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ENVIRONMENTAL ANALYSIS

Strategic Management
Process

Environmental
Scanning

Strategy
Formulation

Strategy
Implementation

Evaluation
&Control

ENVIRONMENTAL SCANNING AND INDUSTRY ANALYSIS


The environmental scan includes the following components:
Analysis of the (external) Macro-environment (Societal
Environment)
Analysis of the firm's (external) Task Environment ( Industry
Environment)
Analysis of the firms Internal Environment (Organizational
Environment)
The societal environment is composed of political-legal,
economic, socio-cultural and technological forces ( known as
PEST factors)
The task environment (industry) contains stakeholder groups
that have an impact or are heavily impacted by the
organization. These are governments, local communities,
suppliers, creditors, employees/labor unions, special interest
groups, and trade associations.

Environmental Analysis
Analyse EXTERNAL Environment Conditions
SOCIETAL ENVIRONMENT

TASK ENVIRONMENT

T
Analyse INTERNAL Company Situation

S
Competencies,
Capabilities,
Resource strengths and weaknesses,
Competitiveness

Identify
Strategic
Options
for the
Company

Select the
Best
Strategy
for the
Company

Environmental Variables

The Components of a Companys Macro-Environment


MACROENVIRONMENT
Legislation and
Regulation

Suppliers

Rival
Firms

Substitutes

COMPANY
Buyers

New
Entrants

IMMEDIATE INDUSTRY
AND COMPETITIVE
ENVIRONMENT

The Components of a Companys Macro-Environment


MACROENVIRONMENT
Legislation and
Regulation

Suppliers

Rival
Firms

Substitutes

COMPANY
Buyers

New
Entrants

IMMEDIATE INDUSTRY
AND COMPETITIVE
ENVIRONMENT

The Components of a Companys Macro-Environment


MACROENVIRONMENT
Legislation and
Regulation

Suppliers

Strat.
Group
1

Strat.
Group
2

Substitutes

Strat.
Group
3

New
Entrants

IMMEDIATE INDUSTRY
AND COMPETITIVE
ENVIRONMENT

Buyers

Strategic Groups
Firms in same strategic group have two or more competitive
characteristics in common
(eg. Nokia, Motorola, Ericsson) (Econet, Telecel, Net*One)

Sell in same price/quality range

Cover same geographic areas


Be vertically integrated to same degree

Have comparable product line breadth

Emphasize same types of distribution channels

Offer buyers similar services


Use identical technological approaches

Within

the industry environment,


Strategic Groups are important because
a firm does not compete against
everyone in an industry but only against
those with similar strategies using
similar resources.

PEST Analysis
A scan of the external macro (societal) environment in which
the firm operates reveals the business opportunities lying
ahead and the threats the organization will have to face in
future.
Developments or trends in a corporation's societal
environment typically do not affect the corporation directly
but indirectly through their impact on one or more
stakeholder groups in the corporation's task environment.
This can be expressed in terms of the following factors:
Political/Legal
Economic
Social
Technological
The acronym PEST (sometimes also labeled as SLEPT") is
used to describe a framework for the analysis of these
macro-environmental factors.

PEST Factors ( Detailed)

A PEST analysis fits into an overall


environmental scan as shown in the following
Political factors diagram:

Economic factors

include government regulations and legal issues and


define both formal and informal rules under which the
firm must operate. Some examples include

affect the purchasing power of potential customers and


the firm's cost of capital. The following are examples of
factors in the macro-economy

tax policy

economic growth

employment laws

interest rates

environmental regulations

exchange rates

trade restrictions and tariffs

inflation rate

political stability

Social factors

PEST

FACTORS

Technological
factors

include the demographic and cultural aspects of the


external macro-environment. These factors affect
needs and the size of potential markets. Some social
factors include:

population growth rate


age distribution
career attitudes
health consciousness

can lower barriers to entry, reduce minimum efficient


production levels, and influence outsourcing decisions.
Some technological factors include:

R&D activity
automation
technology incentives
rate of technological change

How to identify the strategic factors


in the External Environment?
List the major trends or developments emerging in
each of the four forces of a firm's societal
environment.
Then estimate the likely impact of these general trends
upon the primary stakeholders, e.g., communities,
creditors, competitors, etc. These data form a series
of strategic inputs - those trends and developments
that are very likely to determine the future
environment.
Plot these strategic issues on an issues priority matrix
Those issues judged to have a high probability of
occurring and a high probable impact on the
corporation are strategic factors.
Categorize these factors as opportunities or threats.
(Keep in mind that some strategic factors may be both
opportunities and threats depending upon how one

Example: The trend toward dual-career couples is a


development in the societal environment of companies
worldwide. Socio-cultural forces linked to the changing
role of women plus the trend toward single family
households combined with the economic forces of high
interest rates and inflation in the 1970s to send both men
and women searching for full-time jobs in addition to
their being parents. This development in the societal
environment affected companies through its impact on
employee/union groups (who asked for parental leave
and/or company-sponsored day care centers),
customers (employed parents who increasingly shop for
convenience goods because of time constraints), and
special interest groups and even governments (who
asked business firms to help support local schools and
deal with community social problems).

Issues Priority Matrix


(External Strategic Factors of a firm are those that fall under High or Medium priority)

Forecasting Techniques
- Trend Extrapolation Vs Scenario Writing

Extrapolation is simply the extension of present


trends into the future.
It relies on the
assumption that the environment is reasonably
consistent and changes slowly in the short run.
As a result, extrapolation is fairly easy to do - as
witnessed by its being the most widely used
form of forecasting.
Everything will be fine until a sudden new
formation occurs!
extrapolation is fine if the time frame to be
predicted is short and one is lucky.

Forecasting Techniques
- Trend Extrapolation Vs Scenario Writing

Scenario-writing, in contrast, is based upon a series of


historical data plus informed hunches from key people
in the company who have access to environmental
information
or from a Delphi panel of outside experts.
Like extrapolation, scenario-writing is a very popular
forecasting technique,
but unlike extrapolation, it can get very complicated
and time consuming.
one clear-cut advantage over extrapolation:
It
encourages forecasters to make their assumptions
explicit. One is thus more likely to recognize the
dangerousness of moving forward without information.

Ensuring information on strategic environmental factors


gets to the attention of strategy makers

a real problem in most large corporations barriers


to good communication.
The very people who are in the best positions to
gather this data are often the ones who either fail to
pass it on because it's too much of a chore
or they fail to notice it because no one told them
how important certain developments are to top
management.
proper information dissemination is an important
part of environmental scanning
corporations should make attempts to schedule a
series of analytical reports for top management's
information.

The purchasing department, for example, might

be tasked with the job of compiling a quarterly


analysis of the availability and reliability of
present and future suppliers.
The market research department might prepare
analyses of present and future customers for
certain products and services with special
attention to demographic shifts.
Each report would need to conclude with a list of
strategic factors to monitor in the coming months
or years.
The need to get first hand information from the

market, NOT desk research!!

Industry Analysis: Porters Five-Forces Model


The task (industry) environment contains stakeholder
groups that have an impact on or are heavily impacted by
the organization.
These include:
governments, local communities, suppliers,
creditors, employees/labor unions, special interest
groups, and trade associations.
However, the level of competitive intensity present in
an industry is more closely felt and determined by the
industry structure in which the firm operates.
Michael Porter provided a framework that models an
industry as being influenced by five forces.
The strategic business manager seeking to develop a
competitive edge over rival firms can use this model to
better understand the industry context in which the firm
operates Porters 5 forces PRESENTATION.ppt

Diagram of Porter's 5 Forces Determinants of Industry


Attractiveness

SUPPLIER POWER

THREAT OF
NEW ENTRANTS
(BARRIERS
TO ENTRY)
Absolute cost
advantages
Proprietary learning
curve
Access to inputs
Government policy
Economies of scale
Capital requirements
Brand identity
Switching costs
Access to
distribution
Expected retaliation
Proprietary products

Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost or differentiation
Switching costs of firms in the industry
Presence of substitute inputs
Threat of forward integration
Cost relative to total purchases in industry

DEGREE OF RIVALRY
-Exit barriers
-Industry concentration
-Fixed costs/Value added
-Industry growth
-Intermittent overcapacity

BUYER POWER
Bargaining leverage
Buyer volume
Buyer information
Brand identity
Price sensitivity
Threat of backward integration
Product differentiation

THREAT OF
SUBSTITUTES
-Switching

costs
-Buyer
inclination
to substitute
-Priceperformance
trade-off of
substitutes

STRATEGIC MANAGEMENT PROCESS


External
Environment

Corporate Performance Evaluation

Environmental Scanning
T

Vision
Mission
Goals
Objectives
STRATEGIES
Corporate
Business
Functional
Policies

Programs
Budgets
Procedures
Evaluation

Internal
Environment

INTERNAL SCANNING: ORGANIZATIONAL


ANALYSIS

The analysis of a corporation's internal environment


reveals the strengths and weaknesses of the firm.
It includes an assessment of a firm's structure and
culture, and its functional areas (such as marketing,
finance, research & development, operations, human
resources, and information systems )
Quite a number of techniques and concepts are
available to analyze the internal environment of the
organization e.g.
the Resource-Based view
McKinsey's 7-S Framework
Value chain analysis
The experience curve etc

The Resource-Based Approach


According to the resource-based view of the firm, a

company's sustained competitive advantage is primarily


determined by its resource endowments that are often
revealed through the competencies the firm possesses.
The approach focuses on Resources, Capabilities &

Competencies as key Internal Strategic Factors


Resources:
are the capital or financial, physical, social or human,
technological and organizational factor endowments that allow a
company to create value for its customers.
Assets that are the building blocks of an organization. These
include:
-Physical assets (plant, equipment, location, etc.)
-Human assets (employees and their skills)
-Organizational assets (structure, culture and reputation)
Tangible vs. Intangible resources
The 4Ms

The strengths and weaknesses of resources can be


measured by:
Companys past performance
Companys key competitors and
Industry as a whole.
The extent to which it is different from that of the
competitors, it is considered as a strategic asset.

Evaluation of key resources


A unique resource is one which is not found in

any other company.


A resource is considered to be valuable if it
helps to create strong demand for the product.
Barney (d.u.) has evolved VRIO framework of
analysis to evaluate the firms key resource i.e.
Value does it provide competitive
advantage?
Rareness do other competitors possess it?
Imitability is it costly for others to imitate?
Organization does the firm exploit the
resource?

Capabilities
Refer to companys skills at coordinating and exploiting its

resources & putting them to productive use.


These skills reside in an organizations rules, routines and
procedures.
These comprise business processes and routines that manage the

interaction among resources to turn inputs into outputs.


E.g.. Marketing capability, R&D capability, production capability.

COMPETENCIES:
Competencies are firm specific strengths that allow a company to

differentiate its products and for achieve substantially lower cost


than its rivals and thus gain a competitive advantage.
-It is the cross-functional integration and coordination of
capabilities.
Each division may have its own competencies. E.g.. One division
may have competency in New product development while
another division may have competency in recruiting human
resources

Types of competency
i) Core competency:
It is an activity central to a firm's profitability and competitiveness that

is performed well by the firm.


Core competencies create and sustain firm's ability to meet the critical

success factors of particular customer groups.


ii) Distinctive competency:

It is a competitively valuable activity that a firm performs better than its

competitors.
These provide the basis for competitive advantage.

These are cornerstone of strategy.


They provide sustainable competitive advantage because these are hard

to copy.
Distinctive competence is a unique strength that allows a company to

achieve superior efficiency, quality, innovation and customer


responsiveness. It allows the firm to charge premium price and achieve
low costs compared to rivals, which results in a profit rate above the
industry average

Toyota has world class manufacturing processes.


In order to call anything a distinctive competency it should

satisfy 3 conditions, namely:


Value disproportionate contribution to customer perceived
value;
Unique unique compared to competitors;
Extendibility capable of developing new products.
Distinctive Competencies are built around all functional areas:
Technology related
Manufacturing related
Distribution related
Marketing related
Skills related
Organizational capability
Other types. II

The relevance of the resource-based view of the firm to


strategic management in a global environment?
The resource-based view of the firm is an attempt to bring attention to the importance of
a corporation's resources in strategic management. For much of the 1980s, Porter's
concepts of industry analysis and competitive strategy dominated the field of strategic
management to such an extent that many felt that industry structure alone seemed to
determine a firm's profit potential.
Unfortunately, this emphasis on the industry tended to ignore a firm's core skills and
competencies. What good is the knowledge that a niche in the market exists that can be
reached through a focused differentiation competitive strategy if a corporation doesn't
have the resources to implement such a strategy? Experts on the resource-based view
suggest that differences in performance among companies may be explained best, not
through differences in industry structure identified by industry analysis, but through
differences in corporate assets and resources and their application.
The resource-based view of the firm is compatible with the traditional concepts of
S.W.O.T. and distinctive competence popular in the field since the 1960s.
The only danger with the resource-based approach is that people may go overboard
again and tend to put too much emphasis on internal factors and not enough on external
factors.
Nevertheless, the idea that the durability and imitability of corporate resources
determine competitive advance is a very useful one.
The movement toward a more global environment simply accentuates the need to
assess and to build a firms competencies so that it can successfully compete worldwide. A competency may be distinctive in ones home country, but only be a core
competency (or less) in another location in the world

The Experience Curve Advantage


(Bruce Henderson BCG)
Based on the assumption underlying the BCG growth-share portfolio matrix,
Henderson argues that the key to profits lies in market share. Results from
PIMS research supports this notion. If a corporation is able to sell a very large
number of new products by offering them at a very low price (actually below
unit cost unless vast quantities are sold), it will gain a dominant market share
and pre-empt competition by keeping the price too low for potential competitors
to earn profits. This forms a formidable entry barrier.
The corporation successfully using the experience curve will earn large
profits either as a star or when it eventually becomes a cash cow. Model-T
Fords and Bic ball point pens are just two examples. The experience curve thus
is a basis for using financial and operating leverage to achieve a low cost
business-level strategy
The experience curve concept does have its limitations, however. For one
thing, it does not consider that a corporation can be very profitable with very
low leverage by occupying a dependable niche in the marketplace based upon
some differentiating strategy such as quality or snob appeal. Rolls Royce
automobiles and Maytag washers are just two examples of firms ignoring the
experience curve by pricing at a cost above the market price and still achieving
solid profits. Differentiation and focus strategies can be very successful

The Value Chain


To analyze the specific internal activities through which firms can create
a competitive advantage, it is useful to model the firm as a chain of valuecreating activities. Michael Porter labels this as the value-chain of the
firm.
A value chain is a linked set of value-creating activities beginning with
basic raw materials coming from suppliers, to a series of value-added
activities involved in producing and marketing a product or service, and
ending with distributors getting the final goods into the hands of the
ultimate consumer. Industry value-chain analysis can identify which firms
are strongest (and weakest) in each stage of the industrys value chain.
Assuming the firm under consideration operates at various stages of the
industry value chain, a comparison with other firms at each stage can
help identify a firms strengths and weaknesses. The systematic
examination of an individual firms value activities in corporate valuechain analysis can lead to a better understanding of a corporations
strengths and weaknesses - thus identifying any core or distinctive
competencies. According to Porter, Differences among competitor value
chains are a key source of competitive advantage.

Corporations Value Chain

Porter classifies value-chain


into
Primary Value Chain Activities and Support Activities

Primary Value Chain Activities:


Inbound Logistics > Operations > Outbound Logistics > Marketing & Sales >
Service

The goal of these activities is to create value that exceeds the cost of
providing the product or service, thus generating a profit margin
Inbound logistics include the receiving, warehousing, and
inventory control of input materials.

Operations are the value-creating activities that transform the


inputs into the final product.
(Contd.)

Outbound logistics are the activities required to get the


finished product to the customer, including warehousing,
order fulfillment, etc.
Marketing & Sales are those activities associated with
getting buyers to purchase the product, including channel
selection, advertising, pricing, etc.
Service activities are those that maintain and enhance the
product's value including customer support, repair
services, etc.

Support Activities
The primary value chain activities described above are facilitated by
support
activities. Porter identified four generic categories of support
activities, the details of which are industry-specific.
Procurement - the function of purchasing the raw materials and
other inputs
used in the value-creating activities.
Technology Development - includes research and development,
process
automation, and other technology development used to support the
value-chain activities.
Human Resource Management - the activities associated with
recruiting,
development, and compensation of employees.
Firm Infrastructure - includes activities such as finance, legal,
quality
management, etc.
Support activities often are viewed as "overhead", but some firms
successfully have used them to develop a competitive advantage,

Industry Vs Corporate Value Chain


The focus of value-chain analysis is to examine the corporation in the
context of the overall chain of value-creating activities, of which the firm
may only be a small part. In industry value-chain analysis, the value
chain is split into two segments, upstream and downstream parts with
the corporation under examination being the focal point. In analyzing
the complete value chain of a product, note that even if a firm operates
up and down the entire industry chain, it usually has a center of gravity
- an area of primary expertise where its primary activities (and core
competencies) lie. One goal of industry value-chain analysis is to
identify where on the chain is the activity providing the greatest return
on investment. This might be an activity which a corporation might
want to expand when doing strategic planning.
In corporate value-chain analysis, each corporation has its own
internal value chain of activities. Each of a companys product lines has
its own distinctive value chain. Because most corporations 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

The Value System


The firm's value chain links to the value chains of
upstream suppliers and downstream buyers. The result is a
larger stream of activities known as the value system. The
development of a competitive advantage depends not only
on the firm-specific value chain, but also on the value
system of which the firm is a part
Value chain analysis can be used at both the industry level
and at the corporate level to assess a corporation's
strengths (competencies) and weaknesses

Organizational Structure
The specific ways in which the value-chain is organized and
managed result in a specific organizational structure. The
basic organizational structures are simple, functional,
divisional, SBU, and conglomerate

If a corporation's structure is compatible with present and


potential strategies, it can be viewed as an internal corporate
strength. If, however, the structure is not compatible with
either present or potential strategies, it is a definite weakness
and will act to constrain strategy formulation. For example, if
a corporation is structured on the basis of function, this may
be a weakness if the firm wishes to grow by acquiring other
profitable corporations. In order to implement such a strategy,
the strategy formulators may have to reorganize on a
divisional basis.
To the extent that top and middle managers have no
experience with such a structure, a lot of unforeseen problems

Organizational Structures

Prentice Hall, Inc. 2008

5-41

Organizational Culture
Corporate culture is the collection of beliefs, expectations, and
values learned and shared by a corporation's members and
transmitted from one generation of employees to another
Corporate culture, a collection of beliefs, expectations, and
values shared by a corporation's members, acts to shape the
behavior of people in a corporation. Since corporate culture has a
powerful influence on the behavior of managers as well as other
employees, it may strongly affect a corporation's ability to shift its
strategic direction.
Acting in a manner similar to structure, to the extent that a
corporation's culture is compatible with present and potential
strategies, it can be viewed as an internal corporate strength. To
the extent that it is not compatible, it may spell disaster for a
strategic change in the implementation stage. A strategy which
contradicts an entrenched culture may find itself being quietly (or
not so quietly) sabotaged by the corporation's most loyal and
competent employees.