Chapter two:

Environment Analysis and Strategy Formulation

Contents of the chapter.
 External Environment
 Macro/ Mega
 Task/Industry Environment
 Internal Environment
 Resources and Capabilities
 The Nature & Sources of Competitive Advantage
 Levels of strategy
 Corporate Strategies
 Business Strategies
 Functional Strategies

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 External Environmental Analysis
 External forces affect the types of products developed, the nature of
positioning and market segmentation strategies, the type of services
offered, and the choice of businesses to acquire or sell.
 Analyzing external environment is to identify opportunities and threats
(external strategic factors) and develop the strategy to use opportunities
and defend the threats.
 Identifying and evaluating external opportunities and threats enables
organizations to develop a clear mission, to design strategies to achieve
long-term objectives, and to develop policies to achieve annual
objectives.

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 External Environment: Macro

 Events that take place outside of the organization and are harder to

predict and control.

 Composed of dimensions in the broader society that influence an

industry and the firms within it.

 Can be more dangerous for an organization, because they are

difficult to predict and uncontrollable by the organization.

 They are classified as demographic, economic, political/legal,

sociocultural, technological, and physical (ecological).

 They affect the firms indirectly through the task environments.

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 Macro Factors with their Elements
Demographic  Population size  Ethnic mix
 Age structure  Income distribution
 Geographic distribution  Level of education
Economic  Inflation rates  Personal savings rate
 Interest rates  Business savings rates
 Trade deficits or surpluses  Gross domestic product
 Budget deficits or surpluses
Political/Legal  Taxation laws  Educational policies
 Regulations in import and  Political ideology,
export  Laws on hiring and
 Financial regulations promotion,
Socio-cultural  Workforce diversity  Shifts in work and career
 Attitudes about the quality preferences
of work.  Shifts in preferences
regarding product and service
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 Macro Factors with their Elements- cont…

Technological  Product innovations  R&D expenditures

 Applications of knowledge  New communication
technologies

Global factors  Important political events  Different cultural

 Critical global markets and institutional
attributes
Physical  Energy consumption  Availability of water
Environment  Practices used to develop as a resource
energy sources  Availability of
 Renewable energy efforts forests and wildlife ,
Minimizing a firm’s climate
environmental footprint

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 Macro Factors with their Elements- cont…

 Firms cannot directly control macro environments but, they gather

the information needed to understand all segments and their

implications for selecting and implementing the firm’s strategies.

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 External Environment: Industry
 An industry is a group of firms producing the similar or close
substitute of the firms product or service.
 The industry environment is also called task or immediate
environment.
 It refers to those elements or groups that directly affect the
corporation and, in turn, are affected by it.
 It is typically the industry within which the firm operates.

 These are suppliers, competitors, customers, creditors,

employees/labor unions and trade associations.
How to identify and analyse?
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 Industry Environment Analysis
Porter’s Five-Forces Model of competitive analysis is a widely
used approach for developing strategies in many industries:

Threats of new entrants

Rivalry among competing firms

Threats of substitute products

Bargaining power of suppliers

Bargaining power of consumers

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 Industry Environment Analysis cont….

1. Threats of new entrants

 New entrants to an industry typically coming up with new

capacity, a desire to gain market share, and substantial

resources. therefore, threats to an established corporation.

The threat of entry depends on the presence of entry barriers and

the rivalry (retaliations) from existing competitors.

 An entry barrier is an obstruction that makes it difficult for a

company to enter an industry.

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 Industry Environment Analysis cont….
 possible barriers to entry are:
 Economies of scale: are derived from incremental efficiency improvements
through experience as a firm grows larger. Therefore, the cost of producing each
unit declines as the quantity of a product produced during a given period increases.

 Product differentiation( through promotion, quality improvement, etc.)

 Capital requirements

 Access to distribution channels

 Government policy

 Switching cost: If switching costs are high, a new entrant must offer either a

substantially lower price or a much better product to attract buyers. Usually, the
more established the relationships between parties, the greater are switching costs.

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 Industry Environment Analysis cont…
2. Rivalry among existing firms
 A competitive move through lowering prices, enhancing quality, adding

features, providing services, extending warranties, and increasing

advertising have a obvious effect on its competitors

According to Porter, intense rivalry is related to the presence of several

factors, including:
 Similarcapability of firms competing
 Dropping demand for the industry’s products
 When barriers to entering the market are low
 When rivals have excess capacity
 When barriers to leaving the market are high

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 Industry Environment Analysis cont….
3. Threat of Substitute Products or Services

 A substitute product is a product that appears to be different but

can satisfy the same need as another product.

 Examples of substitute products are: tea is a substitute for coffee;

e-mail is a substitute for the fax; pure water is a substitute for a

bottled water .

 If the price of coffee goes up high enough, coffee drinkers will

slowly begin switching to tea.

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 Industry Environment Analysis cont….
4. Bargaining power of the buyers
 Buyers affect an industry through their ability to force down prices,
bargain for higher quality or more services, and play competitors
against each other.
 A buyer or a group of buyers is powerful if some of the following
factors hold true:
 A buyer purchases a large proportion of the seller’s product or
service.
 Buyer has the potential to integrate backward by producing the
product by itself.
 The purchased product can be easily substituted without affecting
the final product adversely.

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 Industry Environment Analysis cont….
5. Bargaining power of the suppliers
 Suppliers can affect an industry through their ability to raise prices or
reduce the quality of purchased goods and services.
 This can happen when the following condition happen

 Few suppliers and many buyers

 Its product or service is unique

 Substitutes are not readily available

 Suppliers are able to integrate forward and compete directly with

their present customers
 When the buyer is small buyer

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 The Internal environment
Internal Environmental analysis

 Internal analysis is an approach to identify internal strategic factors

(critical strengths and weaknesses) that are likely to determine whether a

firm will be able to take advantage of opportunities while avoiding
threats.

 Internal factors includes tangible and intangible resources.

 Such strategy enhance distinctive competency and the competitive

advantage.

 A distinctive competence is something that a company can make, do, or

perform better than its competitors.

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 The Internal environment cont…
Distinctive competences and Competitive advantage
Distinctive competences

 A firm’s strengths that cannot be easily matched or imitated by

competitors are called distinctive competencies.

 Strategies are designed in part to improve on a firm’s

weaknesses, turning them into strengths and may be even into

distinctive competencies.

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 The Internal environment cont…
Competitive advantages

 It is a condition or circumstance that puts a company in a favorable

or superior business position.

 A superiority gained by an organization when it can provide the

same value as its competitors but at a lower price, or

 Competitive advantage results from matching core competencies to

the opportunities.
 Competitive advantage allow the productive entity to generate more
sales or superior margins than its competition.
 Weaknesses ⇒ Strengths ⇒ Distinctive Competencies ⇒ Competitive Advantage

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 The Internal environment cont…
how we analyses internal environment?
Approaches/ Methods Of internal Analysis
 Value chain Analysis

 Quantitative Analysis

 Qualitative Analysis

 Benchmarking

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 Value chain analysis

 Value chain- a linked set of value creating activities that begin

with basic raw materials coming from suppliers, moving on to a

series of value-added activities involved in producing and marking
a product or service, and ending with distributors getting the final
goods into the hands of the ultimate consumer.
A typical value chain of manufacturing product is as follows:

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 Resource based view
This approach emphasizes the internal resource:

 physical resources, human resources, and organizational resources.

 Physical resources include all plant and equipment, location,

technology, raw materials, machines;

 Human resources include all employees, training, experience,

intelligence, knowledge, skills, abilities; and

 Organizational resources include firm structure, planning processes,

information systems, patents, trademarks, copyrights, databases, and so

on.

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 LEVEL OF STRATEGY

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 LEVEL OF STRATEGY

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 [Link] level Strategy
The corporate strategy defines the organization’s overall direction
and the high-level ideas of how to move towards it.

These plans are usually created by a select strategy group and the
top management.

A corporate strategy is generally broader than the other strategy

levels.

Strategies at this level are more conceptual and futuristic than

business and functional level strategies.
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 Corporate level strategy cont…
A corporate strategic plan generally encompasses:
 The vision for the organization
 The company’s values
 The Strategic Focus areas
 The strategic objectives
 The most important KPIs

Types of Corporate level strategies

 There are four types of corporate level strategies. These are:
a. Stability Strategy
b. Growth Strategy
c. Declining Strategy
d. Combination Strategy
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 a. Stability or Consolidation strategy
A firm following stability strategy:
 Maintains its current business and product portfolios

 Maintains the existing level of effort just to maintain an

incremental growth
 Focuses on fine-tuning its business operations and improving

functional efficiencies through better deployment of resources.

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 When to use stability strategy?

WHEN;-

 The industry is in turmoil / confusion.

 The organization just finished a period of rapid growth and

needs to consolidate its gains before pursuing more growth.

 The industry is in a mature stage with few or no growth

prospects and the firm is currently in a comfortable position in
the industry.

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 Approaches of Stability strategy
1. No Change Strategy; is stability strategy that you decide that
you aren’t going to do anything new and you keep continuing the
work as it is.

2. Holding/ Pause;- It’s a temporary or short-term strategy that

applied when the firms wants to have some rest before
implementing the growth strategy again at the time of rapid growth.

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 b. Growth Strategies
Meaning:- Significantly expanding production capacity, entering
new global markets, diversifying into new areas.

 Growth is a promising and popular strategy that tends to be

equated with dynamism, vigor, promise and success.

 It is characterized by:

 Significant reformulation of goals and directions

 Major initiatives and moves involving investments

 Exploration into new products, technology and markets

 Innovative decisions, actions and so on.

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 c. Declining Strategy
 Is commonly used when the life cycle of the industry is in its

decline stage

 Is necessary for a firm to cope up hostile and adverse situations

in the environment
 Approaches of Retrenchment strategy:
Turnaround Strategy

Survival Strategy

Liquidation Strategy

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 A. Turnaround Strategy
 A turnaround situation exists when a firm encounters declining

financial performance after a period of prosperity.

 The strategic causes of performance downturns may include:

 Increased competition

 Raw material shortages

 Decreased profit margins due to operating and labor

problems.

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 Turnaround Strategy cont…
 Turnaround strategy involves a two stage process.

The initial stage focuses on objectives of survival and

achievements of a positive cash flow.

The second phase involves a return-to-growth or

recovery stage

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 B. Survival Strategy
 Is used when the firms is at the border of extinction, for renewing

the fortunes of the company.

 Divestment:- an organization divests when it sells a business unit

to another firm that will continue to operate.

 Spin-off:- in a spin-off, a firm sets up a business unit as a

separate business through a distribution of stock or a cash deal.

 Re-structuring the business operations by:
Restructuring its management team
Financial reengineering or
Overall business reengineering

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 C. Liquidation Strategy
 Liquidation strategy:

 Is the final option for a declining company.

 Applied when there is no promising future for the business.

 A simple shutdown will prevent owners from throwing good

money after bad once

4. Combination Strategies
The above strategies are not mutually exclusive. It is possible
to adopt a mix of the above to suit particular situations

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 Business Level Strategies
Business-level strategy
 Is the plan of action that strategic managers adopt to use a

company’s resources and distinctive competences to gain a

competitive advantage over its rivals in a market or an
industry.
 Focuses on “how to compete in a particular industry or

product-market segment?”
 Determines the competitive advantage of a firm

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 Basis of the choice of Business Level Strategy

The process of defining a business involves decisions about:

 Customer needs, or what is to be satisfied

 Customer groups, or who is to be satisfied

 Distinctive competences, or how customer needs are to be

satisfied
This level strategy is classified
 Competitive Strategy- Cost leadership, Differentiation and
Focus
 Cooperative Strategy – Licensing, Joint Venture and Value
Chain Partnership

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 The end

THANK YOU!

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 QUIZ 5%

1. Write the Industry Environment Analysis (2.5%)

2. Write and discuss the level of strategy (2.5%)

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