STRATEGIC

BUSINESS
ENVIRONMENT
ANALYSIS
Environmental Scanning
 Before an organization can begin strategy
formulation, it must scan the external
environment to identify possible
opportunities and threats and its internal
environment for strengths and
weaknesses.
 Environmental scanning
 the monitoring, evaluation, and
dissemination of information relevant to the
organizational development of strategy
 Identifying External
Environmental Variables
 In undertaking environmental scanning, strategic
managers must first be aware of the many
variables within a corporation’s natural, societal,
and task environments
 Natural environment
 includes physical resources, wildlife and climate that
are an inherent part of existence on Earth
 form an ecological system of interrelated life
 Changes in the natural environment usually affect a
business corporation first through its impact on the
societal environment in terms of resource availability
and costs and then upon the task environment in
terms of the growth or decline of particular industries.
Identifying External
Environmental Variables

 Societal environment
 mankind’s social system that includes
general forces that do not directly touch on
the short-run activities of the organization,
but that can influence its long-term
decisions
 economic, technological, political-legal and
sociocultural
 Identifying External
Environmental Variables

 Task environment
 those elements or groups that directly affect a
corporation and, in turn, are affected by it
 government, local communities, suppliers,
competitors, customers, creditors, unions,
special interest groups/trade associations
 A corporation’s task environment is typically
the industry within which the firm operates.
 Industry analysis (popularized by Michael
Porter) refers to an in-depth examination of key
factors within a corporation’s task
environment.
Scanning the Societal Environment:
STEEP Analysis

 STEEP Analysis
 monitoring trends in the societal and
natural environments
 sociocultural, technological, economic,
ecological and political-legal forces
Some Important Variables in the Societal
Environment

Table 3-1 Some important variables in the societal

environment
Examples of Current Sociocultural Trends

 Increasing environmental awareness

 Growing health consciousness
 Declining mass market
 Changing household composition
 Increasing diversity of workforce
 Scanning External
Environment
Figure 3-1
Scanning
external
environment
 IDENTIFYING EXTERNAL STRATEGIC
FACTORS
 No firm can successfully monitor all external factors.
 Choices must be made regarding which factors are important and
which are not.
 One way to identify and analyze developments in the
external environment is to use the issues priority matrix
as follows:
 1. Identify a number of likely trends emerging in the natural,
societal, and task environments.
 These are strategic environmental issues—those important
trends that, if they occur, determine what the industry or the
world will look like in the near future.
 2. Assess the probability of these trends actually occurring,
from low to medium to high.
 3. Attempt to ascertain the likely impact (from low to high)
of each of these trends on the corporation being examined.
 IDENTIFYING EXTERNAL STRATEGIC
FACTORS…

 A corporation’s external strategic factors

are the key environmental trends that are
judged to have both a medium to high
probability of occurrence and a medium to
high probability of impact on the
corporation.
 Those environmental trends judged to be a
corporation’s strategic factors are then
categorized as opportunities and threats
and are included in strategy formulation.
Industry Analysis: Porter’s Forces
Driving Industry Competition
Figure 3-2
Forces driving
industry
competition
Threat of New Entrants
 Threat of new entrants
 new entrants to an industry bring new
capacity, a desire to gain market share and
substantial resources
 The threat of entry depends on the presence
of entry barriers and the reaction that can
be expected from existing competitors.
 Entry barrier
 an obstruction that makes it difficult for a
company to enter an industry
Barriers to Entry

Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution
channels
Cost disadvantages
independent of size
Government policies
Rivalry among Existing
Firms
 In most industries, corporations are
mutually dependent.
 A competitive move by one firm can be
expected to have a noticeable effect on
its competitors and thus may cause
retaliation.
 Rivalry among Existing
Firms
 According to Porter, intense rivalry is related to the
presence of several factors, including:
 Number of competitors: When competitors are
few and roughly equal in size, they watch each other
carefully to make sure that they match any move by
another firm with an equal countermove.
 Rate of industry growth: Any slowing in
passenger traffic tends to set off price wars in the
airline industry because the only path to growth is to
take sales away from a competitor.
 Product or service characteristics: A product
can be very unique, with many qualities
differentiating it from others of its kind or it may be a
 Rivalry among Existing
Firms…
 Amount of fixed costs: Because airlines must fly
their planes on a schedule, regardless of the number
of paying passengers for any one flight, they offer
cheap standby fares whenever a plane has empty
seats.
 Capacity: If the only way a manufacturer can
increase capacity is in a large increment by building a
new plant, it will run that new plant at full capacity to
keep its unit costs as low as possible—thus producing
so much that the selling price falls throughout the
industry.
 Height of exit barriers: Exit barriers keep a
company from leaving an industry.

Threat of Substitute
Products or Services

 Substitute product
 a product that appears to be different but
can satisfy the same need as another
product
 The identification of possible substitute
products means searching for products
that can perform the same function,
even though they have a different
appearance.
The Bargaining Power of
Buyers
 Bargaining power of buyers
 ability of buyers to force prices down,
bargain for higher quality and play
competitors against each other
 A buyer or a group of buyers is powerful if
some of the following factors hold true:
Large purchases, backward integration,
alternative suppliers, low cost to change
suppliers, product represents a high
percentage of buyer’s cost, buyer earns low
profits, product is unimportant to buyer
 The Bargaining Power of
Suppliers
 Suppliers can affect an industry through their
ability to raise prices or reduce the quality of
purchased goods and services.
 Supplier or supplier group is powerful if some
of the following factors apply:
 Industry is dominated by a few companies
 Unique product or service
 Substitutes are not readily available
 Ability to forward integrate
 A purchasing industry buys only a small portion
of the supplier group’s goods and services and
is thus unimportant to the supplier
Relative Power of Other Stakeholders

 A sixth force that should be added to

Porter’s list to include a variety of
stakeholder groups from the task
environment.
 Government
 Local communities
 Creditors
 Trade associations
 Special interest groups
 Unions
 Shareholders
 Industry Evolution
 Over time, most industries evolve through a series of
stages from growth through maturity to eventual
decline.
 The industry life cycle is useful for explaining and
predicting trends among the six forces that drive
industry competition.
 Fragmented industry
 no firm has a large market share and each firm only
serves a small piece of the total market in competition
with other firms
 Consolidated industry
 domination by a few large firms, each struggles to
differentiate products from its competition
 Hypercompetition
 Most industries today are facing an ever-increasing level
of environmental uncertainty.

 Market stability is threatened by short product life cycles,

short product design cycles, new technologies, frequent
entry by unexpected outsiders, repositioning by
incumbents and tactical redefinitions of market
boundaries as diverse industries merge.

 In hypercompetitive industries, competitive advantage

comes from an up-to-date knowledge of environmental
trends and competitive activity coupled with a willingness
to risk a current advantage for a possible new advantage.
Strategic Groups
 Strategic group
 a set of business units or firms that pursue
similar strategies with similar resources
 Companies or business units belonging
to a particular strategic group within the
same industry tend to be strong rivals
 Thus, tend to be more similar to each other
than to competitors in other strategic
groups within the same industry.
 Strategic Types
 A strategic type is a category of firms based on a common
strategic orientation and a combination of structure, culture,
and processes consistent with that strategy.
 Defenders-are companies with a limited product line that
focus on improving the efficiency of their existing operations.
 Prospectors-are companies with fairly broad product lines
that focus on product innovation and market opportunities.
 They tend to emphasize creativity over efficiency.

 Analyzers are corporations that operate in at least two

different product market areas-one stable and one variable.
 Reactors are corporations that lack a consistent strategy-
structure-culture relationship
 Their (often ineffective) responses to environmental

pressures tend to be piecemeal strategic changes.

Using Key Success Factors to Create
an Industry Matrix

 Key success factors

 variables that can significantly affect the
overall competitive positions of companies
within any particular industry
 They are usually determined by the
economic and technological characteristics
of the industry and by the competitive
weapons on which the firms in the industry
have built their strategies.
 Industry Matrix
 Industry matrix
 summarizes the key success factors within a
particular industry
Table 3-3 Industry Matrix

To generate an industry matrix using two industry

competitors (called A and B), complete the
following steps for the industry being analyzed
( next slide):
 Industry Matrix
 1. In Column 1 (Key Success Factors), list the 8 to 10 factors that
appear to determine success in the industry.
 2. In Column 2 (Weight), assign a weight to each factor, from 1.0 (Most
Important) to 0.0 (Not Important) based on that factor’s probable impact on
the overall industry’s current and future success.
 3. In Column 3 (Company A Rating), examine a particular company
within the industry—for example, Company A. Assign a rating to each factor
from 5 (Outstanding) to 1 (Poor) based on Company A’s current response
to that particular factor.
 4. In Column 4 (Company A Weighted Score), multiply the weight in
Column 2 for each factor by its rating in Column 3 to obtain that factor’s
weighted score for Company A.
 5. In Column 5 (Company B Rating), examine a second company within
the industry – in this case, Company B. Assign a rating to each key success
factor from 5.0 (Outstanding) to 1.0 (Poor), based on Company B’s
current response to each particular factor.
 6. In Column 6 (Company B Weighted Score), multiply the weight in
Column 2 for each factor times its rating in Column 5 to obtain that
 Synthesis of External
Factors—EFAS
Table 3-4 External Factor Analysis Summary (EFAS Table)
Internal Scanning and organizational
Analysis

 Internal scanning, often referred to

as organizational analysis, is
concerned with identifying and
developing an organization’s
resources and competencies.
A Resource-Based Approach
to Organizational Analysis

 Resources
 an organization’s assets and are thus the
basic building blocks of the organization
 tangible, intangible
 Capabilities
 refer to a corporation’s ability to exploit its
resources
 consist of business processes and routines
that manage the interaction among
resources to turn inputs into outputs
A Resource-Based Approach
to Organizational Analysis…

 Core competency
 a collection of competencies that cross
divisional boundaries, is wide-spread
throughout the corporation and is something
the corporation does exceedingly well
When core competencies are superior to
those of the competition, they are called
distinctive competencies.
 Distinctive competency
 core competencies that are superior to those
of the competition
 VRIO Framework of Analysis
 Barney, in his VRIO framework of analysis,
proposes four questions to evaluate a firm’s
competencies:
1. Value: Does it provide customer value and
competitive advantage?
2. Rareness: Do no other competitors possess it?
3. Imitability: Is it costly for others to imitate?
4. Organization: Is the firm organized to exploit
the resource?
 If the answer to each of these questions is yes for a
particular competency, it is considered to be a
strength and thus a distinctive competence.
 Using Resources to Gain Competitive
Advantage

 Proposing that a company’s sustained competitive

advantage is primarily determined by its resource
endowments, Grant proposes a five-step, resource-
based approach to strategy analysis.
1. Identify and classify resources in terms of strengths and
weaknesses
2. Combine the firm’s strengths into specific capabilities and
core competencies
3. Appraise profit potential—Are there any distinctive
competencies?
4. Select the strategy that best exploits the firm’s capabilities
and competencies relative to external opportunities
5. Identify resource gaps and invest in upgrading weaknesses
 Access to a Distinctive
Competency
 A corporation can gain access to a
distinctive competency in four ways:
 Asset endowment
 Acquired from someone else
 Shared with another business
 Built and accumulated within the company
Access to a Distinctive
Competency
 The desire to build or upgrade a core competency
is one reason entrepreneurial and other fast-
growing firms often tend to locate close to their
competitors.
 Clusters
 geographic concentrations of interconnected
companies and industries
 Clusters provide access to :
 Employees
 Suppliers
 Specialized information
 Complementary products
Determining the Sustainability
of an Advantage

 Two characteristics determine the sustainability

of a firm’s distinctive competency(ies):
durability and imitability.
 Durability
 the rate at which a firm’s underlying resources,
capabilities or core competencies depreciate or
become obsolete
 Imitability
 the rate at which a firm’s underlying resources,
capabilities or core competencies can be
duplicated by others
 Determining the Sustainability
of an Advantage
 A core competency can be easily imitated to the
extent that it is transparent, transferable, and
replicable.
 Transparency
 the speed at which other firms understand the
relationship of resources and capabilities supporting a
successful strategy
 Transferability
 the ability of competitors to gather the resources and
capabilities necessary to support a competitive challenge
 Replicability
 the ability of competitors to use duplicated resources
and capabilities to imitate the other firm’s success
 Determining the Sustainability
of an Advantage

 It is relatively easy to learn and imitate

another company’s core competency or
capability if it comes from explicit
knowledge.
 Explicit knowledge
 knowledge that can be easily articulated and
communicated
 Tacit knowledge
 knowledge that is not easily communicated
because it is deeply rooted in employee
experience or in the company’s culture
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 marketing a product or
service and ending with distributors
getting the final goods into the hands of
the ultimate consumer
Industry Value Chain
Analysis
Value chain segments include:
 Upstream

 Downstream

 Center of gravity
 the part of the chain that is most important
to the company and the point where its
core competencies lie
Corporate Value Chain
Analysis
Primary activities Support activities

 Inbound logistics  Procurement

 Operations  Technology
 Outbound development
logistics  Human resource
management
 Firm infrastructure
 A Corporation’s Value Chain
A
corporatio
n’s value
chain
Corporate Value Chain
Analysis
1. Examine each product line’s value
chain in terms of the various activities
involved in producing the product or
service
2. Examine the linkages within each
product line’s value chain
3. Examine the potential synergies
among the value chains of different
product lines or business units
Organizational Structures

Simple Functional Divisional

Strategic
Conglome
Business
rate
Units
Basic Organizational
Structures
Basic
organizatio
nal
structures
Corporate Culture:
The Company Way

 Corporate culture
 the collection of beliefs, expectations and
values learned and shared by a
corporation’s members and transmitted
from one generation of employees to
another.
Functions of Corporate
Culture
1. Conveys a sense of identity for
employees
2. Generates employee commitment
3. Adds to the stability of the organization
as a social system
4. Serves as a frame of reference for
employees to understand
organizational activities and as a guide
for behavior
Corporate Culture:
The Company Way

 Cultural intensity
 the degree to which members of a unit
accept the norms, values and other
cultural content associated with the unit
 shows the culture’s depth
 Cultural integration
 the extent to which units throughout the
organization share a common culture
 culture’s breadth
 Strategic Marketing Issues
 Market position
 refers to the selection of specific areas for
marketing concentration and can be expressed
in terms of market, product and geographic
locations
Market position deals with the question,
“Who are our customers?”
 Marketing mix
 the particular combination of key variables
under a corporation’s control that can be used to
affect demand and to gain competitive
advantage
Brand and Corporate
Reputation
 Brand
 a name given to a company’s product
which identifies that item in the mind of the
consumer
 Corporate brand
 a type of brand in which the company’s
name serves as the brand
Brand and Corporate
Reputation
 Corporate reputation
 a widely held perception of a company by
the general public
Consists of two attributes:
 Stakeholders’ perceptions of quality

 Corporation’s prominence in the minds

of stakeholders
 Strategic Financial Issues
 Financial leverage
 ratio of total debt to total assets
 describes how debt is used to increase earnings
available to common shareholders
 Capital budgeting
 the analyzing and ranking of possible investments
in fixed assets in terms of additional outlays and
receipts that will result from each investment
 Hurdle point (some accepted criteria for
example, years to pay back investment, rate of
return or time to break-even point) for the
purpose of strategic decision making.
Strategic Research and Development
Issues

 R&D intensity
 spending on R&D as a percentage of sales
revenue
 principal means of gaining market share in
global competition
 Technology transfer
 the process of taking new technology from
the laboratory to the marketplace
R&D Mix
 Basic R&D
 focuses on theoretical problems
 Product R&D
 concentrates on marketing and is concerned
with product or product packaging
improvements
 Engineering R&D
 concerned with engineering, concentrating on
quality control and the development of design
specifications and improved production
equipment
Impact of Technological Discontinuity on
Strategy

 Technology discontinuity
 when a new technology cannot be used

to enhance current technology, but

substitutes for the technology to yield
better performance
 The displacement of one technology by

another (technological discontinuity)

is a frequent and strategically important
phenomenon.
Strategic Operations Issues
 Intermittent systems
 item is normally processed sequentially, but
the work and sequence of the process vary
 Continuous systems
 work is laid out in lines on which products
can be continuously assembled or processed
 Operating leverage
 impact of a specific change in sales volume
on net operation income
Experience Curve
 Experience curve
 unit production costs decline by some fixed
percentage each time the total
accumulated volume of production units
doubles
Increasing Use of Teams
 Autonomous (self-managed)
 a group of people work together without a
supervisor to plan, coordinate and evaluate
their work
 Cross-functional work teams
 various disciplines are involved in a project
from the beginning
 Concurrent engineering
 specialists work side-by-side and compare
notes constantly to design cost-effective
products with features customers want
Increasing Use of Teams
 Virtual teams
 groups of geographically and/or
organizationally dispersed co-workers that
are assembled using a combination of
telecommunications and information
technologies to accomplish an
organizational task
Quality of Work Life and
Human Diversity

Quality of work life includes

improvements in:
 Introducing participative problem

solving
 Restructuring work

 Introducing innovative reward systems

 Improving the work environment

Quality of Work Life and
Human Diversity

 Human diversity
 the mix in the workplace of people from
different races, cultures and backgrounds
 provides a competitive advantage
Strategic Information
Systems/Technology Issues

Information systems/technology
contributions to performance:
 Automation of back office processes

 Automation of individual tasks

 Enhancement of key business functions

 Development of a competitive

advantage
Strategic Information
Systems/Technology Issues

 Supply chain management

 the forming of networks for sourcing raw
materials, manufacturing products or
creating services, storing and distributing
the goods and delivering them to
customers and consumers
 Internal Factor Analysis
Summary
Internal Factor Analysis Summary (IFAS Table: MayTag
as Example
 In class exercise
 Small- Group Exercise: Analyzing Competitive Advantage
 Break into a group of 3–5 students.

 Drawing on the concepts introduced in this chapter, analyze the

competitive position of your school in the market for business

education. Then answer the following questions:
1. Does your business school have a competitive advantage?
2. If so, on what is this advantage based, and is this advantage
sustainable?
3. If your school does not have a competitive advantage in the market
for business education, identify the inhibiting factors that are holding
it back.
4. How might the Internet change the way in which business education
is delivered?
5. Does the Internet pose a threat to the competitive position of your
school in the market for business education, or is it an opportunity
for your school to enhance its competitive advantage?