani Government holds approximately 54% stake
in Pakistan State Oil.
 The company has retail coverage of over 3,800 outlets,
representing 80% participation in total industry network.
 How to Evaluate External Environment?

1. The External Factor Evaluation (EFE) matrix-

It allows strategies to summarize and evaluate
economic, social, cultural, demographic,
environmental, political, legal, technological, and
competitive information.
 How to develop EFE matrix?
i. List factors: The first step is to gather a list of external
factors. Divide factors into two groups: opportunities and
threats.
ii. Assign weights: Assign a weight to each factor. The
value of each weight should be between 0 and 1 (or
alternatively between 0 and 100 if you use the 0 to 100
scale). Zero means the factor is not important. One or
hundred means that the factor is the most influential and
critical one.  The total value of all weights together
should equal 1 or 100.
iii. Rate factors: Assign a rating to each factor. Rating
should be between 1 and 4. Rating indicates how effective
the firm’s current strategies respond to the factor.
 1 = the response is poor.
2 = the response is below average.
3 = above average.
4 = superior.
Weights are industry-specific. Ratings are company-
specific.
 Multiply weights by ratings: Multiply each factor
weight with its rating. This will calculate the weighted
score for each factor.
 Total all weighted scores: Add all weighted scores for
each factor. This will calculate the total weighted score
for the company.
 Highest possible weighted score for the organization
is 4.0; the lowest, 1.0. Average = 2.5

 Total weighted score of 4.0 =

Organization response is outstanding to threats &
weaknesses.

 Total weighted score of 1.0 =

Firm’s strategies not capitalizing on opportunities or
avoiding threats
2. Competitive Profile Matrix (CPM)- It compares
the company with direct competitors and check
whether company is doing well as compared to
competitors or not.
 Competitive profile matrix is essential tool used in
strategic management process, it contain all the
important critical success factors of industry.
Success factor can vary form industry to industry,
every industry consider different success factor, all
the companies in CPM are measured on same
scale by considering the same success factor.
3. Competitive Intelligence (CI) Program: A
systematic, legal and ethical program for
gathering, analyzing, and managing external
information that can affect your company's plans,
decisions, and operations.
 The competitive intelligence information obtained
using CIP can be used in programs that
supplement planning, mergers and acquisitions,
restructuring, marketing, pricing, advertising, and
R&D activities.
 Cl in business means only gathering information
that is publicly available.
 Business Espionage…?
4. Porter's Five Forces Analysis is an outside-in
business strategy tool that is used to make an
analysis of the attractiveness (value...) of an
industry structure developed by Michael E. Porter
of Harvard Business School in 1979.
i. Entry of competitors- how easy or difficult is it for
new entrants to start to compete, which barriers do
exist.
ii. Threat of substitutes- how easy can our product or
service be substituted, especially cheaper.
iii. Bargaining power of buyers- how strong is the
position of buyers, can they work together to order
large volumes.
iv. Bargaining power of suppliers- how strong is the
position of sellers, are there many or only few
potential suppliers, is there a monopoly.
v. Rivalry among the existing players- is there a
strong competition between the existing players, is
one player very dominant or all equal in
strength/size.
 Sixth force in the model is termed as the relative power
of other stakeholders including: government, society,
stockholders, complementors, employees etc.
I/O Model of Superior Returns
 The Industrial Organization
Model suggests that above-
average returns for any firm are
largely determined by
characteristics outside the firm.

 The I/O model largely focuses

on industry structure or
attractiveness of the external
environment rather than internal
characteristics of the firm.
 I/O Assumptions

 Environment determines strategy

 Firms possess similar resources and thus pursue similar
strategies.
 Resources are mobile
 Decision-makers – rational & act in the best interests of the
firm.
 Internal Assessment
Internal Audit:
 An independent & systematic methodology in
organization to examine and evaluate business
processes, procedures and activities with the goal of
highlighting organizational problems and
recommending solutions.

 Focuses on developing objectives and strategies to

capitalize upon internal strengths and overcome
weaknesses
 Internal Audit
Parallels process of external audit
•Information from:
•Management
•Marketing
•Finance/accounting
•Production/operations
•Research & Development
•Management information Systems

Internal Audit
Involvement in performing an internal strategic-management audit
provides vehicle for understanding nature and effect of decisions in other
functional business areas of the firm
 A capability is usually considered a “bundle” of resources
to perform a business process (which is composed of
individual activities)
 A competency is an internal capability that a company
performs better than other internal capabilities. (The
firm’s most important capabilities are called
competencies.)
 A core competency is a well-performed internal
capability that is central, to a company’s strategy,
competitiveness, and profitability.
 A distinctive competence is a competitively valuable
capability that a company performs better than its rivals.
 Distinctive competency is the
set of strengths, characteristics
and qualities including skills,
technologies, or resources that
distinguish it from
competitors. When the
strength provides superior and
unique customer value and is
difficult to imitate then the
distinctive competence creates
a sustainable competitive
advantage.
 ResourcesCapabilities CompetenciesCompetitive Advantage
 A competitive advantage is simply an advantage you have over your
competitors.
 3M Company, officially known as the
Minnesota Mining and Manufacturing
Company is an American multinational
conglomerate corporation.
 With over 76,000 employees (with 6000
Scientists) they produce over 55,000
products, including: adhesives, abrasives,
laminates, passive fire protection, dental
products, electrical materials, electronic
circuits and optical films.
films
 3M has operations in more than 60 countries
– 29 international presence with
manufacturing operations, and 35 with
laboratories.
 Company allows all employees to spend
15% on working projects of their own
interest.
 Resource Based View (RBV)
 The Resource-Based view (RBV) is a business
management tool used to determine the strategic resources
available to a firm. It holds that internal resources are
more important than external factors in order to get
competitive advantage.
 The key points of the theory are:
• Identify the firm’s potential key resources.
• Evaluate whether these resources fulfill the (VRIN)
criteria:
1. Physical resources
•3 Areas of firm’s Internal Resources
2. Human resources
3. Organizational resources
•RBV say that a firm  Valuable- when they enable a firm to
should have VRIN to conceive or implement strategies that
improve its efficiency or effectiveness
get competitive  Rare- valuable firm resources possessed
advantage by large numbers of competing firms
cannot be sources of either a competitive
advantage or a sustainable competitive
advantage.
 Imperfectly Imitable- This advantage
could be sustainable if competitors are not
able to duplicate this strategic asset
perfectly
 Non-Substitutable Even if a resource is
rare, potentially value-creating and
imperfectly imitable, an equally important
aspect is lack of substitutability

 These characteristics of resource

enable the firm to achieve sustainable
competitive advantage (Empirical
Indicators)
 Economic Performance
Exploited by
Costly to
the Competitive Economic
Valuable Imitate?
Rare? Organization? Implications Performance
?
Competitive
No -- -- -- Below Normal
Disadvantage
Competitive
Yes No -- -- Normal
Parity
Temporary
Yes Yes No -- Competitive Above Normal
Advantage
Sustained
Yes Yes Yes Yes Competitive Above Normal
Advantage
What is Sustainable Competitive Advantage?
Sustainable competitive advantage is the focal point of your
corporate strategy.  It allows the maintenance and improvement of your
enterprise's competitive position in the market.
It is an advantage that enables business to survive against its
competition over a long period of time.
 Pakistan Railways (PR) is a national state-owned rail
transport service. It is administered by the federal
government under the Ministry of Railways. PR provides an
important mode of transportation throughout Pakistan. It is
commonly referred to as the "life line of the country
 Due to massive corruption and mismanagement PR is facing
a financial deficit of around Rs 40 billion and has so far
closed down thirteen passenger trains to address fiscal
constraints,
 Pakistan Railways carries 65 million passengers annually
 Pakistan International Airlines Corporation is the flag
carrier airline of Pakistan. The airline offers services in 24
domestic destinations and 39 international destinations in
25 countries across Asia, Europe and North America.
 Fleet size 39
 460 Employees
per vehicle/craft.
 Internal Assessment
Integrating Strategy and Culture

 Organizational Culture –“The specific collection

of values and norms that are shared by people and
groups in an organization and that control the way
they interact with each other and with
stakeholders outside the organization & to cope
with its problem of external adaptation and
internal integration…is considered valid and
taught to new members
 Organizational Culture

 May represent a strength or weakness of firm

 Miss changes in external environment because

they are blinded by strongly held beliefs
 When a culture has been effective in the past,
natural tendency to stick with it in future, even
during times of major strategic change
 Management Function
(Internal Assessment)
Stage of Strategic
Function Management Process
When Most Important
Planning
Planning Strategy
Strategy Formulation
Formulation

Organizing
Organizing Strategy
Strategy Implementation
Implementation

Motivating
Motivating Strategy
Strategy Implementation
Implementation

Staffing
Staffing Strategy
Strategy Implementation
Implementation

Controlling
Controlling Strategy
Strategy Evaluation
Evaluation
 Internal Assessment

Management

Forecasting
Forecasting

Establishing
Establishing Objectives
Objectives
Planning
Planning Devising
Devising Strategies
Strategies

Developing
Developing Policies
Policies

Setting
Setting Goals
Goals
 Internal Assessment
Organizational
Organizational Structure
Structure&&
Management Design
Design::
• • Designing
DesigningJobs
Jobs(Job
(JobSpecialization)
Specialization)
• • Departmentalization
Departmentalization(Grouping
(GroupingJobs)
Jobs)
• • Establishing
Establishingreporting
reportingrelationships
relationships
(Chain
(Chainof
ofcommand
command&&span
spanof of
Organizing Control)
Control)
Organizing
• • Authority
AuthorityDistribution
Distribution(Delegation
(Delegation++
Centralization
Centralization&&Decentralization)
Decentralization)
• • Coordinating
CoordinatingActivities
Activities
• • Differentiating
Differentiatingbetween
betweenLine
Line&&Staff
Staff
positions
positions
 Internal Assessment

Management Job
Job enrichment
enrichment
Job
Job satisfaction
satisfaction
Needs
Needs fulfillment
fulfillment
Organizational
Organizational change
change
Motivating
Morale
Morale
Motivating
Rewards
Rewards
Cohesiveness
Cohesiveness andand work
work
teams
teams
 Internal Assessment
Staffing
Staffing
Management Human
Human Resource
Resource
Development
Development
Compensation
Compensation
Safety
Safety &
& Health
Health
Staffing
Staffing Employee
Employee Relations
Relations
(HRM)
(HRM)

Affirmative
Affirmative action
action
EEO
EEO
 Internal Assessment

Management Quality
Quality control
control
Financial
Financial control
control
Sales
Sales control
control
Inventory
Inventory control
control
Expense
Expense control
control
Controlling Analysis
Analysis of
of variances
variances
Controlling
Rewards
Rewards
 Internal Assessment
Management Audit Checklist

1. Does the firm use strategic-management

concepts?
2. Are company objectives and goals
measurable and well communicated?
3. Do managers at all hierarchical levels plan
effectively?
4. Do managers delegate authority well?
5. Is the organization’s structure appropriate?
 Internal Assessment
Management Audit Checklist

6. Are job descriptions and job specifications

clear?
7. Is employee morale high?
8. Are employee turnover and absenteeism low?
9. Are organizational reward and control
mechanisms effective?
 Research & Development
Research & Development Functions
 Development of new products before competitors (First-mover
advantage or FMA/ pioneer advantage)

 Improving product quality

 Improving manufacturing processes to reduce costs
Research & Development Audit
•Are the R&D facilities adequate?
•If R&D is outsourced, is it cost effective?
•Are the R&D personnel well qualified?
•Are R&D resources allocated effectively? Are MIS and computer systems
adequate?
•Is communication between R&D & other organizational units effective?
•Are present products technologically competitive?
 Research & Development

1. Financing as many projects

as possible
R&D Budgets
2. Budgeting relative to
competitors
3. How many successful new
products are needed
 Marketing
•Customer Needs/Wants for Products
1. Defining
2. Anticipating
3. Creating
4. Fulfilling

•Marketing Functions
1. Customer analysis
2. Selling products/services
3. Product & service planning
4. Pricing
5. Distribution
6. Marketing research
7. Opportunity analysis
 Marketing
Opportunity Analysis
1. Are markets segmented effectively?
2. Is the organization positioned well among competitors?
3. Has the firm’s market share been increasing?
4. Are the distribution channels reliable & cost effective?
5. Is the sales force effective?
6. Does the firm conduct market research?
7. Are product quality & customer service good?
8. Are the firm’s products/services priced appropriately?
9. Does the firm have effective promotion, advertising, &
publicity strategies?
 Finance/Accounting

 Considered single best measure of a firm’s

competitive position and over all attractiveness to
investors.

•Finance/Accounting Functions
1. Investment decision (Capital budgeting)
2. Financing decision
3. Dividend decision
 Basic Financial Ratios
Firm’s ability to meet its
1. Liquidity Ratios
short-term obligations
i. current ratio = current assets / current liabilities
Current assets includes cash , marketable securities,
inventory, and prepaid expenses. Current liabilities
includes accounts payable ( 1 year or less) and
salaries payable etc.
ii. Quick ratio = (Current Assets - Inventory) / Current
Liabilities
The quick ratio is similar to the current ratio but
eliminates the inventory figure in the current assets
section of the balance sheet .
 Financial leverage ratios provide an indication of the
2.Leverage Ratios long-term solvency of the firm. Unlike liquidity ratios
that are concerned with short-term assets and liabilities

i. Debt Ratio = Total Liabilities / Total Assets

Percentage of total funds that are made by liabilities
ii. Debt to Equity = Total Debt / Total Equity
This ratio indicates the ratio of debt on a firms balance sheet to
the amount of funds provided by owners
iii. Times Interest Earned = EBIT / Total Interest
The times interest earned ratio indicates how well the firm's
earnings can cover the interest payments on its debt.
iv. Long Term Debt to Equity = Long Term Debt / Total Equity
This ratio indicates the ratio of debt on a firms balance sheet to
the amount of funds provided by owners.
 3.Activity Ratios Effective use of firm’s resources

i. Inventory-turnover = Sales/Inventory of finish

goods
ii. Fixed assets turnover = Sales/ Fixed Assets
iii. Total assets turnover = Sales/Total Assets
iv. Accounts receivable turnover = Annual Credit
sale/Accounts Receivable
v. Average collection period = Accounts
receivables/Total Credit Sales/365 days
 Basic Financial Ratios
4.Effectiveness shown by returns on sales & investment
Ratios
• Gross profit margin
• Operating profit margin(EBIT/sales)
• Net profit margin
4.Profitability Ratios • Return on total assets (ROA)
• Return on stockholders equity (ROE)
• Earnings per share
• Price-earnings ratio

Firm’s ability to maintain economic

position
5.Growth Ratios Ratios
Sales
Net income
Earnings per share
Dividends per share
Finance/Accounting Audit
•Where
•Where is is the
the firm
firm strong/weak
strong/weak indicated
indicated by
by
financial
financial ratio
ratio analysis?
analysis?
•Can
•Can the
the firm
firm raise
raise short-term
short-term capital
capital as
as
needed?
needed?
•Can
•Can the
the firm
firm raise
raise long-term
long-term capital
capital as
as needed
needed
through
through debt
debt and/or
and/or equity?
equity?
•Does
•Does the
the firm
firm have
have sufficient
sufficient working
working capital?
capital?
•Are
•Are capital
capital budgeting
budgeting procedures
procedures effective?
effective?
•Are
•Are dividend
dividend payout
payout policies
policies reasonable?
reasonable?
•Are
•Are the
the firm’s
firm’s financial
financial managers
managers experienced
experienced
&& well
well trained?
trained?
 Production/Operations
Production/Operations Functions

 Process
 Capacity
 Inventory
 Workforce
 Quality
Production/Operations Audit
•Are
•Are suppliers
suppliers ofof materials,
materials, parts,
parts, etc.
etc. reliable
reliable and
and
reasonable?
reasonable?
•Are
•Are facilities,
facilities, equipment
equipment & & machinery
machinery in in good
good
condition?
condition?
•Are
•Are inventory-control
inventory-control policies
policies and
and procedures
procedures
effective?
effective?
•Are
•Are quality-control
quality-control policies
policies && procedures
procedures effective?
effective?
•Are
•Are facilities,
facilities, resources,
resources, and
and markets
markets strategically
strategically
located?
located?
•Does
•Does the
the firm
firm have
have technological
technological competencies?
competencies?
 Management Information Systems
Purpose
 Improve performance of an enterprise by
improving the quality of managerial decisions.
 Management Information Systems
• Information Systems
• CIO/CTO
• Security Do managers use the information system
• Do managers use the information system
User-friendly to
tomake
makedecisions?
decisions?
• E-commerce Are data of MIS updated regularly?
Are data of MIS updated regularly?
Are strategists of the firm familiar with
Are strategists of the firm familiar with
the
theinformation
informationsystems
systemsofofrival
rivalfirms?
firms?
Are data protected?
Are data protected?
Do all functional areas of firm
Do all functional areas of firm
contribute
contributeinput
inputin
inMIS
MIS
 Internal Analysis (IFE)
Five Step Process:
1. List key internal factors (10-20)
 Strengths & Weaknesses
2. Assign weight to each (0 to 1.0)
 Sum of all weights = 1.0
3. Assign 1-4 rating to each factor
 Firm’s current strategies response to the factor
4. Multiply each factor’s weight by its rating
 Produces a weighted score
5. Sum the weighted scores for each
 Determines the total weighted score for the organization.
 The Value Chain
 To analyze the specific activities through which firms can create a
competitive advantage, it is useful to model the firm as a chain of
value-creating activities. Michael Porter identified a set of interrelated
generic activities common to a wide range of firms.
 Inbound logistics include the receiving, warehousing, and inventory
control of input materials.
 Operations are the value-creating activities that transform the inputs
into the final product.
 Outbound logistics are the activities required to get the finished
product to the customer, including warehousing, order fulfillment, etc.
 Marketing & Sales are those activities associated with getting buyers
to purchase the product, including channel selection, advertising,
pricing, etc.
 Service activities are those that maintain and enhance the product's
value including customer support, repair services, etc.