Chapter Three: Environmental Analysis

CHAPTER THREE

ENVIRONMENTAL ANALYSIS

Chapter 3

Envt'al Analysis

1

Content 1.

Internal Environmental Analysis a) SWOT Analysis b) Value chain analysis

2.

External Environmental Analysis a) General (PESTEL/STEPEL)

Chapter 3

Envt'al Analysis

2

Chapter 3

Envt'al Analysis

3

The Internal Environme nt Chapter 3

Envt'al Analysis

4

Internal Analysis of the Organization  As

Shown in the previous diagram an analysis of the internal environment enables an organization determine what it can do- that is, the actions permitted by its unique resources, capabilities and core competencies.

 The

proper matching of what a firm can do with what it might do allows the development of strategic intent, the pursuit of strategic mission and formulation of strategies. Chapter 3

Envt'al Analysis

5

Internal Analysis cont’d … Strengths:  Strength

is a resource, skill, or other advantage relative to competitors and the needs of the markets a firm serves or expects to serve.

 It

is a distinctive competence that gives the firm a comparative advantage in the market place.

 Strengths

may exist with regard to financial resources, image, market leadership, buyer/supplier relations etc. Chapter 3

Envt'al Analysis

6

Internal Analysis cont’d … Weaknesses: Weakness

is a limitation or deficiency in resource, and capabilities that seriously impedes a firm’s effective performance.

Lack

of facilities, financial resources, management capabilities, marketing skills, and brand image can be source of weaknesses.

Chapter 3

Envt'al Analysis

7

Competitive Advantage When

a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage. Chapter 3

Envt'al Analysis

8

Competitive Advantage cont’d

…

 Michael

Porter identified two basic types of competitive advantage:  cost advantage  differentiation advantage  A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself. Chapter 3

Envt'al Analysis

9

Resources Resources

are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily. The following are some examples of such resources:     

Patents and trademarks Proprietary know-how Installed customer base Reputation of the firm Brand equity Chapter 3

Envt'al Analysis

10

Capabilities Capabilities

refer to the firm's ability to utilize its resources effectively. An example of a capability is the ability to bring a product to market faster than competitors.

Chapter 3

Envt'al Analysis

11

Core Competencies  The

firm's resources and capabilities together form its core competencies.

These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage i.e. core competencies serve as sources of competitive advantage. Chapter 3

Envt'al Analysis

12

Core Competencies cont’d … Resources & Capabilities: four criteria

 Not

all of a firm’s resources & capabilities have the potential to be the basis for competitive advantage. This potential can be realized when resources & capabilities are:

 Valuable: Allow the firm to exploit opportunities or

neutralize threats in its external environment  Rare: Possessed by few, if any, current & potential competitors  Costly to imitate: When other firms cannot obtain them or must obtain them at a much higher cost  Non-substitutable: The firm is organized appropriately to obtain the full benefit of the resources in order to realize a competitive advantage Chapter 3

Envt'al Analysis

13

Core Competencies cont’d … When

the four criteria are met, resources & capabilities become core competencies.

Core

competencies can become core rigidities

Chapter 3

Envt'al Analysis

14

Core Competencies cont’d …

For building core competencies two conceptual tools or frameworks might be available as firms search for competitive advantage:  Value

chain analysis, which is a framework for determining which value creating competencies should be maintained, upgraded, & developed and which should be outsourced.

 Determining

which of the firm’s resources & capabilities are core competencies using the four criteria: valuable, rare, inimitable, nonsubstitutable Chapter 3

Envt'al Analysis

15

The Process of Internal Analysis

The process of internal analysis of an organization involves four basic steps: 1. Developing a profile of financial, physical, organizational, human, & technological etc resources 2. Determining the key success requirement of the product/market segments in which the organization competes or might compete 3. Comparing the resource profile to the key success requirements to determine the strengths & weaknesses 4. Comparing the strengths & weaknesses of the organization with those of its major competitor’s Chapter 3

Envt'al Analysis

16

The Functional Approach for Internal Analysis The

simplest way to begin an analysis of a corporation’s value chain is by carefully examining its traditional functional areas for potential strengths and weaknesses.

Functional

resources include not only the financial, physical, and human assets in each area, but also the ability of the people in each area to formulate and implement the necessary functional objectives, strategies, and policies. Chapter 3

Envt'al Analysis

17

The Functional Approach for Internal Analysis cont’d …

The

resources include the knowledge of analytical concepts and procedural techniques common to each area as well as the ability of the people in each area to use them effectively. Chapter 3

Envt'al Analysis

18

Value Creation  Value

consists of the performance characteristics and attributes provided by companies in the form of goods or services for which customers are willing to pay.

 The

firm creates value by performing a series of activities that Porter identified as the value chain. In addition to the firm's own value-creating activities, the firm operates in a value system of vertical activities including those of upstream suppliers and downstream channel members. Chapter 3

Envt'al Analysis

19

Value Chain Analysis  The

value chain was described and popularized by Michael Porter in his 1985 in Competitive Advantage: Creating and Sustaining Superior Performance.

A

value chain is a systematic way of viewing the series of activities a firm performs to provide a product to its customers.

 It

allows the firm to understand the parts of its operations that create value & those that do not. Chapter 3

Envt'al Analysis

20

 It

Value Chain Analysis cont’d …

is a template that firms use to understand their cost position & identify multiple means of implementation for a chosen business-level strategy.

 The

value chain categorizes the generic value-adding activities of an organization.

 The

"primary activities" Represent the sequence of bringing materials into the business, converting them into final products, making it available to the customers and proving after sale support to the consumer.

I.e. they include: inbound logistics, production, outbound logistics, sales and marketing, and after sales service Chapter 3

Envt'al Analysis

21

The Value Chain Firm Infrastructure (e.g., Finance, Planning) Human Resource Management

Support Activities

Technology Development

Support primary activities

M A R G I N

Procurement

Inbound Logistics

Operations (Manufacturing)

Outbound Logistics

Marketing & Sales

Value Creation

After-Sale Service

Primary Activities Flow of product to the customer Chapter 3

Envt'al Analysis

22

Value Chain Analysis cont’d … The

"support activities" include: firm infrastructure management, HRM, R&D, and procurement.

The

most important thing is that the cost & value drivers should be identified for each value activity.

Thus,

the ultimate goal maximize value creation minimizing costs. Chapter 3

is to while

Envt'al Analysis

23

Value Chain Analysis cont’d …  Each

of an organization’s product lines has its own distinctive value chain. Because most organizations make several different products or services, an internal analysis of the firm involves analyzing a series of different value chains.

 The

systematic examination of individual value activities can lead to a better understanding of an organization’s strengths and weaknesses. Chapter 3

Envt'al Analysis

24

The External Environmen t Chapter 3

Envt'al Analysis

25

External Environmental Analysis The Process of Performing an External Analysis  Gather relevant information  Identify the most important opportunities and threats  Rank them from the most important to the least important Chapter 3

Envt'al Analysis

26

External Environmental

cont’d … OPPORTUNITIES: An opportunity is a major favorable situation in a firm’s environment. Identification

of

◦ a previously overlooked market segment, ◦ changes in competitive or regulatory circumstances, ◦ technological changes, and ◦ improved buyer or supplier relationships could represent opportunities for the firm. Chapter 3

Envt'al Analysis

27

External Environmental

cont’d … THREATS: A

threat is a major unfavorable situation in a firm’s environment. Threats are key ingredients to the firm’s current or desired opposition.



Identification of ◦ the entrance of new competitors, ◦ slow market growth, ◦ increased suppliers,

bargaining

power

of

key

buyers

◦ technological changes, and new or regulations could represent threats to a firm’s success.

Chapter 3

or

revised

Envt'al Analysis

28

The General Environmen t (PESTE – Analysis) Chapter 3

Envt'al Analysis

29

The General Environment

Analysis

of the general environment is focused on its future impacts on firm’s performance.

In

this respect, the awareness & understanding of an increasingly turbulent, complex & global general environment is critical.

The

general environment influences the firm’s strategic options & the decisions made in light of this. Chapter 3

Envt'al Analysis

30

A

The General Envir (Cont…)

scan of the external general environment in which the firm operates can be expressed in terms of the following factors:  Political; Economic; Social; Technological

 The

acronym PEST (or sometimes rearranged as "STEP") is used to describe a framework for the analysis of these external general environmental factors.  Firms also add one more E to the PEST analysis and conduct PESTE analysis to address the growing interest on Ecological factors. Chapter 3

Envt'al Analysis

31

Political Factors: Political

factors define the legal and regulatory parameters of organizations’ operation.  There are laws that could restrict the potential profits of businesses: fair trade decisions, anti-trust laws, tax programs, minimum wage legislation, pollution & pricing policies. Chapter 3

Envt'al Analysis

32

Political Factors: cont’d … 

Other political actions aimed at protecting employees, customers, the general public, and the environment.

There

are also political actions that are designed to benefit and protect organizations: patent laws, government subsidies, and product research grants Chapter 3

Envt'al Analysis

33

Political Factors: cont’d …

Political action can bring about substantial impact on three governmental functions that influence the external environment of firms:



Supplier function: government decision regarding the accessibility of private businesses to governmentowned natural resources and stockpiles of agricultural products will profoundly affect the viability of the strategies of the firms. Chapter 3

Envt'al Analysis

34

Political Factors: cont’d …

 Customer

function: government demand for products and services can create, sustain, enhance, or eliminate many market opportunities.

Competitive

function: the government can operate as an almost unbeatable competitor in the market place.  Thus, knowing of government’s strategies can help a firm avoid unfavorable confrontation with the government as a competitor. Chapter 3

Envt'al Analysis

35

Political Factors: cont’d …

Some key Political (Gov’al & legal) variables: 

Tax laws



Environmental protection laws



Level of government subsidies



Antitrust legislation



Terrorist activities



Import/Export regulations



Fiscal & monetary policies



Size of Government budget



Local, state & national elections Chapter 3

Envt'al Analysis

36

Economic Factors: Economic

assessment must

address:  The overall economic forecast and the likely funding stream that will be available.  The international and national forces that can affect the economic well being of the organization should be analyzed.

Chapter 3

Envt'al Analysis

37

Economic Factors: cont’d …

Some key economic variables:            

Availability of credit Level of disposable income Interest rates Inflation rates Unemployment trends Consumption patterns Stock market trends Import/Export factors Demand shifts Price fluctuations Fiscal policies Tax rates Chapter 3

Envt'al Analysis

38

Social Factors: These

factors include the beliefs, values, attitudes, opinions, and life style of persons depending up on cultural, demographic, religious, and ethnic conditioning. Chapter 3

Envt'al Analysis

39

Social Factors: cont’d …

Some key socio-cultural variables:  Changing work values  Ethical standards  Growth rate of population  Life expectancies  Rate of family formation  Consumer activism  Geographic shifts in population  Attitudes towards business  Average level of education  Attitudes towards leisure time Chapter 3

Envt'al Analysis

40

Technological Factors: Organizations must strive to understand the existing scientific or technological advances:  To

avoid obsolescence and promote innovation, the organization must be conscious of technological changes that could affect its operation

 It

should understand that new technologies might require new operation systems and bring about sudden and dramatic effect on an organization’s environment.

 Intelligible

technological adaptations can suggest possibilities for new products, improvements in existing products, or in manufacturing and marketing techniques

Chapter 3

Envt'al Analysis

41

Technological Factors: cont’d … Some key technological variables  R&D activity  automation  technology incentives  rate of technological change Chapter 3

Envt'al Analysis

42

Ecological Factors Reading Assignment Ecological/environment

factors

Chapter 3

Envt'al Analysis

43

The SWOT Matrix A

firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities.

 In

some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity.

 To

develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed. The SWOT matrix is shown below: Chapter 3

Envt'al Analysis

44

The SWOT Matrix cont’d …

Opportunitie s

Threats

Strength s

Weaknesse s

S-O

W-O

strategi strategies es

S-T

W-T

strategi strategies es Chapter 3

Envt'al Analysis

45

The SWOT Matrix cont’d …

 S-O

strategies pursue opportunities that are a good fit to the company's strengths.

 W-O

strategies overcome weaknesses to pursue opportunities.

 S-T

strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats.

 W-T

strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats. Chapter 3

Envt'al Analysis

46

THANK YOU!

Chapter 3

Envt'al Analysis

47