STRATEGIC MANAGEMENT

UNIT 2:
ENVIRONMENTAL ANALYSIS AND
DIAGNOSIS
 Environmental Analysis
 also known as external analysis, environmental scanning or appraisal
 The environment is a major source of change. Some firms become victims
of this change while others use it to their advantage.
 Process- identifies the opportunities and threats
 Environmental analysis is holistic exercise, exploratory process, continuous
process
 The purpose of environmental analysis is to enable the firm to turn change
to its advantage by being proactive.

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 Environmental Analysis
In deciding an organization’s future direction, managers must answer three questions:
 What is the organization’s present position?
 Where does the management want the organization to be in future?
 How does the organization move from its present position to the future desired
position?
 The above questions are answered through the analysis of the firm’s external and
internal environment.

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 ENVIRONMENTAL ANALYSIS

Role of environmental analysis:

 Analyse the environment to determine what factors in the environment
present opportunities and vice versa
 Allows time to anticipate opportunities and plan to take responses to these
opportunities.
 Helps in eliminating unsuitable alternatives and to process promising
alternatives

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 Analysis of Organisation’s Eternal Environment
Classification of environment: (I) General Environment and (II) Specific Environment

(I) General Environment:

 also known as remote, macro, or indirect-action environment

 It includes economic, political, technological, legal, socio-cultural…

 It set forth the framework for organisation’s operations, determine inputs,

process and export outputs back to the environment.

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FACTORS OF GENERAL ENVIRONMENT: PESTEL ANALYSIS

1. Political Environment:
 Political stability
 Political parties and their ideologies
 Political interference in business operations
 Govt. system, Govt. policy toward business
 Govt. policy towards global companies
 Foreign policies like maintaining relationships with other countries, giving
favoured status to specific countries in terms of business, etc.
 Behaviour of bureaucracy towards business like delays, red-tapism, etc.

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In analyzing Political Environment, an org. may put the following questions

 Political system influence on business

 Approaches of Govt. towards business- restrictive or facilitating?
 Facilities and incentives offered by the govt.?
 Legal restrictions in entering a particular industry segment.
 Restrictions in importing technology, capital goods, raw materials?
 Restrictions in importing products and services? Export obligations?
 restrictions on pricing and distribution of goods?

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 2. Economic Environment: It includes/is made up of the following

 Factors include economic growth, inflation rates, interest rates, disposable income
of consumers and unemployment rates.
 National income and its distribution, monetary policy and fiscal policy, economic
system, natural resources, manpower and productivity, financial facilities and
infrastructural facilities, plant and equipment supplies.
 These factors may have a direct or indirect long term impact on a company, since it
affects the purchasing power of consumers and could possibly change
demand/supply models in the economy.
 Consequently it also affects the way companies price their products and services.

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 3. Social Environment: Socio-cultural

 it consists of attitudes, beliefs, desires, expectations, education, and customs of the

society at a given point of time.
 Business point of view, it may include- expectations of society from business;
attitudes of society towards business and its management; level of education; class
structure; views towards customs, traditions…
 S-CE includes population trends such as the population growth rate, age distribution,
income distribution, career attitudes, safety emphasis, health consciousness, lifestyle
attitudes and cultural barriers
 These factors are especially important for marketers when targeting certain
customers.
 In addition, it also says something about the local workforce and its willingness to
work under certain conditions.
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 4. Technological Environment:

 These factors pertain to innovations in technology that may affect the

operations of the industry and the market favorably or unfavorably.
 This refers to technology incentives, the level of innovation, automation,
research and development (R&D) activity, technological change and the
amount of technological awareness that a market possesses.
 Includes inventions and techniques which may affect the way of doing things-
designing, producing and distributing products.
 These factors may influence decisions to enter or not enter certain industries,
to launch or not launch certain products or to outsource production activities
abroad.

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 5. Environment: Physical /Geographical

 Environmental factors have become important due to the increasing scarcity

of raw materials, pollution targets and carbon footprint targets set by
governments.
 These factors include ecological and environmental aspects such as weather,
climate, environmental offsets and climate change which may especially
affect industries such as tourism, farming, agriculture and insurance.
 growing awareness of the potential impacts of climate change is affecting
how companies operate and the products they offer.

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 6. Legal Environment

 Although these factors may have some overlap with the political factors, they
include more specific laws such as discrimination laws, antitrust laws,
employment laws, consumer protection laws, copyright and patent laws, health
and safety laws, etc.
 companies need to know what is and what is not legal in order to trade
successfully and ethically
 If an organization trades globally this becomes especially tricky since each
country has its own set of rules and regulations.
 Be aware of any potential changes in legislation and the impact it may have in
the future.

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(II) Specific Environment:

 also known as task, operating, micro, or direct-action environment -

affects individual organisations differently.
 Organisations are directly affected by the nature of industry
concerned and the type of competition prevailing therein.
 It includes forces lying outside the organisation directly relevant to
making decision about input acquisition, transformation process, and
export of output.
 Should consider both specific environment and general environment

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Analysis of Specific Environment: Industry analysis and competition

 Nature of industry and competitive forces shaping

competition in the industry defines industry environment

 Nature of industry: industry structure, industry life cycle,

industry attractiveness, and industry performance.

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MICHAEL E PORTER’S 5 FORCES MODEL

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MICHAEL E PORTER’S 5 FORCES MODEL

 widely used approach for developing strategies

 intensity of competition among firms varies widely across
industries.
 Porter has identified five forces that shape competition in an
industry

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According to Porter, the nature of competitiveness in a given
industry can be viewed as a composite of five forces:-
1) Rivalry among competing firms/ competitors
2) Potential entry of new competitors
3) Potential development of substitute products
4) Bargaining power of suppliers
5) Bargaining power of consumers

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 Forces shaping competition
Potential Entrants

Threats of entry

Industry
Bargaining Power of suppliers Competitors Bargaining Power of buyers
Suppliers Buyers
Rivalry among
competitors

Threats of substitute products

Substitutes

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 1. Rivalry among competing firms/ competitors

 the most powerful of the five competitive forces.

 Reasons- more equal in size and capability, demand for the industry’s
products declines, price cutting becomes common, when consumers switches
brand easily, when barriers to leaving the market are high, when the product
is perishable, when consumer demand is growing slowly or declines, when
the products being sold are commodities (not easily differentiated), when
mergers and acquisitions are common.
 As rivalry among competing firms intensifies, industry profits decline
 Intensity of rivalry among competing firms tends to increase as the number
of competitors increases.

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 Strategies pursued by a firm can be successful as long as it gives
competitive advantage
 Change in strategy by one firm affects the rival firms.
 Common countermoves- lowering prices, enhancing quality, adding
features, providing services, extending warranties, and increasing
advertising.

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 2. Potential Entry of New competitors/ Threats of new entrants

 Intensity of competitiveness among firms increases- when new firms

can easily enter a particular firms
 New firms enter industries with higher quality products, lower
prices, and substantial marketing resources.
 Strategist’s job-identify potential new firms entering the market,
monitor the new rival firm’s strategies, to counterattack as needed,
and to capitalize on the existing strengths and opportunities.

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Barriers to entry:- economies of scale, technology and specialised know-how, lack
of experience, strong customer loyalty, strong brand preferences, large capital
requirements, adequate distribution channels, tariffs, access to raw materials,
possession of patents, undesirable locations, counterattack by entrenched
firms.

 When the threat of new firms entering the market is strong:- incumbent firms
generally fortify their positions and take actions to deter new entrants-
lowering prices, extending warranties, adding features.

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 3. Potential development/ Threats of substitute products

 Firms are in close competition with producers of substitute products in other

industries
 Competitive pressures arising from substitute products increase as the
relative price of substitute products declines and as consumers’ switching
cost decreases.
 Examples: Newspaper and magazines competing with Internet and TV; sugar
competing with artificial sweeteners; plastic container producers competing
with glass, paper-board, and aluminium can producers. Uber and Oal vs Local
Taxis, Netflix vs traditional TVs, white board marker vs chalk

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 4. Bargaining power of suppliers

 It affects the intensity of competition in an industry, especially when there are

only a few good substitute raw materials, when the switching raw materials is
especially costly, etc.
 If supplier group is dominated by few organisations and is more concentrated
than the industry it sells to, its bargaining position is better.
 If supplier group supplies a product which does not have any substitute, it enjoys
considerable bargaining power
 If supplier group poses a threat of forward integration, it enjoy considerable
bargaining power.

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 firms may pursue backward integration strategy to gain control or
ownership of suppliers.

 Reasons- suppliers are unreliable, too costly, not capable of meeting a

firm’s needs on a consistent basis.

 Firms can also enter into strategic partnership with select suppliers in
efforts to- reduce inventory and logistics costs (through just-in-time
deliveries); speed up the availability of components; enhance the quality of
the parts and components being supplied and reduce defect rates; assist
each other with-reasonable prices, improved quality
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 5. Bargaining power of consumers
 When customers are concentrated; buy in volume, etc., their bargaining
power represent a major force affecting the intensity of competition
 Bargaining power is also higher when the products purchased are
undifferentiated.
Consumers gain increasing bargaining power under the following circumstances:

 if they can inexpensively switch to competing brands or substitutes

 If they are informed about sellers’ products, prices, and costs
 If they are particularly important to the seller
 If sellers are struggling in the face of falling consumer demand
 If they have discretion in whether and when they purchase the product

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 In such case-consumers often can negotiate selling price, warranty
coverage, and accessory packages to a great extend.
 Rival firms may offer extended warranties or special services to gain
customer loyalty.

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INTERNAL ANALYSIS

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 INTERNAL ANALYSIS

 It is the process of assessing of internal resources and capabilities of an

organization to know its strengths and weaknesses

 Webster’s dictionary defines the word “capable” as “having the qualities or

abilities that are needed to do or accomplish something”

 It is the systematic evaluation of an organisation’s capability in terms of

strengths and weaknesses that lie in different functional areas

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 STRENGTHS AND WEAKNESSES

 Strength: inherent capability which an org. can use. Examples:

financial strength-availability of sources of fund, low cost of capital
or efficient use of funds

 Weakness: inherent limitation or constraint which creates

disadvantage. Examples: inappropriate plant location and layout,
obsolete plant and machinery or uneconomical operations

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 INTERNAL ANALYSIS: ORGANISATIONAL CAPABILITY

 Organisational capability is the inherent capacity or potential of an organisation

to use its strengths and overcome its weaknesses in order to exploit opportunities
and face threats in its external environment.
 OC are the skills-the ability and ways of combining assets, people, and processes-
that a company uses to transform inputs into output.
 Several thinkers: capabilities are the outcomes of an organisation’s knowledge
base, i.e. the skill and knowledge of its employees.
 It is the sum total of resources and behaviour, strengths and weaknesses,
synergetic effects occurring in, and the competencies of, any organisation.

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 INTERNAL ANALYSIS: ORGANISATIONAL CAPABILITY

 Capabilities are most often developed in specific functional areas such as

marketing, production/operation… or in a part of a functional area such as
distribution or quality management.
 Importance:- Competitive advantage, Adapting to change, Respond to
problems and challenges, Improved business performance,

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 INTERNAL ANALYSIS

(a) Human Resource/ Personnel Capability:-

It relate to the existence and use of human resources and skills.
 Employment-related factors:- manpower planning, recruitment and selection,
training and development, human resource mobility, appraisal and compensation
management.
 Maintenance related factors:- Employee retention, safety and health management,
and other benefits…
 Industrial relations related factors: Union-management relationships, grievance
handling mechanism, collective bargaining, system for setting industrial disputes.

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 INTERNAL ANALYSIS

Major Strengths in HR area that can support HR/Personnel Capability:-

 High skilled personnel.

 Favourable attitude to change.
 High motivation and morale.
 Highly satisfied and motivated workforce.
 High personnel retention.
 Low level of absenteeism.
 Effective industrial relations.

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 INTERNAL ANALYSIS

(b) Marketing capability:-

It relates to the pricing, promotion and distribution of products or services

 Product related factors:- variety, differentiation, quality, packaging, perception

by customers, etc.
 Price-related factors:- price fixation and revision mechanism- Price
competitiveness, value for money pricing….
 Promotion-related factors:- promotional tools- sales promotion, advertising,
customer relationship management, etc.
 Place-related factors:- distribution network, transportation and logistics

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 INTERNAL ANALYSIS

Major strengths in marketing area that support marketing capability:-

 Diversified/Wide variety of products.
 Favourable company image.
 Better quality of products.
 Lower price as compared to those of similar products in the market.
 High-profile advertising, efficient promotional efforts and proper product
positioning.
 Effective distribution system.
 Efficient marketing research and feedback system.
 INTERNAL ANALYSIS

(c) Financial capability:-

Relates to the availability, usage and management of funds
 Factors related to sources of funds: Financing, cost of funds, relationship with
various fund providers…
 Factors relates to the usage of funds: capital investment, current assets, loans
and advances, dividend distribution…
 Factors related to the management of funds: accounting and budgetary
systems, state of financial health, return and risk management, cost reduction
and control

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 INTERNAL ANALYSIS

Major Strengths in finance area that supports Financial capability :-

 Access to financial resources.
 High level of credit-worthiness.
 Low cost of capital as compared to competitors.
 Widely distributed shareholding and High level of shareholders
confidence.
 Amicable relationship with shareholders and financial institutions.
 Effective and efficient accounting systems and procedures.

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 INTERNAL ANALYSIS

(d) Production and Operations Capability:-

It relates to the production of products or services, use of material resources

 Factors related to the production system: capacity, location, layout, product or service design,
degree of automation
 Factors related to the operations and control system: production planning, scheduling, inventory
management, cost and quality control, maintenance system…
 Factors related to R&D system: Number and quality of personnel involved, facilities, product
development, patent rights, level of technology used, technical collaboration and support…

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 INTERNAL ANALYSIS: ORGANISATIONAL CAPABILITY

Major Strengths that in Production area that support Productions/operations capability:-

 High level capacity utilisation
 Favourable plant location and offices
 Abundant and multi-sources of raw materials supply/ Reliable sources of supply
 Low cost of production/ Effective control of operational costs
 Existence of effective inventory control system
 Available of high calibre R &D personnel
 Holding well-established patent right.

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CORE COMPETENCIES

 The capability to use the competencies exceedingly well. During late

1980s, C.K Prahalad and Gary Hamel coined the concept of core
competence.
 It is a capability or skill that a firm emphasizes and excels in doing while
in pursuit of its overall mission.

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 Examples of core competencies

Google’s core competency:

 it is based on technology used in the search service, which is capable
of building and organizing a database that makes it possible for the
internet user to find practically any piece of information he may be
looking for.

Reliance Industries Limited:

 Execution of large capital intensive projects

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Maruti:
 Well developed sales and service network through out India
 Very strong knowledge of Indian market

Amazon:
 Fast delivery
 Superior customer service
 Access to a wide range of products at a lower cost

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 Competitive advantage

 CA is a special case in which a firm is compared with one or

more identified rivals against whom the rewards or penalties
could be measured.
 CA is relative rather than absolute and it is measured and
compared with respect to other rivals in an industry.
 Outperforming rivals

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 INTERNAL ANALYSIS TECHNIQUE: Value Chain Analysis:- Michael E Porter

 Value chain analysis: An analysis that attempts to understand

how a business creates customer value by examining the
contributions of different activities within the business to that
value.
 Porter identified 9 strategically relevant activities (Primary and
support activities) that create value.
 Identified 5 Primary Activities and 4 Support activities

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 Value Chain Analysis: Michael E Porter

 Primary Activities:- activities in a firm of those involved in the

physical creation of the product, marketing and transfer to the buyer
and after-sale support. Five (5) groups- Inbound logistics, operation,
outbound logistics, marketing & sales, and service
 Support Activities:- activities in a firm that assist the firm as a whole
by providing infrastructure or inputs that allow the primary activities
to take place on an ongoing basis. Four (4) groups- General
administration, human resource management; technology
development; and procurement

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Primary Activities: 5 groups- Inbound logistics; operation,
outbound logistics; marketing & sales; and service

1. Inbound logistics:- All activities that an org. uses for receiving,

storing, and transporting various inputs with a purpose to
transform them into outputs. IL activities performed in org.
includes materials handling, warehousing and inventory
control.

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Primary Activities: 5 groups- Inbound logistics; operation,
outbound logistics; marketing & sales; and service

2. Operations:- All activities required for the transformation of

raw materials to finished products. Operation activities
performed in org. includes production, assembling,
fabricating, testing, packing, equipment maintenance, etc

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Primary Activities: 5 groups- Inbound logistics; operation, outbound logistics;
marketing & sales; and service

3. Outbound logistics:- All activities that an org. uses for receiving, storing, and
transporting outputs going out of production process. OL activities performed
in org. includes finished goods warehousing, order processing, order picking
and packing, preparing delivery schedules, shipping, physical distribution,
etc..

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Primary Activities: 5 groups- Inbound logistics; operation,
outbound logistics; marketing & sales; and service

4. Marketing and sales:- It involve inducing buyers to buy

products and converting their intention to buy into actual sales.
It includes activities such as advertising and sales promotion,
market research and planning, creating sales force, dealer/
distributor support, etc.

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Primary Activities: 5 groups- Inbound logistics; operation,
outbound logistics; marketing & sales; and service

5. Service:- Activities related to service aim at creating value to

customers. Various facilities related to products include-
installation, after-sales service, supply of spare parts, training to
customers, maintenance and repair, technical assistance etc.

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Support Activities: 4 groups- GeNERAL ADMINISTRATION; human
resource management; technology development; and
procurement
1. General Administration:- Activities, costs and assets relating to
general management, accounting and finance, legal and
regulatory affairs, safety and security, planning, managing
relations, etc.

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Support Activities: 4 groups- General Administration; ; human
resource management; technology development; and procurement
2. Human resource management:- All activities that an org. uses
for managing human resources. HRM activities performed by
org. includes human resource planning, recruitment, selection,
training and development, appraising and compensating
employees.

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Support Activities: 4 groups- General Administration; human
resource management; technology development; and procurement
3. Technology development:- All activities that an org. uses for
creating, developing and improving products and services. TD
activities performed by org. includes R & D, product design,
process design, equipment design…

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Support Activities: 4 groups- General Administration; human
resource management; technology development; and
procurement
4. Procurement:- All activities, costs and assets associated with
purchasing and providing raw materials, supplies, necessary to
support the firm and its activities (inputs needed to produce
products or provide services).

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