CHAPTER THREE

ENVIRONMENTAL
ANALYSIS

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 Outcomes From External & Internal Environmental
Analyses

By Studying the External By Studying the

Environment, firms identify: Internal Environment,
firms identify:
•What they might
choose to do? • What they can do?

Examine unique
Examine resources, capabilities &
opportunities & competencies –
threats
sustainable
competitive advantage
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1.The Internal
Environment

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 Internal Analysis of the Organization
 As Shown in the previous diagram an analysis of the
internal environment enables an organization
determine what it can do- that is, the actions
permitted by its unique resources, capabilities and
core competencies.

 The proper matching of what a firm can do with

what it might do allows the development of
strategic intent, the pursuit of strategic mission and
formulation of strategies.

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 Internal Analysis cont’d …
Strengths:
 Strength is a resource, skill, or other advantage
relative to competitors and the needs of the markets
a firm serves or expects to serve.
 It is a distinctive competence that gives the firm a
comparative advantage in the market place.
 Strengths may exist with regard to financial resources,
image, market leadership, buyer/supplier relations
etc.

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 Internal Analysis cont’d …
Weaknesses:
• Weakness is a limitation or deficiency in
resource, and capabilities that seriously impedes
a firm’s effective performance.

• Lack of facilities, financial resources, management

capabilities, marketing skills, and brand image can
be source of weaknesses.
weaknesses

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 Competitive Advantage
• When a firm sustains profits that exceed the
average for its industry, the firm is said to
possess a competitive advantage over its rivals.
• The goal of much of business strategy is to
achieve a sustainable competitive advantage.

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 Competitive Advantage cont’d …

• Michael Porter identified two basic types of

competitive advantage:
–cost advantage
–differentiation advantage
• A competitive advantage exists when the firm is able
to deliver the same benefits as competitors but at a
lower cost (cost advantage), or deliver benefits that
exceed those of competing products (differentiation
advantage).
• Thus, a competitive advantage enables the firm to
create superior value for its customers and superior
profits for itself.
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 Resources
• Resources are the firm-specific assets useful for
creating a cost or differentiation advantage and
that few competitors can acquire easily.
• The following are some examples of such
resources:
– Patents and trademarks
– Proprietary know-how
– Installed customer base
– Reputation of the firm
– Brand equity

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 Capabilities
• Capabilities refer to the firm's ability to utilize
its resources effectively.
• An example of a capability is the ability to bring
a product to market faster than competitors.

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 Core Competencies
• The firm's resources and capabilities together
form its core competencies.
competencies
• These competencies enable innovation,
efficiency, quality, and customer
responsiveness, all of which can be leveraged to
create a cost advantage or a differentiation
advantage i.e. core competencies serve as
sources of competitive advantage.

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2.The External
Environment

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 External Environmental Analysis

The Process of Performing an External Analysis

• Gather relevant information

• Identify the most important opportunities and

threats

• Rank them from the most important to the least

important

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 External Environmental cont’d …
OPPORTUNITIES:
• An opportunity is a major favorable situation in a
firm’s environment.

• Identification of
– a previously overlooked market segment,
– changes in competitive or regulatory circumstances,
– technological changes, and
– improved buyer or supplier relationships
could represent opportunities for the firm.
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 External Environmental cont’d …
THREATS:
• A threat is a major unfavorable situation in a firm’s
environment. Threats are key ingredients to the firm’s
current or desired opposition.
• Identification of
– the entrance of new competitors,
– slow market growth,
– increased bargaining power of key buyers or suppliers,
– technological changes, and new or revised regulations
could represent threats to a firm’s success.

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The General
Environment
(PESTE – Analysis)

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 The General Environment
• Analysis of the general environment is focused
on its future impacts on firm’s performance.
• In this respect, the awareness & understanding
of an increasingly turbulent, complex & global
general environment is critical.
• The general environment influences the firm’s
strategic options & the decisions made in light of
this.

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 The General Environment (Cont…)
• A scan of the external general environment in which
the firm operates can be expressed in terms of the
following factors:
–Political; Economic; Social; Technological

• The acronym PEST (or sometimes rearranged as

"STEP") is used to describe a framework for the
analysis of these external general environmental
factors.
• Firms also add one more E to the PEST analysis and
conduct PESTE analysis to address the growing
interest on Ecological factors.

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 Economic Factors:
• Economic assessment must address:
• The overall economic forecast and the likely
funding stream that will be available.
• The international and national forces that can
affect the economic well being of the
organization should be analyzed.

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 Economic Factors: cont’d …
Some key economic variables:
 Availability of credit
 Level of disposable income
 Interest rates
 Inflation rates
 Unemployment trends
 Consumption patterns
 Stock market trends
 Import/Export factors
 Demand shifts
 Price fluctuations
 Fiscal policies
 Tax rates
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 Political Factors:
• Political factors define the legal and regulatory
parameters of organizations’ operation.
• There are laws that could restrict the potential
profits of businesses: fair trade decisions, anti-
trust laws, tax programs, minimum wage
legislation, pollution & pricing policies

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 Political Factors: cont’d …
• Other political actions aimed at protecting
employees, customers, the general public, and
the environment.
• There are also political actions that are designed
to benefit and protect organizations: patent
laws, government subsidies, and product
research grants

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 Political Factors: cont’d …
Political action can bring about substantial impact
on three governmental functions that influence
the external environment of firms:

 Supplier function: government decision

regarding the accessibility of private businesses
to government-owned natural resources and
stockpiles of agricultural products will profoundly
affect the viability of the strategies of the firms.

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 Political Factors: cont’d …
• Customer function: government’s demand for products
and services can create, sustain, enhance, or eliminate
many market opportunities.

• Competitive function: the government can operate as

an almost unbeatable competitor in the market place.
• Thus, knowing of government’s strategies can
help a firm avoid unfavorable confrontation with
the government as a competitor.

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 Political Factors: cont’d …
Some key Political (Govermentalal & legal) variables
 Tax laws
 Environmental protection laws
 Level of government subsidies
 Antitrust legislation
 Terrorist activities
 Import/Export regulations
 Fiscal & monetary policies
 Size of Government budget
 Local, state & national elections
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 Social Factors:
• These factors include the beliefs, values,
attitudes, opinions, and life style of persons
depending up on cultural, demographic, religious,
and ethnic conditioning.

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 Social Factors: cont’d …
Some key socio-cultural variables:
 Changing work values
 Ethical standards
 Growth rate of population
 Life expectancies
 Rate of family formation
 Consumer activism
 Geographic shifts in population
 Attitudes towards business
 Average level of education
 Attitudes towards leisure time
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 Technological Factors:
Organizations must strive to understand the existing
scientific or technological advances:
• To avoid obsolescence and promote innovation, the
organization must be conscious of technological
changes that could affect its operation
• It should understand that new technologies might
require new operation systems and bring about sudden
and dramatic effect on an organization’s environment.
• Intelligible technological adaptations can suggest
possibilities for new products, improvements in existing
products, or in manufacturing and marketing
techniques
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 Technological Factors: cont’d …
Some key technological variables
 R&D activity
 automation
 technology incentives
 rate of technological change

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 Ecological/environmental Factors
• An Environmental Analysis identifies problems, conflicts,
or resource constraints that may affect the natural
environment.
• It also examines how a proposed action might affect
people, their communities, and their livelihoods.

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THANK YOU !!

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