TOPIC 3

ENVIRONMENTAL
ANALYSIS.

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3.1 THE BUSINESS ENVIRONMENT.
Everything over which a firm has no control as an organization.
As they are external, the firm cannot control them, but they may however have a
significance impact on the success of its strategy.
When analysing the environment, a distinction tends to be done between two
levels:
• The general environment: Refers to the external medium surrounding the firm from
an overall perspective; the socio-economic system within which it operates.
• The competitive environment: Refers to that part of the environment that is closest to
its everyday operations, the industry to which the firm belongs.

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3.1 THE BUSINESS ENVIRONMENT.
The great challenge the environment poses for management stem from the
uncertainty surroundings.
It may be said the more dynamic, complex, diverse and hostile an environment is,
the greater the uncertainty the firm has to face.
Those factors that favour its operations are known as opportunities.
Those ones that constitute a hindrance are referred as threats.

WHAT IS INSIDE EACH ENVIRONMENT?

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3.1 THE BUSINESS ENVIRONMENT.

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3.2 ANALYSIS OF THE GENERAL
ENVIRONMENT.
The purpose of analysing the general environment is to identify different variables
that affect the firm´s operations from a dual perspective:
1. Those related to the general political, economic and social system
surrounding the firm.
• Infrastructures: transport, telecommunications, education.
• Market´s regulatory framework: Goods and services, labour market.
• Public policies: Fiscal and monetary policy, welfare costs.
• Business culture.
• Conduct of social partners (labour organizations)

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3.2 ANALYSIS OF THE GENERAL
ENVIRONMENT.
2. Those linked to its localisation in a specific country, region or geographical
area.
The Porter Diamond suggests each country or nations has its own
indiosyncrasies for explaining why some are more competitive than other and
why certain industries within each country are more competitive that others.
4 factors that shapes the country´s competitiveness:
1. Provision of relevant and specialised production factors.
2. Conditions of domestisc demand.
3. Highly competitive similar and auxiliary sectors.
4. The strategy, structure and rivalry of existing firms.

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3.2 ANALYSIS OF THE GENERAL
ENVIRONMENT.
The environment´s strategic profile is used to conduct a diagnosis of the general
setting.
This profile is created in two stages:
• The first one involves drafting a list of what we have referred as key factors in the
environment, which are the significant variables that should be analysed.
• The second step is designed to assess the impact of those variables have on the firm
´s business in order to single out the main opportunities and threats.
PESTEL.

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3.2 ANALYSIS OF THE GENERAL
ENVIRONMENT.
The POLITICAL dimension: Related to government stability and the general policies
public administrations follow (fiscal policy, social welfare)
The ECONOMIC dimension: Affects the nature and direction of the economic system in
which the firm operates and is given by its main economic indicators.
The SOCIO-CULTURAL dimension: Includes beliefs, values, attitudes and life-styles of
the people who make up society and the cultural, ecological, demographic, religious,
educational and ethnic conditions of the social system as a whole.

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3.2 ANALYSIS OF THE GENERAL
ENVIRONMENT.
The TECHNOLOGICAL dimension: Includes the scientific and technological framework
that defines the state of a system.
The ECOLOGICAL dimension: Refers to the administrative authorities policy of
preserving the natural environment.
The LEGAL dimension: Covers the administrative, legal and regulatory factors within
which a firm should operate.

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3.2 ANALYSIS OF THE GENERAL
ENVIRONMENT.
Each one of these dimensions highlight the most important aspects that need to
be considered for this analysis.
The environment´s strategic profile is a simple buy very used instrument to
conduct this analysis. It is created in two stages:
• The first one involves grafting a list of what we have referred to here as key factors
in the environment.
• The second stage involves rating the behaviour of each of the key factors on a Likert
scale from 1 to 5.
This analysis is subjective, done by the firm´s management.
It reveals the way they perceive the different variables in the environment. And it
helps to identify opportunities and threats.

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3.2 ANALYSIS OF THE GENERAL
ENVIRONMENT.
It is very simple and easy-to-interpret tool.
Subjective and qualitative tool.
Some observations about it:
• Similar characteristics of the general environment may have different effects in
different industries.
• The impact of the general environment has varies significantly even among firms in
the same industry.
• Not all the variables of the general environment have a significant impact on a
specific industry or firm.

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3.2 ANALYSIS OF THE GENERAL
ENVIRONMENT.

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3.2 ANALYSIS OF THE GENERAL
ENVIRONMENT.
INDUSTRIAL DISTRICTS (Clusters): Numerous group of similar firms and
institutions connected by the same economic activity and located in a specific
geographic environment.
Types of agents:
• Businesses dedicated to the same activity, that provide end products and services.
• Different types of institutions, both public and private, which provide specialised
technical support and information's, such as universities…
• Businesses located upstream and downstream activities in relation to the main or
focus product, such as suppliers of raw materials and client businesses.
• Business in related industries, which provide products that supplement the main
product.

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3.2 ANALYSIS OF THE GENERAL
ENVIRONMENT.
Firms in related industries
Institutions providing providing products that
information and technical complement the main one
support.

Firms in
same Distributing firms
Supplier firms
business and customers

The frontiers of a district are not the same

as the economic sector

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3.2 ANALYSIS OF THE GENERAL
ENVIRONMENT.
Belonging to an industrial district may favour a firm´s competitiveness on the
basis of various factors:
1. Increase in productivity: Easy access to certain specialist resources in the district,
such as suppliers, qualified labour, information…
2. Boost for innovation: Tend to perceive new customers needs and new trends in
technology. Internal competitive pressure forces them to distinguish themselves
in a more creative manner.
3. New start-ups: Favours the incorporation or entry of new companies that will join
to make it stronger and more competitive. The entry barriers are lower and
financing tends to be cheaper.
Industrial districts are a combination of competitiveness and cooperation.
EXAMPLE OF INDUSTRIAL DISTRICT?

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3.3 ANALYSIS OF THE COMPETITIVE
ENVIRONMENT.
The analysis of the general environment is complemented by an analysis of the
sector or industry in which a firm operates, which is referred to as the competitive
environment.
In order to conduct this analysis:
• The first requirement is to define the competitive environment.
• The second requirement involves specifying an industry´s degree of attractiveness
based on the average financial performance expected and identifying the key factors
of success in that industry.
• The third requirement involves establishing smaller competitive environments
through the identification of segments.
• Finally, it is advisable to be familiar with the practices and behaviour of the firm´s
rivals.

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3.3 ANALYSIS OF THE COMPETITIVE
ENVIRONMENT.
The definition of a firm´s competitive environment should answer the question:
who are our competitors?
An industry is defined as “a group of companies offering products or services
that are close substitutes of each other”.
This substitute nature, may be measured by two criteria:
1. The technological criterion: Is applied from the standpoint of supply and defines
an industry as the sum of firms that use similar operating products or raw
materials.
2. The market criterion: Is applied from the demand side and selects the sum of
firms manufacturing products that are closely interchangeable.
EXAMPLES.

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3.3 ANALYSIS OF THE COMPETITIVE
ENVIRONMENT.
Besides the traditional concept of industrial sector, there is a need to define
others closely related to it.
Following Abell´s approach, the competitive environment may be defined on the
basis of three dimensions:
1. Group of customers served: Target consumers of products or services
2. Functions the products or services cover for said customers: The needs they
meet.
3. Technology used, how the product is supplied, the manner in which a function is
covered.
Based on these definitions, three basic concepts may be defined that will help
to define and delimit the competitive environment:

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
a) Industry: Series of firms that, based on a specific technology, seek to attend
to all their customer groups and cover all the possible functions. This concept
would delimit the industrial sector on the supply side.
Functions (all)

INDUSTRY

Customer
groups (all)

Technologies (specific)

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 3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
b) A firm´s business: The specific selection each firm makes of the functions and
customer groups it wishes to cater for.

Business Firm C (all functions

Functions
for one customer group)

Firm A (all functions for all

customer groups)
Business Firm B (one
function for all customers
groups)

Customer group

Business Firm D (one

function for one group of

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Technologies customers)
3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
c) Market: Sum of companies that cover the same function for the same group of
customers, irrespective of the industry in which they operate.
Functions

Industry X
Industry Y
Industry Z
Market (one function, one Customer
customer group, several groups
industries)

Technologies
EXAMPLES.

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
The aim of analysing the industry´s structure is to highlight the opportunities and
threats, answering to the question: how do firms compete in the industry?
The industry structure conditions the firm´s behaviour and profitability.
In an industry with perfect competition, there are very few options available to a
firm.
It is in those industries in a state of imperfect competition that the possibilities
arise for higher earnings.
• Opportunities will be factors that reduce competition and allow above average
earnings.
• Threats will involve aspects that may increase the level of competition, leading
companies in the sector to a more tempered performance.

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
Porter (1980) posits the so-called five-forces model of industry competition, used
for investigating these opportunities and threats.
According to Porter, an industry´s level of attractiveness is informed by the action
of five basic competitive forces, which define the possibility of recording a better
performance, provided threats are tackled and opportunities take.

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.

Potential
entrants

Threat of new
entrants

Industry competitors
Suppliers Buyers
Rivalry among existing
firms Barganing power
Bargaining power of
suppliers Threat of substitute productsof buyers
and services

Substitutes

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
A) The intensity of rivalry among existing competitors: Behaviour of
competitors in the industry at a given moment.
As the intensity of the competition increases, the possibility of higher
returns is reduced, the industry´s attractiveness diminishes.
The intensity of this rivalry is the outcome of a series of structural factors
such as:
• Numerous or equally balanced competitors: Concentred or fragmented
industry.
• Industry´s growth rate: Emerging, growing, mature and declining.
• Mobility barriers.
• Exist barriers: specialized assets, fixed exist costs, emotional or political.
• Company cost structure, strategic interests…

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
B) The threat of new entrants (potential entrants): New firms wishing to enter an
industry. The more attractive an industry is, the more potential rivals there will be.
The possibility that new competitors will enter and start competing depends on:
• Entry barriers: Factors that hinder the entry into the industry of new firms.
Economies of scale and scope, product differentiation, distribution channels…
• Absolute entry barriers: Are very difficult or impossible to overcame. (Government
licence).
• Relative entry barriers: Can be overcome depending on the firm´s resources and
capabilities.
• Reaction of established competitors:
• Industry´s tradition of reprisals: Price wars, special offers, emotional aspects...
• Established companies with major resources for defending themselves

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
C) Threat of substitute products: Those that fulfil the same customer needs as
those already provided by the industry.
As an industry finds substitute products, its level of attractiveness will tend to
diminish.
The importance of the threat of substitute products depends on the following
factors:
• The extent to which they are better fulfilling customer´s needs.
• The prices of the substitute products as regards the industry´s own ones.
• The obsolescence inherent to the industry´s products.
• The costs of switching to the alternative products.

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
D) Bargaining power of suppliers and customers: The ability to impose conditions on their transactions
with firms in the industry.
The main factors with an impact on the bargaining power of suppliers and customers are:

SUPPLIERS
Concentrated suppliers
Small-scale purchases
Differenciated products
High-switching costs
Real threat of forward integration.
No substitute products
Cannot be stockpiled
Important to the customer
Supplier has full information
CUSTOMERS
Concentrated customers
Large-scale purchase
Similar products
Low switching costs
Real threat of backward
integration.
Substitute products
Can be stockpiled
Little importance for the
customer.
Buyer has full information.

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
E) Limitations of five-forces model:
1. It presents a static image of competition: The development of the Industry´s
technology or the strategy of the Industry´s actual firms.
2. It does not take into account the existence of complementary products.
3. It does not consider the existence of other agents: Boundary agents, who can
limit an industry´s attractiveness.
4. Not all the forces carry the same weight: Need to recognise the critical factors.
5. It gives too much importance to an industry´s structure when explaining a firm
´s performance.

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
Identification can be made in most industries of smaller competitive areas in
which the dynamics of competition is structure in a particular way.
This process involves identifying, through what is referred to as industry
segmentation.
The most traditional way is based on variables such as the characteristics of
products (quality, Price, presentation) or customers (geographic areas, life-style)

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
If we analyse the division of the industry into smaller competitive environments,
from the supply perspective, we can find the strategic groups:
• “The group of firms in an industry following the same or a similar strategy along
strategic decision”
These strategic dimensions may include variables such as broad product line,
geographic scope, distribution channels, product quality…
Through the selection of two significant dimensions, the groups could be shown
on a map of strategic groups.
• EXAMPLES

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
The identification of each group permits the firm included in each one to know
who their most direct rivals are.
On the other hand, each group has its own degree of attractiveness, which can be
verified by applying the five-forces model at group level.
A firm may move from one strategic group to another, depending on:
• Mobility barriers between groups, entry barriers.
• Exist barriers in the current group.

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
The analysis if competitors explores the behaviour of a firm´s direct rivals in order
to identify the strategy they are following and, therefore, define the most
appropriate way of tackling them, or else predict their reactions to our own firm´s
movements.
This analysis tends to be extremely important in highly concentrated industries, in
which competition is reduced to a small group of rival firms.
It consists on two key activities:
• Gathering data on competitors : Public information available on competitors.
• Predicting their behaviour: Being capable of “putting oneself in their shoes”

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3.3 ANALYSIS OF THE
COMPETITIVE ENVIRONMENT.
Strategic groups in food retailing

High
F

D
E
PRICE
B
A
C
Low

Small Large
SIZE

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