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UNIT II

ENVIRONMENTAL ANLYIS
Importance of Environmental
Analysis
The strategy that a company may adopt is
influenced by the environment.
An environmental analysis will help the
company to anticipate various threats and
opportunities.
Along with evaluation of its current strategy a
company must also know how its strategy will
work in the future environment.

Importance of Environmental
Scanning
1. To know the various factors which would be
helpful in accomplishing the company
objectives.
2. To know the various factors that would
threaten the survival and growth of a
company.
3. To know the various factors that would
generate new opportunities.

Characteristics of Environment
1. Complex Union Carbide @ Bhopal.
2. Dynamic
3. Uncertain
4. Uncontrollable

Outcomes from External and Internal
Environmental Analyses
Examine opportunities
and threats
Examine unique resources,
capabilities, and
competencies
(sustainable competitive
advantage)
The Context of Internal Analysis
Effective analysis of a firms internal
environment (learning what the firm can do )
requires:
Nurturing an organizational setting in which
experimentation and learning are expected and
promoted
Using a global mind-set
Thinking of the firm as a bundle of
heterogeneous resources and capabilities that
can be used to create an exclusive market
position
Components of Internal Analysis
Creating Value
By exploiting their core competencies or
competitive advantages, firms create value
Value is measured by
A products performance characteristics
The products attributes for which customers are
willing to pay
Firms create value by innovatively bundling
and leveraging their resources and
capabilities
Creating Competitive Advantage
Core competencies, in combination with
product-market positions, are the firms most
important sources of competitive advantage
Core competencies of a firm, in addition to its
analysis of its general, industry, and
competitor environments, should drive its
selection of strategies
The Challenge of Internal Analysis
To develop and use core competencies,
managers must have
Courage
Self-confidence
Integrity
The capacity to deal with uncertainty and
complexity
A willingness to hold people (and themselves)
accountable for their work
Resources, Capabilities and Core Competencies
Resources
Are a firms assets,
including people and the
value of its brand name
Represent inputs into a
firms production process,
such as:
Capital equipment
Skills of employees
Brand names
Financial resources
Talented managers
Resources, Capabilities and Core Competencies
Resources
Tangible resources
Financial resources
Physical resources
Technological resources
Organizational resources
Intangible resources
Human resources
innovation resources
Reputation resources
Resources, Capabilities and Core Competencies
Capabilities
The foundation of many
capabilities lies in:
The unique skills and
knowledge of a firms
employees
The functional expertise of
those employees
Capabilities are often
developed in specific
functional areas or as part
of a functional area
Defining Organizational Capabilities
Organizational Capabilities = firms capacity for
undertaking a particular activity. (Grant)
Distinctive Competence = things that an organization
does particularly well relative to competitors. (Selznick)
Core Competence = capabilities that are fundamental to a
firms strategy and performance. (Hamel and Prahalad)
Examples of
Firms
Capabilities
Resources, Capabilities and Core Competencies
Core Competencies
Activities that a firm
performs especially well
compared to competitors
Activities through which the
firm adds unique value to its
goods or services over a
long period of time
Building Sustainable Competitive
Advantage
Four Criteria of
Sustainable
Competitive
Advantage
Valuable
Rare
Costly to imitate
Nonsubstituable
The internal Environment
It comprises of
Value system
Mission and Objectives
Management Structure and nature
Internal relationships
Human Resource
Company Image and Brand Equity
R & D capability
Financial Factors
Marketing Factors
Analysis of the External Environments
1. General environment
Focused on the future
2. Industry environment
Focused on factors and conditions influencing a
firms profitability within an industry
3. Competitor environment
Focused on predicting the dynamics of
competitors actions, responses and intentions
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Opportunities and Threats
Opportunity
A condition in the general
environment that, if exploited,
helps a company achieve
strategic competitiveness.
Threat
A condition in the general
environment that may hinder
a companys efforts to
achieve strategic
competitiveness.
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Segments of the General Environment
The Demographic Segment
Population size
Age structure
Geographic distribution
Ethnic mix
Income distribution
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Segments of the General Environment
(contd)
The Economic Segment
Inflation rates
Interest rates
Trade deficits or surpluses
Budget deficits or surpluses
Personal savings rate
Gross domestic product
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Segments of the General Environment
(contd)
The Political/Legal Segment
Antitrust laws
Taxation laws
Deregulation philosophies
Labor training laws
Educational philosophies and
policies
Segments of the General Environment
(contd)
The Sociocultural Segment
Women in the workplace
Workforce diversity
Attitudes about quality of worklife
Concerns about environment
Shifts in work and career preferences
Shifts in product and service preferences
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Segments of the General Environment
(contd)
The Technological Segment
Product innovations
Applications of knowledge
Focus on R&D
New technologies
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Segments of the General Environment
(contd)
The Global Segment
Important political events
Critical global markets
Newly industrialized countries
Different cultural attributes
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Industry Environment Analysis
Industry Defined
A group of firms producing products that are
close substitutes (ex: automotive, airline, grocery
retail)
Firms that influence one another
Includes a rich mix of competitive strategies
that companies use in achieving strategic
competitiveness and above-average returns
Barriers to Entry
Product differentiation
Unique products
Customer loyalty
Products at competitive
prices
Capital Requirements
Physical facilities
Inventories
Marketing activities
Availability of capital
Switching Costs
One-time costs customers
incur when they buy from a
different supplier
New equipment
Retraining employees
Psychic costs of ending
a relationship
Access to Distribution
Channels
Stocking or shelf space
Price breaks
Cooperative advertising
allowances
Barriers to Entry
Cost Disadvantages
Independent of Scale
Proprietary product
technology
Favorable access to raw
materials
Desirable locations
Government policy
Licensing and permit
requirements
Deregulation of
industries
Expected retaliation
Responses by existing
competitors may depend
on a firms present stake
in the industry (available
business options)

Bargaining Power of Suppliers
Supplier power increases when:
Suppliers are large and few in number.
Suitable substitute products are not available.
Individual buyers are not large customers of
suppliers and there are many of them.
Suppliers goods are critical to the buyers
marketplace success.
Suppliers products create high switching costs.
Suppliers pose a threat to integrate forward into
buyers industry.
Bargaining Power of Buyers
Buyer power increases when:
Buyers are large and few in number.
Buyers purchase a large portion of an industrys
total output.
Buyers purchases are a significant portion of a
suppliers annual revenues.
Buyers switching costs are low.
Buyers can pose threat to integrate backward into
the sellers industry.
Threat of Substitute Products
The threat of substitute products increases
when:
Buyers face few switching costs.
The substitute products price is lower.
Substitute products quality and performance are
equal to or greater than the existing product.
Differentiated industry products that are
valued by customers reduce this threat.
Intensity of Rivalry Among Competitors
Industry rivalry increases when:
There are numerous or equally balanced
competitors.
Industry growth slows or declines.
There are high fixed costs or high storage costs.
There is a lack of differentiation opportunities or
low switching costs.
When the strategic stakes are high.
When high exit barriers prevent competitors from
leaving the industry.
A Porter's 5 forces analysis on Nokia

Threat of new entrants:
The threat of a new entrant is quite low as the
industry is already established.
Technology is the major differentiator.
Major barrier is high investments in R&D,
technology and marketing.
Nokia holds 29% of the market share in the
industry, the highest market share in the
industry and it need not worry about new
entrants.
A Porter's 5 forces analysis on Nokia

Power of suppliers:
As the leading mobile phone company in the industry
they were in a very strong position when bargaining
with their suppliers.
Can bargain and negotiate with any mobile phone
hardware maker because there is a high number of
equipment suppliers.
The software suppliers for their Smartphones are now
Microsoft, who will have a very high bargaining power.
There is a moderate threat from the powers of
suppliers.
A Porter's 5 forces analysis on Nokia

Powers of buyers:
The power that customers have is rising because of the
increasing number of choices in the mobile telecommunication
industry.
The industry is very price sensitive with customers seeking out
the best value for money.
Many of the consumers will also be tied into long term contracts
so switching from one handset to another will be difficult and
expensive for the consumer, as a result they may not want to
change until the contract is finished.
Buyers have a high amount of power because of the other
handsets they can purchase instead of Nokia

A Porter's 5 forces analysis on Nokia

Threats of substitutes products
Hard to replace, as customers would not be able to be in
constant contact when away from the house.
On the other hand, it could be said that customers would be able
to contact people through others types of media such as social
networking websites, email and home telephones. Although
staying in constant contact would be hard in customers day to
day life.
However, smart phones are capable of a lot of functions so there
are many substitutes if the substitute focuses on one of the
functions, e.g. digital camera can take better photos then smart
phones, notebooks can surf the web just as effectively as smart
phone can.
Threat of a substitute product is very low due to the fact a mobile
phone is no longer just for making calls but for all the other
function as well

A Porter's 5 forces analysis on Nokia

Competitive rivalry:
Nokia rivals have moved to smart phones and androids while
Nokia have only just recently released their first smart phones
leaving them trailing their rivals such as Apple and HTC.
There is also very little differentiation between the competitors
which means any new smart phones in the market, like Nokia
Lumia, will find it difficult to tempt existing iphone and HTC
customers to switch.
Intense competition from large companies such as; Apple, HTC,
Blackberry, Sony Ericcson and LG, ect.
Competitive rivalry is very high and Nokia must be aware of the
threat that competitors have on their business

Competitor Analysis

In formulating business strategy, managers must
consider the strategies of the firm's competitors.
The goal of competitor analysis is to understand:
with which competitors to compete,
competitors' strategies and planned actions,
how competitors might react to a firm's actions,
how to influence competitor behavior to the firm's own
advantage.
Competitor analysis has two primary activities,
1) Obtaining information about important competitors, and
2) Using that information to predict competitor behavior.
Primary Sources of Competitor
information
Secondary Sources of Competitor
Information
Competitor Analysis Framework

Michael Porter presented a framework for
analyzing competitors. This framework is based
on the following four key aspects of a
competitor:
1. Competitor's objectives.
2. Competitor's assumptions.
3. Competitor's strategy.
4. Competitor's capabilities.
Competitor Analysis Framework

Globalization
Globalization refers to the strategy of approaching
worldwide markets with standardized products
Awareness of the strategic opportunities faced by
global corporations and of the threats posed to
them is important to strategic planners
Understanding the scope of competing in global
markets is rapidly becoming a required
competence of strategic managers
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Multidomestic and Global Industries
A global industry is one in
which competition crosses
national borders (tires,
athletic shoes)
A multidomestic industry
competition is essentially
segmented from country to
country (food retailing)
Projected Economic Growth
Why Firms Globalize?
Earning high returns from
transferring distinctive
competencies to foreign markets
Realizing location economies by
using lower-cost locations
The resulting lost opportunities,
reduced income, and limited
production
Moving down the experience
curve
- Larger global markets = more
accumulated volume
Question: Should firms be
proactive or reactive?
At the Start of Globalization
External and internal assessments are
conducted before a firm enters global
markets
External assessment involves careful
examination of critical features of the
global environment
Internal assessment involves identification
of the basic strengths of a firms operations
Complexity of the Global Environment
Factors affecting the increasing complexity
of global strategic planning:
Multiple political, economic, legal, social, and
cultural environments
Interactions between the national and foreign
environments are complex
Geographic separation, cultural and national
differences, and variations in business practices
all tend to make communication and control
efforts difficult
Extreme competition
4 Strategic Choices Globally
1. International strategy
Create value by transferring skills
and products abroad.
2. Multidomestic strategy
Maximize local responsiveness by
customizing products and marketing
strategy for local markets.
3. Global strategy
Pursue low-cost status, offer standardized global
products.
4. Transnational strategy
Use global learning to achieve low-cost status,
differentiation, and local responsiveness simultaneously.
The Advantages and Disadvantages of Different Strategies
for Competing Globally
Strategy Advantages Disadvantages
International
Transfer of distinctive competencies
to foreign markets
Lack of local responsiveness
Inability to realize location economies
Failure to exploit experience-curve
effects
Multi
domestic
Ability to customize product offerings
and marketing in accordance with
local responsiveness
Inability to realize location economies
Failure to exploit experience-curve
effects
Failure to transfer distinctive
competencies to foreign markets
Global
Ability to exploit experience-curve
effects
Ability to exploit location economies
Lack of local responsiveness

Transnational
Ability to exploit experience-curve
effects
Ability to exploit location economies
Ability to customize product offerings
and marketing in accordance with
local responsiveness
Reaping benefits of global learning
Difficulties in implementation because
of organizational problems
Four Basic Strategies
Escalating Commitments to International Markets
Environmental scanning
Environmental scanning can be defined as the
study and interpretation of the political,
economic, social and technological events and
trends which influence a business, an industry
or even a total market.
Environment scanning v/s Environment analysis
Environment "scanning" means to collect data
about a given environment. Environment
"analysis" means to analyze or "make sense of"
the data that was collected during the scanning
phase.
Environmental scanning is one component of
the environmental analysis.

Environmental Scanning
The screening of large amounts of information to
anticipate and interpret change in the environment.
Environmental scanning is the process of gathering
information about events and their relationships within
an organization's internal and external environments.
Information has two primary strategic role - in objective
setting and in strategy formulation
The basic purpose of environmental scanning is to
help management determine the future direction of the
organization.
They scan in order to avoid surprises, identify threats
and opportunities, gain competitive advantage, and
improve long-term and short-term planning
Environmental Scanning
Competitor Intelligence
The process of gathering information about competitors
who they are?; what are they doing?
Is not spying but rather careful attention to readily
accessible information from employees, customers,
suppliers, the Internet, and competitors themselves.
May involve reverse engineering of competing products to
discover technical innovations.
Global Scanning
Screening a broad scope of information on global forces
that might affect the organization.
Important to firms with significant global interests.
Assessing the Environment
Forecasting
The part of organizational planning that involves
creating predictions of outcomes based on
information gathered by environmental scanning.
Facilitates managerial
decision making.
Is most accurate in
stable environments.
Assessing the Environment (contd)
Types of Forecasting
Quantitative forecasting
Applying a set of mathematical rules to a series
of hard data to predict outcomes (e.g., units to
be produced).
Qualitative forecasting
Using expert judgments and opinions to
predict less than precise outcomes (e.g.,
direction of the economy).
Forecasting Techniques
Various techniques are used to forecast future:
Extrapolation is extension of present trends into the future.
Brainstorming is qualitative approach requiring simply the
presence of people with some knowledge if the situation to
be predicted.
Expert opinion is qualitative technique in which experts in a
particular area attempt to forecast likely developments.
Delphi technique in which separated experts independently
assess the like hoods of special events. These
assessments are combined and sent back to each expert
for fine tuning until an agreement is reached.
Statistical modeling is a quantitative technique that attempts
to discover casual or at least explanatory factors that link
two or more time series together.
Scenario writing is focused descriptions of different likely
future presented in a narrative fashion
ETOP Analysis
Economic Environment Analysis
This includes the countries
Economic condition
Economic policies
Stages of development
Per capita income
Nature of economy
Interest rate and inflation rate
Labour Cost
Business Cycle stage
Efficiency of Financial Markets

Legal Environment Analysis
Political/Legal segment seriously influence the
nature of competition and the profitability of the
industries.
- For Ex. Tax levied on electronic items.
- Permits and Permissions.
- Import and Export controls
- Confronting with Laws and Regulations (Health, Safety
etc)
Regulatory frameworks have played an enabling role
for globalisation.
Governments are working together at international
level in imposing legislative controls (Ex. Global
Warming)
The agreements between two countries at
international level and the union of the countries
producing one type of product affect notably
economic activities

Analysis of Competitive Capabilities
Competitive capability
Strategic Capability/Competitive capability of an
organisation is its ability to survive in the
marketplace.
The base for the strategic capability is the
organisations ability to differentiate itself from
others who are offering similar products.
Why it is Important?
The strategic capability is necessary to cope with
the changes in the environment and to gain
competitive advantage.
The organisation should have the internal
capability of using its resources and core
competencies in overcoming the threats and
exploiting the opportunities.

Analysis of Competitive Capabilities
The Strategic Capability can be related to 3 main
factors
1. Whether the organisation has the necessary resources to
deliver a new strategy.
2. Identifying competencies in relevant areas i.e. availability
of the expertise and knowledge within the organisation
3. To have an understand whether or not the organisation
has the capacity to implement and manage the change.
The Organisation capability could be its
- Financial Capability
- Marketing Capability
- Technological Capability
- Human Resource Capability
Difference between SWOT and TOWS

TOWS analysis is very similar to the SWOT
method.
It is the next level of SWOT.
TOWS simply looks at the negative factors
first in order to turn them into positive
factors.
It was propounded by Heinz Weihrich in 1982.
Today this model has been used for research
and strategy formulation around the globe.
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TOWS Matrix
Internal
Factors
External
Factors
Strengths
(list key
strengths)
Weaknesses
(list key
weaknesses)
Opportunities
(list key
opportunities)
SO Strategies:
strategies that
use strengths
to take
advantage of
opportunities
(Maxi Maxi)
WO Strategies:
strategies that
reduce
weaknesses &
take advantage
of opportunities
(Mini Maxi)
Threats
(list key
threats)
ST Strategies:
strategies that
use strengths
to overcome
threats
( Maxi Mini)
WT Strategies:
strategies that
reduce
weaknesses
and overcome
threats
( Mini Mini)
TOWS Matrix
SO Strategies
Seeks to mass-up firms strengths to exploit the
opportunities. ( Ex. HUL)
ST Strategies
Attempts use the firms strengths to deal with
environmental threats. ( Ex. HUL)
WO Strategies
Aims at minimising the weakness and maximising
the opportunities. (Ex. Raymond's dependence for
technology)
WT Strategies
Tries to minimise weaknesses and threats.
For Ex. Managerial weakness can be minimised
by training & external threat can be met by
Strategic alliances.

282
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Identifying the Competitive
Advantage
Competitive Advantage
A firms profitability is greater than the average profitability
for all firms in its industry.
Sustained Competitive Advantage
A firm maintains above average and superior profitability
and profit growth for a number of years.
The Primary Objective of Strategy
is to achieve a
Sustained Competitive Advantage
which in turn results in
Superior Profit and Profit Growth.
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Strategy, Resources, Capabilities &
Competencies
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Competitive Advantage, Value
Creation, and Profitability

1. VALUE or UTILITY the customer gets from owning
the product
2. PRICE that a company charges for its products
3. COSTS of creating those products
Consumer surplus is the excess utility a
consumer captures beyond the price paid.
Basic Principle: the more utility that consumers get
from a companys products or services, the
more pricing options the company has.
How profitable a company becomes depends
on three basic factors:
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Building Blocks of Competitive
Advantage




The Generic Distinctive
Competencies
Allow a company to:
Differentiate product offering
Offer more utility to customer
Lower the cost structure
regardless of the industry,
its products, or its services

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Efficiency
Measured by the quantity of inputs it takes to
produce a given output:
Efficiency = Outputs / Inputs
Productivity leads to greater efficiency and
lower costs:
Employee productivity
Capital productivity
Superior efficiency helps a company
attain a competitive advantage
through a lower cost structure.
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Quality
Reliable and
Differentiated by attributes that customers perceive to have
higher value
The impact of quality on competitive
advantage:
High-quality products differentiate and increase the value
of the products in customers eyes.
Greater efficiency and lower unit costs are associated with
reliable products.
Superior quality = customer perception of
greater value in a products attributes
Form, features, performance, durability, reliability, style, design
Quality products are goods and services that are:
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A Quality Map for Automobiles
When customers
evaluate the quality of
a product, they
commonly measure it
against two kinds of
attributes:

1. Quality as Excellence

2. Quality as Reliability
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Innovation
Innovation is the act of creating new
products or new processes
Product innovation
Creates products that customers perceive as more
valuable and
Increases the companys pricing options
Process innovation
Creates value by lowering production costs

Successful innovation can be a major
source of competitive advantage by
giving a company something unique,
something its competitors lack.
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Responsiveness to Customers


Superior quality and innovation are integral to superior
responsiveness to customers.
Customizing goods and services to the unique demands of
individual customers or customer groups.
Enhanced customer responsiveness
Customer response time, design, service, after-sales
service and support

Superior responsiveness to customers differentiates
a companys products and services and leads to
brand loyalty and premium pricing.
Identifying and satisfying customers needs
better than the competitors
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The Durability of Competitive
Advantage
1. Barriers to Imitation
Making it difficult to copy a companys distinctive competencies
Imitating Resources
Imitating Capabilities
1. Capability of Competitors
Strategic commitment
Commitment to a particular way of doing business
Absorptive capacity
Ability to identify, value, assimilate, and use knowledge
1. Industry Dynamism
Ability of an industry to change rapidly
The DURABILITY of a companys competitive advantage over its
competitors depends on:
Competitors are also seeking to develop distinctive
competencies that will give them a competitive edge.
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Why Companies Fail
Inertia
Companies find it difficult to change their strategies and
structures
Prior Strategic Commitments
Limit a companys ability to imitate and cause
competitive disadvantage
The Icarus Paradox
A company can become so specialized and inner directed based on past
success that it loses sight of market realities
When a company loses its competitive advantage, its
profitability falls below that of the industry.
It loses the ability to attract and generate resources.
Profit margins and invested capital shrink rapidly.
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Comparing Toyota and General
Motors
Superior value creation requires that the gap between
perceived utility (U) and costs of production (C) be
greater than that obtained by competitors.
The Value Chain
Competitive advantage is created and sustained only when a
firm is able to perform the most critical functions either
more cheaply or better than its competitors Michael
Porter.
The concept was first described and popularized by Michael
Porter in 1985.
Value Chain Analysis is one way of identifying which activities
are best undertaken by a business and which are best
provided by others ("out sourced").
It helps the managers to find the strengths and weaknesses
of each activity of the firm and its competitors.
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The Value Chain
A company is a chain of activities for transforming inputs into
outputs that customers value including the primary and
support activities.
Primary value chain activities
Primary Activity Description
Inbound logistics All those activities concerned with receiving and storing externally
sourced materials
Operations The manufacture of products and services - the way in which resource
inputs (e.g. materials) are converted to outputs (e.g. products)
Outbound
logistics
All those activities associated with getting finished goods and services
to buyers
Marketing and
sales
Essentially an information activity - informing buyers and consumers
about products and services (benefits, use, price etc.)
Service All those activities associated with maintaining product performance
after the product has been sold
Support activities
Secondary
Activity
Description
Procurement This concerns how resources are acquired for a business (e.g.
sourcing and negotiating with materials suppliers)
Human Resource
Management
Those activities concerned with recruiting, developing, motivating
and rewarding the workforce of a business
Technology
Development
Activities concerned with managing information processing and the
development and protection of "knowledge" in a business
Infrastructure Concerned with a wide range of support systems and functions such
as finance, planning, quality control and general senior management
Guidelines for crafting successful
business strategies
1. Place top priority on crafting and executing strategic moves
that enhance the companys competitive position for the
long term.
2. Be prompt in adapting to changing market conditions,
unmet customer needs, buyer wishes for something better,
emerging technological alternatives and new initiatives of
competitors.
3. Invest in creating a sustainable competitive advantage.