UNIT 2: Environmental Analysis & Diagnosis

Analysis of company’s external and internal environment

Internal and External Environment Factors of Organizational Environment
Organizational environment denotes internal and external environmental factors influencing
organizational activities and decision-making.
What is Organizational Environment?
Every organization, whether business or non-business, has its environment. The organizational
environment is always dynamic and ever-changing.
Changes today are so frequent, and every change brings so many challenges that managers and
leaders of the organization need to be vigilant about environmental changes. The
environment of an organization consists of its surroundings – anything that affects its
operations favorably or unfavorably.
Environment embraces such abstract things as an organization’s image and such remote visible
issues as the country’s economic conditions and political situations.
The environmental forces, abstract and visible, need careful analysis. The systematic and
adequate analysis produces the information necessary for deciding what strategy to pursue.
Managers cannot make appropriate and sound strategies simply based on their guesses and
instincts. They must use relevant information that directly flows from their organization’s
environment analysis.
Internal and External Environment Factors that Influences Organizational Decision
Making
By the word “environment,” we understand the surroundings or conditions in which a particular
activity is carried on.
And we know that an organization is a social entity that has a hierarchical structure where all
necessary items are put together. They act within it to reach the collective goal.

Organizations or, more specifically, business organizations and their activities are always being
affected by the environment. In an organization, the management body’s actions are
influenced by the environment.
Types of Organizational Environment
What are the Environmental Factors of a Job Design
1. Internal environment / Micro environment.
2. External environment / Macro environment.
1. General environment.
2. Industry environment.
An organization’s operations are affected by both types of environments.
Therefore, managers need to make an in-depth analysis of the elements of the environment so
that they can develop an understanding of the internal and external situations of the
organization.
Based on their understanding, they will be better able to establish the required objectives for

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 their organization and formulate appropriate strategies to achieve those objectives.
Internal Environment of Organization
Forces, conditions, or surroundings within the organization’s boundary are elements of the
organization’s internal environment.
The internal environment generally consists of elements within or inside the organization, such
as physical resources, financial resources, human resources, information resources,
technological resources, the organization’s goodwill, corporate culture, and the like.
The internal environment includes everything within the boundaries of the organization.
Some of these are tangible, such as the physical facilities, the plant capacity technology,
proprietary technology, or know-how; some are intangible, such as information processing
and communication capabilities, reward and task structure, performance
expectations, power structure management capability, and dynamics of the organization’s
culture.
Based on those resources, the organization can create and deliver value to the customer. This
value is fundamental to defining the organization’s purpose and the premise on which it
seeks to be profitable.
Are we adding value through research and development or customer service, or by prompt
delivery, or by cutting any intermediary which reduces the customers’ costs?
Organizations build capabilities over a long time. They consistently invest in some areas so
that they can build strong competitive businesses based on the uniqueness they have
created.
The manager’s response to the external environment would depend upon the availability and
the configuration of resource deployment within the organization.
The deployment of resources is a key managerial responsibility.
Top management is vested with the responsibility of allocating resources between the ongoing
operations/activities and future operations of strategic nature. That is they might yield
returns in some future time that require resources now to be nurtured and have some
associated risks.
The top management has to balance the conflicting demands of both, as resources are always
finite.
For example, General Electric is an aggressive innovator and marketer who has been ruthless
in its approach to changing proactively as well as reactively to sustain its competitive
positions in the respective industries.
This implies that over the years, General Electric has invested in developing those capabilities,
systems, and processes that enable it to respond.
Elements of the internal environment are;
1. Owners and Shareholders
2. Board of Directors
3. Employees
4. Organizational Culture
5. Resources of the Organization
6. Organization’s image/goodwill
The internal environment consists mainly of the organization’s owners, the board of directors,
employees, and culture.

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Owners and Shareholders
Owners are people who invest in the company and have property rights and claims on the
organization. Owners can be individuals or groups of persons who started the company; or
bought a share of the company in the share market.
They have the right to change the company’s policy at any time.
Owners of an organization may be an individual in the case of a sole proprietorship business,
partners in a partnership firm, shareholders or stockholders in a limited company, or
members in a cooperative society. In public enterprises, the government of the country is
the owner.
Whoever the owners are, they are an integral part of the organization’s internal environment.
Owners play an important role in influencing the affairs of the business. This is the reason
why managers should take more care of the owners of their organizations.
Board of Directors
The board of directors is the company’s governing body elected by stockholders. They oversee
a firm’s top managers, such as the general manager.
Employees
Employees or the workforce, are the most important element of an organization’s internal
environment, which performs the administration tasks. Individual employees and also the
labor unions they join are important parts of the internal environment.
If managed properly they can positively change the organization’s policy. But ill-management
of the workforce could lead to a catastrophic situation for the company.
Organizational Culture
Organizational culture is the collective behavior of members of an organization and the values,
visions, beliefs, and habits that they attach to their actions.
An organization’s culture plays a major role in shaping its success because culture is an
important determinant of how well the organization will perform.
As the foundation of the organization’s internal environment, it plays a major role in shaping
managerial behavior.
An organization’s culture is viewed as the foundation of its internal
environment. Organizational culture (or corporate culture) significantly influences
employee behavior.
Culture is important to every employee, including managers who work in the organization.
A strong culture helps a firm achieve its goals better than a firm having a weak culture. Culture
in an organization develops and ‘blossoms’ over many years, starting from the practices of
the founder(s).
Since culture is an important internal environmental concern for an organization, managers
need to understand its influence on organizational activities.
Resources of the Organization
An organization s resources can be discussed under five broad heads: physical resources,
human resources, financial resources, informational resources, and technological resources.
Physical resources include land and buildings, warehouses, and all kinds of materials,
equipment, and machinery. Examples are office buildings, computers, furniture, fans, and
air conditioners.
Human resources include all employees of the organization from the top level to the lowest

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 level of the organization. Examples are teachers in a university, marketing executives in a
manufacturing company, and manual workers in a factory.
Financial resources include capital used for financing the organization’s operations, including
working capital.
Examples are investments by owners, profits, reserve funds, and revenues received out of a
sale. Informational resources encompass ‘usable data needed to make effective decisions.
Examples are sales forecasts, supplier price lists, market-related data, employee profiles, and
production reports.
Organization’s image/goodwill
The reputation of an organization is a very valuable intangible asset. High reputation or
goodwill develops a favorable image of the organization in the minds of the public (so to
say, in the minds of the customers).
‘No- reputation’ cannot create any positive image. A negative image destroys the
organization’s efforts to attract customers in a competitive world.
The internal environment of an organization consists of the conditions and forces that exist
within the organization.
Internal environment {sometimes called micro-environment) portrays an organization’s ‘in-
house’ situations.
An organization has full control over these situations. Unlike the external environment, firms
can directly control the internal environment.
The internal environment includes various internal factors of the organization, such as
resources, owners/shareholders, a board of directors, employees and trade unions, goodwill,
and corporate culture. These factors are detailed out below.
External Environment of Organization – Factors Outside of the Organization’s Scope
Factors outside or organization are the elements of the external environment. The organization
has no control over how the external environment elements will shape up.
The external environment embraces all general environmental factors and an organization’s
specific industry-related factors. The general environmental factors include those that are
common in nature and affect all organizations.
Because of their general nature, an individual organization alone may not be able to
substantially control its influence on its business operations.
Managers have to continuously read signals from the external environment to spot emerging
opportunities and threats. The external environment presents opportunities for
growth leadership and market dominance and poses the threat of obsolescence for products,
technology, and markets.
While one section of an organization faces opportunities, another faces threats from a similar
environment, perhaps because of differentiation in their respective resources, capabilities,
and entrenched positions within the industry.
For example, the burgeoning mobile telephone market in India provides enormous
opportunities for different types of organizations, from handset manufacturers, content
developers, application developers, and mobile signal tower manufacturers to service
providers.
At the same time, it poses a threat to the fixed-line telephone business, which has long been the
monopoly of public sector enterprises.

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The increasing demand for telecommunication services in India post-deregulation was an
enormous opportunity for early entrants to enter the telecom services business and compete
for revenue with state-owned organizations.
At the same time, the growing demand for mobile services led to an expansion of industrial
capacity, price wars, lowering of call tariffs, acquisitions, and declining industry profits.
India has one of the lowest call rates in the world. As the industry matured and consolidation
took place, the old players had to alter their business models and strategies.
The external environment can be subdivided into 2 layers;
General Environment of Organization – Common Factors that All Companies in the
Economy Face
The general environment usually includes political, economic, sociocultural, technological,
legal, environmental (natural), and demographic factors in a particular country or region.
The general environment consists of factors that may affect operations but influence the
firm’s activities.
The factors of the general environment are broad and non-specific, whereas the dimensions of
the task environment are composed of the specific organization.
The external environment consists of an organization’s external factors indirectly affecting its
businesses. The organization has little or no control over these factors, so the external
environment is generally non-controllable.
However, there may be exceptions. The external environmental factors reside outside the
organization, which can lead to opportunities or threats.
For the convenience of analysis, we can divide the external environment into two groups: (a)
general environment (or remote environment), and (b) industry environment (some call it
the ‘immediate operating environment,’ ‘task environment, or specific environment’).
The general environment consists of factors in the external environment that indirectly affect
firms’ business operations.
The major factors that constitute the general environment include political situations, economic
conditions, social and cultural factors, technological advancements, legal/regulatory
factors, natural environment, and demographics in a particular country or region.
The industry environment consists of those factors in the external environment that exist in the
industry in which the organizations operate their business. The industry environmental
factors are generally more controllable by a firm than the general environmental factors.
Industry environment comprises those factors in the external environment that exists in tie
concerned industry of a firm in which it is operating its business.
For example, US Pharma is operating its business in the pharmaceutical industry.
Therefore, all factors that are likely to affect the business operations of Incepta Pharmaceuticals
Limited would be included in the ‘industry environment’ of the company.
There are 6 factors in the industry environment: suppliers, buyers & customers, competitors &
new entrants, substitute products, regulators, and strategic partners.
It may be noted that some industry environmental factors, such as competitors and substitute
products, may exist even outside the concerned industry.
For example, a leasing company may emerge as a competitor of the companies in the banking
industry in terms of attracting deposits and providing loans to business houses.
Regarding the industry environment, the important issue to appreciate is that they reside in the

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 immediate competitive situations of a firm.
Also, they are very specific in that they can be easily identified. For these reasons, they are
often regarded as ‘specific environment’ or ‘task environment.’
The strategy-makers must understand the challenges and complexities of the general and
industry environmental factors. They must appreciate that the general environmental
factors are largely non-controllable because of their distantly located external nature.
When strategists take cognizance of both the general (remote) and industry (operating)
environments, they are likely to become more proactive in strategic planning.
In the following discussions, you will find a broad description of the general environment.
8 Elements of the General External Environment
The general environment includes the; distant factors in the external environment that is general
or common in nature. Its impact on the firm’s operations, competitors, and customers make
its analysis imperative.
We can use the PESTLE model to identify and analyze the factors in the general environment.
PESTLE Model covers political, economic, sociocultural, technological, legal, and
environmental (natural). Along with these, we can add additional factors that suit the
current modern business atmosphere, demographic factors, and international factors.
8 elements or factors of the general environment of an organization are;
1. Political Legal Factors
2. Economic Factors
3. Socio-Cultural Factors
4. Technological Factors
5. Legal Factors
6. Environmental / Natural Factors
7. Demographic Factors
8. International Factors
9. Regulators
Political Legal Factors
The political factors of the general environment refer to the business-government relationship
and the overall political situation of a country.
A good business-government relationship is essential to the economy and, most importantly,
for the business.
The government of a country intervenes in the national economy by setting policies/rules for
business. We see many such policies – import policy, export policy, taxation policy,
investment policy, drug policy, competition policy, consumer protection policy, etc.
Sometimes, the government pursues a nationalization policy for state ownership of a business.
Some countries, such as India, pursue state-driven mercantilism to reduce imports and increase
exports. Some countries; have liberalized their economy and shifted from centrally
managed economies to capitalist economies or welfare economies.
In many 3rd world countries, successive governments emphasize privatization more than state
ownership. As global competition has increased, the government has also liberalized its
trade policies to align with the WTO agreements.
Another important issue is political stability, which substantially affects business firms’
operations. Divert’s decision about investment is highly affected by political stability.

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Managers must be able to understand the implications of the activities of these agencies and
groups.
Government agencies include different ministries, the office of the Controller of Imports and
Exports, the Board of Investment, the Revenue board or agency, Chambers of Commerce
and Industry, Employers’ Associations, the Environmental Protection Movement, and the
like.
Since the pressure groups put restraints on business managers, managers should have clear
ideas about the actions of these groups.
Economic Factors
The economic factor of an organization is the overall status of the economic system in which
the organization operates. The important economic factors for business are inflation,
interest rates, and unemployment.
These factors of the economy always affect the demand for products. During inflation, the
company pays more for its resources, and to cover its higher costs, they raise commodity
prices.
When interest rates are high, customers are less willing to borrow money, and the company
itself must pay more when it borrows. When unemployment is high, the company can be
very selective about who it hires, but customers’ buying power is low as fewer people are
working.
A country’s economic conditions affect market attractiveness. The performance of business
organizations is affected by the health of a nation’s economy.
Several economic variables are relevant in determining business opportunities.
Examples of economic factors include the trend in economic growth, population income levels,
inflation rate, tax rates for individuals and business organizations, etc.
There is thus a need to analyze the economic environment prudently by the business firms.
The economic environment comprises a distinct variable with which management must be
concerned. A country’s economy can be in a situation of boom or recession or depression
or recovery, or it may be in a state of fluctuation.
Managers/strategy-makers must be able to predict the economy’s state. These warrants the
necessity of studying the economic environment to identify changes, trends, and their
strategic implications.
Business organizations operate their businesses in markets consisting of people. These people
are likely to become customers when they have purchasing power. And purchasing power
depends on income, prices, savings, debt, and availability of credit.
Therefore, business organizations must pay attention to customers’ income and consumption
patterns.
However, all the economic variables in the economy must be treated holistically for the clear
envisioning of the entire economy and the market.
Socio-Cultural Factors
Customs, mores, values, and demographic characteristics of the society in which the
organization operates make up the general environment’s socio-cultural factors.
A manager must well study the socio-cultural dimension. It indicates the product, services, and
standards of conduct that society will likely value and appreciate.
The standard of business conduct varies from culture to culture, as does the taste and necessity

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 of products and services. Socio-cultural forces include culture, lifestyle changes, social
mobility, attitudes toward technology, and people’s values, opinion, beliefs, etc.
A society’s values and altitudes form the cornerstone of society. They often drive other
conditions and changes. The hand for many products changes with the changes in social
attitudes.
Socio-cultural factors differ across countries. In many countries, worker diversity is now a
common phenomenon.
We find in first world countries the increasing life span of population, trend towards fewer
children, movement of population from rural areas to urban areas, increasing rate of female
education, more and more women entering the mainstream workforce, etc.
All these have a primary effect on a country’s social character and health.
Therefore, managers of business organizations need to study and predict the impact of social
and cultural changes on the future of business operations in terms of meeting consumer
needs and interests.
Business firms must offer products in society that correspond to their values and attitudes. It
denotes the methods available for converting resources into products or services.
Technological Factors
Managers must be careful about technological factors. Investment decisions must be accurate
in new technologies, and they must be adaptable to them.
Technological factors include information technology, the Internet, biotechnology, global
transfer of technology, and so forth. None can deny the fact that the pace of change in these
technological dimensions is extremely fast.
Technological changes substantially affect a firm’s operations in many ways. The advancement
of industrialization in any Country depends mostly on the technological
environment. Technology has major impacts on product development, manufacturing
efficiencies, and potential competition.
Business organizations facing changing technology problems are always more difficult than
those with stable technologies.
The effects of technological changes occur primarily through new products, processes, and
materials. An entire industry may be transformed or revitalized due to new technology.
Strategy formulation is linked to technological changes. An intelligent response to the ever-
increasing technological advances should be entrepreneurial rather than reactive.
Strategic managers need to monitor developments in technology for their particular industry
when formulating a strategy. A quick and thorough study of technological changes; helps
managers achieve a higher market share because of the early adoption of new technology.
A firm must be aware of technological changes to avoid obsolescence arid promote innovation.
It means that strategy managers of an organization must be adept in – technological
forecasting.
Legal Factors
The legal environment consists of laws and regulatory frameworks in a country. Many laws
regulate the business operations of enterprises, such as the Factories Act, Industrial
Relations Ordinance, the Contract Act, and the Company law, just to name a few.
Business laws protect companies from unfair competition and consumers from unfair business
practices.

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Business laws also protect society at large. The laws regarding a merger, acquisitions, industry
regulation, employment conditions, unionization, workmen’s compensation, and the like
affect a firm’s strategy.
Even globalization has caused significant repercussions in the legal environment. Thus,
business managers must thoroughly know the major laws that protect business enterprises,
consumers, and society.
And the overall situation of law implementation and justice in a country indicates that there is
a favorable situation in business in a country.
Environmental / Natural Factors
Strategy-makers need to analyze the trends in the natural environment of the country where it
is operating their business.
The most pertinent issues in the natural environment that strategy-makers should consider
include the availability of raw materials and other inputs, changes in the cost of energy,
levels of environmental pollution, and the changing role of government ‘in environmental
protection.
Changes in the physical/natural environment, such as global warming, will heavily affect our
daily lives and the functioning of our organizations with various consequences.
Demographic Factors
The demographic environment is concerned with a country’s population.
Specifically, it is related to the population’s size, age structure, geographic distribution, ethnic
mix, and income distribution.
With over 8 billion population, demographic changes are evident worldwide. There is negative
population growth in some countries, and in some countries, couples are averaging fewer
than two children. In general, the average age is increasing.
In many countries, rural-urban migration is rampant. These trends suggest numerous
opportunities for firms to develop products and services to meet the needs of diversified
groups of people in society.
Strategy-makers must analyze the demographic issues, especially the size and growth rate of
the population, age distribution, ethnic mix, educational level, household patterns, and
inter-regional movements.
International Factors
Virtually every organization is affected by international factors. It refers to the degree to which
an organization is involved in or affected by businesses in other countries.
The global society concept has brought all the nations together, and modern network of
communication and transportation technology, almost every part of the world is connected.
General external environmental factors are interrelated with organizational success.
Therefore, strategy-makers need to analyze them in an interrelated fashion to understand and
visualize the ‘whole of the environment.
Industry/Task Environment of Organization – Industry Factors that are Vital for
Business Functions
A business firm’s strategy is affected by the structural characteristics of the industry, it is thus
considered essential for a firm to make an elaborate analysis of the industry in which the
firm operates its business.
Based on Michael Porter’s research results, the Van industry structure consists of suppliers,

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 buyers, direct competitors, new entrants, and substitutes. The strategy-makers of a firm
need to be concerned with the impact of the industry structure on the firm’s strategy.
Once the external environmental analysis has been completed, they should embark upon
industry analysis. Industry analysis helps them have clear information about what is
happening in the industry in which their companies are operating their businesses.
Since the industry contains competition, its analysis brings to light the complexities of the
competition and the consequent challenges facing the industry.
The industry environmental factors, on the other hand, are those factors in the external
environment that specifically reside in a particular industry and affect competition, such as
suppliers, customers, competitors, and substitute products.
The task environment consists of factors that directly affect and is affected by the
organization’s operations. These factors include suppliers, customers, competitors,
regulators, and so on.
A manager can identify environmental factors of specific interest rather than having to deal
with a more abstract dimension of the general environment.
6 Elements of the Industry or Task environment
As a manager or entrepreneur, you should be able to identify the various elements of the
industry environment so that you can take appropriate steps to respond to them effectively
in order to survive in the industry.
6 elements of the task environment for an organization are;
1. Suppliers
2. Customers & Buyers
3. Competitors & New Entrants.
4. Regulators
5. Substitute Products
6. Strategic Partners
Suppliers
Suppliers are the providers of production or service materials. Dealing with suppliers is an
important task of management.
A good relationship between the organization and the suppliers is important for an organization
to keep a steady following of quality input materials. Suppliers are sources of resources
such as raw materials, components, equipment, financial support, services, and Office
Supplies.
To ensure a company’s long-term survival and growth, it is essential to develop a dependable
relationship between a business firm and its suppliers. Concerning its competitive position
with suppliers, a company should address the following questions;
 Are the suppliers’ prices competitive?
 Do suppliers offer attractive quantity discounts?
 How costly are their shipping charges?
 Are vendors competitive in terms of production standards?
 Are suppliers’ abilities, reputation, and services competitive?
 Are suppliers reciprocally dependent on the firm?
Customers & Buyers
“Satisfaction of customer”- the primary goal of every organization. The customer pays money

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 for the organization’s product or services. They are the peoples who hand them the profit
that the companies are targeting.
Managers should pay close attention to the customers’ dimension of the task environment
because its customers purchase what keeps a company alive and sound. Strategy managers
must understand the composition of the company’s customers.
With this end in view, they need to develop an exhaustive customer profile of the present and
potential customers. Managers will be in a better position to pragmatically plan the firm’s
strategic operations, anticipate changes in the size of the markets, and anticipate demand
patterns.
While constructing a customer profile, managers need to use information regarding customers’
geographic location, demographic characteristics, psychographic issues, and buyer
behavior.
Competitors & New Entrants.
The competitors often influence the policies of the organization. Competitive marketplace
companies are always trying to stay and go further ahead of their competitors.
In the current world economy, competition and competitors in all respects have increased
tremendously. A firm needs to analyze the competitive intensity in the industry. It needs to
understand its competitive position in the industry to improve its chance of designing
winning strategies.
Many companies develop a ‘competitor profile’ to accurately forecast their short-and-long-
term growth and profit potentials.
A competitor profile may include such variables as market share, product line, the effectiveness
of sales distribution, price competitiveness, advertising and promotion effectiveness,
location, and age of the facility, production capacity, raw material costs, financial position,
etc.
This positive effect is that the customers always have options, and the quality of products goes
high.
The new entrants are the upcoming competitors of the firm. They are potential competitors
because the competitive intensity increases when they enter the industry with similar
products.
Regulators
Regulators are units in the task environment that have the authority to control, regulate or
influence an organization’s policies and practices.
Government agencies are the main player in the environment, and interest groups are created
by their members to attempt to influence organizations as well as the government. Trade
unions and the chamber of commerce are common examples of interest groups.
Substitute Products
The producers of substitute products are indirect competitors.
Substitute products serve the same categories of customers. They can meet the similar needs of
customers and, therefore, emerge as threats.
For example, when the detergent powder is capable of meeting customer needs in a much better
way, or even in the same way as the laundry soap does, the detergent powder becomes a
strong indirect competitor of laundry soap.
Strategic Partners

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They are the organization and individuals with whom the organization is to an agreement or
understanding for the benefit of the organization. These strategic partners, in some way,
influence the organization’s activities in various ways.
The industry environment is the competitive environment of a business organization. The
industry environment substantially affects a firm’s business operations because it is the
‘immediate’ external environment of the firm, also known as the ‘immediate operating
environment.’
Every firm operates its business in an industry. Therefore its activities are directly affected by
any change in the industry, and therefore its activities are directly affected by any changes
in the industry environment.
Changes in the general environment can directly impact any of the factors in the industry
environment.
An organization has greater control over the industry’s environmental factors than the general
environmental factors.
One point is to be noted that although the industry environment affects all the firms in the
industry, in reality, all firms are not affected equally.
Influence of Internal and Environment on Business
Business managers must understand the various facets of the impacts of the external
environment.
They need to recognize that the external environment has many aspects that can significantly
impact a firm’s operations. They need to undertake an analysis of the environment
regularly.
This is particularly important for the reason that developments/changes in the remote
environment influence business organizations. They also need to understand the influences
of changes in the industry environment.
Managers are benefited in several ways when they have a deep understanding and appreciation
of the impact of environmental factors on business:
 Knowledge of the environment helps managers identify the direction in which they
should proceed. They will travel along with a distinct way of changing direction
whenever necessary. Without an understanding of the environment, managers are like
a bicycle without a handlebar – no way of maneuvering while riding on a street.
 Managers can isolate those factors, especially in the external environment, which are of
specific interest to the organization.
 Managers can take preparation to deal with a predicted crisis in any of the factors in the
environment. They can develop crisis plans for overcoming crises that affect an
organization.
 The key to achieving organizational effectiveness is understanding of the environment
in which the firm operates its
No knowledge or inadequate knowledge is very likely to lead managers to
ineffectiveness because of ‘running on the wrong road for reaching the goals.

Impact of the environment on the organisation’s policies and strategies

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What is environmental scanning?
Environmental scanning involves analyzing and leveraging data regarding events, patterns,
trends, opportunities, and potential threats, to help improve decision making. Further, the
environmental scanning process is a subsection of strategic planning and is a key
component in developing successful planning and management strategies.
Environmental scanning should not be confused with external scanning, as external scanning
strictly measures, tracks, and analyzes external data only. On the other hand, the
environmental scanning process involves various types of both internal and external data
and is understood to create a larger understanding of how your organization is situated
within its industry, its market, and provides clear comparisons between your competition.
This article will take a closer look at the importance of environmental scanning, the five
sectors of environmental scanning, and the difference between internal and external
environmental scanning.
The importance of environmental scanning
Beyond simply gathering a deeper understanding of the business landscape and
gaining competitive intelligence insights, environmental scanning is also linked to
generating successful business strategies. According to a Gartner study, enterprises will
miss out on up to 10% of annual sales due to poor business strategies. This includes both
developing and executing said business strategies. Environmental scanning fulfills the
informational needs required for improving strategic planning and generates insights on
competitors that can be used internally to compare your competitor’s strategies against your
own.
The five types of environmental scanning
As mentioned previously there are various types, or modes, of environmental scanning, that
can be conducted internally and/or externally. Today, many companies conduct a variety
of environmental scans, both internally and externally. This is primarily due to the
increasing competitiveness in business landscapes and the increasing amount of data, that
can generate thoughtful insights, being created daily. Likewise, the five major modes of
scanning include: economic, technological, legal, ecological, and sociological.
1. Economic scanning involves evaluating how consumers are spending their money, which
industries are outperforming others, and the financial health of various markets due to
economic factors.
2. Technological scanning refers to the evaluation and tracking of new technologies, updated
technologies, and consumer & business trends within tech.
3. Legal scanning involves monitoring legislative changes and their overall impact on business
rules and regulations, consumer activities, and public health and safety.
4. Ecological scanning considers climates, natural disasters, and green issues as a whole.
5. Sociological scanning involves deepening one’s understanding of current social movements,
political climates (not related to legislation), and cultural impacts of business decisions.
Internal vs. external environmental scanning
In order to conduct a thorough environmental scan, companies must take a look at both internal
and external factors. Likewise, it is important that companies regularly gather, collect, and
analyze both internal data (possibly from a CRM or from HR) as well as external data
from third-party data providers. Let’s take a look at some of the internal and external factors

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 (similar to the above-mentioned scanning types) that companies often examine when
performing an environmental scan.
Internal factors
 Company’s organizational structure
 Business strategies, marketing strategies, etc.
 Culture and workplace environment (including employee retention, turnover, etc.)
 Overall company-wide leadership
External factors
 Economic conditions
 New technologies
 Competitors’ performance
 Global events (i.e. COVID-19)
 Political and legislative changes
 Workforce trends
 Climate, natural disasters, etc.
 Cultural trends (global and domestic)

The environmental scanning process

As one can see, the environmental scanning process can require vast amounts of data, resources,
processing, and analysis. According to research conducted by the University of Toronto’s
Information Studies Program, the environmental scanning process includes four major
checkpoints: searching, enacting, conditioned viewing, and undirected viewing.
 Searching relates to the perception and initiation of a necessary environmental scan.
During this process, a company or organization will aim to collect as much data as
possible to create an accurate business landscape.
 Enacting relates to the initiation of an environmental scan without the necessity of one.
For instance, if a company recognizes they don’t have the resources to conduct an
accurate scan but proceed to do so regardless.
 Conditioned viewing pertains to companies that recognize the need for a scan, but are
passive about the process and, in turn, don’t generate useful insights.
 Undirected viewing is similar to enacting, however, the company or organization
realizes there is not a need or they don’t have the ability to conduct a scan, so a scan
does not take place.
Benefits of utilizing environmental scanning
Environmental scanning provides companies with various benefits, beyond the above-
mentioned advantages, such as strategic planning and overall business landscape research.
Some additional benefits of environmental scanning include:
 Improves company-wide organizational strategies
 Enhances market adaptability and boosts performance
 Helps generate unique proactive marketing and sales strategies
 Benefits risk mitigation best practices and overall threat management

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Analysis of specific environment
– PESTEL, SWOT & Michael E. Porter’s 5 Forces model.
What is PESTLE Analysis? An Important Business Analysis Tool

What is PESTLE Analysis? PESTLE analysis, which is sometimes referred to as PEST

analysis, is a concept in marketing principles. Moreover, this concept is used as a tool by
companies to track the environment they’re operating in or are planning to launch a new
project/product/service, etc. So, let’s find out what these letters stand for first.
PESTLE is a mnemonic which in its expanded form denotes P for Political, E for Economic, S
for Social, T for Technological, L for Legal, and E for Environmental. It gives a bird’s eye view
of the whole environment from many different angles that one wants to check and keep a
track of while contemplating a certain idea/plan.
Political factors in PESTLE Analysis
These factors determine the extent to which a government may influence the economy or a
certain industry. For example, a government may impose a new tax or duty due to which
entire revenue generating structures of organizations might change. Political factors include
tax policies, Fiscal policy, trade tariffs, etc. that a government may levy around the fiscal
year and it may affect the business environment (economic environment) to a great extent.
Economic factors in PESTLE Analysis
These factors are determinants of an economy’s performance that directly impacts a
company and have resonating long term effects. For example, a rise in the inflation rate of
any economy would affect the way companies price their products and services. Adding to
that, it would affect the purchasing power of a consumer and change demand/supply
models for that economy. Economic factors include inflation rate, interest rates, foreign
exchange rates, economic growth patterns, etc. It also accounts for the FDI (foreign direct
investment) depending on certain specific industries who’re undergoing this analysis.
Social factors in PESTLE Analysis
These factors scrutinize the social environment of the market, and gauge determinants like
cultural trends, demographics, population analytics, etc. An example of this can be buying
trends for Western countries like the US where there is high demand during the Holiday
season.
Technological factors in PESTLE Analysis
These factors pertain to innovations in technology that may affect the operations of the
industry and the market favorably or unfavorably. This refers to automation, research and
development, and the amount of technological awareness that a market possesses.

Legal factors in PESTLE Analysis

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These factors have both external and internal sides. There are certain laws that affect the
business environment in a certain country while there are certain policies that companies
maintain for themselves. Legal analysis takes into account both of these angles and then
charts out the strategies in light of these legislations. For example, consumer laws, safety
standards, labor laws, etc.

Environmental factors in PESTLE Analysis

These factors include all those that influence or are determined by the surrounding
environment. This aspect of the PESTLE is crucial for certain industries particularly for
example tourism, farming, agriculture, etc. Factors of a business environmental
analysis include but are not limited to climate, weather, geographical location, global
changes in climate, environmental offsets, etc.

SWOT Analysis - Definition, Advantages and Limitations

SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By definition,

Strengths (S) and Weaknesses (W) are considered to be internal factors over which you have
some measure of control. Also, by definition, Opportunities (O) and Threats (T) are
considered to be external factors over which you have essentially no control.
SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic
position of the business and its environment. Its key purpose is to identify the strategies
that will create a firm specific business model that will best align an organization’s resources
and capabilities to the requirements of the environment in which the firm operates.
In other words, it is the foundation for evaluating the internal potential and limitations and
the probable/likely opportunities and threats from the external environment. It views all
positive and negative factors inside and outside the firm that affect the success.
A consistent study of the environment in which the firm operates helps in
forecasting/predicting the changing trends and also helps in including them in the decision-
making process of the organization.
An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given
below-

1. Strengths - Strengths are the qualities that enable us to accomplish the

organization’s mission. These are the basis on which continued success can be made
and continued/sustained.

Strengths can be either tangible or intangible. These are what you are well-versed in or
what you have expertise in, the traits and qualities your employees possess (individually and
as a team) and the distinct features that give your organization its consistency.

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Strengths are the beneficial aspects of the organization or the capabilities of an
organization, which includes human competencies, process capabilities, financial resources,
products and services, customer goodwill and brand loyalty.
Examples of organizational strengths are huge financial resources, broad product line, no
debt, committed employees, etc.

2. Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our
mission and achieving our full potential. These weaknesses deteriorate influences on
the organizational success and growth. Weaknesses are the factors which do not
meet the standards we feel they should meet.

Weaknesses in an organization may be depreciating machinery, insufficient research and

development facilities, narrow product range, poor decision-making, etc. Weaknesses are
controllable. They must be minimized and eliminated.

For instance - to overcome obsolete machinery, new machinery can be purchased. Other
examples of organizational weaknesses are huge debts, high employee turnover, complex
decision making process, narrow product range, large wastage of raw materials, etc.

3. Opportunities - Opportunities are presented by the environment within which our

organization operates. These arise when an organization can take benefit of
conditions in its environment to plan and execute strategies that enable it to
become more profitable. Organizations can gain competitive advantage by making
use of opportunities.

Organization should be careful and recognize the opportunities and grasp them whenever
they arise. Selecting the targets that will best serve the clients while getting desired results
is a difficult task.
Opportunities may arise from market, competition, industry/government and technology.
Increasing demand for telecommunications accompanied by deregulation is a great
opportunity for new firms to enter telecom sector and compete with existing firms for
revenue.

4. Threats - Threats arise when conditions in external environment jeopardize the

reliability and profitability of the organization’s business. They compound the
vulnerability when they relate to the weaknesses.

Threats are uncontrollable. When a threat comes, the stability and survival can be at stake.
Examples of threats are - unrest among employees; ever changing technology; increasing
competition leading to excess capacity, price wars and reducing industry profits; etc.
Advantages

SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it
involves a great subjective element.

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It is best when used as a guide, and not as a prescription. Successful businesses build on
their strengths, correct their weakness and protect against internal weaknesses and external
threats. They also keep a watch on their overall business environment and recognize and
exploit new opportunities faster than its competitors.

SWOT Analysis helps in strategic planning in following manner-

a. It is a source of information for strategic planning.

b. Builds organization’s strengths.

c. Reverse its weaknesses.
d. Maximize its response to opportunities.
e. Overcome organization’s threats.
f. It helps in identifying core competencies of the firm.

g. It helps in setting of objectives for strategic planning.

h. It helps in knowing past, present and future so that by using past and current data,
future plans can be chalked out.

SWOT Analysis provide information that helps in synchronizing the firm’s resources and
capabilities with the competitive environment in which the firm operates.
Limitations

SWOT Analysis is not free from its limitations. It may cause organizations to view
circumstances as very simple because of which the organizations might overlook certain key
strategic contact which may occur. Moreover, categorizing aspects as strengths,
weaknesses, opportunities and threats might be very subjective as there is great degree of
uncertainty in market.
SWOT does stress upon the significance of these four aspects, but it does not tell how an
organization can identify these aspects for itself.
There are certain limitations of SWOT Analysis which are not in control of management.
These include-

a. Price increase;
b. Inputs/raw materials;
c. Government legislation;
d. Economic environment;

e. Searching a new market for the product which is not having overseas market due to
import restrictions; etc.

Internal limitations may include-

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 a. Insufficient research and development facilities;
b. Faulty products due to poor quality control;
c. Poor industrial relations;

d. Lack of skilled and efficient labour; etc

Porter's 5 Forces Explained and How to

Use the Model
The fundamentals you need to analyze an industry's weaknesses and strengths

What Are Porter's Five Forces?

Porter's Five Forces is a model that identifies and analyzes five competitive forces that
shape every industry and helps determine an industry's weaknesses and strengths. Five
Forces analysis is frequently used to identify an industry's structure to determine corporate
strategy.
Porter's model can be applied to any segment of the economy to understand the level of
competition within the industry and enhance a company's long-term profitability. The Five
Forces model is named after Harvard Business School professor, Michael E. Porter.

Porter's 5 forces are:

1. Competition in the industry

2. Potential of new entrants into the industry
3. Power of suppliers

4. Power of customers

5. Threat of substitute products

Understanding Porter's Five Forces

Porter's Five Forces is a business analysis model that helps to explain why various industries
are able to sustain different levels of profitability. The model was published in Michael E.
Porter's book, Competitive Strategy: Techniques for Analyzing Industries and Competitors in
1979.
The Five Forces model is widely used to analyze the industry structure of a company as well
as its corporate strategy. Porter identified five undeniable forces that play a part in shaping
every market and industry in the world, with some caveats. The Five Forces are frequently
used to measure competition intensity, attractiveness, and profitability of an industry or
market.

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1. Competition in the Industry
The first of the Five Forces refers to the number of competitors and their ability to undercut
a company. The larger the number of competitors, along with the number of equivalent
products and services they offer, the lesser the power of a company.

Suppliers and buyers seek out a company's competition if they are able to offer a better
deal or lower prices. Conversely, when competitive rivalry is low, a company has greater
power to charge higher prices and set the terms of deals to achieve higher sales and profits.

2. Potential of New Entrants Into an Industry

A company's power is also affected by the force of new entrants into its market. The less
time and money it costs for a competitor to enter a company's market and be an effective
competitor, the more an established company's position could be significantly weakened.

An industry with strong barriers to entry is ideal for existing companies within that industry
since the company would be able to charge higher prices and negotiate better terms.

3. Power of Suppliers
The next factor in the Porter model addresses how easily suppliers can drive up the cost of
inputs. It is affected by the number of suppliers of key inputs of a good or service, how
unique these inputs are, and how much it would cost a company to switch to another
supplier. The fewer suppliers to an industry, the more a company would depend on a
supplier.

As a result, the supplier has more power and can drive up input costs and push for other
advantages in trade. On the other hand, when there are many suppliers or low switching
costs between rival suppliers, a company can keep its input costs lower and enhance its
profits.

4. Power of Customers
The ability that customers have to drive prices lower or their level of power is one of the
Five Forces. It is affected by how many buyers or customers a company has, how significant
each customer is, and how much it would cost a company to find new customers or markets
for its output.

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A smaller and more powerful client base means that each customer has more power to
negotiate for lower prices and better deals. A company that has many, smaller, independent
customers will have an easier time charging higher prices to increase profitability. 5. Threat
of Substitutes
The last of the Five Forces focuses on substitutes. Substitute goods or services that can be
used in place of a company's products or services pose a threat. Companies that produce
goods or services for which there are no close substitutes will have more power to increase
prices and lock in favorable terms. When close substitutes are available, customers will have
the option to forgo buying a company's product, and a company's power can be weakened.
Understanding Porter's Five Forces and how they apply to an industry, can enable a
company to adjust its business strategy to better use its resources to generate higher
earnings for its investors.
What Are Porter's Five Forces Used for?

Porter's Five Forces Model helps managers and analysts understand the competitive
landscape that a company faces and to understand how a company is positioned within it.

Is Porter's Five Forces Model Still Relevant?

Yes, even though it was created more than 40 years ago, the Five Forces Model continues to
be a useful tool for understanding how a company is positioned competitively.
What Are Some Drawbacks of Porter's Five Forces?
The Five Forces model has some drawbacks, including that it is backward-looking, making its
findings mostly relevant only in the short term; that limitation is compounded by the impact
of globalization.
Another big drawback is the tendency to try to use the five forces to analyze an individual
company, versus a broad industry, which is how the framework was intended.
Also problematic is that the framework is structured so that each company is placed in one
industry group when some companies straddle several. Another issue includes the need to
assess all five forces equally when some industries aren't as heavily impacted by all five.
What's the Difference Between Porter's Five Forces and SWOT Analysis?
Porter's 5 Forces and SWOT (strengths, weaknesses, opportunities, & threats) analysis are
both tools used to analyze and make strategic decisions. Companies, analysts, and investors
use Porter's 5 Forces to analyze the competitive environment within an industry, while they
tend to use a SWOT analysis to look more deeply within an organization to analyze its
internal potential.

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Internal analysis: Importance of organisation’s capabilities, competitive advantage & core
competence

Comparison Chart

BASIS FOR
COMPETITIVE ADVANTAGE CORE COMPETENCE
COMPARISON

Meaning Competitive Advantage implies the Core Competence refers to the specific
virtue, that helps the firm to perform skills, knowledge and expertise, that is
better than its rivals at the market hard to be followed by the competitors.
place.

Success Formula It does not amounts to sure success It amounts to a sure success formula for
formula for a firm in the long run. a firm in the long run.

Superiority It provides a temporary competitive It provides sustained superiority to the

superiority to the firm. firm.

Accrues from Functional Strength Fundamental Strength

Helps in It helps the firm in specific and limited It helps the firm in general, far reaching
way. and multifaceted manner.

Advantage Provides competitive strength in a Provides excellence in a variety of

particular business or product. businesses and products.

Definition of Competitive Advantage

Competitive Advantage alludes to a condition, that puts a firm in a position, favourable to it,
i.e. one which allows the company to produce products or services at reasonable prices,
which are in vogue, for the customers. In such a situation, the firm is able to reap more
profits or generate more revenue, when compared to its competitors.
Competitive Advantage is something that keeps you a step ahead than the competitors. It
can be attained due to some factors like product quality, brand, cost structure, customer
loyalty and so forth.
The three strategies by which a firm can gain competitive advantage, according to Michael
Porter, are:

 Cost Leadership Strategy

 Differentiation strategy

 Focus strategy

Definition of Core Competence

22
Core Competence can be defined as the fundamental strength of a business which includes
a unique combination of various resources, knowledge and skills, which differentiates a
company in the marketplace. It is the profound dexterity that provides one or more lasting
competitive advantage to the company in creating and delivering perceived benefits to the
customers.

Core Competency is something that provides access to a number of markets, difficult to

catch up by rivals and must make a considerable amount of contribution, in providing value
to the customers. It can be gained by the distinct set of skills or production techniques. It
provides a structure to the companies, which is helpful in ascertaining their major strengths,
to strategize accordingly.
Key Differences Between Competitive Advantage and Core Competence
The primary differences between Competitive Advantage and Core Competence are given
hereunder:

1. Competitive Advantage can be understood as the specific feature, which helps the
firm to outrun its rivals at the market place. On the contrary, core competence is
defined as the set of skills and strength, that results in a competitive advantage.
2. Competitive advantage does not ensure success to the firm in the long term. As
against this, core competence ensures the success of the firm in the long term.
3. Competitive Advantage provides a temporary competitive superiority to the firm,
over other firms in the marketplace. Conversely, core competence provides a long
lasting superiority to the firm, over its competitors.
4. Competitive Advantage is a result of functional strength, whereas core competence
is derived from core strength, i.e. the proficiency which is fundamental to the
business or product, such as a distinct capability in business process or technology.
5. When it comes to impact, the core competence has a far-reaching impact, as it helps
the firm in general and multifaceted manner, while the competitive advantage has a
limited and specific impact on the business.

6. Competitive advantage helps in gaining competitive strength in a particular business

or product. As against this, core competence helps in gaining excellence in multiple
businesses and products.

Michael E. Porter’s Value Chain Analysisand Diamond Model.

What is the Porter’s Value Chain Analysis?

The value chain also known as Porter’s Value Chain Analysis is a business management
concept that was developed by Michael Porter.

23
In his book Competitive Advantage (1985), Michael Porter explains that a value chain is a
collection of activities that are performed by a company to create value for its customers.
Value Creation creates added value which leads to competitive advantage by research and
development. Conducting a value chain analysis and implementing improvements and
reduce costs can lead to added value also creates a higher profitability for an organization.
What is the Porter’s Value Chain Analysis Model?
The strength of this analysis is its approach. It focuses on the systems and business activities
with customers as the central principle rather than on departments and accounting expense
categories.
It links systems and activities to each other and demonstrates what effect this has on costs
and profit margins. Consequently, the Value Chain Analysis makes clear where the sources
of value and the losses can be found in the organization.
The Value Chain activities
It consists of a number of activities, namely primary activities and support activities.
Primary activities have an immediate effect (cost advantage) on the production,
maintenance, sales and support of the products or services to be supplied. These activities
consist of the following elements:
Inbound Logistics

These are all processes that are involved in the receiving, storing, and internal distribution
of the raw materials or basic ingredients of a product or service. The relationship with the
suppliers is essential to the creation of value in this matter.

Production
These are all the activities (for example production floor or production line) that convert
inputs of products or services into semi-finished or finished products. Operational systems
are the guiding principle for the creation of value.

Outbound logistics
These are all activities that are related to delivering the products and services to the
customer. These include, for instance, storage, distribution (systems) and transport.
Marketing and Sales
These are all processes related to putting the products and services in the markets including
managing and generating customer relationships. The guiding principles are setting oneself
apart from the competition and creating advantages for the customer.
Service
This includes all activities that maintain the value of the products or service to customers as
soon as a relationship has developed based on the procurement of services and products.

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The Service Profit Chain Model is an alternative model, specific designed for service
management and organizational growth.
Support activities of the Value Chain Analysis
Support activities within the Porter’s Value Chain Analysis assist the primary activities and
they form the basis of any organization.
In the figure dotted lines represent linkages between a support activity and a primary
activity.
A support activity such as human resource management for example is of importance within
the primary activity production but also supports other activities such as service and
outbound logistics.
Firm infrastructure

This concerns the support activities within the organization that enable the organization to
maintain its daily operations. Line management, administrative handling, financial
management are examples of activities that create value for the organization.
Human resource management

This includes the support activities in which the development of the workforce within an
organization is the key element. Examples of activities are recruiting staff, training and
coaching of staff and compensating and retaining staff.

Technology development
These activities relate to the development of the products and services of the organization,
both internally and externally.
Examples are IT, technological innovations and improvements and the development of new
products based on new technologies. These activities create value using innovation and
optimization.
Procurement
These are all the support activities related to procurement to service the customer from the
organization.
Examples of activities are entering into and managing relationships with suppliers,
negotiating to arrive at the best prices, making product purchase agreements with suppliers
and outsourcing agreements. Organizations use primary and support activities as building
blocks to create valuable products, services and distinctiveness.
Using the Porter’s Value Chain Analysis
Porter’s Value Chain Analysis: There are four basic steps that have to be followed if you wish
to use the Value Chain as an analysis model. By following these basic steps the organization
can be analyzed using the Value Chain.

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Step 1 of the Porter’s Value Chain Analysis: identify sub activities for each primary activity
For each primary activity, sub-activities can be determined that create a specific value for an
organization.

There are three categories of sub activities, namely:

 Direct activities (for instance online sales from Marketing& sales)

 Indirect activities (for instance keeping the CRM up-to-date from Marketing& sales
or organizing a golf tournament for customers)

 Quality assurance (Proofreading and editing advertisements from Marketing& sales).

Step 2: identify sub activities for each support activity

Here it concerns the idea how support activities such as firm infrastructure, human resource
management, technology development and procurement can create value within the
primary activities.
Use the same distinction as in step 1 for direct and indirect activities and quality assurance.
For example, consider how human resource management can create value to inbound
logistics, marketing & sales and service. This will also have to be done for the other support
activities.
Step 3: identify links
This is a crucial and time-consuming step because this is about finding the links between all
the different kinds of added value you have identified.
This part is of importance for an organization when it concerns increasing competitive
advantage from the value chain. For example, a development within a CRM solution can
have a link with increasing production and sales volumes through certain investments.
Another example is the link between the complaints that have been recorded within the
primary activity service and the increase of unfilled vacancies (human resource
management) within the primary activity outbound logistics.
Step 4 of the Porter’s Value Chain Analysis: look for opportunities/ solutions to optimize
and create value
After you have completed the value chain analysis it is important to determine what
activities are to be optimized in order to create added value and the final product.
This is about quantitative and qualitative investments that can eventually contribute to
increasing your customer base, competitive advantage and profitability.
Creating business cases will help you give priority and return on investment (ROI) to the
possibly required added value creation of a primary or support activity.

26
Porter Diamond Model Explained
Porter Diamond Model discusses factors and traits of a business that make it more
successful than others in a particular region. It enables companies to identify the resources
that need to be developed to enhance their performance compared to the rest of the
entities dealing in the same category of products and services.
Michael Eugene Porter, an American academician and influential thinker on management
and competitiveness, developed the Porter Diamond model. It is an economic model for
businesses, especially multinational organizations planning to expand their operations in
different markets. The model lets companies identify the key areas to focus on to capture
global markets effectively.

With the help of this theory, the business players can understand the reason for certain
industries being widespread in particular nations. On this basis, they can analyze their
position in the market and thereby implement strategies to compete and excel.

The Porter Diamond theory outlines four main factors that reveal how businesses enjoy a
national advantage in the international markets. These attributes make certain nations
become more competitive than others for specific industries. For example, Germany is well
known for its engineering, while Greece is famous for the tourism services it offers on a
global platform.
Porter Diamond Framework
The unique Porter Diamond framework consists of four attributes/factors. If all these four
factors are favorable, companies will innovate and stay competitive. This domestic
competitiveness prepares them to excel in international markets as well. Besides, the role of
government and chance or unpredictable external events also influence competitive
advantage.
#1 – Company Structure, Rivalry, and Strategy
This aspect of the theory focuses on the competition in the native markets that businesses
have to excel against. The region in which the firms operate determines the structure and
strategies to be framed to compete in the home market.
As a result, the strategies differ from nation to nation. For example, Italy, known for its
fashionable clothing, will definitely have a different approach than Greece, which
emphasizes tourism and related facilities.
In addition, rivalry plays an important role in driving every entity operating in the same
sector to improve, innovate, and perform better than each other. Therefore, the businesses
have to be consistent. This makes them trustworthy and reliable national companies around
the globe in the long run.
#2 – Factor Conditions
Factor conditions include resources available to businesses that help them perform well.
The availability of resources could be influenced by the skillset, strategies, infrastructure, or

27
nature. For example, Italy performs well because of its ability to choose better fabrics;
Greece’s tourism market is influenced by the weather, which might keep changing.
The natural resources constitute the basic factors, while the infrastructure, skilled experts,
and capital form the advanced factors. A nation develops a real competitive advantage with
the development of advanced elements. In contrast, the contribution of basic factors to
regional advantage is comparatively lower.
#3 – Demand Conditions
The demand for a particular product or service also plays an essential factor. Porter
Diamond model’s third attribute indicates how the increase in demand for an item among
local customer boosts the growth of a brand or business.
When customers want a product, businesses strive to improve the quality and live up to
their expectations. As a result, they become competent enough to acquire the number one
position on the global platform.
#4 – Supporting and Related Industries
Another factor that influences business growth is the complementary services that lend
support to the companies of national advantage. For example, the tourism services in
Greece would never be the best if the accommodation facilities and food units over there
did not support the industry.
#5 – Government
The government also plays a vital role in developing and retaining the competitive
advantage by offering a conducive environment for businesses to flourish. This includes
developing a robust infrastructure, ensuring fair market practices, developing education
institutions, etc.
#6 – Chance
In addition, chance or luck may also contribute to competitive advantage or disadvantage.
For instance, unpredictable events like wars, natural disasters, political situations, etc., can
positively or negatively impact an industry or nation, creating a competitive advantage or
wiping it off.
Example
Let’s consider the following Porter Diamond model example:
The car manufacturing industry of Germany is one of the best examples to be cited here.
The economy’s best sector complies with all the attributes and, therefore, strives through
global challenges easily. With several competitors in the home market, car manufacturers
continuously innovate and excel. As a result, the nation manages to have the best car
models.
Having no speed limits and an aspiration of citizens to have a quality and speedy life
encourages the demand for high-speed luxury cars in the nation. Besides, skilled resources

28
like car engineers from globally-recognized German universities give car manufacturers an
edge over others. Thus, the demand conditions and factor conditions are all met.
Next, the support from the metal industries that offer the best spare parts to the car
manufacturers tends to be the best support system for the national market. Besides, the
German government’s support in the form of better infrastructure and educational
institutions creates a national competitive advantage for the car industry.
How to use Porter Diamond Model?
Porter Diamond model is used to identify the business surroundings and act accordingly to
become the best. In 1990, in the book “The Competitive Advantage of Nations,” Porter
discussed the role of government in stimulating the competitive positioning of an economy
on the global platform.
His model, likewise, suggested the methods through which the businesses can excel, be it by
enhancing their skilled labor or deploying advanced technology, or introducing the
relevant fiscal policy.

Some of the uses of the Porter Diamond model are as follows:

 It helps businesses understand the structure and techniques of their rival companies,
allowing them to frame their strategies accordingly.
 Businesses use regional advantages to capture international markets.

 They value suppliers as they understand the importance of their support.

 Firms of national importance get to know the power of buyers in enhancing business
growth.
 The model teaches market players to innovate, remain updated, and put in their best
efforts to fight the fear of being substituted.

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