Analysing the Environment

ENVIRONMENTAL ANALYSIS
Environmental analysis
- is a strategic tool.
- is a process to identify all the external and internal elements, which can
affect the organization’s performance.
- The analysis entails assessing the level of threat or opportunity the factors
might present.
- These evaluations are later translated into the decision-making process.
- The analysis helps align strategies with the firm’s environment.
- Businesses are greatly influenced by their environment, so they must
constantly analyse the trade environment and the market.
External Factors
should be
(1) important to achieving long-term and annual objectives,
(2) measurable,
(3) applicable to all competing firms, and
(4) hierarchical in the sense that some will pertain to the overall company and others will be more
narrowly focused on functional or divisional areas
The Industrial Organization (I/O) View
The Industrial Organization (I/O) approach to competitive advantage
- advocates that external (industry) factors are more important than internal factors in a firm
achieving competitive advantage.
- Proponents of the I/O view, such as Michael Porter, contend that organizational performance
will be primarily determined by industry forces.
- Porter’s FiveForces Model is an example of the I/O perspective, which focuses on analyzing
external forces and industry variables as a basis for getting and keeping competitive advantage.
 - Competitive advantage is determined largely by competitive positioning
within an industry, according to I/O advocates.
- Managing strategically from the I/O perspective entails firms striving to
compete in attractive industries, avoiding weak or faltering industries, and
gaining a full understanding of key external factor relationships within that
attractive industry.
Key External Forces:
- can be divided into five broad categories
- 1. economic forces
- 2. social, cultural, demographic and natural environmental forces
- 3. political, legal and governmental forces
- 4. technological forces
- 5. competitive forces
- changes in external forces translate into changes in consumer demand for both
industry and consumer products and services
- external forces affect the type of products developed, the nature of positioning and
market segmentation strategies, the type of services offered and the choice of businesses
to acquire or sell
1. Economic Forces
- Increasing numbers of two-income households is an economic trend in many
countries
- Improved customer service, immediate availability, trouble-free operation of
products, and dependable maintenance and repair services are becoming more
important.
- People today are more willing than ever to pay for good service if it limits
inconvenience.
- Economic factors have a direct impact on the potential attractiveness of various
strategies.
- For example, when interest rates rise, funds needed for capital expansion become
more costly or unavailable.
 - Also, when interest rates rise, discretionary income declines, and the demand for
discretionary goods falls.
- When stock prices increase, the desirability of equity as a source of capital for market
development increases.
- Also, when the market rises, consumer and business wealth expands
Key Economic Variables to Be Monitored
Availability of credit Level of disposable income Stock market trends
Propensity of people to spend Foreign countries’ economic conditions
Interest rates Import/export factors
Inflation rates Demand shifts for different categories of goods and services
Money market rates Income differences by region and consumer groups
Government budget deficits Price fluctuations
Gross domestic product trend Monetary policies
Consumption patterns Fiscal policies
Unemployment trends Tax rates
Worker productivity levels Organization of Petroleum Exporting Countries (OPEC)
2. Social, Cultural, Demographic, and Natural Environment forces
- the social transformation is driven to a large extent by the overlapping impact of
the internet, developments in the telecast sector, radio, mobile phones etc.
- increase in the educational levels has expanded the reach of the print media
- movies play a tremendous role, for good or evil, in the social life, particularly of the
poor and less educated
- the developments in the communication sector has been adding newer and newer
dimensions to promotion/marketing of products and social and political campaigning
- online marketing is growing, supported by the expansion of internet banking,
credit/debit card usage and courier service
- the influence of social media is growing, particularly among the youth
- the influence of the communication revolution is boosting the rising expectations –
the constant exposure of the influx of goods and services and amenities through movies
and other media keep boosting an aspiration to possess them one day – and the
demonstration effect – the tendency to imitate the lifestyles of the well-to-do
 - small family norm has become widespread
- the employment of women has lead to a necessitating factor – lack of time to
attend to household work and
- a facilitating factor – which has increased the convenience and comfort
- double/multiple income households – increased the demand for consumer non
durables, a variety of services, packaged food like ready to eat/heat products, ready mix
food ingredients and shift in shopping habits
- eating out and picnics/tours are growing fast
-the social transformation – driven to a significant extent by the acculturation and
sanskritisation processes and the communication revolution brought in by the
internet, mobile phones and cable TV
 - acculturation
refers to the process of cultural and psychological change resulting from
interaction between different cultures
- process in which members of one cultural group adopt the beliefs and behaviours
of another group
- is usually in the direction of a minority group adopting habits and language
patterns of the dominant group
- it can be also reciprocal
Common acculturation
- impacts include changes in language preference, food, clothing etc.
- adoption of common attitudes and values, membership in common social groups
and institutions, and loss of separate political or ethnic identification
Sanskritisation
- a term popularised by M.N.Srinivas,
- refers to a form of social change observed in India
- the process by which castes placed lower or middle in the caste hierarchy seek
upward mobility by emulating the customs, ritual, ideology and way of life in the upper
or dominant castes
Migration, education and social mobility of population and the resultant cross-cultural
interaction are important influencers
Demographic
- global demographic trend are influencing the business geography of the world
- India occupies a central place in this demographic-geographic stage
 - it is true that the number of Indians below the poverty line is larger than the
total population of many countries
- it is also true that the total number of well-to-do-Indians is larger than the total
population of many countries
- the demographics is rewriting the global business
- demographic factors such as size of the population, population growth rates, age
composition, ethnic composition, density of population, rural-urban distribution,
family size, nature of the family, income levels, sociological factors etc., have very
significant implications for business
3. Political, Government, and Legal Forces
- for firms that depend heavily on government contracts or subsidies, political
forecasts can be the most important part of an external audit
- changes in patent laws, antitrust legislation, tax rates, and lobbying activities can
affect firms significantly
- the increasing global interdependence among economies, markets, governments,
and organisations
- makes it imperative that firms consider the possible impact of political variables on
the formulation and implementation of competitive strategies
- in the face of a deepening global recession, countries worldwide are resorting to
protectionism to safeguard their own industries
- governments are taking control of more and more companies as the global
economic recession crippled firms considered vital to the nation’s financial stability
Examples of Political, Government and Legal Variables
1. Govt regulations
2. Changes in tax laws
3. Special tariffs
4. Number of patents
5. Environmental protection laws
6. Level of government subsidies
7. Import export regulations
8. Size of government budgets
9. World oil, currency and labour markets
10. Location and severity of terrorist activities
4. Technological Factors
- the internet has changed the very nature of opportunities and threats by altering
the life cycle of products,
increasing the speed of distribution, creating new products, and services,
erasing limitations of traditional geographical markets, and
changing the historical trade-off between production standardization, and
flexibility
- technological advancements can affect organisation’s products, services, markets,
suppliers, distributors, competitors, customers, manufacturing processes, marketing
practices, and competitive position
 - technological advancements can create new markets, result in proliferation of
new and improved products,
change the relative competitive cost positions in an industry, and render existing
products and services obsolete
- technological changes can reduce or eliminate cost barriers between businesses,
create shorter production runs, create shortage in technical skills
and result in changing values and expectations of employees, managers and
customers
- the pace of technological change is increasing and literally wiping out businesses
every day
- an emerging consensus holds that technology management is one of the key
responsibilities of strategists
- firms should pursue strategies that take advantage of technological
opportunities to achieve sustainable, competitive advantages in the market place
5. Competitive Forces
- identify rival firms, and determining their strengths, weaknesses, capabilities,
opportunities, threats, objectives, and strategies
- collecting and evaluating information on competition is essential for successful
strategy formulation.
- seven characteristics that describe the most competitive companies
1. Market share matters
2. Understand and remember precisely what business you are in
3. Make it better, not just products, but the whole company, if necessary
4. Innovate or evaporate
5. Acquisition – the most successful purchases are in niches that add a technology or
a related market
6. People make a difference – listen to them
7. There is no substitute for quality
Competitive Intelligence programs
- is a systematic and ethical process for gathering and analyzing information about
the competition’s activities and general business trends to further a business’s own
goals
- the more knowledge and information a firm can obtain about its competitors, the
more likely it is that it can formulate and implement effective strategies
The end