Chapter 2

Environmental appraisal
Contents…
 Concept of environment, the company and its
environment, scanning the environment,
technological, social, cultural, demographic,
political, legal and other environments forces.
SWOT analysis, competitive advantage, value
chain analysis
Meaning of environment
 Environment or business environment is
something that is external to the firm or one
which surrounds an organization.
Characteristic/features of general environment

 It usually holds both opportunities and threats

 Developments in general environment change

competitive battle lines

 The same environment trend can have different

on different industries
 Difficulty of predicting with any degree of

accuracy in some case while others readily

predictable
 The dimensions of general environment with

strongest influence on business may differ

from country to country.
Components of general environment
 Economic environment
1. General economic conditions
2. Economic systems
3. economic policies
4. Economic growth
5. Interest rates
6. Exchange rates
 Technological environment
 Social environment
 Demographical environment
 Political and legal environment
 Global environment
Industry environment/micro environment
1st- Rivalry Among Competing Sellers

 Usually the Strongest of the Five forces

 Key factor in determining Strength of Rivalry:
 How aggressively are Rivals using various Weapons
of Competition to improve market position, higher
market share and competitive advantage?

 Competitive Rivalry is a combative contest

involving:
 Aggressive actions
 Defensive countermoves
2nd- Potential New Entrants
into the Industry
 Seriousness of threat depends on:
 How vast is the group of potential candidates
and
their available resources
 Barriers to Entry into the Industry
 Reaction of existing firms
 Evaluating threat of entry involves assessing:

 How formidable entry barriers are for each type

of potential entrant
 Attractiveness of growth and profit prospects
Common Barriers to Entry
Consider the example of Airlines industry:
 Significant Economies of Scale
 Brand preferences and Customer Loyalty
 High capital requirements or other

specialized resource requirements

 Regulatory policies
 Tariffs and International trade

restrictions
 Ability of industry members to launch

dynamic initiatives to block a newcomer’s

entry
 3rd- Firms in Other Industries offering
Substitute Products

 Substitutes matter when customers prefer buying

the products or services of firms in other industries
For example:
 Sugar v/s Artificial sweeteners
 Spectacles v/s Contact lens v/s Laser surgery
 Newspapers v/s Television v/s Internet
 When is the competition from Substitutes stronger?
• Many good substitutes are readily available
• Substitutes are suitably priced
• Higher quality and performance of substitutes
• End user switching costs are lower
• End users grow more comfortable with using
substitutes
 4th-When is the Bargaining Power of Suppliers
Stronger?
 Industry members incur high costs in switching their purchases
to alternative suppliers
 E.g. Automobile Engines – Fiat engines preferred by manufacturers

 Raw materials are in short supply

 E.g. Precious metals for jewellery

 Supplier provides a differentiated component that enhances the

quality of performance of sellers’ products
 E.g. Intel’s micro-processors

 There are only a few suppliers of a specific component

 E.g. Aircraft Engines: GE and Rolls-Royce

 Some suppliers threaten to forward integrate and could become a powerful

rival
 5th-Buyers

 WhetherSeller-Buyer relationships represent a

Weak or Strong competitive force depends on:

 Whether Buyers have sufficient bargaining

leverage to influence terms of sale in their favor
 Extent and competitive importance of Seller-
Buyer strategic partnerships in the industry

 e.g. Large Retail Buyers like Wal-Mart & Staples can

negotiate better because of their large volume
purchases and ‘Prestige’ status
When is the Bargaining Power
of Buyers Stronger?
 Buyer switching costs to competing brands or
substitutes are low
 Buyers are large and can demand concessions

 Large-volume purchases by buyers are

important to sellers
 Product demand is weak or reducing

 Only a few buyers exist

 Identity of buyer adds prestige to seller’s list of

customers
 Environment scanning

 It is a process through which an organization

monitors and understands various environment
factors and determines the opportunities and
the threats that are provided by these factors.
Features of environmental scanning

 It is a holistic exercise
 It is an exploratory process
 It is a continuous process
 It is a indispensible
Significance of environmental scanning

 It helps in converting threats into opportunities

 Changing colour of environment
 Narrowing down the alternatives
 Strategic management starts with

environmental scanning
Factors governing the choice of environment

 Nature of environment
 Managerial philosophy
 Age of the organization
 Type of the business
 Size and power of the organization
 Geographic dimensions
Techniques of environmental scanning

 PEST analysis
 QUEST analysis
 SWOT analysis
 ETOP analysis
 PEST analysis

PEST denotes political, economical, social and

technological analysis. It describes a framework
of macro-environmental factors.
some experts called it as SLEPT by adding legal
force to it.
 QUEST analysis
QUEST represents quick environmental scanning
technique. it is a four step process, they are as
follows
1. Observing the major events and trends in the
industry
2. Speculating of future happenings
3. Preparing summary report
4. Reviewing report and scenarios by experts
 SWOT analysis

 S- strengths
 W- weaknesses
 O- opportunities
 T- threats
 ETOP analysis
 ETOP stands for environmental threat and
opportunity profile. It is a very significant tool
which is widely used in environmental
diagnosis.
 Steps in preparing ETOP
 Identification of different components of

relevant environment
 assessing significance of environmental factors
 Assessing impact factor
 Combining significance and impact factor
The Company’s Value Chain
 A company’s Value Chain consists of all activities
carried out
for designing, purchasing, manufacturing,
marketing, distributing and supporting its
product or service
 It is called a Value Chain as the essential intent
of a company is to accomplish activities that
ultimately add value for buyers
 The Value Chain contains 2 types of activities:
◦ Primary activities where most of
the value for customers is created
◦ Support activities that assist
performance of the primary activities
Primary and Support activities in a Value
Chain
 Steps in internal analysis
Identification of strategic internal factors

Historical analysis

Evolution analysis

Competitive analysis

Identification of critical success factors

Company profile(SWOT)
Identification of strategic internal factors
 Research and development and engineering
factors
 Production and operation factors
 Human resources factors
 Finance and accounting factors
 Marketing factors
 Informational factors
 Historical analysis

 Preparation of functional area profile

 Functional area- resource development matrix

what are the features of this?

 Consisting each area one at a time
 Comparing of overall pictures
 Comparison of weakness to strengths.
 Evolution analysis
Product life cycle?
 Introduction
 Growth
 Maturity
 Decline
Product life cycle
 Competitive analysis

Techniques of competitive analysis

 Strategic advantage profile
 Balance score card
 Financial analysis
Identification of critical success
factors

Preparing company profile