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Strategic Management Environments Analysis

This document discusses analyzing a firm's strategic environment. It covers: 1) The general environment including economic, political, social, and technological factors that can impact strategy. 2) The industry environment including competition, market structure, industry life cycles, and Porter's 5 forces. 3) Defining the relevant market and industry the firm competes within. 4) A firm's internal environment including resources, objectives, and capabilities that determine strategic options. Assessing these external and internal factors is key to strategic planning.

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54 views4 pages

Strategic Management Environments Analysis

This document discusses analyzing a firm's strategic environment. It covers: 1) The general environment including economic, political, social, and technological factors that can impact strategy. 2) The industry environment including competition, market structure, industry life cycles, and Porter's 5 forces. 3) Defining the relevant market and industry the firm competes within. 4) A firm's internal environment including resources, objectives, and capabilities that determine strategic options. Assessing these external and internal factors is key to strategic planning.

Uploaded by

jonas887
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

UMBB/IGEE

Engineering management

Environments

Environmental analysis has become a key task in strategic planning in the last
two decades. Assessing the strategic situation is the first phase in determining
the proper strategies for a firm. This process often begins with an assessment of
the general environment in terms of economic, technological, social, and
political/legal influences. They are important collectively as well as individually
and often override industry or organizational variables and strategies.

Certain authors distinguish between the general environment (economic,


technological, social, political, regulatory, and others) and the industry or
competitive environment (the market, industry structure, and suppliers,
customers, and others with whom the firm deals directly). First, you will
examine two of the factors in the relevant general environment. Then, you will
look at the industry or competitive environment, including the effect of life
cycle stages on strategy formulation. Finally, you will consider an organization's
internal environment.

The General Environment

Economic and Political Factors

The state of the economy is very important to the success of a firm. Some of the
same factors that affect the economy directly influence your firm. Therefore,
assumptions made about the economy, both macro and micro, will affect the
strategies you choose. For example, if you are predicting an economic upturn (in
which GDP, disposable income, and investment levels are increasing), your
strategy to increase sales will be more likely to succeed than it would during an
economic downturn.

Timing can also affect your strategic direction. Assumptions must be made in
the present about the future in order to allow time to implement strategy. If you
react only on the basis of current economic activity, by the time your strategies
are in place, the economy could easily be very different.

Inflation and interest rates also affect strategy. The firm's rate of return must be
appropriate for inflation and interest rates at the time. Fiscal policies such as tax
rates and depreciation allowances can affect the profits of your firm and
therefore your choice of strategies.

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The type of economy you are working in (socialistic, capitalistic or laissez faire)
can influence strategy selection. The effect of a certain economic system on
your operations may influence in which countries or industries you choose to do
business. The degree of industry regulation in place or anticipated may also
affect strategy choices.

As a manager, you should view your company as one of a number of players in


a political arena, and you should assess the agendas of all the players. In
pursuing their own agendas, other players may create issues that affect your
firm. These issues are raised and dealt with in forums such as the legislature, the
media, and elsewhere. In this political environment, strategy is usually
negotiated with other players. Your firm has four basic options: do nothing and
accept the consequences; exit the business or market; modify strategies to offset
or capitalize on the issue; or seek to influence the environment. Influence can be
had by dominating the other players or by negotiating a relatively desirable
outcome with them.

The Industry Environment

After analyzing the general environment, a second major step in assessing the
organization's strategic situation is analyzing the industry or proximate
environment. In this environment you see the effects of competition and market
structure, including industry and strategic-group memberships. Industries,
markets, and products can progress through definite life cycle stages that can
influence the industry environment. Important to the industry environment is the
experience curve and its strategic implications as discussed in Module 8 of the
text.

An essential part of analyzing the industry environment is to correctly define the


market or market segment that the company is trying to serve. Also important
and related is defining the industry in which the business-unit will compete.
Markets and industries can range in size from local to global. In fact, there
appears to be a trend toward transnationalization and globalization of industries.

While businesses are demographically and structurally part of an industry, they


may also be strategically related to a subset of firms within an industry—the
strategic group. Competition in markets occurs among firms in industries as well
as among strategic groups. According to Michael Porter, competition depends
on five major factors: the threat of new entrants, the threat of substitution, the
bargaining power of suppliers, the bargaining power of customers, and the
degree of rivalry among existing competitors.

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Defining Markets and Industries

Although there is no one way to define markets, they tend to be described in


terms of several dimensions:

The products or services making up the market—these can be


broadly or narrowly defined. Generally, the most useful way to
categorize products in terms of their markets is into groups with
similar functions and/or technologies.
The customers to whom the products are sold—are they of
similar or different types?
The geographical regions the market serves.
The manufacturing level of the product (components vs. goods)
—raw material, component, subassembly, or finished goods.

Multidimensional factors—a combination of the above factors


may be used.

Market definition is an important and difficult step in formulating strategy. The


strategy you employ will largely be determined by the definition of your served
market; however, an appropriate served market definition at one point in time
may not be an appropriate definition later on.

Global industries are those that require global operations to compete


effectively. An international business is a national or domestic firm that has
expanded into one or more foreign markets, but its basic orientation is toward its
home country or market. A multinational (also called multilocal or
multidomestic) business is one that operates in a number of different countries.
It not only sells its products in different countries, but also has production and
other facilities in other countries, in order to be responsive to unique national
needs.

The main difference between international and multinational firms seems to be


that an international firm markets its products in different countries, but does not
have production or other operating facilities in countries other than its home. A
multinational firm not only sells its products in foreign markets (as does an
international firm), it also has production and other facilities outside its home
country.

In most cases, a firm can choose to compete on an international or multinational


basis without incurring any significant disadvantages. This is not true for a

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global industry, in which choosing to operate on a limited scale can create
significant disadvantages.

The Internal Environment and Resources

Analyzing your organization's internal environment is the third aspect of


assessing the strategic situation. This environment includes the values and
expectations of your firm's stakeholders; its mission, goals and objectives; and
its resources. These factors combined determine what your organization is trying
to accomplish and how successful it is likely to be. You must assess your
internal environment before strategy alternatives can be formulated. Alternatives
open to the company can then be selected from a number of generic strategic
options.

It is important to realize that organizations go through fairly typical patterns or


stages of development as they grow from single-product businesses. The growth
strategies that firms pursue often dictate changes in company structures and
processes, and needs tend to change as firms become more and more successful.

In general, organizations possess five types of resources they can employ toward
achieving their objectives. They are:

Financial resources such as cash flow, debt capacity, the availability of new
equity, and cash and other liquid resources on hand.

Physical resources such as plants and equipment, buildings, land, inventories,


vehicles, and other facilities.

Human resources such as management, supervisors, production employees,


staff specialists, sales people, engineers, etc.

Technology such as patents, licenses, designs, production methods, proprietary


information, technological skills, and the like.

Organizational resources such as systems, procedures, management


techniques, decision-making models, company reputation, good will, etc.

One of the reasons many small businesses fail and strategies in larger firms do
not succeed is that management attempts to do more than resources will permit
or support. For this reason, strategies need to be evaluated in terms of the
resources they require and the organization's ability to support those
requirements. Spreading one's self too thin is a recipe for failure. In addition,
resources are relative. A company's strengths and weaknesses must be evaluated
not in absolute terms, but in relationship to its competitive environment
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Common questions

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The life cycle stage of a product or industry—comprising introduction, growth, maturity, and decline phases—profoundly impacts strategic decisions. In the introduction stage, the focus is on market entry and initial positioning. Growth involves scaling operations and capturing market share. As maturity sets in, strategies shift towards optimizing efficiency and maintaining market position. During decline, considerations may include divestment or reinvention. Each stage necessitates specific strategic orientations to handle competitive pressures and evolving market dynamics .

Political and legislative environments impact corporate strategies by creating operational constraints or opportunities through regulatory policies, taxation, and legal structures. Firms typically respond by adapting strategies to conform to or capitalize on these influences, negotiating for favorable conditions, or attempting to shape future environmental policies. Strategic responses may involve compliance, lobbying, or strategic withdrawal from unfavorable markets to optimize alignment with political landscapes .

Defining a market is challenging due to the need to balance product functions, customer types, geographic scope, and product manufacturing levels, often using a combination of these dimensions for accuracy. Market definitions must be dynamic, adapting to technological advancements, consumer preferences, and competitive landscapes. A static definition risks obsolescence, whereas evolving definitions allow for strategic flexibility and relevance .

Industry and competitive environments shape strategic frameworks through variables such as market structure, strategic group dynamics, and lifecycle stages. Industry forces, including market entry barriers, product substitution threats, and competitive intensity, dictate strategic priorities. Strategic groups offer insights into competitor behavior and strategic alignment, requiring contextual adaptation to maintain competitive advantage. Strategic decisions must respond to these environmental pressures to ensure sustainability and growth .

A firm's internal resources—financial, physical, human, technological, and organizational—determine its strategic options by defining its capabilities and limitations. Success probability hinges on aligned resource allocation to strategic imperatives and balancing constraints with ambition. Strategies must align resource capacity with competitive demands, avoiding overextension which leads to failure. Evaluating resources relative to competitors ensures robustness in strategy development .

International firms market their products in foreign countries while maintaining a basic orientation towards their home country, lacking significant production facilities abroad. In contrast, multinational firms operate in multiple countries, both selling products and establishing production and other operational facilities outside their home country to better respond to national needs. The primary distinction lies in the scope and scale of operational integration in foreign markets .

Globalization fosters strategic positioning shifts as firms adapt operations to meet diverse international demands while leveraging global efficiencies. Transnational industries necessitate agility in market-specific adaptations combined with integration for global consistency. Strategic positioning increasingly emphasizes global brand strength, adaptability to multi-national market conditions, and leveraging cross-border resource advancements to maintain competitiveness .

Bargaining power of suppliers and customers crucially shapes competitive strategies. When suppliers exert high bargaining power, firms may focus on diversifying input sources, enhancing supplier relationships, or developing in-house capabilities. Conversely, powerful customers necessitate firms tailor offerings, improve service levels, or enhance value propositions to retain business. These dynamics encourage strategic flexibility to balance cost structures and market positioning .

In politically dynamic environments, a firm can either accept consequences, exit the market, modify strategies to mitigate impacts, or proactively work to influence the environment. Long-term objectives are affected by the chosen path: passive acceptance may stabilize short-term but risk future alignment; exiting contracts future growth terrain; adaptive modification promises resilience, while environmental influence offers low predictability with potential strategic clarity gains .

Economic factors significantly impact strategic planning by dictating assumptions about the broader and immediate market conditions. Macroeconomic assumptions, such as predictions of economic upturns or downturns, influence strategies aimed at increasing sales or capitalizing on growth opportunities during favorable conditions . Micro-level assumptions relate more specifically to the firm's economic context and can alter strategic approaches, including adjustment to inflation, interest rates, and fiscal policies. These factors both directly affect the firm's profitability and strategic choices, necessitating anticipatory adjustments rather than reactive measures to current economic conditions .

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